Jump to content

Buffett, Munger praise Google's 'moat'


jasonw1
 Share

Recommended Posts

Buffett, Munger praise Google's 'moat'

http://www.marketwatch.com/news/story/Buffett-Munger-praise-Googles-moat/story.aspx?guid=%7BCADB3B8E-7DD3-4943-AC90-1E964D35B709%7D

 

I was quite surprised to see Buffett and Munger’s comments, considering they have traditionally shy away from technology companies, plus the comments came from nowhere during the press conference, so I guess they must have been thinking about this for a while, and Google’s moat must have been obvious and widening to convince them.

 

What do you think of Google as an investment?

 

Link to comment
Share on other sites

Well, like I said earlier, one aspect of my daily job is online marketing. Actually, I have both "Google qualified individual" and "Microsoft Ad Excellence" certifications. So I think it's fair to say that it's fairly inside my circle of competence.

 

Let me give you some short comments.

 

Google is, in the online search and content advertising fields, the leader. Regarding search content, they have criteria that make sense to provide relevant "organic" (not paid) results to people who use their search engine, and they do it fast. When people type keywords on Google, they hope that they'll be able to find what they are searching for fast enough. As long as Google is able to do that job better than the other search engines, they should be able to keep their search volume, because they already have the mindshare asset.

 

Now, they bare the fruit of this asset by providing paid results (AdWords) to people. The ways they use to determine how paid results will show up in the overall results is also brillant and sensible to the end user. It's basicaly a keyword bid system, but it goes further than that. It's also people who do the search that will tell you how you rank. If they don't click on any of your ads because they are not relevant to them, even if you bid very high for they keywords, you'll probably end up at the very end of the results. It's a win (user) -win (Google) -win (advertiser) situation system.

 

Regarding content, they have a very wide network of websites who use Google content to advertise and get paid on clicks. Google scan content of websites to provide relevant ads to visitors. When visitors clicks, the owner of website get paid, Google get paid and the advertiser get qualified leads (if he advertise properly). Since Google has a lot of advertiser, it's a good idea to do business with Google. Since Google has a lot of websites owner's as partners, it's a good idea for online advertisers to do business with Google.

 

It goes even further than that. Google has terrific tools. Unlike traditional medias, with Google you can segment like no one I know. It's a little bit like Yellow Pages in some sense. You can choose your keywords and only show your ads when people type those keywords (let's say that you sell hot-dogs. It people in your locality type "hot-dogs restaurant" on Google, it might be a good idea to show up. If they type "south korean gymnastic", maybe your ad budget wouldn't be well spended if you would show up there.

 

You can also segment locally. You may want to target several countries (not a good idea if you're a local hot dogs restaurants), your country, a region, a town or even some specific spots on a map. Google allow you to do that!!!

 

Same thing with content. You can choose the keywords, the specifics websites, the geography, etc.

 

Google has some other great tools, ads features, etc. but I'll stop here. Suffice it to say that they are the leaders in that field. It enjoy a very significant moat that bare some juicy fruits for it's owners. But that's not to say that it is necessarely a durable moat. Microsoft is very agressive in that field and they do a good job. Far from being Google, but I see them as challengers. And who really knows what this field will look like in 10 years? That's the point where I get less confortable with Google. It's not like boring insurance you know...

 

Now, Google as an investment. For those who have red "From good to great" terrific book, Google might be a good case study of what not do to regarding focus. Google tries a lof of new ventures and I'm not so confortable with that. To me, they should invest time, energy and money on where they core competences are (I guess they do that), but leave the extra cash to the shareholders (they do not do that). I guess Peter Lynch would call that diworsification.

 

So I'm not confortable enough to invest in Google.

 

 

Cheers!

 

Link to comment
Share on other sites

Since Munger said, Google's moat is the widest he has ever seen---

 

Let us put extra effort in guessing what Charlie could be seeing.

 

Charlie did not say it is a good investment, so for the discussion sake I will leave it out.

 

Guesses:

 

Is there a tipping point, after which competitors cannot catch up ?

Is it the large number of users ? (numbers alone will not be enough in online things.

                                       but in manufacturing and retail, with larger and larger numbers, economies of scale kick-in).

In newspapers, Once there are certain number of readers, the advertisers only go there.l

    This eventually led a single newspaper in a town.

    Is there some kind of dynamic here ?

   

What more can google do to increase the moat ?

 

(Let us leave aside about google's other initiatives sucess/failures..)

 

Link to comment
Share on other sites

I think it's a buy at $300 or below, but not at current prices.

 

Their operating expenses were out of control until last year when they hired a new CEO. For the last 2 quarters their opex have decreased in much larger proportion than the slowdown in revenue. I thought that was a very interesting trend and I was very impressed.

Link to comment
Share on other sites

I don't really understand why Munger thinks Google's moat is "something he's never seen before". The switching cost for search is ZERO, and it only takes 10 seconds to switch. As matter of fact I routinely use a couple of different ones, if I don't find the the information from one, I'll try the other one. I would agree Google is the clear leader in this space, and I usually don't need to use anything else. The switch cost for publishers is the easy as well, all you need is to copy/paste some scripts to your web pages. I don't have experience about switch cost for advertisers, but from their sign up process it looks pretty easy as well.

