Building Economic Moats Around Online Businesses

By webadmin on 08:22 am Dec 07, 2011
Category Archive

Brendan Rakphongphairoj

I have always been an avid follower of Benjamin Graham and Warren Buffett when it comes to investing.  As an aspiring tech entrepreneur, I question how principles popularized by these two great individuals may be applied to online businesses, namely building a competitive edge and an economic moat around a business.

After all, we may be all too familiar with numerous popular online brands that have come and gone in a blink of an eye. But how do we go against this tendency and create online brands that are built to last?

First, what is an economic moat? Simply put, an economic moat is a durable competitive advantage that protects a business from external threats.  The quintessential example of a wide-moat business is Coca-Cola, through its prevalent distribution channels, impressive economies of scale and visionary marketing efforts, which have kept the company safe and altered the very environment it functions in. Coca-Cola is especially unique because it thrives in an industry that is core to our human survival, unlike online businesses. People need to drink, and as global populations increase, the firm will reap larger profits.

An online business is dissimilar because it’s challenging to create distribution channels that exclude your competitors. Aside from online business models that require a significant amount of physical assets, Web sites are also generally quite cost efficient due to a large number of B2B Web services to choose from. With this backdrop, it’s seemingly problematic to build a viable economic moat. Either way, though, there are certain characteristics that many successful Web sites have across multiple industries.

Web sites currently function as platforms with an extraordinary capability to disseminate information effectively. As the hardware and software become increasingly sophisticated, the potential of Web sites to make larger impacts on society also increases.Thus, as horizons expand, the programmers that build these sites also need to create more sophisticated Web platforms.  We can glimpse these changes occurring now simply by the types of new Web sites that are published and the number of newer programming languages that exist. For example, in its earliest stage, Web sites were quite basic and programmed with simple HTML.

Web site businesses that are built to last understand that the capabilities of Web sites to disseminate information are not static but dynamic and therefore consistently have talented individuals to build sophisticated yet simple platforms.

Google, for example, is a firm that understands this. The consistent improvements on its search engine such as giving keyword suggestions and tracking what we want before we even type the query is an example of increased sophistication in a simple interface.
Moreover, Facebook and Wikipedia were also new, effective and innovative platforms to transmit and share information. These Web sites consistently acknowledge that Web platforms are dynamic in nature and therefore invest in innovation.

Since Web sites are informational vehicles, it seems that not only must Web sites have an effective platform to transmit information, they must also have a wealth of information.  Sites that last for years consistently have new and useful information.

 Moreover, the type of information must be unique in the sense that it may only be accessible from that specific Web site. This explains why it seems that everywhere we surf on the Internet, Web sites are actively collecting data about our habits, tendencies and knowledge. It’s no surprise that they are doing this because it’s increasingly clear that having access to data means having access to long-term survival.

Conversely, with seven billion people on our planet now, it’ll come as no surprise that there is also too much data out there and much of it is useless. Prevailing Web sites have a way of filtering through this jungle of data and extracting only what’s necessary. However, it may not only be extraction that’s necessary but computation as well. Yahoo Finance for example has a large amount of historical financial data. On top of that though, they calculate the P/E ratio, Institutional Percentage Held and Dividend Yield among many other calculations. It’s becoming clear that we live in an increasingly sophisticated world where data is king.
Ultimately, in this day and age, entrepreneurs will need to understand their core competencies even more and seek to build a wide enough economic moat around these competencies.  Seeking to introduce both sophistication and simplicity while also finding mechanisms to publish insightful data are just some key steps to building an economic moat.