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MOATS are for dummies!


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Haha that unsubtle mentioning of his book, nice..  Guess he needs the money. Maybe he can ask Warren to buy it?

 

If Apple had moats it would fight for market share based on price, shaving margins. If Apple had moats it would stop inventing new product categories because it would no longer have the need to invent new product categories. If Apple had moats, we’re told, it make more money.

 

What?

 

 

And so they count on their products succeeding on merit, not low prices. They like it that old product categories die and new categories replace them. They like not having moats because moats reward only sloppy behavior.

 

So high quality products with the latest software, the Itunes ecosystem, the huge app store, compatibility of all products, brand value, .. don't constitute a moat?

 

They simply are in a business were doing nothing means losing, that doesn't mean they don't have a moat. Doing nothing would simply mean they lose there moat slowly and then quickly. Thus they try to stay ahead of their competitors so that they can keep those margins. But I'm preaching to the choir here..

 

 

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I agree with this post, it's fascinating to think about.  Apple is doing something unique, they create new products that capture the large upfront margin and then let the product drop off as margins shrink.

 

Some of his point might be lost on a non-technical audience.  Substitute moat with vendor lock-in.  You purchase ILOG from IBM and rearchitect your call center to use it.  IBM can never release another update and you're stuck with them paying for years, that's a moat.  That's no uncommon in the IT world.  If you saw some of the outdated stuff that companies are using and paying IBM to support you'd be shocked.

 

I'd disagree that the Apple ecosystem is a moat.  I love Apple products, they work well and I like their build quality.  Recently I needed to buy a Windows machine for a business project.  I'm on that machine almost all the time now, if I had to never use OS X again it would be fine.  The fact that songs are in iTunes or whatever isn't a big deal.  The important things (documents/code) works on both environments.

 

Apple needs to continually be pushing the ball forward.  A company with a moat can sit on a crappy product and fail to innovate for years and still reap giant rewards.  Look at the telecom carriers and their moat, it's giant, telecom innovation isn't exactly thriving in the US, doesn't matter.

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Why sit on a crappy product with ok margins when you can develop better products with much higher margins that also help the long term success of the company? Some companies can improve products and returns, others can't. Telecom etc is mostly in the latter group. Or they often can but the rewards aren't worth the effort/risk.

 

Not everyone is fine with switching back and forth between windows/apple/something else. The moat exists out of more than this but it is a vital part of it. Plenty of repeat costumers out of habit and convenience.

 

Sooner or later every moat ceases to exist as moats are breachable. KO's moat would be breached one day if they stopped marketing their products for example. In the same way Apple prefers to keep digging dirt out of that moat to maximize current and future returns. That's only the sensible thing to do.

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Technophiles argue other phones are both technologically superior to the iphone and provide a better value (cost-benefit) to the end user. Yet look at the economic results.

 

There's a reason Apple's competitors are playing in the low cost field.

 

Also, product updates do not mean a moat is non-existent.

 

Gillette would still be shilling 1 blade razors. Instead PG has added so many blades I can shave from my sideburns down to my adam's apple in one fell swoop.

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I agree with this post, it's fascinating to think about.  Apple is doing something unique, they create new products that capture the large upfront margin and then let the product drop off as margins shrink.

 

The author states his position is that "Apple does not believe in moats". If they have a moat and how strong that moat is if it exists is a slightly different topic. I don't believe the "Apple does not believe in moats" position, even though their ecosystem is not as strong a moat as switching costs from IBM or Oracle it is still a moat. It may not be as deep or have as many crocidiles (yet to be seen). Moats as we know can be based on switching cost, lowest cost provider, network effect and intagible assets (brand for example). It seems to me to that Apple has for a long time been strategically focusing on intagibles (brand), switching cost (eco system) and now network effect (payments). Even if you believe they don't have strong moats in these areas it seems hard for me to swallow that they don't believe in moats.