 

One big moat I can think of is the "network effect", where more search query brings more publishers, then brings more advertisers, which is similar to the moat like EBAY. Although switching is easy, people don't have any incentive to switch, as long as Google's service is at least as good as the second one. Google's technology is definitely ahead of others at the moment, but it's not something they can sleep on as it changes quickly and others are catching up fast, though Google has managed to stay a few steps ahead so far. But if they have a few flops, even minor, the whole pictures could change very quickly, as the switching is so easy and fast.

 

I really like Google's products and their culture, although not shareholder friendly, which is common for technology companies, as they rely heavily on the creativity and hard-working of engineers, but hey people get rich investing with MSFT before. It's good to see Google is putting some control into their cost and becoming a bit more focused, it probably also indicates their fast growth days are over and they're now big and mature.

 

BTW, Microsoft doesn't own AskJeeves, it has its own Live search.

 

Full disclosure: long EBAY, MSFT, no position on GOOG, yet.

Link to comment
Share on other sites

Guest kawikaho

I've been working in high tech for the past 10 years and I can tell you one thing, nothing in IT has a "moat".  There's a new service coming out called Wolfram Alpha that is pretty astounding.  It looks to compete directly with Google and Yahoo.  I can't even believe someone mentioned Ebay's moat.  AMZN has killed Ebay's moat a long time ago. 

 

 

Link to comment
Share on other sites

Google's moat is a fairly general term.  Having read a lot on Munger including his books, I think that his version of moat would include a number of things other than the usual search speed etc applied to search engine companies.  They have an easy to use Pay-per-click advertising service (main revenue generator) which can be targeted and monitored and tweaked and scaled instantly by the user to such a degree that newspaper, yellow pages and radio ads look like a childish game of blind man's bluff in comparision.  I don't think Google or the internet will eliminate radio or TV ads as there are always people who can be persuaded/herded by a compelling ad, but there seem to also be a lot of people who go looking for what they want and find it using Google.  The moat also contains an army of Phd's (a Phd is almost a prerequisite at Google and Munger likes people who are smart like him).  Google builds their own servers and own unmanned server farms all over the country that look like military installations including some with dedicated water treatment plants for purifying cooling water for servers etc (lots of hardware).  Big sharks in the moat in the form of mindshare (we Google things, movie characters Google things - it's a verb now! - we don't Firefox them or IE8 them).  Perhaps most importantly they have big goals, namely to digitize everything so all information is searchable by everyone, and young leaders who seem to be getting there fast.

 

None of these things are unassailable if Google drops the ball or gets into some kooky di-worseifications (thanks to Peter Lynch for that term) but seeing as how they are oriented towards a huge goal and generate mountains of cash from the existing machine to pump back into the machine advancing towards the goal (they're way ahead and accelerating) and are led by young dedicated people, I can see how Munger states they have the biggest moat he's seen. 

 

. . . and after all that I don't even own any stock!

Link to comment
Share on other sites

The "switching costs" of Coke and Pepsi are also "zero", but you're looking in the wrong place.  Here are some ideas on Google's moat.

 

The value is in the product distribution networks.  Essentially a large distribution network accompanied by strong branding can be extremely difficult to displace.  Think also about how MacDonald's monetizes their large distribution network (80% gross margins off franchisees vs ~20% owned restaurants) where franchisees pay monthly subscriptions (branding, food, etc) to belong to the network.  Google also monetizes businesses that advertise on-line since they are one of the few ad distribution networks and companies are willing to pay recurring monthly subscriptions to belong to Google's ad distribution channels because of their reach.

 

Google is providing good results to consumers through their search property (~60% marketshare) as well as various sub-properties (e.g. email, video streaming, etc).  They have developed an ad distribution network which provides access for companies to their various customer-facing properties.  The larger the properties, the more valuable the ad distribution channels.  Also, the ad distribution network has a tendency to displace other competitive networks (the so-called "network effect").  Further, the barriers to entry are now significantly high, such that few competitors have the pockets and skills to build comparable ad distribution networks.  MSFT, a worthy competitor in other markets, isn't committed to this market and is having its hat handed to it -- Gates knows and he talks to Warren and Charlie.  Even their desktop monopoly is becoming increasingly irrelevant (smaller relative market size, new competitors, government regulation, MSFT's weakening management caliber) compared to the advertising markets (trillions).

 

So, now the hard part is to model it and value it and determine what the "margin of safety" is and what the stability of the "owner earnings growth" is and that will give you some appreciation of GOOG's intrinsic value.  Munger offers one fantastic clue given his understanding of moats which is much deeper than mine.

