According to the great wisdom of the masses as understood by Wikipedia, a industry is said to be a natural monopoly “if one firm can produce a desired output at a lower social cost than two or more firms”. The most obvious situation arises in the case of utilities. If there is little possibility for differentiation in the product and traditional understanding of economies of scale apply, then the company who scales the quickest can offer the cheaper prices driving consumer costs below the production costs of the other companies.

There has been some discussion of whether the online search industry follows this pattern and the jury is probably still out on this question. The permutations of search mean that niche markets can exist such as the twitter-yahoo news search. It seems unclear how Google could do this cheaper simply because of its size (it may have better engineers or ideas but the size doesn’t drive down costs of new search development).

I would propose that online security for payments has many characteristics of a natural monopoly.

First, this industry operates on the back end of most websites. This means that the average user knows almost nothing about the various providers other then their logos.

Second, keeping up with hackers and ensuring the safety of data requires a significant amount of R&D. Currently, this industry is Verisign (VRSN, 3.87 B market cap), Entrust (ENTU, 97.07 M market cap), and Symantec Corp. (SYMC, 12.91 B market cap). Symantec is the creator of Norton anti-virus stuff too so the market cap comparison isn’t exactly great. Anyhow, to give you an idea how standardized Verisign has become, even PayPal has their logo promising security. Their earnings are this afternoon so we can get a little more information. Just some ideas I had during constitutional law today.

Happy Hunting all