Learning as MOAT

While the world wonders on the out sized valuations of retail digital business, when the broad economy is in trouble due to the pandemic, there is a little known factor that makes them more powerful to defend themselves from competition. What is this Moat?

Moat is a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack.

Traditional businesses have been valued on financial parameters such as revenue, profitability, free cash flow, leverage etc. While these measure the business, they are always derivatives of the business attributes. One such is learning.

Let us ‘learn’ this with an example. Take a digital native business such as Amazon. While its Prime customer base , shopping experience, logistics are all well documented, what perhaps is not so well documented is its ‘learning as a MOAT’.

With millions of transactions and user behavior logged and analysed, it has learnt over years and decade on user behavior, both good and bad.

Lets take the bad first. A fake listing, a merchant fraud, a customer fraud are all behaviors that cause real financial loss on a daily basis and cause havoc on a business that works on thin margins. Amazon’s years of learnings on how to ‘detect’a bad user behavior and ‘prevent’bad user behaviors helps avoid those nasty costs. While a competitor can under-price themselves funded by VC money, what they cannot replicate are these learnings. Inability to control bad customer behavior is enough to put them out of business. Just ask credit card firms that are poor at handling customer fraud.

The recommendation engines to cross-sell have been fine tuned over years by variations such as seasons/regions/customer segments and many others that a competitor just cannot copy by poaching a few employees. No wonder China is blocking algorithm/model sale on Tiktok to the US owners.

The MOAT is in the data/learnings/algorithms that got finetuned over years and years. None of this is repeatable and there may be very few other businesses that have similar moats. While AWS may have funded these for Amazon and Ads may have funded these for Google, these are very very hard for others to replicate. Same logic goes for the chinese digital giants. Millions of customers have enriched these firms with their behavior and learnings thereof.

While the world is critiquing whether driver-less cars are a fad or fiction, the algorithmic learning is deciding winners and losers in multiple traditional businesses!