Can homogeneity in the crypto space have a moat?

Can a homogeneous industry have a moat? Here, “homogeneous” refers to the quality being the same,

similar to product quality,

with no significant differences.

So everyone generally considers this to be homogenization,

which results in poor differentiation in product quality and service.

For example, in the insurance industry,

whether it’s auto insurance,

or life insurance, they are all standardized,

right? So they can only compete on price,

which means these companies lack pricing power,

including many products like cement,

chemical industry,

steel, which have little differentiation.

Therefore, people traditionally believe this is a fact,

because without pricing power,

you cannot establish a moat.

Moreover, there is often excessive competition,

since anyone can do it,

right? Customers can choose not to buy from you because of high substitutability,

and can buy from others.

From each company’s perspective,

they can’t make money,

which affects their profit margins.

Because gross profit margins are hard to increase,

everyone is competing,

either through price wars or low costs,

leading to poor profit margins,

and weaker sustainability.

Because of this, it’s hard to stand firm,

constantly facing competition, right? So in this situation, each company feels surrounded on all sides,

and at the same time, they struggle to make a profit,

constantly losing money,

and are also under external competitive pressure.

Customers can buy from you or not,

so the sustainability is relatively weak,

which is quite observable.

The next question is: does homogenization necessarily mean you can’t build a moat? Of course not! So here, I want to share my view.

First, what is the key? It’s about what to look at. For a homogeneous industry,

you need to see whether the company was an early entrant,

especially if it entered a new emerging homogeneous industry early,

does it have a first-mover advantage? Although the product itself is highly homogeneous,

if there are early movers,

they can occupy the market first,

and after doing so,

they can prevent others from entering,

making it possible for such a homogeneous industry to establish a moat,

so it can be feasible.

Let me give some examples.

Back in the day, Alibaba and Amazon were similar,

both selling things online,

right? Selling online generally has no moat,

since the goods sold are primarily from others,

and these goods can be sold on different platforms,

so they can’t control the supply sources.

Secondly, at the beginning,

many websites and platform sites could be established by anyone,

the internet was shared and free,

so there was no network advantage,

and these companies had no significant edge.

So why did they eventually become super stocks? In the end, Alibaba and Amazon,

now have moats.

Why? Because when they competed with others,

first, they entered early,

second, they had strong execution,

meaning management capability,

which shows strong execution and strategic direction,

with fewer detours.

They also focused on the right things,

for example, being customer-centric,

treating customers as kings,

and providing a better experience,

which was slightly better than competitors.

Eventually, more buyers preferred their sites,

and as the number of buyers increased,

more sellers wanted to join,

creating a reinforcing effect,

which is a kind of network effect.

Network effect means more buyers,

more sellers,

the bigger you get, the more you grow.

Once you become larger,

you establish a so-called moat.

People no longer go elsewhere,

even if your products are similar,

but you now have a moat.

So, from the product and service perspective, they are homogeneous,

but from the company’s perspective,

they have built a moat.

At this point, Alibaba and Amazon,

can charge merchants some fees.

And merchants can’t go elsewhere,

because other websites have been eliminated one by one.

Smaller traffic websites,

can’t do business,

buyers are unwilling to go,

and merchants are unwilling to go to low-traffic sites.

This is how they establish a so-called moat,

making it difficult for competitors to overthrow them.

This is online business.

For offline, in the past, Walmart in the US,

also built a similar model,

through offline retail,

merchants could sell to this retail store,

or to another retail store.

But during this process,

they improved efficiency,

such as better procurement,

and enhanced information systems,

and operational efficiencies,

which slightly lowered costs,

and made their products slightly better than others.

Although the products are homogeneous,

and the services are similar,

their costs are slightly lower,

and eventually, they eliminated competitors.

Once competitors are eliminated,

they can raise prices,

and also negotiate lower rent, etc.,

thus creating a moat.

Let me give some other examples,

like cement,

cement is a highly homogeneous product,

just sand and clay.

