Moats and Podcasts

Supported by Greenhaven Road Capital, finding value off the beaten path.

Tren Griffin wrote a nice post that explained why some restaurants do and some don’t have moats. Or, why can some businesses raise prices? While Disney can charge more for stuffed animals and Nike can sell $28 socks, Nasty Gal couldn’t raise prices. Why? Is there a big idea behind all this?

Griffin explains profitability in terms of restaurants. We will extend the exercise to podcasts.

These are murkier waters. Restaurants have a simpler revenue and cost structure. Podcasts are more of a patchwork. This American Life is produced “in collaboration with Chicago Public Media.”  Hardcore History has a sponsor and accepts donations. Entrepreneur On Fire has ads and a membership community.

We’ll try to answer the same question as Griffin, can podcasters make money?

TLDR; they can, but not by only podcasting.

Before we jump in let’s remember the two-fold goal. We want to think about the thing and think about the thinking. We’re thinking about podcasts, but also how these ideas apply to any business.

Ready?

1/ Conditions of the environment. In the Galapagos Islands, there are seasons with more rain and seasons with less. When it rains less there are fewer plants and the finches with the larger beaks do better because they can open the Caltrop seeds.

In seasons with more rain, the smaller finches do better because their caloric needs are more easily met by what is available. The larger finches must work harder.

Conditions matter for finches and they matter for restaurants and podcasts.

• The barriers to entry are low. Restaurants begin as food carts or caterers. Podcasters can do everything from a smartphone.
• Limited opportunity.  People have only so much disposable income to spend at restaurants. People have only so much time to listen, read, and watch things.
• Ample alternative supply. Chipotle doesn’t compete against other “fast casual” restaurants like Panera, but also McDonald’s and eating at home. Podcasts have to survive in the attention economy against Westworld, Carrie Underwood, and Instagram.

Like the finches, it’s easier to grow when conditions are good. Milton Hershey had this good fortune.

• There were barriers to entry. To learn how to make caramel, then chocolate, young Milton apprenticed with different confectioners across the country.
• There was a growing opportunity. Hershey started to make chocolate at the right time. “In 1870 America had begun an immigration boom that would last fifty years and triple both the country’s population and the number of potential customers for products like Hershey’s caramels,” wrote Michael D’Antonio.
• There was little competition. Hershey was one of the first to create a good milk chocolate in the United States.

“Supply is the killer of value,” writes Griffin and for podcasts there is a lot of supply.

2/ W-T-P is the M-I-T. In Paul Johnson’s short biography of Winston Churchill he writes, “Churchill had an uncanny gift for getting priorities right. For a statesman in time of war it is the finest possible virtue.”

WTP stands for Wholesale Transfer Pricing, an idea Griffin got from John Malone.

Griffin writes:

“Wholesale transfer pricing =  the bargaining power of company A that supplies a unique product XYZ to Company B which may enable company A to take the profits of company B by increasing the wholesale price of XYZ.”

Griffin elaborates. Restaurants that rent their space are vulnerable to rising rent (WTP). When Apple sells songs for $.99 they are NOT vulnerable to rising costs from labels and artists (they make their money on the devices).

Thanks to digital transfers, podcasters aren’t captive in the same ways. Podcasts and blogs can redirect consumers to a different location. When Morgan Housel left the Motley Fool he changed his Twitter handle without a loss of followers. Unlike a restaurant then, podcasts can move to a new location (domain, RSS feed) and maintain the same traffic.

However, they aren’t fully immune. Companies like Midroll service the ads for podcasts like WTF, The Ringer network, and Doug Loves Movies. If Midroll charges more for ads they don’t have to pass on the revenue to the podcasters. These podcasters are vulnerable to WTP.

3/ Opportunity cost. Few people run restaurants just for the fun of it. The hours are long and hard. As we say about investing here, you can actively invest, or passively invest and have a hobby.

Restaurants have high opportunity cost. Podcasts have almost none.

