Barriers for Musk, Twitter & Netflix
Generally, barriers are seen as a bad thing, the word itself has a negative connotation and a sense of restriction. Personally, I associate them with carparks which is not the most exciting aspect of life!
Economics 101 tells us that barriers to entry are desirable for any business, however in the digital economy the lack of barriers is a key aspect. If you are the dominant digital incumbent, that may become a problem as you fight off the competition. So where does it matter and where does it not?
We feel that businesses like Alphabet (Google) are so well established, that despite no traditional barriers to entry, the likelihood of a replacement is very low. As a very profitable growing business, we feel it is a very different proposition to the disrupters, who may have growing sales, but are far more vulnerable to competition as trends change.
The Word of Elon
Elon Musk is now aiming to run Twitter, as well Tesla & SpaceX, plus he has interests in The Boring Company (an American infrastructure company that he founded) and others. Love him or loathe him, he is a phenomenally successful businessman and obviously extremely charismatic to be able to convince investors and bankers to follow him to promised riches. So, now his attention has turned to Twitter and the board has approved his takeover approach. Now the world’s richest human, it seems inconceivable that in 2018 Tesla faced near bankruptcy as they struggled to repay outstanding bonds that were maturing and secured financing at a very late stage. In the immortal words of Ferris Bueller, “the world moves pretty fast”. To highlight this, in the time I started writing this article to point of submission, he has stepped back from the takeover citing problems with “bots”, but the cynic in me suspects the Tesla share price crash may have an impact on his collateral. It will probably have recovered by the time of publication!
To me, the barrier to entry against Twitter is that it is globally adopted, “the same as Google” I hear you say? Well maybe yes, but the key difference is that advertisers are willing to pay Google and have been seeing the benefits for years. Twitter may have to charge users leading to an 85% reduction in users according to Musk himself. That is a significant gamble in my book.
Facebook (Meta) exploited the lack of barriers when they displaced Myspace in 2003/4 as the dominant global social network despite Myspace having first mover advantage. However, last year Facebook spooked the market when they advised of a big spend in their vision of the Metaverse, but also that there were significant concerns around TikTok taking market share from their users. In the online marketplace, it is very difficult to prevent a new trendier competitor rising up. This is not the first time that Facebook has seen competition however, previously they solved the problem by acquisitions: Instagram in 2012, WhatsApp in 2014. This is unlikely to happen with TikTok as a Chinese company, so we will see how they compete. Conversely Snapchat was once seen as a threat, but they have not materially affected Facebook so far.
One thing that fascinates me is the youth of these companies, old man Facebook was established in 2004 vs Tiktok in 2016.
In my oversimplified world, Netflix’s share slump is a fairly simple and common story. An inventive idea (streaming TV) becomes a disrupter of an established business model (Cable TV with advertising) and gains plaudits and customers at an ever-increasing rate. It is a fantastic investment for years as sales exponentially increase and the company moves to profitability. But eventually the competition catches up and steals their idea and their thunder.
Only 3 years ago, TV remote controls were being sold with a convenient “Netflix” button, to enable the user to skip the “laborious” task of turning on RTE 1, then scrolling down to your streaming site. Now Smart TV’s have links to your digital options: Netflix; Disney+; Amazon Prime; Apple TV; Peacock etc. Netflix’s monopoly of streaming is well and truly over, and the last set of figures highlighted that to Wall Street and crashing down came the valuation multiple and the shares.
So, what is the conclusion from all these observations? I think it is that old fashioned economic principles still hold true. Call it a “barrier to entry”, “business moat” or unique selling point”, businesses need to be able to sell their goods and services in a competitive environment and constantly innovate to prevent someone else doing it better and cheaper. Ryanair has been successful through constant improvement and excellent management, but they also benefit from an industry with huge barriers to entry. It is easier to set up a website than buy a 737, unless you are Elon Musk I suppose!