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Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to write about a bunch of niche industries in which there are rising amounts of market concentration, largely due to financiers on Wall Street executing a strategy called a ‘roll-up.’ Roll-ups happen in sectors that, like cheerleading, you wouldn’t immediately imagine as dominated by corporations with market power. I write a lot about big tech and private equity, but when I say monopolies are everywhere in our economy, I truly mean everywhere. I’ll go into weird areas, like the businesses of mixed martial arts, portable toilets, and mail sorting software.

First, some house-keeping. I did a podcast for Team Human titled “Make America Ours Again.” Also, my book Goliath is now available in the UK.

And now…

Roll-Ups and Add-Ons and Buy-Outs, Oh My

About ten to fifteen years ago, I noticed that American life was getting harder in a bunch of subtle ways. More and more, dealing with problems, like hidden fees on hotel reservations, medical billing issues with my doctor, or problems with gift cards, meant working through increasingly annoying bureaucracies and automated phone trees. Same with filling out human resources forms at work. Many of my interactions with businesses as either a worker or consumer seemed to be coming straight out of the movie Office Space.

I didn’t really understand why until my physical therapist, a wonderful and smart businesswoman, told me about how her industry of independently owned practices was being bought out by a private equity firm. The service her small practice offered was great, with her therapists focused on dealing with the patient’s pain. But the private equity firm, she told me, was gradually buying out competitors in and around Maryland and DC, and corporatizing them. Health insurers made it tough to get reimbursements, so this private equity firm had better bargaining leverage. Corporatized therapy meant checklists and mistreating patients, ignoring their pain and getting them out the door (which would likely drive some of them to take opioids). These twin pressures, of rising market power and concentrated finance, seemed a good explanation for degraded service in a small but important industry.

What my therapist described in her specific area actually a trend. Two days ago, FTC Commissioner Rohit Chopra issued a comment suggesting the FTC pay more attention to small mergers across the economy, with a specific focus on private equity firms who engage in this kind of practice, which is known as a ‘roll-up.’ In a roll-up, usually in markets with lots of competitors and somewhat low barriers to entry, a private equity firm will buy small privately held companies and combine them into one conglomerate, continuing to buy “add-ons” in the same line of business to acquire market power.

Chopra noted roll-ups in physicians practices in anesthesiology and emergency medicine, as well as opioid treatment centers and insurance brokerages. He observed that “68% of private equity buyouts are add-ons from previous acquisitions,” which is to say that most acquisitions by private equity firms are attempts to expand market power for companies they already own. A quarter of these acquisitions, in fact, are “tied to an investment with at least five add-ons.” Given that there are thousands of private equity firms making transactions every year, that’s a lot of attempts to increase market power.

In part, rolling up an industry is a way to raise prices or acquire bargaining power, as my physical therapy described. But even without the ability to build sustainable barriers to entry, there is a strong rationale. Doing a roll-up is designed to take advantage of how capital markets value bigger companies versus small ones, or what is called multiple expansion. Buying a small family owned business for three to four times its cash flow (or what is known in annoying accounting-speak as earnings before interest, taxes, depreciation, and amortization, abbreviated as EBITDA), putting it into a conglomerate that financiers then call a ‘platform’ or ‘market leader’, means you can often sell the much bigger company for eight to ten times that cash flow later on. Is the new bigger corporation more or less profitable? It depends on the industry. But multiple expansion is largely a result of storytelling by financiers to a small club of investors and the ten year period where corporate asset values keep increasing.

There is an entire roll-up expert field, with thousands of private equity firms that are looking for industries to roll-up, some of which are successful and some of which are not. I’m going to describe a few of them, in weird industries. After going through these, you will understand why life, as a consumer, worker, or businessperson, is getting harder. You will also see some of the strategies and legal underpinnings for this trend, and how how to stop and reverse it.

