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This is Business Breakdowns.
Business Breakdowns is a series of conversations with investors and operators diving deep into a single business.
For each business, we explore its history, its business model, its competitive advantages, and what makes it TIG.
We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you.
To find more episodes of Breakdowns, check out joinkolasis.com.
All opinions expressed by hosts and podcast guests are solely their own opinions.
Hosts, podcast guests, their employers, or affiliates, may maintain positions in the securities discussed in this podcast.
This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Welcome back to Business Breakdowns.
This is Matt Russell and we're mixing up the format this week.
We're coming upon 200 episodes of Business Breakdowns.
And one of the best things about hosting this show is each episode brings something completely different, but you start to see the connective tissue that ties certain businesses together.
The frameworks that are well documented in some cases and less documented in other cases.
And you really start to just create this mapping of different industries, different end markets, different business strategies.
And we're often getting asked in conversation, what's your favorite episode?
And I certainly have favorite episodes, which you might hear in this conversation, but I think there's ideas that come out of episodes that really stand out to me and things that are thought-provoking in a way that I hadn't considered before.
I want to think about applying them whether it's operating our media business or thinking about it through the investing lens.
And that's what we're aiming to do on this episode.
So you'll hear a bunch of audio clips from episodes that we've isolated that we think are stand out and that I personally found to be stand out commentary.
And sharing just some of the context around them, why we think they're interesting and bringing that to life.
Now, I wanted to make sure that this episode had some cohesiveness to it.
So I would say all of these audio clips tend to focus on end markets.
Unique things about end markets, unique frameworks around end markets.
And I would say this is the biggest lesson or biggest focus point for me after leaving the investing world, stepping into an operator seat, operating in the media market.
This is so incredibly important.
And it's not a one-size-fits-all approach.
I think everybody just assumes, well, you want to be part of a growing market.
As we will hear through these clips, that is not the only case.
There are different ways to go about this.
But I thought this was a good start to this format of an episode and I think you'll enjoy.
To start off, my favorite framework that has come out on the various episodes has been the concept of low-barried entry, high-barried scale.
And our guest, Zed Osmani, talked about this on the L'Oreal episode.
I would think about most of the products that are being introduced or being acquired are probably things that can be done in-house.
So what's the value proposition that really comes along with the acquisition of these brands?
Some of it is to ensure their competitive advantages stay strong and their barriers to entry stay elevated.
So whenever they can see the brand is starting to look appealing to consumers and might start being at risk of becoming an issue or a serious competitor to them, they will move in and acquire.
So there's an element of defensiveness in the acquisitive strategy.
But at the same time, there's an element of focusing on continuing to fuel the growth because one of the view of the companies, there are some brands there that might be well placed to initially grow but might start getting challenged once it's a case of growing to scale and becoming multinational and addressing all markets throughout the world.
The previous CEO of L'Oreal used to highlight that barriers to entry in the industry might not be that elevated but barrier to scale is very high.
And by that, a brand can surface in a local market but to move it from that local market to a multinational approach to recognition throughout the globe is much more challenging.
And L'Oreal has that expertise and that expertise is a combination of being good at marketing, notably advertising, but also being good at reaching all the different consumers and the different channel points through which the consumers access those products and then being also good at fueling what is a competitive advantage through R&D, through the research
and development and the technological advances that they're able to make across cosmetics products in particular to be able to then keep that competitive advantage but also to be able to distribute that R&D know how across all the brands in different packages in different formats and in different messages.
Now what's so interesting to me about the L'Oreal example and the point on low-barrier to entry high-barrier to scale is one, I work in the media business which is kind of the ultimate example of low-barrier to entry high-barrier to scale today.
But beyond that, when I look at pretty much any development in business and one thing that technology has done, it has made starting businesses so much easier than it was five years ago, let alone, ten years ago, let alone, 20 years ago, there are so many tools that are just making it simple to start a business and this gets into not just the operational side of things
and distribution and reach and being able to have a platform like you never had before, it's also things that are really complicated, like setting up entities and filing in certain states and doing all the accounting work, there are tools everywhere.