 

Some of his point might be lost on a non-technical audience.  Substitute moat with vendor lock-in.  You purchase ILOG from IBM and rearchitect your call center to use it.  IBM can never release another update and you're stuck with them paying for years, that's a moat.  That's no uncommon in the IT world.  If you saw some of the outdated stuff that companies are using and paying IBM to support you'd be shocked.

 

Yes. Worked in IT for a long time and I know exactly what you are talking about. But switching costs is a particular type of moat. I agree that Apple that does not have the switching cost moat that IBM does. I always chuckle when I am on a flight and I see someone fire up Lotus notes, or some app to access an AS/400 app over in flight wifi.

 

I'd disagree that the Apple ecosystem is a moat.  I love Apple products, they work well and I like their build quality.  Recently I needed to buy a Windows machine for a business project.  I'm on that machine almost all the time now, if I had to never use OS X again it would be fine.  The fact that songs are in iTunes or whatever isn't a big deal.  The important things (documents/code) works on both environments.

 

That is your opinion based on your experience and personal prefernce. I can provide similar real life stories that provide a different viewpoint. Moats take a long time to build and it remains to be seen if Apple is building a strong one in their ecosystem, but I still argue they believe in moats.

 

Apple needs to continually be pushing the ball forward.  A company with a moat can sit on a crappy product and fail to innovate for years and still reap giant rewards.  Look at the telecom carriers and their moat, it's giant, telecom innovation isn't exactly thriving in the US, doesn't matter.

 

Telecom is essentially a utility from a moat perspective. Different type of moat. Not trying to come of as a crazy Apple bull here but does anyone here really believe that they do not believe in moats and not actively trying to build them?

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I agree with this post, it's fascinating to think about.  Apple is doing something unique, they create new products that capture the large upfront margin and then let the product drop off as margins shrink.

 

The author states his position is that "Apple does not believe in moats". If they have a moat and how strong that moat is if it exists is a slightly different topic. I don't believe the "Apple does not believe in moats" position, even though their ecosystem is not as strong a moat as switching costs from IBM or Oracle it is still a moat. It may not be as deep or have as many crocidiles (yet to be seen). Moats as we know can be based on switching cost, lowest cost provider, network effect and intagible assets (brand for example). It seems to me to that Apple has for a long time been strategically focusing on intagibles (brand), switching cost (eco system) and now network effect (payments). Even if you believe they don't have strong moats in these areas it seems hard for me to swallow that they don't believe in moats.

 

Some of his point might be lost on a non-technical audience.  Substitute moat with vendor lock-in.  You purchase ILOG from IBM and rearchitect your call center to use it.  IBM can never release another update and you're stuck with them paying for years, that's a moat.  That's no uncommon in the IT world.  If you saw some of the outdated stuff that companies are using and paying IBM to support you'd be shocked.

 

Yes. Worked in IT for a long time and I know exactly what you are talking about. But switching costs is a particular type of moat. I agree that Apple that does not have the switching cost moat that IBM does. I always chuckle when I am on a flight and I see someone fire up Lotus notes, or some app to access an AS/400 app over in flight wifi.

 

I'd disagree that the Apple ecosystem is a moat.  I love Apple products, they work well and I like their build quality.  Recently I needed to buy a Windows machine for a business project.  I'm on that machine almost all the time now, if I had to never use OS X again it would be fine.  The fact that songs are in iTunes or whatever isn't a big deal.  The important things (documents/code) works on both environments.

 

That is your opinion based on your experience and personal prefernce. I can provide similar real life stories that provide a different viewpoint. Moats take a long time to build and it remains to be seen if Apple is building a strong one in their ecosystem, but I still argue they believe in moats.

 

Apple needs to continually be pushing the ball forward.  A company with a moat can sit on a crappy product and fail to innovate for years and still reap giant rewards.  Look at the telecom carriers and their moat, it's giant, telecom innovation isn't exactly thriving in the US, doesn't matter.

