After reading Buffett: the making of an American capitalist by Roger Lowenstein I couldn’t help but equate Warren Buffett’s views on daily newspapers in the 1980s with the SaaS winners of today.
After Buffett bought The Buffalo News he was sued by the other daily paper for launching a Sunday edition and initially lost on the grounds that it was anti-competitive (which was patently false). In the trial, a number of statements came out including the idea that owning a daily newspaper with no competitors was like having an exclusive toll bridge that crossed the main river in town. Buffett was focused on businesses that had pricing power such that they could raise prices and continue to thrive even in an inflation-heavy environment (a.k.a. a strong moat!). Eventually, the other daily newspaper in Buffalo went out of business and The Buffalo News generated a tremendous amount of cash for many years until the Internet disrupted it.
SaaS winners demonstrate many of the same characteristics as monopoly daily newspapers in the 1980s. Only, instead of being specific to a geography, they are specific to a market and a segment. People love to comment how marketing automation had many success stories, but it really was a winner per segment at time of market consolidation:
- Eloqua – enterprise
- Marketo – mid-market
- Pardot – low mid-market
- HubSpot – small business
Just like New York is a market and Buffalo is a segment for daily newspapers, there are hundreds of SaaS markets and thousands of segments that will produce winners. Let’s look at some more comparisons between daily newspapers pre-Internet and SaaS winners:
- Strong recurring revenue
- Audience/users that love the product
- Marketplace fees (see Salesforce.com charging 15% of revenue)
- Pricing power
- Network effects
One question I’ve been asked many times over the years is, “Why can’t Google take 10 software engineers and just copy XYZ product?” The answer, it seems, is the similar to trying to be the number two or three daily newspaper in the 1980s: the scale, expertise, product/market fit, and accumulated brand value was too much for an upstart. Put more simply, the market and segment coalesced around one winner and that momentum steamrolled everyone else. Google took 1,000 software engineers and tried to compete with Facebook as a new social network, only to lose miserably.
Now, in this comparison, one type is a monopoly media provider to consumers and the other type is a business software provider to businesses, but many of the same desirable characteristics that Buffett looks for applies to both. Winning a SaaS market and segment is incredibly valuable, just like monopoly newspapers in the 1980s.