The good, the bad and the WACCY

SHOPPING FOR an iPod Shuffle USB cable last week, I learnt two things. One, they are not in stock in High Street stores. Two, Apple thinks $50 is an appropriate price for a piece of wire.

I think it’s taking the amber fluid.

Fortunately it appears you can buy a functional non-Apple piece of wire for less than $10 online.

However, Apple’s attempted price-gouging illustrates what companies will do if they think they can get away with it. The more market power a company has, the bigger a premium it can charge over cost.

Apple has achieved market power through its innovative technology and brand identity. Others do it by monopolising the supply of a product or service.

Of these, some are born monopolies, some achieve monopoly, and others have monopoly thrust upon them. All three have attractions for investors because of their ability to deliver relatively high returns for relatively low risk. Examples include Auckland Airport, Vector and Chorus.

But there is a catch. The same things that make monopolies attractive for investors – the rivers of cash, the milking of captive customers – also attract regulatory action to curb excess profits.

Last week, Chorus shares were pole-axed after the Commerce Commission said it thought the telco network operator was charging way too much for wholesale broadband services.

Chorus said the commission’s proposed price cuts would slash its earnings by $150 million to $160m a year after December 2014 and, after closing at $3.40 on Friday, November 30, Chorus shares spent Monday and Tuesday skydiving to $2.78 – a drop of 18 per cent.

This year power network operator Vector was pinged by two commission price decisions, proposing cuts to its electricity and gas distribution prices. In August the commission proposed average price cuts of 8 per cent on its electricity distribution and in October, it said Vector should cut gas distribution and transmission prices by an average 16 and 25 per cent respectively.

The market appeared to be expecting the electricity move but the second triggered a share-price decline of about 10 per cent over the following weeks.

Auckland Airport, meanwhile, is in the throes of a commission review assessing how well an ‘‘information disclosure’’ regime is working to benefit consumers and limit excess profits.

The routine review followed the airport’s announcement in June of changes to airline fees, involving an average increase of 31 per cent per domestic passenger – from $4.23 to $5.55 – and an average cut of 2.6 per cent – from $22.13 to $21.55 – per international passenger.

Although a similar process at Wellington Airport led to a commission finding the company was ‘‘earning an excessive return over time’’, the review has had no discernible effect on Auckland Airport’s share price, which rose about 12 per cent over the period. What to make of these events? Although regulatory action doesn’t always hit a company’s shares, investors would surely be wrong to assume a regulated