And think about the themes that you always hear about, no code, AI, pretty much anything that's being done right now, the barriers have been broken, it is a lot simpler to enter into businesses.
Now why is this interesting?
Because I think we all know it's easier to start a business.
But I don't think we've hit that next chapter where the challenge of scaling and the idea of scale gated markets has really come into play and I think when you look at something like L'Oreal and Cosmetics, that is an incredibly old market, you have an incumbent who kind of isolated this spot, they have an acquisition pipeline that has essentially created from those
low-barriers to entry and I think you could start to look around at other markets, I would say media is one of them, where there could be similar dynamics taking place and it's these industries where technology certainly plays a role and there are certain hurdles that might be solved either through distribution, but more interestingly through operational know-how
R&D, which I think are really, really key.
I think as much as all of these tools have made it easier to operate businesses, certainly being the beneficiary of that myself, I do think that you start to have certain missing DNA that exists and I think it's something interesting to focus on, it's certainly something that I haven't forgotten about since we recorded that episode.
It's always interesting when you have this shift from businesses being disruptors of the incumbents to actually having this case where incumbents come back into the strength and they start to acquire all of those disruptors for one reason or another and it becomes a very healthy end market.
The next clip comes from our conversation on Amintek earlier this year with Nail Fockery from Oster Royce and we've covered several of the acquisitive high-performing conglomberts over the years, constellation, HICO, even Atlas Copco in Sweden and you often hear these M&A strategies revolving around targets being number one or number two in their market
and there's a similar storyline here, but Amintek's preference for smaller lower growth markets really stands out in this example.
Usually in the history of doing the show and looking at businesses leads to some type of pricing power as well, whether the company decides to take it but that representing a small percentage of the overall cost but being mission critical is usually a good formula that leads to pricing power in my experience.
Yeah, exactly and that's the case here.
Would you say there's anything unique about these various end markets that they're targeting, anything that they try to do that might unify their strategy in terms of how they're approaching it?
Yeah, I would say it's not necessarily the specific end market.
I mean they do obviously have a focus on certain end markets, they find more attractive but it's the structure.
So if you talk to the company or if you talk to former employees, you get a very consistent message that Amintek tends to be number one or number two, they're always going to be the dominant player.
They want to be in really small markets.
So on average, the market's size, the whole market is about two to three hundred million dollars in size and they tend to have un-average.
It's a very broad sweep number but it's about 25 to 30% share on average in each market.
They will actually avoid markets that are really large in size, they have billion dollars or more because they don't want to attract competition from the larger players that are seeking growth.
So they don't want to be in really huge profit pools which is actually smart because while hard to grow in that, it just avoids competition.
So typically you'll see one to three global players that are dominant.
Amintek is one of them, typically one or two, number one or two and the rest of the market is very highly fragmented among a bunch of mom and pops.
And the other thing about their end markets is they tend to be highly regulated.
So if you think about what we've talked about, MedTech, AMD, Power, these are really highly regulated markets, products tend to be spec'd in and therefore are pretty sticky.
That answer really captures so many interesting dynamics about Amintek.
I mentioned right off the top the idea of targeting businesses and markets that aren't growing but I think just in general picking the end market, how important of a decision that is whether you're operating and deciding on your career, whether you're investing and looking at the business, the end market you choose is so insanely important.
Now the maybe obvious answer to this is well, you should pick a market that is growing.
Something like AI right now, you can ride that wave.
And if you think that it's going to be here in five, 10, 15 years, that's incredible.
But I think there's this alternative way to look at this.
As we've seen from a lot of the conversations we've had about businesses that operate and highly regulated, high barrier to entry markets, just like now was discussing.
And how often do we see that these are the best performing pieces of the value chain in their respective markets?
Amintek, Transdyn, Hico, moving to Motorola, Axon.
I think there are so many interesting themes here just about how they become consolidated, how unique the buyer is from a customer perspective.