1) Portable Toilets

The portable toilet market would seem to be somewhat difficult to monopolize. Renting porta potties is traditionally a working class business, with small regional players owned by families who work in and around construction and event promotion, and then sell to those industries. It relies on dealing with chemicals and sewage, and also being reasonably good at sales. There are some economies of scale involving route density, because sending trucks out to plumb and clean boxes does allow each truck to service more locations per hour. But scale isn’t that important, and it’s not a complex industry. “At the end of the day, it’s a four-foot-square box,” as one salesman put it. “And guess what? People take a shit in it!”

The average portable toilet costs $400-1000 and then goes out to rent for $200+ a day, though there are luxury versions for weddings and higher-end events. The would-be monopolist in this space is called United Site Services, which is owned by a billionaire named Tom Gores, who controls a Beverly Hills-based private equity firm named Platinum Equity. (There’s another private equity roll-up play in the space called “Johnny on the Spot.”) United Site Services is, as a contact of mine put it, “financial engineering at its finest.” a company that has been tossed around by private equity firms several times. USS has acquired over 25 smaller companies over the past three year, and openly shops for more acquisitions. They even list their acquisitions on their website under “Our Growing USS Family.”

Would-be monopolists aren’t actually any good at the underlying business, but are excellent at financial engineering. You see this most evidently when a truculent business owner simply refuses to sell, and chooses to compete. Here’s what happened when one “port-a-potty king” in New York City, Charlie Howard, got an offer from United Site Services to buy his business, which is named Call-A-Head, but refused. One of his rivals, who ran a business Mr. John, did sell out. “Within days, according to Charlie, the toilet giant was calling Call-a-Head’s clients, offering a 30 percent discount on rentals,” which, if true, is of course a means of engaging in predatory pricing. Howard saw United Site Services as “a lot of college-educated people from Harvard” and “bean counters,” which is what private equity is.

Job review sites seem to confirm Howard’s impression. Job boards for United Site Services are full of angry ex-workers accusing the company of buying out a business for which they worked, and then treating the employees badly, trying to monopolize regional markets, as well as just generally doing a bad job integrating acquisitions.

What is the strategy here from the perspective of Platinum Equity? Will United Site Services monopolize regions of portable toilets? Maybe, maybe not. But it show all the fancy nonsense about economic efficiency and capital market fluidity is just that; our financial managers are spending huge amounts of time and capital working on rolling up a business based on renting toilets so they can flip the business at a higher multiple to some other private equity firm. Despite all the financial engineering, there are no network effects or economies of scale. It’s just renting boxes people shit in.

2. Prison Phone Services

Another area, perhaps among the most gruesome and cruel businesses, is the market for providing phone services to prisoners. These companies charge between $10-15 for inmates to receive a single phone call, and then offer a kickback to the jail in return. It’s almost hard to believe this is an industry, since it largely operates by extracting money from the families of prisoners, who are already among the poorest and most powerless people in America, in order to finance their own imprisonment.

There are three major competitors in this market, Global Tel*Link (GTL), Securus Technologies, and 3Cinteractive Corp. Both Securus and GTL are owned by private equity. Securus in fact is owned, once again, by billionaire Tom Gores’s Platinum Equity, which is trying to roll up the port-a-potty business (he also owns the Detroit Pistons and does a lot for charity). Right after buying Securus, Gores had the corporation try to buy 3Cinteractive, one of its remaining competitors, but regulators blocked the acquisition. No matter, all three major firms were recently sued for price-fixing, so even if they can’t merge, they allegedly do collude. I suspect there are roll-ups in jail services space, like payment cards and video-conferencing.

3. Dentistry

Another industry that is undergoing the roll-up strategy are dentist practices, and this time it’s led by leveraged buy-out giant KKR through a company called Heartland Dental. It’s a similar story as United Site Services, with regional practices bought up and turned into a corporate chain, though there’s a better argument for a monopoly play. Scale for dentistry enabled better negotiating bulk with insurance companies. "Look at what happened to pharmacy and it’s going to go that way in dentistry," said the CEO of Heartland Dental. "We can be where Walgreens is in 20 years.” Of course, part of corporatizing dentistry is corrupting it; “In 2013, a U.S. Senate committee found that some company-controlled dental clinics were providing unnecessary procedures to children in order to collect more money from Medicaid.”