 

- O

 

I don't really understand why Munger thinks Google's moat is "something he's never seen before". The switching cost for search is ZERO, and it only takes 10 seconds to switch. As matter of fact I routinely use a couple of different ones, if I don't find the the information from one, I'll try the other one. I would agree Google is the clear leader in this space, and I usually don't need to use anything else. The switch cost for publishers is the easy as well, all you need is to copy/paste some scripts to your web pages. I don't have experience about switch cost for advertisers, but from their sign up process it looks pretty easy as well.

 

Link to comment
Share on other sites

I've been working in high tech for the past 10 years and I can tell you one thing, nothing in IT has a "moat".  There's a new service coming out called Wolfram Alpha that is pretty astounding.  It looks to compete directly with Google and Yahoo.  I can't even believe someone mentioned Ebay's moat.  AMZN has killed Ebay's moat a long time ago. 

 

 

The thing about high tech is not lack of moat, but market change too quickly which makes previous moat obsolete. A company could dominate a market completely and have moat around it, until one day people move to something else and that market doesn't exist anymore. This is very different from Coke and Gillette where you can count on people will always drink and shave, you just need to be the best for making soda or razor. In high tech, you need to worry about the rug may get pulled under you, the demand for your product can be gone completely in a short time frame.

 

EBAY has a strong moat in online auction, but that market is not growing anymore. I don't think AMZN killed or can kill EBAY's moat, I don't think anyone can displace EBAY as the online auction leader. But that market does have the danger being nibbled by fixed pricing marketplace or free listing sites like craigslist.com, it could become less revelent. The other gem EBAY has is Paypal, great business model, and its moat as online payment is incredible, not even Google can shake that, although they've tried with their Google Pay.

 

 

 

Link to comment
Share on other sites

Value-is-what-we-get, didn't we also used to "Xerox" everything?

 

I would also add that a new competitor would probably need to be more than 'better' to displace Google. The reason Google displaced MSN and Yahoo is that those engines were fairly ineffective in 2000.

 

Unless the average person finds themselves sifting through link after link for their page, the First Mover advantage should be sticky.

Link to comment
Share on other sites

The "switching costs" of Coke and Pepsi are also "zero", but you're looking in the wrong place.  Here are some ideas on Google's moat.

 

The value is in the product distribution networks.  Essentially a large distribution network accompanied by strong branding can be extremely difficult to displace.  Think also about how MacDonald's monetizes their large distribution network (80% gross margins off franchisees vs ~20% owned restaurants) where franchisees pay monthly subscriptions (branding, food, etc) to belong to the network.  Google also monetizes businesses that advertise on-line since they are one of the few ad distribution networks and companies are willing to pay recurring monthly subscriptions to belong to Google's ad distribution channels because of their reach.

 

Coke and Pepsi switching cost is not zero, because it's about human taste and habit. Human taste can't be standardized, can't be quantified with technical specs and performance numbers, and once you have a habit it's hard to break it, all this add to switching cost.

 

For Google, I agree the distribution network, or the network effect, is a really powerful force; the barrier to entry is high which is another plus. And another thing about Google is that its revenue is recurring, it's not like many other high tech companies where their previous product becomes their biggest competitor, as you have to keep coming up with new/better things to convince people to buy/upgrade. I don't buy the "trillion dollar ad market" comparision though, as Google will be the broker of advertising, a lot of the revenue actually goes the content owners. It's more like a highway toll type of business, which is a great one as long as they maintain their market.

 

However I don't see why distribution network is a moat in Pepsi vs Coke case, I think Pepsi has as good of a distribution network as Coke, IMO Coke's real moat is its taste, human habit and its brand.

 

Link to comment
Share on other sites

But would you not agree that it would be nearly impossible for Joe Cola to match Coke/Pepsi for distribution reach?

Agree. I just want to point out it's not the moat differentiates Coke from Pepsi.

 

Buffett has said in multiple occasions: even given $10 billion (or whatever huge number he used), he can't displace Coke. I think you can have a comparable distribution network if you throw money at it, but the other things of Coke are what you can't buy with money. 

Link to comment
Share on other sites

Value-is-what-we-get, didn't we also used to "Xerox" everything?

 

Agreed Rabbitsrich - and from one simple act - producing a quick accurate copy of a document - XRX had 17 billion in sales last year and I can't remember the last time I saw a machine that said Xerox on it.

 

I think a moat means more than barriers to entry by competitors, it includes the gap between entry and catching up if at all possible.

 

We may not "Google" anything in ten years time but I expect Google will be a larger company kicking out more cash than they are now.

Link to comment
Share on other sites

My issue with Google is they're a one-tricky-pony in terms of sources of revenue. I own a (very) small business and have a good amount experience with Google Adwords and Adsense, and advertising on Google has been much more profitable for Google as it has been for me (I usually don't get back the amount spend on Google Ads in purchases). I have pretty much stopped using it.

 

Google spends a lot of time and money coming up with things that are 'cool' but not really big revenue drivers. I think it's a great company, and I own a couple shares of it (wish I bought more when it was $250 of course), but would like to see part of their earnings be from something other than advertising. They do have a huge Moat, but it's whether they can use that moat to keep growing earnings. Right now, most of their growth is coming from expanding internationally, rather than a large increase in advertising spending.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...