And I've just come to appreciate this as a key market dynamic in deciding whatever you're going to do.
Now to take this discussion even a layer deeper on end markets, we're going to go to the conversation that I had with Rob Hanson from Vontobl asset management.
And one of the things that he pointed out, which I think is very, very interesting, is that it's not just this broad total addressable market that you should be thinking about and applying a certain margin level to that addressable market.
And that's what you have, particularly in hard asset industries.
Every individual geography operates differently.
And I would say even in the digital world, we can see it in media, it is incredibly dependent on who your audience is and then who aligns with that audience in terms of what end market.
And I think this all ties back, ties back to the Amintek example, it ties back to the L'Oreal example in terms of how you're dealing with competition, the end markets that you operate in and how you're going about scaling in those markets.
It really is interesting to hear about how important it is from a logistical standpoint.
When the price is so impacted by the transportation cost, I can think about coal in the US, that was such a massive driver.
I think it was 35% of the overall cost of coal at one point.
And Rails refused to move on pricing and that killed a lot of the coal mines.
Here it just would seem like the geographical focus is really important.
Has that essentially led to local geographic monopolies where certain players are just dominant in the areas that they have the quarries?
These local monopolies are hugely important.
And you want to be numbered one or number two in a market.
So I mentioned they have 10% share overall.
And the number two player Martin Materials probably has a 9% share as well.
But really that doesn't matter on the whole for the whole entire United States because it's really what you can do in that local market.
So I was reading a Harvard Business School case because they looked at the IPO of some of materials.
And one of the factoids in there was pretty interesting.
Markets where you have one to four players, the margins tend to be 25% to 40% for aggregates.
Markets where you have five or greater players, the margins are 10 to 25%.
So these local monopolies are really hugely important.
And that's a big contributor to the value of the business.
And in Vulcan's case, in 90 plus percentage of the markets there in their number one or number two.
The only thing I will add is that Vulcan might be my favorite episode that I've recorded.
A lot of this has to do with not knowing the business all that well.
It was one that I had heard from many others around me about how great of a business it was.
And you can hear in the moment some thinking through the risks certainly could be expensive.
Certainly going to be cyclical, but they have built a very, very interesting monopoly in an industry that is needed for pretty much anything that we build and is incredibly difficult to break into.
Now the next audio clip is definitely a pivot.
It's still dealing with the end market, but it has to do with the way that giants are created in industries, the way that businesses and their origin stories might have some connective tissue.
And this came on our episode on ASMR with Tom Alch from Bailey Gifford.
And I will say I doubt anyone focused on this when they listen to the episode.
The technology that ASMR has created is way more interesting than this point on funding and this stroke of luck that Tom talks about, but we'll get to it.
You mentioned EUV that having a big role 10 years ago, it seems like a technology that's really owned by ASMR today.
What's been the evolution there and how has ASMR become the dominant player with that particular technology?
The interesting thing is when it starts to back in the 90s when this decision was made, ASMR was not at the forefront, but it hadn't been focusing on EV.
It'd been focusing on survival.
There was a bit of a stroke of luck.
The research into EV was developed by the Americans.
They'd seen their semiconductor industry decimated by the Japanese.
They developed through state funding, part of energy and DARPA put a lot of money into this in a consortium with industry partners from across the US to fund the development of technology.
But they didn't want to give it to the Japanese and they didn't have a domestic lithography maker that was going to be capable of taking it forward.
They invited ASMR to join the consortium and take that technology on.
That was a really massive step, I think, in the history of ASMR and of the industry as a whole.
At that time, the plan was to introduce it in the mid-2000s.
They thought they could get this up and running.
They thought they would have to get it up and running to be making semiconductors and continuing laws law from 2004-2006 onwards.
Obviously, it was late, but 2010 it still wasn't there.
2012 ASMR managed to persuade Intel Samsung TSMC to support them to co-invest in the company to 23% share between them in ASMR.
