Who's buying IPL Title sponsorship? Discussing business moats beyond brand value.
Moats are key to success for any business and you should know what these are!
By Rachita Kumar and Harry Kapoor
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Update: Dream11 bagged the rights for IPL Title sponsorship. Although controversial, now that it’s ‘legal’, it makes so much sense for Dream11 given that their business model revolves around Sports and they will definitely recover much more than that this IPL.
Who do you think will buy IPL's title sponsorship rights this year?
Patanjali vs. Unacademy vs. Byju's vs. Zomato? Or any other brand?
Why do you think companies spend so much amount on sponsorship. It's to establish a brand value. But why? Because the brand is a moat.
What is a moat now?
Something very tough to replicate and something which gives the company a high competitive edge. Investors see 'moats' as key criteria when evaluating any business.
But is spending money to build a brand the only 'moat' possible?
Nope!
Here are different moats a company can have:
1. Economies of Scale - The more you sell, the tougher it is to compete with you in terms of pricing. Since your fixed costs are the same and marginal costs are low, you will benefit with scale. Simple eg: Software - Building software costs the same regardless of the number of people buying it.
2. Network effects - the experience and value of the platform for each customer gets better as more customers join in. Network effects are different from virality (read the article below for more).
3. Counter-positioning - Practice of developing your business model such that incumbents have conflicting incentives preventing them to compete effectively. Eg Competing with you could hurt one of their other businesses
4. Switching Costs - High product stickiness leads to high switching costs (un-willingness to shift). Eg. Gmail. You’ve already given your email address to all your friends and used it to sign up to hundreds of services so won't switch to another email provider.
5. Brand: As we talked about before, you are more likely to trust and buy from a brand whose ads are shown on TV than a new company.
6. Cornered Resource - company gaining preferential access to it. Resources can be material as well as human. Eg Google with AI PhDs (attracting good talent is a cyclical process)
7. Patents/ Intellectual Property - If you have a patent/ IP on a new technology or innovation, then others cannot copy that explicitly and hence you have a major moat over it. Usually, it's for a period of 10 years (in electronics) and more (in pharma). Patents are also for brand names (like Apply iPod).
8. Regulations - Favorable regulations often act as moats for companies against the competition (for eg- Foreign cos in China are not allowed to operate in China without a JV, and now India is taking a similar stance. Similarly, regulations can make or break a business in many industries, especially in the case of Financial Regulations (RBI).
9. Process Power - Process can contribute to product quality, customer satisfaction, sales. And remain completely irreproducible.
10. Distribution - Though this is linked to economies of scale, but slightly nuanced. Having access to customers at scale acts as a moat since you can then upsell them multiple things if they trust you. Eg- today companies first tap distribution (Khatabook, CRED, Sharechat etc.) and then think of what products to sell.
11. Embedding - This is an extension to switching costs, but looping people in through multiple links (products, partnerships, APIs etc.) helps you increase the switching costs as they see more value in a bundle. Eg- WeChat lets you do almost everything within the app, thus even if there is a better messaging app, you are unlikely to shift.
12. There can be multiple other moats depending on the business, industry etc. Religion, Politics, Power also act as moats in many cases for eg 😉
Which companies do you think have really strong moats? Discuss in comments below!
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Want to deep-dive further? Here you go-