4. Mixed Martial Arts

The Ultimate Fighting Championship (UFC) is the preeminent mixed martial arts league in the United States, owned by private equity giants KKR, Silver Lake Partners, Ari Emanuel’s Endeavor, and MSD Capital.

There is a bitter antitrust suit that has been going on for years about how the UFC monopolized the business, and thus deprived fighters of income. Mixed martial arts started becoming popular in the late 1990s, with a variety of leagues offering pay packages to stars, somewhat similar to boxing. As with cheerleading, another private equity fueled roll-up I’ve written about, you wouldn’t think that mixed martial arts is prone to monopolization; all you need is a stage and some fighters, right?

But in 2006, UFC began a merger wave to take its competitors out of the business. As it gained power, the UFC allegedly forced all of the top fighters to basically become exclusive to it, denying the other leagues any ability to get access to talent. It would also intentionally counter-program against rivals, purposely staging fights on the same nights as its rivals so as to force them to lose money, and the UFC would pressure sponsors of fighters for other leagues to drop out.

The strategy worked. UFC was able to buy out its rivals, purchasing World Extreme Cagefighting (“WEC”) and World Fighting Alliance, as well as rival promoter Pride and a host of others. Eventually in 2011, it merged to monopoly with the remaining major promoter, “Strikeforce,” which was a deal the Obama administration should have, but did not, block. UFC even forced Mark Cuban’s HDNet, which was hosting some fights, to shut down its fight business. Soon it had most of the major fighters.

In November 2008, the President of UFC actually celebrated his monopolization publicly on YouTube, posting a video listing the various competitors he had put out of business, holding up a mock tombstone listing their names, and saying “I’m the grim reaper, motherf***ers.”

The real cost of the monopolization is on fighters, who get 20% of the take for any fight, and have few other real options. These fighters are classified as independent contractors, and have been apparently prohibited from speaking out against safety protocols by the UFC during the pandemic.

5. Mail Sorting Software

In 2017, private equity firm Thompson Street Capital Partners bought technology firm BCC Software, which provides the kind of complex software for industrial-strength mailing. Such software is helpful for businesses who have to use the post office to get millions of pieces of mail out there. These are an endless number of niche business to business sectors most of us never see, high-end mailing software is just one of them.

The United States Post Office allows bulk mailers to send mail at lower postage rates so long as they do some of the USPS's work for them, which is to say match the complex codes that map out how mail gets delivered. So rather than just dumping off 100,000 envelopes that are all alphabetized by the mailer's last name, you would put the right numbering on these envelopes and bundle them in trays or sacks with similar classifications. As a mailer, you get better discounts if you're cutting out more of the USPS's work, and sorting things so the USPS doesn’t have to is a big part of that work.

This kind of sorting is a complex undertaking, and the Post Office’s physical mail delivery network changes in tiny ways every week. Routes change due to floods, new or closed facilities, and so forth; so keeping up with the Post Office is necessarily complex. Though the market for this software is complex, there are basically three top-flight software packages that help bulk mailers do this work, and they are very expensive. One was created by Satori Software, one by Presort, and one by BCC Software. First, Satori bought Presort in 2012, and then BCC Software bought Satori in 2019. Stakeholders assumed this last merger would be blocked, as antitrust enforcers would surely see it as creating an illegal monopoly. But as usual, enforcers were napping, so all of a sudden, the three top-flight industrial mail sorting software are now owned by one private equity holding company.

From what I understand, the monopoly is quite an unhappy place now, and customers have little to no bargaining power.

What to do?

