There is nothing I love more in interviewing managements than when a company with a five year track record tells me they have an insurmountable barrier to entry. I just ask them, "So, then how did you enter this business?"
The assumption you are making is that the competitor must be IBM or Compaq. Why not another entrepreneur like Michael Dell?
There are several telltale signs of businesses with strong barriers to entry.
1) High ROE. OK, Dell has that.
2) Stable share over time. The track record has not been established, but if you look at the history of this business, it has been one of constantly changing leadership, each of which probably thought they had barriers to entry. Apple had a neat business model too at one time.
3) Small number of competitors. Absolutely not the case in this industry.
4) No recent entry into the industry. Absolutely not the case in this industry. Dell is the proof.
I bring this up on the Buffett thread because these are the things he looks for. Tobacco, soft drinks, reinsurance, chewing gum, Disney, television networks.
Dell has not stood the test of time, and the history of this industry tells me to be very skeptical.
JJC |
