When I read that Infospace’s stock price had dropped 22% on reports that it has lost its largest customer, Cingular, and that analysts were calling for the company to shut down and return cash to shareholders, one word came to mind: oligopsony. (That is how my mind works.)
A monopoly describes a marketplace with many buyers but only one seller. The market for PC operating systems is effectively a monopoly, dominated by Microsoft. A monopsony is a market with only one buyer. This is rarer, so the word is unfamiliar. The market for tanks and helicopter gunships in the US is a monopsony.
An oligopoly is a market with many buyers but just a handful of sellers, and an oligopsony is a market with many sellers but just a few buyers. So few that they "can play off one supplier against another, thus lowering their
costs. They can also dictate exact specifications to suppliers, for
delivery schedules, quality, and … pass off much of the risks of overproduction,
natural losses, and variations in cyclical demand to the suppliers." (Wikipedia.)
The market for mobile content and applications in the US is an oligopsony. Four buyers dominate the market - Cingular, Verizon, Sprint (including Nextel), and T-Mobile - but there are hundreds of sellers like Infospace. Consequently the buyers have extraordinary power: power to dictate contract terms, to rein in suppliers that are too ambitious, and even to summon competitors into existence for suppliers who have none. Even if you get to be big and successful, when you only have four possible customers, losing one means losing at least 20% of your revenue overnight.
If you were checking Infospace’s stock this week, you might have guessed that the ticker was INFO (it is actually INSP). INFO is the ticker of Metro One Telecommunications, which was until a few years ago one of the biggest providers of directory services to the US carriers - the original mobile content business. When you called 411 from your wireless phone, Metro One answered. Then the company lost its contract with Sprint, and began a long slow decline from around $150 to $2.50.
How do you make a billion dollars in this kind of market? You can grow your business as fast as possible into one of a handful of powerful sellers - an oligopoly to counter an oligopsony. This has been the strategy of almost every mobile content company to date, and so far none has succeeded. Or you can market your content directly to consumers. Not surprisingly, many new startups in the mobile content market are taking this approach. It will be interesting to see if any of them are more successful than Infospace.
