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Invisible Companies
Steve Ross was a legend. Starting with nothing but a job at his father-in-law’s funeral parlor, he built Time Warner into one of the world’s largest companies, making a mark on every part of the media landscape. MTV and Nickelodeon were born under his roof. He bought and ran Atari. He helped found the New York Cosmos and, with it, professional soccer in America. When Ross died in 1992, Clint Eastwood dedicated his Best Picture Oscar for Unforgiven to him; two years later, Steven Spielberg did the same with Schindler’s List.
Everyone glosses over the boring part. To build the stake he needed to get into the media business, Ross bought and built a string of strikingly mundane companies in the 1950s and ’60s. He started by convincing his father-in-law to let him rent his funeral parlor’s limousines out at night, when they weren’t being used. Then he founded a rental car company, merged it with a parking lot business, bought a cleaning business, and took the whole thing—including the funeral parlor—public as Kinney Services. Ross used Kinney to buy a flooring company, a painting company, a carpentry company, and a plumbing company. He then parlayed this hodgepodge of everyday businesses into acquiring the legendary Warner Bros. movie studio.
There’s a puzzle here worth thinking about. Ross essentially picked up a bunch of stones off the ground and traded them in for a diamond. Usually, to make big money in business, you have to do something no one else can do or have something no one else can have. But any competent businessperson could have bought or started the businesses Ross did. In 1990 he took home $78 million, the largest pay package of any executive in America at the time. How did he get there?
If you took economics, your introductory textbook said something like this: “Business dynamics cause firms to enter and exit markets so that, in the long run, prices are driven down to minimum average total costs, resulting in all firms earning zero economic profit.” What this means is that no company should be able to make outsized profits for very long.
Of course, plenty of companies do make money for a long time, and business strategists have laid out the reasons: Michael Porter’s barriers to entry (you do something no one else can do), and Jay Barney’s costly-to-imitate resources and capabilities (you have something no one else can have). These “moats” protect a company from profit-destroying competition.
The businesses Ross bought and started did not have moats. Funeral parlors, parking lots, rental cars, and the rest are easy industries to compete in. You can tell because they are crowded with competitors. Yet in 1969, Ross bought Warner for roughly $400 million—about $3.5 billion today. Without any sort of moat, Ross should not have been able to accrue the wealth needed to buy one of the storied movie studios of the ages. But he did.
Steve Ross wasn’t the only one. Constellation Software, Waste Management, HEICO, and many other rollups searched for just these sorts of businesses, and built extraordinary profits by looking where no one else was looking. This entire class of mundane businesses sits right in front of our noses, but both management strategists and most businesspeople just couldn’t see it. These businesses are invisible.[1]
You can’t, of course, make a definitive list of today’s invisible companies; that’s the point. But the building blocks of Steve Ross’ early empire are perfect examples, for their time. Others, like HVAC, trailer parks, and candle retailing, were much more fragmented businesses until someone realized they were invisible sources of profit and rolled them up. Hindsight suggests we are currently surrounded by highly profitable companies that we never even think about, while common sense suggests this is impossible.
Your basic econ 101 “economic-profits-go-to-zero” explanation has a couple of assumptions: frictionless entry and exit of companies into an industry, and perfect knowledge of the