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Chutes, Ladders, and Moats
Firms try to build higher and higher walls to keep enemies (upstarts and
competitors) from invasion. Business theorists call these structures “barriers
to entry.”
They are nice in theory, but, increasingly, traditional walls are showing
cracks, even crumbling—especially in tech. The plummeting price of
processing power (Moore’s Law again), coupled with an increase in
bandwidth and a new generation of leadership that has digital in their DNA,
has produced bigger ladders than anyone ever expected. ESPN, J.Crew, and
Jeb Bush … all unassailable, no? No. Digital ladders (over-the-top video, fast
fashion, and @realdonald trump) can vault almost any wall.
So, what’s a ridiculously successful firm to do? Malcolm Glad-well, the
Jesus of business books, highlights the parable of David and Goliath to make
the key point:
don’t fight on other people’s terms
. In other words, once
you’ve made the jump to light speed as a tech firm, you need to immunize
yourself from the same conquering weapons your army levied on the
befuddled prey. There are several obvious examples: network effects
(everyone is on Facebook because … everyone’s on Facebook); IP protection
(every firm in tech over $10 billion is suing, and being sued by, every other
$10 billion tech firm), and developing an industry standard—monopoly—
ecosystem (typing this on Word because I have no choice).
However, I’d argue that digging deeper moats is the real key to long-term
success.
The iPhone will not be the best phone for long. Too many firms are
struggling to catch up. However, Apple has a key asset with a stronger
immune system: 492 retail stores in 19 countries.
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Wait, a marauder could
just put up an online store, no? No.
HP.com
vs. the Apple Regent Street store
in London is like bringing a (butter) knife to a gunfight. And even if Samsung
decides to allocate the capital, nine women can’t have a baby in a month, and
the Korean giant would need a decade (at least) to present a similar offering.
Brick and mortar’s troubles have been laid at the feet of digital disruption.
There is some truth to that. However, digital sales are still only 10–12 percent
of retail.
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It’s not stores that are dying, but the middle class, and the stores
serving them. Most that are located in, or serving, middle-class households
are struggling. By comparison, stores in affluent neighborhoods are holding
strong. The middle class used to be 61 percent of Americans. Now they are
the minority, representing less than half the population … the rest being
lower or upper income.
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So, Apple, recognizing that ladders will keep getting taller, opted for more
analog (time/capital expensive) moats. Google and Samsung are both coming
for Apple. But they are more likely to produce a better phone than to replicate
the romance, connection, and general awesomeness of Apple’s stores. So,
every successful firm in the digital age needs to ask: In addition to big, tall
walls, where can I build deep moats? That is, old-economy barriers that are
expensive and take a long time to dredge (and for competitors to cross).
Apple has done this superbly, continually investing in the world’s best brand,
and in stores. Amazon, also going for moats, is building a hundred-plus
expensive and slow-to-get-built warehouses. How old economy! A good bet
is Amazon will open thousands before they are done.
Recently Amazon announced leases on twenty 767s and purchased
thousands of Amazon-branded tractor-trailers.
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Google has server farms
and is launching early twentieth-century aviation technology (blimps) into the
atmosphere that will beam broadband down to Earth.
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Facebook, among the
Four Horsemen, has the fewest old-economy moats, making it the most
vulnerable to an invading army with big-ass ladders. You can expect that to
change, as Facebook announced they, along with Microsoft, are laying cable
across the floor of the Atlantic.
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The success of single companies like Apple can hollow out entire markets,
even regions. The iPhone debuted in 2007, and devastated Motorola and
Nokia. Together they have shed 100,000 jobs. Nokia, at its peak, represented
30 percent of Finland’s GDP and paid almost a quarter of all of that country’s
corporate taxes. Russia may have rolled tanks into Finland in 1939, but
Apple’s 2007 commercial invasion also levied substantial economic damage.
Nokia’s fall pummeled the entire economy of Finland.
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The firm’s share of
the stock market has shrunk from 70 to 13 percent.
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