They've got 1.4 billion euros of R&D funding into ASMR.
And finally, in 2019, people take 13, 14 years after it was supposed to be delivered.
These first EUV machines came out.
It's all just about being able to make the patents smaller, make them more efficiently and therefore make them a lower cost.
But also to make them better, the high-quality patents, because you're not having to use lots of tricks to try and get a really wide bandwidth of light down to a very, very tiny design of size.
In terms of the storyline for how they were trusted with developing this technology, did the Americans put all their chips in the ASMR basket?
Were there any other businesses that they trusted to try to develop this?
Obviously, none of the companies within Japan, but was there anybody else that they looked to or hopes would develop this?
So the idea of the consortium that was set up in the late 90s was just to research and produce fundamental research into the potential of extremum survival.
For that, like technology to be available to anyone who wanted to.
So had to be a domestic US player that was strong enough to carry it on, then they could have done so.
The Japanese set up their own consortium and the Coordinate Collaborator Deaths try and develop extremotrivala.
And they continued to progress and around 2007 Nikon had a prototype of an EUV machine, but the sheer cost of developing it and the sheer technological challenge meant that ultimately first Canon and the Nikon gave up on it.
They had to give up, they couldn't get it to work, they didn't think it would work.
And the only sml had the funds, the resources and the support in order to push through and bring this to market.
So every example is a little bit different, but I think anytime you see competitors collectively working together on either an initiative, a project, whether that's direct funding or they're all becoming a customer of the same entity, it is worth paying attention.
You get businesses like Visa that come out of it.
You get businesses like FICO.
And there are others out there in the market, whether they have become a standard or not, they're worth paying attention to with the initiative, the project, a sml here being an incredible example in terms of what actually played out.
And when you think about the timeline, it took to play out just absolutely fascinating.
The next audio clip is going to capture the market niche that I really never appreciated.
It's tough to call this an end market.
It's more of a market strategy.
But when I do get asked, what's the most interesting thing you've heard about or learned about on the show?
And I would say, call me crazy, but the idea of licensing and patents as an industry.
There's a lot of gray area here and a lot of gray area in terms of how you judge it.
But I really loved this commentary from William Notte from 91 on Dolby.
That is still the business model today.
Dolby is a licensing-led business model.
So that's the first business model decision.
The second is raise fascination and focus with protecting intellectual property.
So early on, Dolby became known for the experts in the dark arts of patent protection.
Again, that's something that flows through today and is an important competitive vantage.
They have 17,000 patents.
And that's a stock while they're continually adding to.
The third dynamic to think about is the importance of branded technologies.
Dolby, when it was first launched, we talked about the audio cassette market, which was his first market.
You'll see they were pioneers in what we call ingredient marketing.
You'll see the Dolby logo on the side of cassette tape.
And there's a signal of the quality.
And again, this is apocryphal, but supposedly Intel, when they were deciding their Intel inside marketing strategy, those stickers you have on the side of laptops to show that they're powered by an Intel CPU, that she went to Ray Dolby to talk about how they should implement that.
I kept the point on ingredient marketing in there because I think it is so interesting who you see stickers of on what products and why.
But the main thing that stands out here is Ray Dolby and his early work done in the world of patents.
And we've covered several businesses now, most recently interdigital, previously, Dolby, we covered in Visaline and all of these businesses have a deep history with patents, litigation, enforcing the technology that they have created and how they license it and making sure that they are properly compensated for that.
So I hope you enjoyed this format on business breakdowns.
If you do have feedback, if you're on Spotify, you can drop us a comment there.
You know our email hello at join colossus.com.
My social media profile is in the links.
You can send me a DM or give me a shout on whatever platform you like.
We wanted to test this out.
We kept it isolated to end markets, but you can imagine we could do this on so many different themes.
So if it is something you like, please let us know.
Otherwise, we will be back to our regularly scheduled micro programming for the weeks going forward.
We have four recordings next week and many more to do after that.
See you next week on business breakdowns.
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