The Economics of a Toll Bridge

Buffett tells us that the fundamental economics of a toll bridge are excellent. However, this post is not about a toll bridge. Rather, it’s about the “functional equivalents” of a toll bridge.

Now, apart from the reasons Buffett talked about, what are the other reasons that make a toll bridge a very good business model?

    1. There is usually no alternative. People who have to move from A to B, have to use it. The owner of the toll bridge won’t let you through unless you pay the toll. That’s the key phrase: pay the toll. Keep this phrase in mind because we will need it later.
    2. Even if there is an alternative, people still prefer to use the toll bridge. That’s because in the mind of the user, it does not make sense to use the alternative. Now there can be all kinds of reasons why people prefer to use a toll bridge instead of an alternative. For example, the alternative may be too far, too crowded, too risky (crime-ridden) or too expensive. There may be other reasons as well but the key thing to remember is that the preference is in the mind of the user. Keep this phrase in mind too because we will need it later.

What really happens on a toll bridge?

Now let’s think about what really happens on a toll bridge. If you stand at a vantage point high above the bridge, what do you see? Well, you see movement. You see traffic. And you see the toll barrier, i.e. the gateway. There has to be a gateway owned by someone and used by someone else to pass through. Vehicles passing through have to pay a toll. The toll keeper collects the money and opens the gate. Most of his effort came in making the toll bridge. Now, all he does is open the gate and collect the toll.

Now let’s see what we have. We have several key words or phrases to remember:

    1. Pay the Toll
    2. In the Mind of the User
    3. Movement
    4. Traffic
    5. Gateway

These terms constitute a “bridge” which will connect our physical toll bridge to the metaphorical one.

Toll Bridge is a metaphor

Do these terms remind you of something other than a physical toll bridge? Think about it for a while. What other business models require customers to pay the toll to use something that has no alternative in the mind of the users  something that involves movement of traffic and where the owner of the metaphorical toll bridge is the owner of a gateway?

I am a Tree

In Orhan Pamuk’s best-loved novel “My Name is Red,” a chapter (“I am a Tree”) ends with this beautiful quote.

I thank Allah that I, the humble tree before you, have not been drawn with such intent. And not because I fear that if I’d been thus depicted all the dogs in Istanbul would assume I was a real tree and piss on me: I don’t want to be a tree, I want to be its meaning.

In the spirit of Orhan Pamuk’s metaphorical tree, our toll bridge is saying

I don’t want to be a toll bridge, I want to be its meaning.

Your Assignment

Find other “toll bridges.” Here is a hint.

Post your thoughts. I will come back to finish this…

I Don’t Want to be a Toll Bridge, I want to be its meaning

All right then. I have read your responses many of which were excellent!

It’s been such a long time. It feels good to be recognised at last. I am overwhelmed. You’ve figured out so many manifestations of me.

You spotted me in payment gateways like VISA and MASTERCARD. Billions of transactions go through me everyday.

You saw me in GOOGLE where advertisers pay me to make you discover them when you search for something that’s related to them. I am the gateway in the virtual world through which you end up going from where you are to where my customers want you to be.

In an earlier avatar, I used to be owned by newspaper and television tycoons. I was the gateway through which advertisers reached consumers but when GOOGLE arrived, I moved to greener pastures. As they say, the medium is the gateway.

You located me in the servers of the dominant stock (NSE) and commodity (MCX) exchanges, as well as transaction exchanges for second hand goods (EBAY). I am the gateway which allows billions of transactions to happen everyday and my owners take a cut every time a trade occurs.

You unearthed me in networks of gas pipelines (GAIL), electricity cables (POWERGRID). I am the gateway internet companies (BHARTI) use to make you pay for reading this. I am the network you use when you call your sweetheart or send him or her a gift (DHL).

Every year you notice millions of excited children rushing past me just to be close to a fictional character called Mickey Mouse.

Movie producers go through me to display their movies to you. Your iPhone has more than 50 apps bought from me — the iTunes store. Thousands of app writers pay me the toll to enable them to sell their apps to you. Hundreds of vendors use me — the storefront — to sell their wares to you. They pay me a nice commission too, every time you buy.

If you are a company and you want to raise capital, you better go through me. I am the influential investment banker. I am the dominant credit rater. I can reduce your cost of capital. And I will collect my toll.

You found me in Religion too. I am the temple you give money to. Inside your mind, I am the stairgateway to heaven.

You may think of me as evil, but look I am just a gateway who’s doing its job. You paid a bribe to a toll-keeper babu to move that environmental clearance file to that senior officer who has his own toll collector just outside her office. Yes, I know I am in trouble because of my friendship with a high-profile company. Arvind says I am its gateway for getting things done. Am I? I’ll leave that judgment to you.

So you see, I’ve been around. And I am awesome. But under what conditions do I become truly awesome? That happens if:

  1. I live forever;
  2. I am unregulated;
  3. I don’t cost too much to maintain;
  4. I hugely dominate my markets, leaving virtually nothing for my next competitor because I am the winner who gets to keep all; and
  5. I am insanely profitable. The cash just keeps on rolling in, year after year after year. You only have to look at the tummy of a typical priest in a revered temple to see what I mean.

Now you know the criteria. But beware! There are many masqueraders out there pretending to be me. Why, only yesterday a brand was posing in front of you as me! Imposter!

Didn’t you know I don’t cost much to maintain? You don’t have to spend a fortune to take care of me. That’s not what happens with big brands. Their owners have to spend fortunes investing in maintaining them — billions and billions of dollars every year. Brands are far more demanding than me. I don’t ask for much at all. My needs are few and far between. Just keep me in good shape by spending a little here and a little there and I will keep you happy year after year. When you think of me, think Vatican, not Coca-Cola.

There are some tiny toll bridges out there who aspire to be me one day. If you spot them early, and own them before they become big like me, you could become rich like me.

I can be yours, but first you’ll have to find me.