 

Telecom is essentially a utility from a moat perspective. Different type of moat. Not trying to come of as a crazy Apple bull here but does anyone here really believe that they do not believe in moats and not actively trying to build them?

 

In IT there's also a psychological/emotional moat.  Your counterpoint to my OS X->Windows experience brought this to mind.  I've worked in some Windows shops where they will think that Mac can't do something because they don't have first hand experience.  They are so MS experienced that they wouldn't even try an Apple product, even if it has the functionality and is superior.

 

At the same time I think this is the moat that Apple wants to have.  The emotional one, where users just blindly user their products because they have the Apple logo on them.  Once a company gets traction like this it's nearly impossible to switch away. 

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The notion that Apple doesn't believe in moats is absurd.  Yes, they are willing to cannibalize existing products with new ones (abandon one moat by digging a new one in a different spot), but Apple's moat is: its design, its high build quality, its eco-system (breadth of products that all work together), its simplicity (all the features that are necessary, but none that are not).  Apple has built a brand that stands for all of these things and more.  That is its moat.

 

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I think it goes beyond the brand into the organization of Apple itself. We've seen in real-time how hard it is to build the whole stack of hardware, software and services that work together. Look at Microsoft's, Facebook's, Amazon's, and Google's failed entry into hardware. And look at Samsung's failed entry into software and services.

 

I don't think it's a coincidence that, as Tim Cook says, only Apple can do this. It's Apple's unique organization and culture that was the best and most important thing that Steve Jobs created, as Tim Cook said in a recent interview. It's a systematic structure for innovation (innovation is hard to do, whereas mere novelty is quite easy to do). That's Apple's moat.

 

(Whether the above is actually true or not, I believe that's close to Apple's internal narrative as to what its moat is.)

 

With the recent round of hires we'll see how well this structure can take in new kinds of inputs (culture leaders, creative personalities, etc.) and convert them into product innovation.

 

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I think it goes beyond the brand into the organization of Apple itself. We've seen in real-time how hard it is to build the whole stack of hardware, software and services that work together. Look at Microsoft's, Facebook's, Amazon's, and Google's failed entry into hardware. And look at Samsung's failed entry into software and services.

 

I don't think it's a coincidence that, as Tim Cook says, only Apple can do this. It's Apple's unique organization and culture that was the best and most important thing that Steve Jobs created, as Tim Cook said in a recent interview. It's a systematic structure for innovation (innovation is hard to do, whereas mere novelty is quite easy to do). That's Apple's moat.

 

(Whether the above is actually true or not, I believe that's close to Apple's internal narrative as to what its moat is.)

 

With the recent round of hires we'll see how well this structure can take in new kinds of inputs (culture leaders, creative personalities, etc.) and convert them into product innovation.

 

 

Agreed that is also part of their moat.  It is just the flip side of saying that one of the things their brand represents is seamless integration of hardware and software.  The Apple brand represents this, because they are the only company in the world that has pulled this off correctly.  Not only do they design their own devices, but even their own IC's.    They are a device design company, an IC design company, a software company, a services company, all rolled into one.  I can't think of any other company that has pulled all of that off successfully and been world class in every area.  Apple has a moat.

 

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Apple maintains its high end Moat by continuous improvement. 

 

Coke maintains its moat by continuous advertising. 

 

Disney spent a fortune creating Frozen and opened up a whole new audience by tapping girl power. 

 

All companies spend money to maintain their competitive position.

 

Even Peter Lynch's gravel pit needs to spend money getting environmental approvals, building roads, etc. 

 

Even a real live moat in old times needed to be managed with resources spent on it. 

 

Apple is no different. 

 

Buffett has said somewhere that he wants a business that even an idiot can run.  He was wrong in this statement.  Coke required really good CEOs to maintain its leadership position.  Buffett has been involved in ousting weak CEOs at coke.  Management is always key.  There are no exceptions. 

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Apple maintains its high end Moat by continuous improvement. 

 

Coke maintains its moat by continuous advertising. 

