19 December 2011

Social Moats

Some have noted valuation issues vis a vis tech companies, partly because it is hard sometimes to project what they do into the future, in terms of sales, it is hard to see a structure for a stable moat, in effect.

I am using a more fluid concept of moat here, to try and take in tech and social companies. It is that buying network which persists in a stable way, focused on a provider. What it may be hard to see is that moat forming and persisting.

However a social company may have less visible, but conceptually more stable moats. It seems social companies exist as and in networks. This was the initial concept of a social network, but as these companies have moved through the start up phase, they have noted that sales can exist in a social environment.

This is a significant discovery. It seems contingent on sheer numbers and an environment, a tech created environment, plus a product and not losing sight of the fact that the users expect to be entertained and socially enhanced. Now that sounds familiar, it is the basis for interaction experiences with much media.

However, social media is highly interactive, if it is not, you may not get those effective numbers, in a stable way (with a caveat discussed below). It is perhaps more like a video game environment, where users will make huge efforts, than those who go to the cinema. But perhaps less tolerance of effort.

Is it perhaps more like going to a party ? In all these cases that social element in a network drives it, with the similar caveat, that much like the experience of a bad party, or a bad film, one may leave. But there may be a difference.

The question is, does interaction incidental to the product, that is throughput through the network, create numbers for the product. That is not necessarily a negative, the capacity to create demand, is a powerful concept. It does exist in more traditional entertainment settings, for example, demand can be created for products through marketing.

So far, there is not much marketing needed to drive products in social setting, you do it for social reasons and because the product keeps you entertained, in ways that fit many user's conception of entertainment. But that social element makes up for much.

Can targeting make up for numbers ? Well, that is a question for all who produce content. It may be something which technology can and is attempting to solve. So let us look for where instability may occur, assuming you have the numbers. I say this because it is apparent at smaller numbers, that there is great instability.

And it seems even with large numbers, this may exist as well. That is, instability may evaporate such a company even more quickly than a tech company. So the valuation issue may be partly that, the instability wreaks havok with projections, which assume stability.

Social moats are so new, it is hard to see if they have a capacity to re-form, which is what I am getting at, once they become unstable, even assuming any have yet become unstable.

Traditional companies, have have issues re-forming moats once they lose them, that may be a function of the stability. I would suggest there are issue in removing that control of the user base, i.e. one does may not necessarily want a social network to be too stable.

So can expect unstable but flexible moats may be more amenable to re-formation, that is what I am getting at. What I am considering is the tantalizing possibility, that a network can re-create moats and stabilize them. But can they advance them.

That is, no matter how much a network can shore up a moat, this is a highly competitive environment, and something else could be coming at that moat, that is not a problem for the network, in some cases.

But then again, it leaves open the possibility of a moat in such a circumstance adapting quickly, with network assistance, assuming that is there, and rising to greater heights.

A related question is to what extent competitive arbitrage on the novelty of social moats will reduce their comfort zone. But that is competition at work and leads to the formation of companies, which helps all those good things come back.

This all leads open the question of the pull of (relatively speaking) traditional media in social settings. That is, is this sufficient and is the addition of that moat, already existing plus novel social products, a big thing.

I must note as well that the lesson of even tech is that when moats go they go and this may be the case with social moats. It all comes down to the act of buying, and when a buyer loses faith in the provider, they go somewhere else. In a network this can be focused somewhere else.

But what I am looking at here is the power of that network to shore up and even re-form moats. But the network must have the faith and there must presumably be a cohesion between the network and the moat one wants to maintain, but there may be a structural advantage in symmetry between networks.

Now what creates that symmetry may be a function of the structure of the network and the adaptability of the provider, which may point to a possible competitive advantage for start ups.

However the issue is that what are relatively speaking traditional companies in this environment, are themselves innovative competitively honed tech companies. So the question is, is there an advantage being a social company, coming from this environment. Are tech moats sufficiently different from social moats such that a good social company can survive and thrive, even facing this competition.

Now all this ignores the stability of company structure, which can be regarded as the grounding for valuation. The question to ask is how much do these moats, tech or social show in company statements.

I have suggested that to value this way, one may need to think of the company in a ranging market, that is to project valuations, you are projecting through a more complex future structure than with other companies. That is, we come back once again to the difference between equities and forex.

And indeed some pairs like some tech, will show stable growing share value. But the question is, like with those pairs, is this grounded in company statements in the same way it is grounded in traditional moats. Will this growth turn off and on in surprising ways, but not perhaps surprising in a more complex future elaboration of structure.

It is the instability in valuations, but it is not an unstable structure, in fact it can be regarded as a very stable structure, and is like the basis for valuations of strong companies, in more usually functioning equity markets. But it comes back to making investing decisions like trading decisions.

© 2011 Guy Barry - All Rights Reserved.