Myth of the Moat: How new-age tech cos “perform” without durable competitive advantages

13thDec'24

Google Dictionary defines moat as “a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack”. The Term was popularized by Warren Buffet in business which implies durable competitive advantages unique to firms which aid in protecting their market position over time.

Take for example, what is widely considered to be Apple’s moat - the Brand. How many of us have friends who go crazy every time a new iPhone is launched? They will buy “upgraded” (slimmer and slightly better camera) versions of the same phone on the launch day. Can’t afford it? It doesn’t matter; they will take EMIs with no hesitance. Companies with strong brands have incredible pricing power, ensuring sustainable margins no matter what the competition. Buffet realizes obviously, Berkshire Hathaway is one of Apple’s largest shareholders.

The term “moat” gets thrown around a lot in investing circles. What sets you apart? Why won’t this much bigger company with much deeper wallets not be able to do what you do? I don’t see the point of these questions. I think it's especially unfair to ask young tech companies these questions because given the nature of the businesses, it's incredibly difficult to build durable competitive advantages.

In this piece, I want to explore a bunch of these tech businesses and try to figure out why it's so difficult to develop a moat. As a regular consumer of B2C products, I am often interested in how each player in a business attempts to differentiate itself (or copy from competitors). Going by the list in India:

a. Quick Commerce: Blink it, Zepto, Big Basket, Swiggy Instamart, Flipkart Minutes and Amazon coming up with its own offering

Who is going to win? There are four fronts any quick commerce marketplace has to get right to become the best - a) Fastest Delivery 2) Lowest Prices 3) Widest selection of products 4) Best customer support.

Any of these can be a competitive advantage. But are these durable? If the reason I use Swiggy today is because it has the fastest delivery in my area and tomorrow Zepto opens a dark store closer to my area - I am likely to switch to Zepto.

Some customers are just naturally sticky. They will download one application and continue with it forever (if it works smoothly). Why did they choose that app? Likely because it was the first mover. Incumbency advantages are huge, that is why agility amongst this cos to venture in new geographies will be a decisive factor.

b. Fintech - More specifically, UPI Payment Apps + More: Google Pay, PhonePe, Paytm, Amazon Pay, Super Money, Cred etc.

I don’t have the patience to list the gazillion apps that provide UPI Payments as a service in India, that in itself is a sniff test for the level of competition at play.

Q: Why do you use Product A and not B?

I can guarantee you in most cases users simply don’t care. They likely installed a UPI app and chose to stick around. Some might prefer App X because of its user interface, App Y because they feel it has low payment failure rates (though that says more about the banking partner). Some of my friends move between Apps depending on whatever is offering the most cashbacks. But a high burn rate is just a customer acquisition strategy, probably not the most sustainable moat.

To be clear, it's unfair to categorize these businesses as just payment apps. Cred does credit card bills, UPI payments, e-commerce, financing, sell insurance and the list goes on. As a former cred skeptic, credit to Mr Shah - the plan is working just fine! They have onboarded millions of creditworthy customers on the platform, and they are originating about 2000-2500 crores of loans monthly (This is my estimate based on their FY24 financials, I still find this number hard to digest). Their insurance game is also quite strong.

Super Money does UPI Payments, but it also has partnered with Banks to offer high yielding FDs. While Super money does that and focuses on introducing their co-branded cards for the Flipkart business, Stable Money has been moving on to becoming a marketplace for corporate bonds.

Creating a credit card bill payments or a UPI payments app (or both in one) or any tech innovation can easily be adopted and replicated by another firm. What’s differentiates these businesses will be how they choose to attract, retain customers and monetize their existing customer base.

c. Ride Sharing: Uber, Rapido, Ola, BluSmart, Namma Yatri etc.

This space has seen the rise of localized players taking huge chunks of smaller geographical markets. Not a long back Rapido made the switch to 4 wheelers, charging zero commission from the drivers. The plan seems to have worked (In terms of ride availability in my region, Rapido is the quickest to guarantee a ride).

BluSmart owns its entire fleet. So maybe it's unfair to call it a pure tech company but I would still argue it's one of the rare companies that has been able to build a brand. I am always happier whenever I see a BluSmart pulling up.

These companies have innovated with different modes of transportation (Rapido with 3 wheelers) or different pricing structures (Namma Yatri operates on a subscription model for drivers and not commissions). What’s the competitive advantage? Number of driving partners? Maybe. Is it durable? Not really.

More examples:

d. Dining out: EasyDiner, District (by Zomato) and Dineout (by Swiggy)

e. Travel Marketplaces: MakeMyTrip, EaseMyTrip, Yatra, Cleartrip + International Players like Booking.com

MakeMyTrip is comfortably successful in this space. Again, first mover advantage, good branding?

f. Movie Ticketing: BookMyShow, District

I would like to highlight one moat exception which are networking effects. The reason I use WhatsApp and Instagram is because all my friends use it. Of course, they are incredible products which have provided reliable service and innovation over time. But if a build a texting app that is exactly like WhatsApp tomorrow, it will be very difficult for me to convince users to move.

But for most other companies, everything is indefensible. There is no case for a durable advantage to be made for them. They must constantly innovate and execute new ideas to survive. Customer loyalty can change in an instant - contingent on whoever is providing the best service (making customer service more crucial than ever). For what it's worth, we are observing extremely competent leaders who have taken bold bets that have been paying off well. So far, I have been loving this game.