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From what I did understand from the teachings of Warren Buffett, one of the aspects that value investors are looking for in a company is a clear competitive advantage, he usually calls it the moat. By that he means something that makes it very tough for competitors to enter the same business. That is actually the holy grail of capitalism because, as it is taught in every basic economics class, as long as there is profit to be made, there will always be new competitors.
If you think of the entertainment business, very few companies have been able to maintain an image positive enough in the mind of their consumers for them to not even second guess their choice at the moment of making their buying decision.
Just to clear the fog, the company I have in mind is The Walt Disney Company (NYSE: DIS). As described by the company itself, with its subsidiaries, it is a global entertainment company. The business segments of the Company are Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products. The Media Networks segment consists of domestic broadcast television network, television production and distribution operations, domestic television stations, cable networks, domestic broadcast radio networks and stations, and Internet and mobile operations. The Studio Entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video programming, musical recordings and live stage plays. The Consumer Products segment engages with licensees, manufacturers, publishers and retailers globally to design, develop, publish, promote and sell a range of products based on Disney characters. As you can see, it is a much diversified company!
I am thinking of an example that Warren Buffet once came with; as he was talking about how powerful the perception that parents tend to have with Disney products. The Walt Disney Company has been a symbol of good memories for many people, young and old, because of the original stories they manage to come with. As I was stating a little earlier, the example that Warren Buffett was giving was of a parent that wanted to occupy his children for a couple of hours. Let’s assume that the parent gets at the video store and has to choose quickly between a Disney movie and for example a DreamWorks movie. He doesn’t want to take the time to look at the back of the DVD, so he will go with the safe bet: a Disney movie.
He went further into giving the analogy by saying to the audience:”I if say Lucasfilm, Time Warner or Viacom, nothing comes to your mind. But if I say Disney, something comes to your mind!” My personal experience led me to realize the importance of that fact.
At current prices, Disney’s stock hasn’t been so cheap in the last 10 years, so it must be the right time to buy!
If you think of the entertainment business, very few companies have been able to maintain an image positive enough in the mind of their consumers for them to not even second guess their choice at the moment of making their buying decision.
Just to clear the fog, the company I have in mind is The Walt Disney Company (NYSE: DIS). As described by the company itself, with its subsidiaries, it is a global entertainment company. The business segments of the Company are Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products. The Media Networks segment consists of domestic broadcast television network, television production and distribution operations, domestic television stations, cable networks, domestic broadcast radio networks and stations, and Internet and mobile operations. The Studio Entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video programming, musical recordings and live stage plays. The Consumer Products segment engages with licensees, manufacturers, publishers and retailers globally to design, develop, publish, promote and sell a range of products based on Disney characters. As you can see, it is a much diversified company!I am thinking of an example that Warren Buffet once came with; as he was talking about how powerful the perception that parents tend to have with Disney products. The Walt Disney Company has been a symbol of good memories for many people, young and old, because of the original stories they manage to come with. As I was stating a little earlier, the example that Warren Buffett was giving was of a parent that wanted to occupy his children for a couple of hours. Let’s assume that the parent gets at the video store and has to choose quickly between a Disney movie and for example a DreamWorks movie. He doesn’t want to take the time to look at the back of the DVD, so he will go with the safe bet: a Disney movie.
He went further into giving the analogy by saying to the audience:”I if say Lucasfilm, Time Warner or Viacom, nothing comes to your mind. But if I say Disney, something comes to your mind!” My personal experience led me to realize the importance of that fact.
At current prices, Disney’s stock hasn’t been so cheap in the last 10 years, so it must be the right time to buy!
Full disclosure: the author has no position in DIS.
Nice post, good example of an industry with high barriers to entry (aka high competitive advantage)
ReplyDeleteHigh barriers to entry are synonyms of security, which often leads to interesting financial results.
I liked your analogy of security Myri. Disney's case shows just how important it is for a company to be a very effective marketing machine in order to maintain their profits.
ReplyDeleteWhat are other potential barriers to entry?