For example, China’s Conch Cement,

if it was the first to build a plant in that area,

then it’s very hard for a second to enter,

because the market radius only allows one to survive.

Even if the second company performs well,

it’s difficult to replace the first,

since it’s hard to maintain a competitive advantage during that period.

Highways are similar,

after the Shanghai-Nanjing Expressway was built,

it’s also a homogeneous product,

cars driving on it are no different.

The result is the same,

once built, it’s hard to build another,

which is a typical homogeneous industry,

but it can still have a moat.

Because even building a second highway wouldn’t be profitable,

costs can’t be recovered.

This is the concept of high switching costs,

the cost of duplication,

which is high,

leading to the formation of a moat.

Highways also have a moat,

which is the high switching cost.

But what is the core here? It’s what I mentioned earlier,

which is the first-mover advantage,

whether in cement, highways, or online sales,

once entered, it must be able to establish a barrier,

creating a threshold for later entrants,

which they cannot cross,

thus blocking them out,

and this is the moat.

So, first-mover companies have a moat here.

But sometimes, even after entering early, a company cannot establish a moat,

it cannot create a barrier to prevent others,

like the breakfast industry,

selling breakfast is not feasible,

so the breakfast industry,

despite being large,

as I mentioned in another program,

its biggest problem is high homogenization.

Selling buns, fried dough sticks, soy milk in the morning,

even if you enter and expand,

another person might open a similar shop the next day,

on the street,

and compete with you,

so your first-mover advantage doesn’t give you a competitive edge.

That’s why there are no leading stocks in the breakfast industry,

hardly any large companies,

because early entry and scaling don’t create a moat,

so it’s not effective here.

Therefore, the core of a homogenization moat is that the barrier cannot be low,

homogeneity itself has this inherent problem,

if the barrier is too low,

new entrants will keep coming,

and there will be no real moat.

So, the restaurant industry also finds it hard to produce leading stocks,

because the entry barrier is low,

and the market you occupy might eventually be eroded,

leading to everyone not making money.

What did Haidilao do? Haidilao is not just about its food quality,

because food can always find good chefs,

and its menu,

others can copy.

But Haidilao relies on service,

which is its differentiation,

and this is its strategy,

to differentiate through service,

and corporate culture,

since corporate culture is hard to copy,

it uses this to build its moat.

What is the takeaway from this article? In homogeneous industries,

companies find it hard to make money,

and profit margins are less sustainable,

because competitors have limited pricing power.

But if a first-mover enters such an industry,

even if it’s homogeneous,

it can leverage network effects,

like Alibaba and Amazon, the bigger they get, the stronger,

ultimately forming a moat.

The real winners in such homogeneous industries,

these super stocks,

are Alibaba and Amazon, which are typical examples,

Walmart is also a typical example.

Another example,

current courier services are highly homogeneous,

delivering goods to your door,

buying something and having it delivered,

so transportation trucks are all the same,

used by everyone,

which makes it a highly homogeneous industry.

But who enters early is crucial.

What does early entry lead to? A network effect,

which creates an offline network effect.

The larger my scale,

the better my service,

I can deliver to places others can’t,

even at a loss, I will deliver there.

This makes people willing to use this service,

the faster I am, the faster,

the more planes I have, the faster I get.

If you only have one or two planes,

you might as well not have planes,

so the more planes I have,

the stronger the network effect.

Air freight planes are very important here,

so on the surface, it looks like a homogeneous industry,

but early entry is key.

SF Express has a big advantage here,

because it was an early entrant,

it started early.

That’s all for now.

I’ve discussed the relationship between homogenization and moats,

but it’s not always the case that homogenization means no moat.

Once an industry is homogenized,

it can truly become a moat,

and often, these are super stocks,

because the market is large,

and the industry often has a big market space.

Homogenization can actually be advantageous because of fierce competition,

but once you win, you can make a lot of money,

like Alibaba and Amazon, which are typical examples.