A bottleneck business is a term created by Akre Capital Management and it describes a business that:
a) sits atop large, global, secular growth opportunities fed by multiple industries and geographies, b) has those opportunities funneled (hence the bottleneck visual) disproportionately to it because of sustainable competitive advantages, and c) enjoys exceptional economics, often superior to the industries and customers the business serves.
The two companies they highlight as quintessential bottleneck businesses are American Tower (AMT) and Mastercard (MA).
SIT ATOP LARGE, GLOBAL, SECULAR GROWTH OPPORTUNITIES FED BY MULTIPLE INDUSTRIES AND GEOGRAPHIES.
American Tower’s cellular tower assets across 17 countries represent the bottleneck in the secular growth of mobile communications and data. The business spans across countries, wireless carriers, handset manufacturers and connected devices.
In Mastercard, we own a business with secularly improving odds of being involved and so profiting from the growing share of electronic payments worldwide, a business that cuts across countries, retailers, online, offline, and mobile commerce.
OPPORTUNITIES FUNNELED DISPROPORTIONATELY BECAUSE OF SUSTAINABLE COMPETITIVE ADVANTAGES.
American Tower’s business is advantaged by the physics of radio frequency (including the physics of spectrum re-use and signal propagation) and the deployment and service efficiencies of carrier co-location on macro towers.
Mastercard’s leading global payment network is the result of powerful network effects having solved the two-sided dilemma of merchant acceptance and consumer usage, as well as the need for standards and innovation in payment systems.
Using Akre Capital Management’s framework, which companies in our portfolio are bottleneck businesses? We already own American Tower and Mastercard.
If Mastercard is a bottleneck business because of its two-sided network effects between merchants and consumers, then Visa is one too.
Broadridge Financial Services
Broadridge Financial Services is a bottleneck business. If you’re a publicly-traded company that needs to send a bunch of shareholder communications out then you need to partner with Broadridge. It is the biggest company in this space and has the widest reach.
Also, major financial firms around the world are in the process of mutualization. They’re unloading a large portion of their back-office operations like clearing and settlement to a third party. Broadridge is the largest player in space too.
Broadridge turned someone else’s cost center into a profit center. More assets in the system and more trades being done means Broadridge is right there to service that growth and can scale it. Broadridge has made itself a vital company in the smooth operations of the global financial system. It’s a critical player. It’s like a utility company but the big difference is Broadridge can scale across many businesses and geographies, and it’s not heavily regulated like a utility company so it can earn strong economic returns on its critical position in the global financial system.
Microsoft and its Azure cloud business is a bottleneck business. The shift to cloud-based computing is one of the strongest and secular trends affecting businesses and the market right now. It’s a global phenomenon and Microsoft Azure is in a prime position as the number two cloud provider to benefit from this trend. Especially since the top company is AWS and Amazon competitors might not want to use AWS.
Scale advantages accrue fast to cloud infrastructure companies and so we only see Microsoft’s position getting stronger and earning outsized returns as the world continues to shift to the cloud.