Friends,
In September 2004, Netflix founder Reed Hastings had what he thought would be a one-off meeting with an investor: Hamilton Hemler. Little did he know that seven years later, Hemler's wisdom would carry Netflix through its most difficult period: the transition from DVD-by-mail to streaming.
Of course, we all know today that Hastings made the right move. But it was nowhere near as obvious back then. Following the botched attempt to roll out "Qwikster" as the DVD-by-mail business, Netflix stock dropped nearly 80%.
Helmer would later pen 7 Powers: The Foundations of Business Strategy to let everyone else in on the secrets he bestowed upon Netflix. One of the key takeaways was that every moat has two aspects to it:
- Benefit: A company with a competitive advantage can either charge more for its goods, have cheaper input costs, or both.
- Barrier: An obstacle must exist to make it so the competition is unable or unwilling to do the hard work to take said benefit away.
In Netflix's case, it could spend $10 million on a new movie, and spread that cost out over (initially) tens of millions of subscribers. If anyone else (even Disney!) wanted to make a similar quality, they had a much smaller base of subscribers to help pay for it, making such a venture prohibitively expensive.
That was the barrier protecting Netflix back then. The benefit came down the road when Netflix got more subscribers for its in-house content, and that content became cheaper on a per-subscriber basis.
You can see the same thing playing out today with one of our favorite investments: MercadoLibre.
The company has a multi-decade head start on building out fulfillment networks across Latin America (akin to Amazon's head start in North America). Recently, the company announced free shipping for smaller orders in Brazil. The market has balked at this, as they don't like Mercadolibre lowering its margins (the benefit).
But what we think many are missing is that Mercadolibre is simply flexing its moat muscles by making the competition (Amazon, Sea Limited, etc) unwilling to build out a similar network. Because customers can get free shipping today with Mercadolibre, they'll expect the same from any other e-commerce player.
Because none of those players has the same base upon which to build that fulfillment network, it becomes prohibitively expensive. In theory, they'll eventually pull back on those ambitions, and Mercadolibre can shift back from focusing on the barrier to the benefit.
And we'll be happy to be holding shares when that happens.
Wishing you investing luck in the months ahead,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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