Scorch the Earth

“In business, I look for economic castles protected by

unbreachable moats.” - Warren Buffett

I'm an intellectual. I like thinking about stuff. My favorite subject is business models. I love thinking through and analyzing business models. I find them to be fascinating. Nothing turns me on like a well-crafted business model. I'm also a writer that loves telling stories through analogies.

The best businesses on Earth are, as Buffet described, economic castles with by moats. By definition, every mega-cap company is a castle with wide moats. Otherwise the king at the nearest castle would have already stormed the new, massively profitable castle as it was being built next door.

A few examples of castles and their respective moats:

Coca Cola - marketing and distribution

Amazon - economies of scale

Walmart - economies of scale with retail presence

Microsoft - the Windows ecosystem (high switching costs)

Facebook - the Facebook ecosystem (high switching costs)

Google - search and the user data needed to optimize search

But the best kings aren't just those that build moats. After building moats, the best kings burn everything surrounding their castle to the ground, destroying any chance of prosperity in nearby lands. The further the enemy from the king's castle, the harder it will be to wage war at home.

What separates moat-building from earth-scorching? Earth-scorching is the process of making it unprofitable, and thus undesirable, to exist in related markets.

There's an old video of Eric Schmidt (that I can't find) in which he talks about some of Google's guiding philosophies. Schmidt learned the hard way what it means to lose on price. During the rise of business productivity apps in the early 90s, his team at Sun never thought that Microsoft could simply undercut them on price as they did. His strategic miscalculation cost him one of the largest fortunes in the history of humanity. He learned his lesson the hard way. That's why Google gives everything away for free. It's difficult to compete with free.

Being free is economically feasible in certain layers of the technology value chain, such as search, but obviously not in others, such as hardware. In hardware businesses, Google doesn't try to make money. They sell hardware at negligible margins to promote the use of their services at a higher level of the value chain. In the process of doing so, they're making it undesirable and unprofitable to be in the businesses on which Google relies to deliver customers to its front door. Android, Chrome, Fiber, the Nexus line, and the acquisition of Motorola were all driven by this meta strategy. Over time, Google will continue to milk profits at the end of the value chain while those who fall earlier in the value chain see their profits, cash, and resources wither. Google doesn't want anyone to even think about competing with them.

The best businesses aren't castles with moats. They're castles with moats that are oases in deserts.