Gatekeepers of Growth: Exploring the World of Bottleneck Businesses
What is a bottleneck business?
Essentially, it's a money-printing machine. Akre Capital Management coined the term, and here's how they describe it:
A bottleneck business is a business that sits atop large, global, secular growth trend fed by multiple industries and geographies. It has those opportunities funneled to it because of sustainable competitive advantages. And finally, it enjoys exceptional economics and high returns. Often superior to the industries and customers the business serves.
The first two bottleneck business examples, American Tower and Mastercard, come from Akre Capital Management.
Both companies dominate large, global secular growth trends that span multiple industries. They also boast strong, sustainable competitive advantages.
American Tower Corporation
American Tower owns and operates thousands of wireless communication towers globally, providing essential infrastructure for mobile phone carriers and data services. As demand for mobile data and 5G surges, telecom providers increasingly rely on American Tower's vast network to scale their services. The substantial costs and regulatory hurdles involved in constructing new towers create significant barriers to competition, giving American Tower a formidable competitive edge.
For mobile carriers aiming to offer top-tier service to their customers, utilizing American Tower's assets is practically indispensable.
Mastercard Inc.
Mastercard’s global payment network allows it to facilitate transactions between consumers, merchants, and financial institutions across the world. Its deep relationships with banks, established infrastructure, and reputation for security create a powerful network effect: the more businesses and individuals that use Mastercard, the more essential it becomes. New competitors face insurmountable barriers trying to replicate this scale, security, and trust.
The rise of digital payments further cements Mastercard’s pivotal role, solidifying its position as a bottleneck business in the burgeoning e-commerce landscape.
More Bottleneck Businesses
Using Akre Capital Management's framework, what other companies qualify as bottleneck businesses?
Visa Inc.
Like Mastercard, Visa operates one of the largest global payment processing networks. Its extensive network connects millions of merchants, financial institutions, and consumers worldwide. This dominance makes Visa indispensable for facilitating electronic transactions, creating high barriers for competitors, and ensuring consistent revenue through transaction fees.
Visa’s pivotal role in facilitating e-commerce makes it a bottleneck business as the world shifts more towards online transactions.
Amazon (AWS)
AWS is the leading provider of cloud infrastructure services, offering a wide range of solutions including computing power, storage, and databases. Its vast infrastructure and continuous innovation make it the backbone for numerous startups, enterprises, and government agencies. The extensive ecosystem and scalability options provided by AWS make it difficult for competitors to match its comprehensive service offerings.
The cloud goes through AWS.
Microsoft Corporation
Microsoft dominates several critical software markets, notably with its Windows operating system and Office productivity suite. Additionally, its Azure cloud platform is a major player in cloud services. Microsoft's integrated ecosystem ensures that businesses and consumers rely heavily on its products for daily operations, creating dependency and limiting the adoption of competing solutions.
Azure is solidifying itself as the key number two cloud infrastructure provider. The cloud is built on AWS and Microsoft’s Azure.
Alphabet Inc. (Google)
Google controls the vast majority of the global search engine market, which is a critical tool for information retrieval and online advertising. Its dominance in search algorithms and advertising platforms (like Google Ads) makes it a central hub for businesses looking to reach consumers, thereby restricting the influence of other players in the digital advertising space.
NVIDIA Corporation
NVIDIA is a leading manufacturer of GPUs, which are essential for gaming, professional visualization, data centers, and artificial intelligence applications. Its advancements in GPU technology drive innovations in AI and machine learning, making NVIDIA a crucial supplier for cutting-edge computing needs. This dominance limits competition and positions NVIDIA as a critical player in multiple high-growth technology sectors.
Qualcomm Incorporated
Qualcomm is a key provider of wireless communication technologies and chipsets used in smartphones and other connected devices. Its patents and technology standards are foundational for 4G and 5G networks, making Qualcomm indispensable for mobile device manufacturers and network operators. This control over essential wireless technologies creates significant entry barriers for other companies in the telecommunications space.
ASML Holding N.V.
ASML is the exclusive supplier of extreme ultraviolet (EUV) lithography machines, which are critical for producing high-end semiconductor chips used in advanced technology, including smartphones, data centers, and AI applications. Its EUV machines enable the most advanced chipmakers, like TSMC and Samsung, to manufacture smaller, more powerful, and energy-efficient chips. With no other company capable of producing this technology, ASML holds a crucial position in the global semiconductor supply chain, making it a true bottleneck business.
Common Characteristics
These bottleneck businesses share key traits:
- Control of Critical Infrastructure or Technology: They provide essential services or technologies that form the foundation of their industries.
- High Barriers to Entry: Their market dominance and vast resources make it difficult for new competitors to gain a foothold.
- Widespread Adoption and Dependency: A significant portion of the market relies on their offerings, ensuring consistent demand and revenue.
- Scalability and Innovation: Ongoing investment in innovation and infrastructure helps them maintain and expand their market leadership.
By occupying these crucial positions in their industries, these companies wield considerable influence, command high-profit margins, and sustain long-term growth.
Bottleneck Business Checklist
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