Patrick O’Shaughnessy, James Altucher, and Barry Ritholtz all seem to genuinely enjoy podcasting. Like a restaurant, they earn money, but also get compensated with prestige, recognition, education, and good conversations.

David Chang compared opening a restaurant to graduate school. Both cost about the same, required similar work, and would demand his attention. He chose the former at the cost of the latter.

Marc Andreessen said that opportunity cost is something he thinks about in his investments. It wasn’t that smart investors missed Facebook, he told Tim Ferriss, but that some couldn’t invest because their financial and professional commitments were elsewhere.

It costs a lot in time, money, and energy to start a restaurant. With long hours and small margins, it’s a full-time job. Podcasting is closer to a hobby. The commitments are small, the payoffs multiple, and opportunity cost low.

4/ But what if you REALLY want a comparative advantage? There are five moats (read: ability to raise prices/charge less).

1. Supply-side economies of scale. McDonald’s buying trucks of potatoes.
2. Demand side economies of scale. Waze users reporting traffic flow for other Waze users.
3. Brand. Field Notes, Yeti tumblers.
4. Intellectual property. Lipitor, Marvel superheroes.
5. Government regulation.

Restaurants have access to brand (#3) (Jimmy Buffett, Five Guys Burgers, and Buffalo Wild Wings) and supply side economies of scale (#1) (fast food franchises) and maybe IP (#4).

Podcasters are limited to brand. Sort of. Look at this top podcast list. Some podcasts have more than one brand.  Gimlet, NPR, How Stuff Works, WNYC, Panoply, etc. is one brand. Hosts are another.

Podcast branding is a catch-22. Podcasting is intimate because the person is in your head, but it’s hard to build a brand around a person. As Kevin O’Leary likes to ask on Shark Tank, “What happens if you walk out of here and get hit by a truck?”

Instagram passed this test. (when I wrote about them I had to look up who the founders were) Nasty Gal did not.

It’s hard to imagine Hardcore History without Dan Carlin. Malcolm Gladwell’s name is the biggest thing on the podcast icon.

My guess is that branding similarly to word of mouth testimonials. If a friend suggests a restaurant, you’ll probably try it. If a brand like NPR suggests How I Built This (which is exactly how I found this great show), you’ll probably try it. The host is like the food, if it’s good you’ll come back for more.

5/ The public good problem. Podcasting is nonrival. You, me, and Bobby McGee can all listen to a podcast at the same time. One person using it doesn’t stop others from using it.

• Rival goods;  a physical book, hammers, (eaten) apples, domain names.
• Nonrival goods; music, podcasts, roadways (to a point).

Podcasts are also nonexcludable. Anyone can listen.

• Excludable goods; private concerts, satellite television, private beaches.
• Nonexcludable goods; public concerts, public television, public beaches.

Podcasts are (mostly) public goods because they are nonrival and nonexcludable. Podcasters know this because like musicians (another area Griffin has written about) they supplement their income. Maron is a stand-up comedian. John Lee Dumas has a membership program. Gladwell and Ferriss write books.

Conclusion.

1/ It’s hard for podcasts to be profitable. Low barriers to entry allow anyone to start, and anyone will.

2/ If a podcast does get large enough for advertising, it can be better to farm out the ad work. “Focus on your strengths,” someone might say, but this makes a provider vulnerable to WTP.

3/ The good news is that podcasts have a low opportunity cost. They’re cheap and simple to start and multifaceted rewards.

4/ Podcast moats must be built on brand, but personal brands fail to answer the Kevin O’Leary question.

5/ Podcasts face the public good problem. Fortunately “talking into a microphone” is similar to “talking to a theater” and “talking words onto a page,” two excludable services.

Griffin began his post about restaurants:

“Investing is about owning a partial stake in a real business. You must understand whether the actual businesses in which you own stock earns a return on capital to be a successful investor. The more different types of businesses you understand in this way, the more skill you will acquire in understanding another new business.”

Thanks for reading. Hopefully, we thought in a few new ways.