So I’ve given this business puzzle some thought, and here’s my current take:
- In the two cases that you’ve just read, is the competitive dynamic that is present a type of moat? Or is it a temporary competitive advantage, one that erodes over time?
The way that I phrased this question is malformed: most moats decay over time. But I’m about 70% leaning towards this is not a moat, at least not the way it’s defined in Helmer’s 7 Powers.
To sort of break this down a bit, I asked myself — what is the Benefit here, and what is the Barrier?
The Benefit (as is usually the case in such analyses) is quite clear: the company in question has cost advantages. These cost andvantages enable it to a) survive, b) undercut the competition.
But what of the Barrier? In both cases, Paypal and Mailchimp’s advantage is something of an ‘earned secret’ — a temporary advantage that can be copied if given enough time. I don’t think it is a barrier, because there are multiple competitors today that go toe-to-toe with them.
I’m somewhat on the fence on this last bit, at least when it comes to PayPal. I think there’s a possibility that PayPal’s advantage is that of scale economies — you’d notice that both Wise and Stripe targeted new and different use cases in order to build the transaction volume to feed its fraud detection systems. That’s what you’d expect if you were trying to go up against a scale incumbent.
But the Mailchimp advantage doesn’t seem to be as solid. Sure, you could say that it was the first to use an unorthodox approach, and that it had an extremely competent understanding of the nature of the ESP ignorant spam problem, but these are advantages that (as @kirso has pointed out) should leak out to the broader environment.
- If this is a moat, what is the nature of the Barrier? And what is its Benefit? Also: which one of the 7 Powers is it?
Possibly scale economies for PayPal. But not really a moat in Mailchimp’s case.
I think if you look at the cases for scale economies, you’d realise that one way to get around a scale economy advantage is to find scale in some other part of the world/some other part of the industry, and then parlay that into direct competition. E.g. GM using a ‘multiple cars for multiple product segments’ to go up against Ford’s ‘any colour as long as it is black’ approach.
- If it is not a moat, what lessons can you derive from the cases? How did this advantage ultimately affect the business? And what does it tell us about non-moat competitive advantages?
One of the most surprising things I’ve taken away from these two cases is the notion that the capital environment affects the impact of the advantage. In simpler language: it’s totally possible for temporary competitive advantages to wipe out the competition when the competition is highly dependent on a particular type of capital environment. The common, naive assumption is that ‘the company that raises the most venture capital wins’. But these cases illustrate a corner case: when venture capital is easily available, companies become adapted to relying on cheap and easy capital; when that capital environment dries up, even temporary competitive advantages can allow certain companies to wipe out everyone else.
I like thinking of business environments as biological ecosystems. So there’s some analogy here where say a whole bunch of dinosaurs live happy, carefree lives, feasting on flora and each other, and then an asteroid hits and the tiny mammals with minor competitive advantages (regarding not relying on some environmental surplus) turn out to be the creatures that win in the end.
The other thing that perhaps we should take away is: don’t laugh at temporary competitive advantages. Every little secret helps, even if it eventually leaks out. But then I think this is intuitive to most business operators — even when I was running things, I’d notice that we’d had a small number of competitive advantages that we tried to keep close to our chest, in order to prolong their effective lifespan.