Cultures We Live and Create

MOATS in the Silicon Valley: What Happens to Disruption?

by | Jun 7, 2018

WARREN BUFFETT says he invests only in firms that have moats built around them. Originally conceived to protect castles, moats are increasingly being talked about in new technology circles: Are the Silicon Valley champions of DISRUPTION building MOATS?

A MOAT is a deep and wide trench around a fortified place filled with water functioning as a primary line of defense. Last year Bloomberg reported that the term ‘moat’ is increasingly being used by the tech entrepreneurs from Silicon Valley and elsewhere. The spat between Warren Buffett and Elon Musk of late has brought it back to the discussion. So far known for the companies and practices that have disrupted their respective industries, whether building moats is a new phase, a paradigm shift, of the tech industry?

YES. We know. There were apples and blackberries. They were eaten for centuries. Then came the twentieth century when they became inedible devices. The new technologies changed not only apples and blackberries but what a ‘street view’ means or what ‘social’ is. Sometimes they are branding exercises but many times signaling a deep change that our societies are undergoing. Between the snail mail to the email we have shed not just the pen, paper and stamps but distances, time, quirkiness of handwritings, not least the days-long waiting and agony of the uninformed. That is what often means to be disruptive. You never prefer to go back to the previous stage but it makes you think that you have lost the innocence.

What are Moats?

WHEN tech giants say they want to make moats, they mean exactly the same as the ancient Egyptians who said to have built moats around their castles as early as 1860 BCE, or the medieval European aristocrats for whom moats were more effective than bible or sword in protecting themselves from the enemies which were never a few. 

Moats are deep, broad ditches filled with water that surround a castle or fortification. They are meant to defend from enemies and intruders. They are fences that fortify the real fortifications. They defend owners with a fence around them. Often they are built in the wake of some challenges.

Moats are not completely alien to the tech industry. In a sense, every proprietary technology, like a patent or a copyright,  is a moat. They are the first generation technology moats. When faced with disruptions, existing businesses react with fences to protect themselves.

“But all the time, if you’ve got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it.

Warren Buffett

Why do We Care About Moats as a Tech Jargon?

SO FAR everything about Silicon Valley and the tech startups was about disruption though many observers are already finding the claim hollow.

MOATS ARE ABOUT STABILITY. A marching army does not build moats. So far the tech industry has consisted of marching armies who went after every existing industry compelling them to defend and often vanish in the process. The marching armies plundered the victims and went further ahead with the booty to conquer more. Now, are they coming back home and digging moats around their castles? So, when moats become a tech jargon, do we need to think of a receding army who would prefer a conventional defense?

When revolutionaries become old, many times they become the purveyors of their old stock.

MOATS ARE A GREAT ORNAMENTATION. They give an aura to the castles. The tech castles have been frills-free so far. When they are building moats, are they beautifying their architecture into a spectacle? Less likely. While the distributed technologies like blockchain are in one way widening the spectacle that is technology, tech companies are known for their secretive nature. The moats they build are most likely to have some fancy visualizations but will have deadly piranhas inhabiting in them. So enjoy the spectacle from the distance, moats are not meant to be swimming pools.

MOATS ARE OFTEN ALSO SEWAGES. Do we also see a possible decline of the pomp and splendor we see around these modern technocapitalist castles when the architects of disruption are talking about protecting their kingdoms? Will it be a deep ditch of waste materials ejected from the body politic of disruption?

Greatest Moats in the Making

THE longest moat that was built in history was around the Walls of Benin, in present-day Nigeria. Built over many centuries until 15th century CE, moats and fortifications together covered the length of the walls that were more than 16,000 kilometers.

But the moat that is built by a small tech company doing a tiny task somewhere in the innards of your mobile phone can be a greater moat than the one at Benin. Not often strictly restrained by the physical and geographical constraints of ancient moats, the moats that the tech companies are building could be more robust and fragile at the same time. They are not built by digging soil. They will not be just an outer layer. They probably are going to be hidden because visibility is the first signpost for overcoming the moat. This moat is a potent cocktail of technology and late-capitalism.

Yes, moats protected medieval castles for centuries before they became tourist attractions or Disney models. But in new technologies, everything is quicker. Let us see how long the moats effectively protect the castles. Even the longest moat, the one around the Benin city fell for a disruption of that time: colonialism.

Platform Capitalism: Facebook, Apple, Microsoft, Siemens and GE, Uber and Airbnb. Across a wide range of sectors, these firms are transforming themselves into platforms: businesses that provide the hardware and software foundation for others to operate on. This transformation signals a major shift in how capitalist firms operate and how they interact with the rest of the economy: the emergence of “platform capitalism”. 

Moats are deep, broad ditches filled with water that surround a castle or fortification. They defend owners with a fence around them. Often they are built in the wake of some challenges.

See this excellent overview to find how Netflix, Sirius XM, and Airbnb have built Moats around them!

Competitive Advantages Aren’t Enough. Your Business Needs a Moat.

See a counterpoint on Warren Buffett’s idea of Moats:

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

Warren Buffett

Interview to the Fortune Magazine, Fall 1999

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