Warren Buffet held the annual meeting for Berkshire Hathaway this weekend, and upwards of 40,000 people came to hear his opinions. For hours he waxed eloquently, offering opinions on a wide range of topics sure to cover websites, blogs and tweets for a few days. But I was interested in the comment "Buffett, Munger praise Google's 'moat" according to Marketwatch.com's headline. It's pure 1980s industrial thinking, and why you have to be careful about forecasting and investing following Mr. Buffett.
The concept is that a business can be like an old castle, with a moat around it protecting it from competitors. The company can prosper because no competitor can jump the moat, and thus the profits of the business are protected. And today, Buffett and his partner think Google has such a moat. Now, remember, Buffett bought only 100 shares in Microsoft and long eschewed other high tech companies like Apple, Oracle, SAP and Cisco systems. His favorite phrase was to say he didn't understand these businesses. Now, suddenly, the elder Buffett is becoming tech-savvy, he'd have us think, and he loves Google. Or perhaps he's late to the game, and trying to apply outdated concepts.
I too like Google. But not for the reasons Buffett does. There is no doubt Google is far in front in the search business, and coupling that with ad placement gives them a huge market share today producing double digit revenue and profit growth. Big growth and profits is a good thing. But moats have a way of being jumped, or drained, or filled incredibly rapidly these days. And as good as Google is, what makes Google a good company is how it does not rest on its business success. The company keeps branching into other businesses which have the ability to extend company growth even if search runs into some unforeseen problem.
"Moats" are the industrial classicists way of thinking about strategy. Moats were powerful tools a few hundred years ago, but competitors changed tactics and moats lost their value. Even America's moats – the Pacific and Atlantic oceans - have been breeched by attackers from Japan and the middle east. And the same is true for business moats. They were an industrialists tool, based on big investments and high share, but they no longer have the ability to defend a business's profits. Just look at the Buffalo newspaper Buffett owns. "Newspapers face 'unending losses,' Buffett says" as he now admits newspapers (including his) are not going to make profits any more. Their "local market moat" was made obsolete by internet news competitors and ad sites like Craig's list and Vehix.com.
And now even Berkshire Hathaway is facing a growth stall. Nobody would dare predict bad things for the "oracle of Omaha." But reality is that Berkshire stock is at the same value it was 6 years ago as "Berkshire quarterly operating profit falls." Even the amazing financial machinations and sophisticated tools (like derivatives and credit default swaps) almost nobody understands and Berkshire has been famous for have been unable to overcome losses in the 60+ operating units. And even some of these financial tools are losing money – something Buffett historically avoided completely. But he's learning that competitors are making even these products less profitable.
Times have changed. It's no longer the era for the industrialist, and the financial whiz that can extend an industrialists profits. We live in a fast-paced world where adjusting to market shifts is at the core of maintaining ongoing profits. Google's willingness to Disrupt and use White Space to expand makes it a company worth watching. But stay away from those "moat' protected businesses. Not even one of the world's richest men can make money in that game any longer.