The ebb and flow of moats in technology is demonstrated by the rapid emergence of new companies challenging the business model of those before it. Ten years ago, it was Microsoft. Then Amazon. Myspace. Google. Facebook. Twitter. QuoraPathGrouponLivingSocialZynga SquareUberInstagramDropbox. They all blend together. My list has gaping holes…before Microsoft there was Sun and IBM and hundreds of others. In short, it is incredibly difficult to hold on to the top spot for very long because an “unbreachable moat” is an extremely hard thing to build.
Let’s look at two examples: both companies had the seemingly largest moats in the tech world but look considerably more narrow than they did even a few years ago:
Microsoft thought they had one with Windows and the Office suite. Back in 2000, everyone used Word, PowerPoint and Excel, so much so that you could send someone a .doc file and you knew they could open it because they also had Microsoft Office. But Google crossed that moat pretty easily with Google Docs. The reason it looked like Microsoft had a moat was because usage of Office was so prevalent that it became the default choice for anyone who wanted to write something on the computer. Put another way, Microsoft’s castle was that it sold a ton of copies of Microsoft Office, but it’s moat was that everyone was using Office, making it unthinkable for people to switch to something else. Nevertheless, Google overcame it by offering a product that was even more prevalent (anyone with an internet connection could become a Google Docs user without spending a cent). And they were able to do it because most infrastructure doesn’t cost a lot of money. The cost of the servers necessary to host Google Docs and the cost of the engineers who built the product are miniscule compared to the years of marketing and development Microsoft had put into Office. Microsoft’s other moat, Windows, is a good deal wider. But Google is eyeing that as well with its new Chromebook computers. More importantly, more computing tasks than ever are being performed on mobile devices like iPhones, Android phones, and iPads–arenas which are dominated by Google and Apple.
Google themselves looked like they had one in the mid-2000s. The brilliance of Google wasn’t that they created a better search algorithm. It’s that they took that search algorithm and used it to revolutionize how people advertised on the web. And made money hand over fist in the process. So what is their “moat”? The excellent infrastructure they have for selling web advertising, called AdWords, and the massive ubiquity of Google search. Google makes money as long as people are searching for stuff on Google, and Google search bars are everywhere. All of Google’s other products are basically just ways to get people to search on Google more. Facebook, however, was the first boat to cross Google’s moat. While Google knows what people are searching for, Facebook knows everything about you. That means they can target ads towards you before you even go to Google to search for it. And Facebook is certainly building up an attack on Google’s castle.
So what makes an unbreachable moat for companies that don’t have tons of physical infrastructure like Amazon? I argue that companies that are constantly digging to keep their moat as wide as possible will be the most consistently profitable. The low hanging fruit here is Apple (pun intended). Apple has all the things that I mentioned that aren’t as hard to obtain now–talent, technology, infrastructure, brand. But as I said earlier, money can’t buy innovation. And Apple has a culture of relentless innovation. That’s the main reason why they’re able to turn out great products year after year. Innovation is a tricky thing to cultivate, but once it’s there, you’ve got about as wide a moat as you can hope to dig in today’s technology world.
The lesson here is that a really great idea, really good technology, strong infrastructure, the best talent, a great brand, while all contributing to a business’ moat, aren’t capable of making that moat as wide as you might think. Google has some of the best engineers in the world working for it, but many are leaving for Facebook, Twitter, Quora, you name it. Retaining talent is hard in a world where its very easy to implement your ideas, which is the case thanks to the fall in prices for server space. Setting up a website and scaling in to tens, hundreds, thousands, and millions of users is far less expensive and complicated than it was even a few years ago. The culture of the technology industry is more mobile than ever–it’s more attractive to bounce around to whatever is most exciting rather than hunker down at one company for a decade. In today’s tech world, there are a lot of great ideas and little that stands in the way of their becoming realities. Who wouldn’t challenge the big castles and their moats?
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