We’ve talked often about the diminishing importance of supply-side economies of scale. In its simplest expression, digitization flips the industrial age equation. What was scarce in the industrial age was supply; what is scarce in the digital age is demand (attention).
In the industrial age, scaling supply meant mass production to spread the fixed cost of large capital investments over large volumes. And the industrial age was an age of mass produced, relatively standardized goods. This applied to goods and services provided by the private sector, but also to state-provided services, such as education and public services.
Since the advent of the internet, this is changing. We first noticed the shift in industries where both supply and distribution could be digitized (e.g. media) because supply became abundant faster and this highlighted our limited attention sooner. But it’s becoming increasingly apparent that all industries are being disrupted as software has eaten the world. More and more physical goods have software components to them, making supply more digitized. Where supply cannot be digitized, distribution nearly always can. And where supply-side economies of scale remain important, they can be borrowed. …
For many, ourselves included, the extent of the current crisis came as a bit of surprise. At first, we thought we had a MERS- or SARS-like crisis: a novel virus, but which would be limited to a single region of the world. But, it’s now clear that we face something much more serious and widespread — a global pandemic — that will cause profound social and economic impact.
I look for economic castles protected by unbreachable ‘moats’ -Warren Buffett
The quote above from Warren Buffet, a statement he first made in a 1996 investor letter, is one of his most famous. It neatly encapsulates his investment approach: invest in giant companies that can achieve a “moat” by operating at a scale that others can’t reach.
By spreading the fixed costs of expensive, non-transferable assets like machinery or a banking licence, as well as highly-geared operating expenses like brand marketing and regulatory compliance, over a larger revenue base than competitors, these companies could be better known and cheaper. …