 

Disney spent a fortune creating Frozen and opened up a whole new audience by tapping girl power. 

 

All companies spend money to maintain their competitive position.

 

Even Peter Lynch's gravel pit needs to spend money getting environmental approvals, building roads, etc. 

 

Even a real live moat in old times needed to be managed with resources spent on it. 

 

Apple is no different. 

 

Buffett has said somewhere that he wants a business that even an idiot can run.  He was wrong in this statement.  Coke required really good CEOs to maintain its leadership position.  Buffett has been involved in ousting weak CEOs at coke.  Management is always key.  There are no exceptions.

 

WEB, as usual, is trying to get a point through, and I think here he meant to say that moat maintenance is something that is far easier than moat building, i.e. even relatively mediocre managements can look good if they judiciously maintain the moat. However, the larger the company, the more complex the moat because it faces more "dangers" - diverse customer bases (e.g. go to a McD's in Russia [while they are still open, LMAO] and adults will have coffee or tea, not coke, while kids will gobble up coke like in the US), regulations, competitors - it's more of a headache and the larger the proverbial perimeter, the higher the chances of somebody sneaking in unbeknownst and slipping off with the Crown Jewels ;)

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Buffett has said somewhere that he wants a business that even an idiot can run.  He was wrong in this statement.  Coke required really good CEOs to maintain its leadership position.  Buffett has been involved in ousting weak CEOs at coke.  Management is always key.  There are no exceptions.

 

He wants a business that can be run by ham sandwhich because someday a ham sandwhich will end up running it. I think one of the deeper points in that statement is a company with a strong moat will be more likely to survive sub-par management for quite a while. If you own a business for a very long time there is a good chance you will get some bad managers in there. The Moat can help mitigate that. The bad manager does some damage for while and you boot them out and recover. In the long run the brand or company is not severely damaged. The new coke fiasco might be an example of that.

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Buffett has said somewhere that he wants a business that even an idiot can run.  He was wrong in this statement.  Coke required really good CEOs to maintain its leadership position.  Buffett has been involved in ousting weak CEOs at coke.  Management is always key.  There are no exceptions.

 

He wants a business that can be run by ham sandwhich because someday a ham sandwhich will end up running it. I think one of the deeper points in that statement is a company with a strong moat will be more likely to survive sub-par management for quite a while. If you own a business for a very long time there is a good chance you will get some bad managers in there. The Moat can help mitigate that. The bad manager does some damage for while and you boot them out and recover. In the long run the brand or company is not severely damaged. The new coke fiasco might be an example of that.

 

Agree. 

 

Apple maintains its high end Moat by continuous improvement. 

 

Coke maintains its moat by continuous advertising. 

 

Disney spent a fortune creating Frozen and opened up a whole new audience by tapping girl power. 

 

All companies spend money to maintain their competitive position.

 

Even Peter Lynch's gravel pit needs to spend money getting environmental approvals, building roads, etc. 

 

Even a real live moat in old times needed to be managed with resources spent on it. 

 

Apple is no different. 

 

Buffett has said somewhere that he wants a business that even an idiot can run.  He was wrong in this statement.  Coke required really good CEOs to maintain its leadership position.  Buffett has been involved in ousting weak CEOs at coke.  Management is always key.  There are no exceptions.

 

WEB, as usual, is trying to get a point through, and I think here he meant to say that moat maintenance is something that is far easier than moat building, i.e. even relatively mediocre managements can look good if they judiciously maintain the moat. However, the larger the company, the more complex the moat because it faces more "dangers" - diverse customer bases (e.g. go to a McD's in Russia [while they are still open, LMAO] and adults will have coffee or tea, not coke, while kids will gobble up coke like in the US), regulations, competitors - it's more of a headache and the larger the proverbial perimeter, the higher the chances of somebody sneaking in unbeknownst and slipping off with the Crown Jewels ;)

 

Also agree. 

 

I think a "a somewhat durable situation (sds), is probably what Buffett has in mind. 

