“I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough–I owed this to future capitalists–to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.
I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: 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 doesn’t tend to invest in technology, which brings derision from many in the tech industry. But his logic is perfectly plausible. Technology tends to be complex and difficult to build a protective moat around (ie a durable competitive advantage). Information technologies are perhaps even more difficult to protect.
The OSS market is highly fragmented with no vendor / integrator looking like taking a dominant position. Customer needs vary markedly, there are always shortages of skilled experts, delivery projects have significant risk, revenue is often lumpy. These are just a few of the reasons why, despite massive revenues ($67B per annum according to Insight Research), profitability is difficult to attain consistently.
The organisations that lead the market by revenue (Ericsson led with about $3.4 billion, followed by Accenture, Huawei, IBM, Amdocs and NEC, each with $2.5 to $3.2 billion according to this Gartner report) all have a heavy reliance on skilled experts to derive that revenue. They thrive on the relationships and credibility that this expertise provides, which is possibly the closest anyone in the industry gets to building a moat.
The question for others in the industry is what you can build your moat upon. What gives you your durable advantage that ensures overs on profitability?
You may have noticed the recent sale of Solarwinds for $4.5B. Their most recent profitability statement gives some insights into why that number is so high. They do things a little differently from the other vendors mentioned above, servicing the longer tail of network management with easier, faster, intuitive, self-serve solutions that also better suit the price point of the long tail. You’ll notice in the profitability statement that their cost of sales is vastly different from the other players mentioned above.
Which OSS model would Warren, or you, most likely invest in (if at all)?Read the Passionate About OSS Blog for more or Subscribe to the Passionate About OSS Blog by Email