China’s DeepSeek has exposed the short lifespan of monopolies and shocked US tech investors
The top investors will tell you that monopolies are the best investments money can buy but as the emergence of China’s DeepSeek shows, assumptions about sectors can be short lived.
What are the best businesses? The answer to that question is “monopolies” and investors need to ask whether the current crop of AI-driven large language models and the suppliers of their chips, storage and energy need have the monopoly characteristics they assumed.
This week the broader opportunity of AI for sharemarket investors was questioned after the dramatic arrival of the China-based DeepSeek AI service, which sparked a mini sell-off on all stocks linked with the AI boom.
In the absence of effective regulation, monopolists can raise prices, and maintain elevated profit margins and returns on equity over long periods.
Indeed, as I have noted many times over the decades, the most formidable competitive advantage is the ability to raise prices without a detrimental impact on unit sales volume – a price-making outcome far more attainable under monopolistic conditions.
Warren Buffett’s investment track record illustrates this principle. His most successful acquisitions exhibit monopolistic characteristics, generating revenue so consistently and predictably he once joked that “even your idiot cousin could run it”.
Buffett not only seeks out such monopolies but also legitimises and cheerleads them through his advocacy and investments. When asked at a Berkshire Hathaway annual meeting about the ideal business, he described it as having “high pricing power; a monopoly”.
The reason for Buffett’s preference is clear: a monopolist becomes what economists call a “price maker”. This status allows the firm to set prices near the highest levels consumers will pay, unconstrained by the competitive pressures that typically drive prices down and spur innovation in more crowded markets.
Interestingly, Buffett’s perspective aligns with that of Silicon Valley titan Peter Thiel, who has openly criticised competition as detrimental to profitability.
Thiel, the co-founder of PayPal and an epochal investor in major tech monopolies and duopolies such as LinkedIn and Facebook, has long championed the view that “capitalism and competition are opposites” and that true success comes from securing market dominance rather than engaging in head-to-head rivalry.
Legendary investor Peter Lynch put it succinctly: If you own a monopoly, the emergence of competition is “hazardous to your wealth”.
In other words, from an investor’s standpoint, a robust, unchallenged market position is the clearest path to enduring returns. Competition is for losers.
Despite this, I have discovered the arrival of a competitor rarely flusters great business leaders. Not outwardly anyway.
I have lost count of how many times the worrying emergence of a new competitor has elicited the following response from a publicly unflappable CEO: “We welcome competition, it expands the market for our products.”
Perhaps most memorable, Elon Musk’s Tesla publicly encouraged other automakers to enter the EV market. In 2014, Tesla even released its patents, and Musk said “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology”.
Today’s flood of Chinese EVs is now hurting Tesla sales and adversely impacting the prices Tesla can achieve for its vehicles.
Elsewhere, Netflix pioneered the global subscription streaming model and enjoyed a near-monopoly in early streaming television. Chairman Reed Hastings often stated that more streaming services validated the business model Netflix helped invent.
Hastings went so far as to say he was “excited” to see how new entrants would shape consumer habits and push the overall shift from linear TV to on-demand streaming.
But over time, competitors like Amazon Prime Video, Hulu, Disney+, HBO Max and many more have launched their own platforms, and Netflix’s share of US streaming subscribers has steadily decreased – and the “streaming war” has fragmented the subscriber base across multiple platforms.
Which brings us back to the AI boom on the sharemarket. The emergence of a cheap Chinese AI-powered LLM – DeepSeek – has alerted investors to the semiconductor industry’s arrival at a critical juncture in its lifecycle, while drawing attention to the lack of defensibility in foundational language models.
Back in May 2023, an internal Google document anonymously leaked on Discord revealed an admission that Google and OpenAI “have no moat”.
The leaked document continued “ … the uncomfortable truth is, we aren’t positioned to win this arms race and neither is OpenAI.
“While we’ve been squabbling, a third faction has been quietly eating our lunch … I’m talking, of course, about open source. Plainly put, they are lapping us … and the profound implications are we have no secret sauce.
“Our best hope is to learn from and collaborate with what others are doing outside Google.”
The release of China’s open-source DeepSeek triggered a 17 per cent fall in Nvidia’s share price.
Subsequent comfort that Nvidia “might” still have indisputably monopolistic prospects only resulted in the share price bouncing 8 per cent. My reading is that investors are now feeling the prescience of the Google researcher who leaked that document – a delayed reaction to that moment in 2022
Meanwhile, revealing hubris and insecurity, AI thematically-exposed company CEOs are trotting out that age-old quip and “welcoming the competition”.
Legendary investors Buffett, Thiel and Lynch, as well as micro-economics 101 tell you the best businesses are monopolies.
And experience tells me when a company is priced like a monopoly but is actually no such thing, the consequences can be harrowing on your wallet.
Roger Montgomery is founder and chief investment officer at Montgomery Investment Management
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