 

In that context Apple has an sds, as does Google, probably moreso.  Google is interesting in that we dont know what is going to unseat them at this point.  They too have too spend huge amounts to stay ahead of the curve. 

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I think other examples of strong moats in the technology space are those enjoyed by Baidu, Alibaba and Tencent. The government keeps out competition for foreign enterprises, although it somewhat encourages competition between these three and the other, sub-scale players domestically. It doesn't matter if their services are inferior to Google's, Amazon's, or Facebook's (sometimes the services are better and sometimes they are worse). The competition is simply locked out by the Great Firewall and other regulatory barriers.

 

These companies are also free to be fast-followers of foreign innovation without having to actually compete against that innovation. It's quite a good position to be in.

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Buffett has said somewhere that he wants a business that even an idiot can run.  He was wrong in this statement.  Coke required really good CEOs to maintain its leadership position.  Buffett has been involved in ousting weak CEOs at coke.  Management is always key.  There are no exceptions.

 

He wants a business that can be run by ham sandwhich because someday a ham sandwhich will end up running it. I think one of the deeper points in that statement is a company with a strong moat will be more likely to survive sub-par management for quite a while. If you own a business for a very long time there is a good chance you will get some bad managers in there. The Moat can help mitigate that. The bad manager does some damage for while and you boot them out and recover. In the long run the brand or company is not severely damaged. The new coke fiasco might be an example of that.

 

Agree. 

 

Apple maintains its high end Moat by continuous improvement. 

 

Coke maintains its moat by continuous advertising. 

 

Disney spent a fortune creating Frozen and opened up a whole new audience by tapping girl power. 

 

All companies spend money to maintain their competitive position.

 

Even Peter Lynch's gravel pit needs to spend money getting environmental approvals, building roads, etc. 

 

Even a real live moat in old times needed to be managed with resources spent on it. 

 

Apple is no different. 

 

Buffett has said somewhere that he wants a business that even an idiot can run.  He was wrong in this statement.  Coke required really good CEOs to maintain its leadership position.  Buffett has been involved in ousting weak CEOs at coke.  Management is always key.  There are no exceptions.

 

WEB, as usual, is trying to get a point through, and I think here he meant to say that moat maintenance is something that is far easier than moat building, i.e. even relatively mediocre managements can look good if they judiciously maintain the moat. However, the larger the company, the more complex the moat because it faces more "dangers" - diverse customer bases (e.g. go to a McD's in Russia [while they are still open, LMAO] and adults will have coffee or tea, not coke, while kids will gobble up coke like in the US), regulations, competitors - it's more of a headache and the larger the proverbial perimeter, the higher the chances of somebody sneaking in unbeknownst and slipping off with the Crown Jewels ;)

 

Also agree. 

 

I think a "a somewhat durable situation (sds), is probably what Buffett has in mind. 

 

In that context Apple has an sds, as does Google, probably moreso.  Google is interesting in that we dont know what is going to unseat them at this point.  They too have too spend huge amounts to stay ahead of the curve.

What could unseat Google?

- Chronic BW shortage, both in capacity and speeds. There is a non-zero probability that we will see a tolled versus toll free internet. Those opting to pay tolls for more BW are likely to demand an ad free experience. The toll free variety could slow to a crawl. Ads, if they happen in this realm would drive people to the toll roads.  This happened in Act I already. Dial up internet died this way. Is Google going to be the survivor through this tectonic shift? I dont know but I highly suspect this is the real reason for Google Fiber. They are hoping to shame the ISP's into upgrading BW. Of course at their expense, so that Google can keep collecting ad revs. Google has everything to lose, IMO.

- Privacy concerns. Europe is already putting walls against reaching consumers thru internet advertising. If more of the world follows, Google suffers.

- Security breaches. It is not hard to imagine bad things happening because of things like Google Earth, street views of your home and oh, pictures of your car in your driveway. A few of these where criminals primarily used Google should be really bad headlines.

 

 

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