None of these roll-ups have to happen. Government enforcement of merger law would help of course, as would clear rules by the FTC against a host of anti-competitive practices. In certain markets the government can step in and make the product. For postal sorting software, the USPS could itself produce the software, and for others, like prison phone services, jails should just buy it from a regular telecom company and give it to prisoners for free. It would also help if it were much easier to bring and win private antitrust suits, so that we don’t have to rely on inept government enforcers.

There’s nothing inevitable about any of this, we just happen to live in a moment where we the people are still confused about what kind of power we have through politics. But if we realize that roll-ups are often (though not always) just a means of cheating, and that they are happening so often and in so many industries, we can begin to fight back against that vague and accurate sense that everything seems to ineluctably get worse.

The alternative, of doing nothing, is deeply problematic. If we tilt too far in the direction of concentrating power, our society begins to look less and less like a democratic order. In fact, monopolies are the building bloc of aristocracy, and always have been.

Fortunately, we’ve been in this situation before, and have clawed our way out. In 1796, Thomas Paine, the voice of the American Revolution, wrote a vicious open letter to George Washington criticizing his administration. Pain wrote, “Monopolies of every kind marked your administration almost in the moment of its commencement. The lands obtained by the revolution were lavished upon partizans; the interest of the disbanded soldier was sold to the speculator; injustice was acted under the pretense of faith; and the chief of the army became the patron of the fraud.” In the ‘Revolution of 1800,’ the Democratic-Republican Party defeated the Federalist Party, in the first peaceful transition of national power via an election in modern history.

In other words, the battle over corporate power has always been with us. I hope the next administration and next Congress actually starts to actually get into the fight.

So that’s the main essay for this issue. If you notice any weird monopolies or roll-ups, let me know or post them in the comments. And now a few other, short items.

Amazon Could Be Fined $1 Billion, Pays Just $134k for Violating Sanctions with Iran and Syria: A few days ago, the Treasury Department’s Office of Foreign Assets Control (OFAC) fined Amazon $134k for violating sanctions with Iran, Syria, and Crimea from 2011-2018. Weirdly, OFAC noted that “the statutory maximum civil monetary penalty amount for the apparent violations was $1,038,206,212.” That is a HUGE difference.

OFAC is one of the more powerful parts of government, and it doesn’t mess around, because sanctions are one of the few levers that still work and work quite well. Sanctions compliance penalties reached a decade-high level last year. As an example, a cosmetics company did an internal audit last year, realized inputs for one of its products were coming from North Korea, and told OFAC; it was still fined $1 million. Yet, because Amazon would have litigated and lobbied aggressively, it looks like OFAC went easy on the online giant. It is remarkable how even the most aggressive parts of the U.S. government are afraid of Amazon.

7-Eleven Franchises Become Sharecroppers: Franchise law is fascinating and weird. There’s an interesting story about how 7-Eleven franchises are being screwed by the franchisor with regards to the Paycheck Protection Program loans. In order to qualify for loan forgiveness, franchises must show they spent a certain percentage on payroll, rent, or utilities. The problem is, the 7-Eleven franchisor includes rent payments in an overall payment called the ‘7-Eleven Charge,’ which includes rent, supplies, and whatever other business costs the franchisor wants to be paid for. And 7-Eleven corporate won’t break out what percentage of that goes to rent, so local franchises can’t apply for loan forgiveness. “7-Eleven does not allocate which portion of the Charge is attributable to the lease or the other items encompassed by the Charge,” it told its franchises. Franchising is a huge part of the American small business world, but increasingly it’s just another mechanism to turn seemingly independent businesspeople into dependents on a far-away corporate headquarters.

And that’s the issue.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

UPDATE: I fixed a few things. There are some regional economies of scale in porta potties, though they are not extensive. And private equity firms value portfolio companies based on cash flow (or earnings before interest, taxes, depreciation, and amortization known as EBITDA).

A Land of Monopolists: From Portable Toilets…

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