Wednesday, November 30, 2005

Warren Buffett: Telecom and tough business

There hasn’t been much of a foray in telecom to start with that. Telecom is not a business I understand very well. I have no insights into that business. It’s always struck me as a very competitive commodity-type business, capital intensive. It’s just not a game where I have any kind of any interest at all. I’d rather sell candy or something of the sort, where you can understand the competitive advantage. But I don’t like businesses that are going to change a lot. I like Gillette, you know a hundred years ago almost, they were the dumb regular blade. Like value, they sell over 70 percent of the blades to the rest of the world, in the world—70 percent. Everybody knows how to make them; they don’t have to steal the technology; they don’t have to distribute them. But here’s a company that has 70 percent overtime. So it’s a great, great business. It will dominate 10 years from now. Dominate 20 years from now. Berkley will dominate surely 10 years from now or 20 years from now. Coca-Cola will dominate, but who’s going to do what in telecom? I don’t even know what’s happened in the past very well and I have no idea in a fast-folding industry what’s going to happen. So I view the change as beneficial to society but potentially very harmful to investors. Absence of change is how you get rich in investing. If you buy something that’s very good and you don’t worry about it changing on you and there’s certain mysteries that run themselves with that, there’s certain industries that don’t. Anything with a lot of technology is something to be very wrong on in a short period of time. Now people say you can be very right on it too but I don’t know enough to know the difference. I haven’t run into very many people that do, occasionally people think they do but it’s very hard to predict.

Look at the television industry. Television changes the lives of all of us in this room. I don’t think there’s a television set being manufactured in the United States that there aren’t 20 million of them being sold that were manufactured elsewhere. Radio came along and nobody made money after a little while making radio sets. There’s just all kinds of things that are beneficial for society that involve change. Just take the computer business. If you look at the people that got into computers 30 years ago, you had people like, well I can go down the list, it was a lousy business. Wonderful for society, grew up on it. But it was like, we might use the example of the auto business. 2,000 auto companies in the United States were formed ­ 2,000. There was an Omaha Motor Company. There was a Nebraska Motor Company. There was Maytag, there was Dupont. What you’ve got left, you’ve got two companies struggling and the third sold out to the Germans. They are running the company basically for the pensioners now. It’s been a terrible business model for this country. But it’s thoroughly fascinating. It’s little niche businesses like WD-40, or something like that, that do very well. Just a little something to stick together. Auto manufacturers turn out millions of cars and hundreds of thousands of people work there and they are lousy businesses. Capitalism has had growth in that sense. You can develop a good restaurant and somebody can come along and copy it the next day and figure out something new to add to the menu or add a little more parking. People are always looking at successful models and going after them. That’s terrific for the consumer. It can be very brutal to be in those kinds of businesses. Like McDonalds sort of owned the world 20 years ago, but not now. Wendy’s is doing better. Burger King is kind of struggling. It’s tough. I don’t like tough.


Anonymous Anonymous said...

I have a lot of respect for Buffet but think he's completely off the mark on his criticism of telecoms.

These are the premier wide moat type of companies that he would normally wish to acquire. A great deal of this is to do with government regulation and the intensive capital costs involved. Anyone with a bit of spare change can come along and open a factory and produce sugared water that mimics the flavour and visual appeal and packaging of Coca Cola. What protects Coca Cola from competitors is primarily brand power. Telecoms don't face these same competitive pressures, new entrants into the market are rare, and easily crushed. What results is what we see presently in most markets, massive consolidation and oligopolies, similar to banks. Competition between the 'big four' or 'big three' (for smaller countries) is virtually non-existent, and pricing almost feels coordinated at times as it gouges the consumer and as a consumer one never feels that ones business is especially sought after. Switching banks, like switching ones internet or cellphone plan provider is a hassle, and when prices are similar among the 3 or 4 options, one tends to simply stick with what they are already with.

6:46 PM  

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