When Elon Musk is not dazzling us with tech innovations, and dreams of the future, he is entertaining us with Twitter ‘exchanges’, including the U.S. President (shock!), ro(bots), fellow space entrepreneurs, and most recently, Warren Buffet, one of the most revered investors in American business history, and certainly one of the wealthiest.
In one corner, the mild mannered, 87 year old, understated, mid-westerner. Buffet is famous for saying he does not invest in things he does not understand [which can be read a number of different ways] , which includes a good deal of tech [though his view on intrinsic value may play in here as well]. In 2014, when Buffet commented he does not invest in Bitcoin, Marc Andressen was reported as saying that was an example of “old white men crapping on new technology they don’t understand.” Ouch! Seems like old white men (dead or alive) can’t catch a break these days, even from other white men. So that kind of frames how some in tech view Buffet. Now, in the other corner of the boxing ring, the bold, brash, South African born / California based, tech entrepreneur, who inspires us with solar panel roof tiles, battery packs, next generation transport, trips to Mars, and more – he even inspires us with a “boring” company.
So what’s at issue, and why would I care? The issue is an old concept referred to as “moats”. The idea that a business advantage is so well protected, it is as hard to penetrate as a castle surrounded by a moat (a big one). Not so long ago I reposted a strategy framework I liked that included the concept of moats, so by implication, I am bought in to the concept:
How did this get started? On a Tesla earnings call, a financial analyst was pressing Musk on why he did not consider his Supercharger network a “moat”. Musk eventually responded that the concept of a moat is quaint, and what really determined competitiveness was the rate of innovation. The analyst first asked Musk if he would consider opening the network to other automakers, which Musk said he would be open to, then the analyst flipped and said, wouldn’t that be a bad idea because it is a moat. So you can see how some of these conversations go sometimes, and why some of the responses get a little pointed.
Ok, Musk on the record, moats are quaint, and rate of innovation is what matters. So the term “moat”, in a business context, is considered to be coined [no pun intended] by Warren Buffet, so when Berkshire Hathaway had an investor meeting not long after Musk’s comments, Munger and Buffet decided to not only disagree with Musk, but to state that they actually look for companies with moats when they are making investments. Then they go further to give “See’s Candy” as an example, and in the same meeting they also criticized crypto currency. All of this was enough to get Musk excited about a new venture where he would make crypto candy.
“I’m starting a candy company & it’s going to be amazing” https://twitter.com/elonmusk/status/992876606979952640
“Then I’m going to build a moat & fill it w candy. Warren B will not be able to resist investing! Berkshire Hathaway kryptonite …” https://twitter.com/elonmusk/status/992924525288308736
I am not sure whether any west coast tech entrepreneur would seriously consider a business venture where sugar is the main ingredient (would he stop getting invitations to parties?), so maybe he would innovate to get rid of the sugar, who knows. Whether Musk is really going to do this or not, or fill a moat with candy, I don’t know, and for the sake of this discussion, I am not sure it is relevant, other than to point out the obvious, that a moat is not as impenetrable as it normally might be, when faced with an insurgent that can raise as much capital as Musk has proven capable of.
Source: elonmusk – https://www.instagram.com/p/Bi43eF1DsLt/
And in some senses, that is actually one of the main points. No business can tell with 100% clarity who or what might disrupt them, but we can say with some certainty, that some industries have much higher capital requirements than others, or barriers to entry from a traditional attack. I am not sure that candy is actually one of them, though my understanding is Buffet was referring to brand strength and business model.
Which sets up the next point. There is a line of thinking that a business model advantage is more defendable than a technology advantage, and in a sense, Buffet and Musk are kind of agreeing. Musk is kind of saying you cannot sit on a technology advantage, you have to keep innovating – which is pretty much saying technology advantage is not a moat.
Though in Musk’s aggressive response he is also making a good point. He is saying, hey last generation’s icon who does not understand tech, don’t get too comfortable behind that moat of yours, because if you do, someone is going to cross it, and take your castle from you – there are no longer any moats defensible against tech disruption. Which is also a business/tech truism of types, only the paranoid survives.
If you have ever worked in a company that had a moat, it is a great thing to have, beautiful in fact. So I am not going to criticize the concept of a moat, they are great, they are real, and companies aspire to have them. OTOH, all of us have seen companies passively lounge behind moats, only to see them drained and crossed, especially in tech. Therefore, I also standby the idea that if you are in tech, and perhaps in any business, you better keep innovating, because no moat is forever. Ultimately, we are just arguing about how long a moat/competitive advantage can last, which is a fairly common discussion in strategy circles.
One thing we can say for sure is these are two very smart people, two very successful people, two people whose views are not easily dismissed, and in their own, but different ways, charismatic and admired. The fact that they got into this exchange is probably as much a sign of the times as anything. Though it is entertaining, and it is a good reminder, a moat is a terrible thing to waste, so keep innovating.
There is a growing conversation in business today that there is no moat defensible against tech disruption / digital disruption. What do you think? Boring candy anyone?