Ben Gilbert: preference

Transcript context

…I'm going to supplement Hamilton with his own book so Hamilton doesn't feel awkward. I think there are two parts to this. Number one is if there are readers of Seven Powers and you are patient enough to flip to the appendix after each chapter, there is this concept that we call surplus leader margin, which is the maximum price you can charge more than a competitor while still maintaining your competitive position. Essentially, what we are talking about here is, how much can I charge while maintaining the leadership I have today? That number is not dynamic. That number is dependent on the differential scale you have against the other platform. That's one of the high levels, know what's the overall thing you want to achieve, but at the same time, we recognize the difficulty. Power is both market share and differential margin. Hamilton always knows it's an active trade-off between both entrepreneurs because when you see such a large green field you can penetrate, you should grab that and sacrifice a short-term margin for a larger market share. That's still power because you can realize those profits in the future. It's hard to tell people the one size fits all and this is the exact point. Understanding what is a surplus leader margin, how much is the maximum you can charge given the best alternative out there, and dial up the tune when it's the right time. There's something that I've been thinking about that I want to ask you. We had, months ago after our TSMC episode, a couple of the investors from NZS Capital on. One of the points that they made is we actually don't like to hold Apple in our portfolio right now because our view is that they're being overly extractive to their customers or over the whole ecosystem. That's the 30% stuff with the App Store. They are realizing their market leadership and they are squeezing as much as they possibly can. You contrast that against a TSMC, which does not charge the very most they possibly can to the customers to manufacture their chips. It's a very intentional strategy and they believe that that's sort of a long-term view that they have in order to do that. I'm curious, as investors, how you think about, from the perspective of maximizing enterprise value for a firm, what should a company do? Should they be maximally extractive to their ecosystem or should they leave some surplus on the table? It's a great question. Before commenting specifically on TSMC, one of their primary competitive interfaces, obviously, in terms of fab technology and getting ahead in that is Intel. Just a caveat, both those businesses are amazing, well-managed, and successful. The fact that TSMC seems to be gaining ground is also a reminder to everybody that power is not forever. I use Intel in my book. That's the way life is. Technology is changing, competition changes. For me, one of the longest-term power things I've ever observed is that of elite universities and being able to maintain, which is ironic that it's not even in the private sector. I think on a pricing question like that, pricing may well be tied to a strategic goal, but it's tactically available to anyone. Justification has to be tied to underlying fundamentals. Essentially, what you're doing is, in the case of TSMC which you've cited, they're sort of giving up current profits for something in the future. Presumably, it's future revenues. So either get retention through customer loyalty or acquiring new customers. That leads you to ask, will more customers, more revenue in the future, give you more differential returns? That gets you down to ask about scale economies, do they have it? I would argue, yes, but it's a pretty unusual type of scale economy. There are some very strange industry characteristics here. It's a really large, lumpy capital. I don't know what's the new fab now. Is it $10 billion or something?…

Stored transcript either side of the excerpt. The highlighted words are the published quote; the surrounding text is unedited source, never generated.