A Tech Mogul on a Contrarian Mission to Fill In Buffett’s Sacred Moat
Posted May 7, 2018 8:42 p.m. EDT
OMAHA, Neb. — Elon Musk is taking on Warren Buffett, and their differences run deeper than jokes about candy and medieval fortifications.
At Berkshire Hathaway’s annual meeting over the weekend, I relayed a question from a shareholder to Buffett about a comment Musk had made a couple days earlier.
“I think ‘moats’ are lame,” Musk had said during a Tesla earnings call. It was a criticism of an economic principle that Buffett that coined in 1999 and that has become something of a mantra for his faithful: Invest in businesses “that have wide, sustainable moats around them.”
Such moats, Buffett has said, are made of the competitive advantages that benefit major brands and companies, like distribution networks, pricing power and brand reputation.
But to Musk, they are a metaphor for being stuck in the past. “If your only defense against invading armies is a moat, you will not last long,” he said. “What matters is the pace of innovation — that is the fundamental determinant of competitiveness.”
At a time when technology is upending even old-line industries that once seemed impenetrable to competition, might Musk be right?
“Elon may turn things upside down in some areas,” Buffett said. “I don’t think he’d want to take us on in candy,” suggesting Berkshire’s See’s Candies division enjoyed an unassailably wide moat. The quip elicited laughter from the 20,000 shareholders who packed the CenturyLink Center.
Musk answered the challenge immediately, saying he was starting a candy company. “And it’s going to be amazing,” he wrote on Twitter.
Not only that, Musk said, he planned “to build a moat and fill it with candy” — making it impossible for Buffett to resist sinking his money into the venture.
The repartee was good for some chuckles and clickbait headlines, but the minispat masked a more serious and significant debate taking place across corporate America: Have the traditional moats shrunk?
When direct-to-consumer brands like Dollar Shave Club have been able to take on consumer giants like Procter & Gamble’s Gillette — so much so that Unilever bought Dollar Shave Club for $1 billion — are any businesses still safe? Buffett owns Kraft Heinz, for example, but could upstart food companies one day overtake it, breaking through the substantial network of distribution and marketing arrangements — and brand loyalty — that Kraft Heinz has built up over decades?
Buffett acknowledged that times had changed. “There have been more moats that have become susceptible to invasion than seemed to be the case earlier,” he said.
To a large degree, Musk is a living embodiment of a gleeful invader. With Tesla, he is trying to prove that what was long thought of as a substantial moat around the automobile industry could be overcome. He has gone direct to consumer with Tesla vehicles, bypassing the traditional car dealers that were once considered a barrier to entering the automotive business. He even had what seemed like his own moat: a network of Supercharger stations around the country that he recently opened up to competitors. (His initial panning of the “moat” idea followed a question about why he was willing to cede the advantage that the closed charging network provided.)
But, in truth, Musk’s experience — and challenges — at Tesla may demonstrate just how much a moat remains a powerful deterrent to competitors. In the case of the automobile industry, perhaps the biggest barrier is the huge amount of capital needed — Tesla has already raised more than $12 billion. But even with huge amounts of money, Tesla’s recent production struggles — it has repeatedly missed its targets for making the new mass-market Model 3 — show the immense value of manufacturing experience.
Musk’s willingness to challenge convention has clearly pushed the automobile industry forward, but his progress has lately been bumpier than he initially expected. That’s not to say he won’t succeed, but if he does, he may be the exception, not the rule.
There are still huge swaths of our economy that have dauntingly wide moats, many of them protected by regulatory walls. Banks, which have been speculated about as ripe for disruption by financial technology companies, seem more likely to buy startups than compete against them. Airlines — which Buffett once called “a death trap for investors” — have consolidated, and enormous corporations control virtually all the landing slots at airports around the globe. Before it could get off the ground, any insurgent hoping to challenge them would have to find a spot to come down.
Even many digital businesses have a moat: Google and Facebook control so much of the advertising market that it is hard to see how a kid in a garage with an idea could usurp them anytime soon. Amazon itself has become so powerful that virtually every seller feels it has to go through it. And Buffett has convinced himself that Apple’s deep relationship with its customers through its ecosystem of products and iCloud mean the business has a defensible moat.
“There are some pretty good moats around,” Buffett said. “Being the low-cost producer, for example, is a terribly important moat,” he said, citing Geico, the low-cost insurance company Berkshire owns.
Saturday night, after the Berkshire meeting ended, Musk was still tweeting: “Saying you like ‘moats’ is just a nice way of saying you like oligopolies.”
For better or worse, the limited competition that oligopolies face is usually good for investors — even if consumers might disagree.
But whether they have been dug by a company’s experienced hand, the goodwill of its customers or the heavy machinery of governmental regulation, moats remain a formidable form of protection, even from the most willing of raiders.
Perhaps Charlie Munger, Berkshire’s vice chairman, put it best: “Elon says a conventional moat is quaint. And that’s true of a puddle of water.”