Buffett said after lunch with Sun Yuchen in February 2020 that he did not agree with Sun Yuchen's investment in Tesla, Inc. because the auto industry was highly competitive and its competitors had huge amounts of cash and would not quit easily.

Peter Lynch, another investment guru, has a similar view of investing in auto stocks. He made a lot of money on Chrysler and Ford because he saw auto stocks as cyclical stocks, buying during a recession and selling at the height of the economy.

If you hold car stocks for a long time, the rate of return may not be high.

From the perspective of industrial scale, automobile is a large industry with an output value of several trillion yuan.China sold 25 million cars in 2019, and the number of cars was as high as 150 million, but due to the fragmented pattern, there were no trillions of giants before this year.

By contrast, China's game industry is small, with a total revenue of only 230 billion in 2019. However, due to the good competition pattern, it has cultivated a super giant with a market capitalization of more than one trillion yuan and a small giant with a market capitalization of nearly 500 billion yuan.

It can be seen that to make investment, the ceiling of the track is very important, and so is the competition pattern.Whether it is investment or entrepreneurship, it is very beneficial to see clearly the competition pattern of the industry in advance and then to make a choice.

How is the competition pattern?

There are many Internet companies, classified from the nature of applications, mainly social, e-commerce, search, entertainment (games, music, live) several categories. According to trustdata, the number of monthly active users for major applications in China is shown in the figure.

From the data, we can see that the competition pattern is mainly divided into three categories.

The first category is monopoly.Wechat in the social domain and Baidu, Inc. in the search field all fall into this category, holding more than 90 per cent of the market share and making it almost impossible for their competitors to compete with them.

The second type is multipole.The most typical is the e-commerce sector. Taobao, Pinduoduo and JD.com have 700 million, 290 million and 90 million monthly active users respectively, which seems to be the largest one on Taobao, but from the perspective of retail GMV, JD.com and Pinduoduo have 26% and 12% market share respectively, and they are growing all the time. The competition of e-commerce is far from the end.

The third category is scattered.Music, live streaming, and information platforms are all of this type, and the advantage of the front-runner is not obvious. Each has its own living space, and there is no trend of integration in the industry in the short term.

If the ceiling of the industry determines the upper limit of the whole industry, then the competitive pattern determines the upper limit of the size of a single company. By studying the competition pattern that the industry may face, we can know in advance whether we are investing in a trillion-class company or a trillion-class company.

How to predict the pattern?

What determines the competition pattern in the Internet industry? By sorting out cases in different fields, we find that tracks with good competitive patterns have one obvious thing in common:Sustainable economies of scale.

The scale effect here does not necessarily refer to the number of users. For example, in the field of long video, the number of users is also very large, but these users are not necessarily very sticky. Once the platform does not have good content, users will immediately switch to other platforms. This is an unsustainable scale effect.

In order to find out whether there is a sustainable scale effect in a certain Internet field, we must first judge which link is the core of the industrial chain.

For example, DiDi Global Inc., its upstream (taxi) and downstream (passengers) are very scattered, so the dominance falls on the platform. The more people take a taxi, the more taxis that use the platform, the more passengers can get a taxi, and the more users use the platform.

So we can see that DiDi Global Inc. basically monopolized the taxi market with 20 million monthly active users, and it is very difficult for new competitors to enter the game.

On the contrary, like the LVB platform, it is not because there are so many people watching LVB on a certain platform that the core of the platform is chosen by well-known VJs.
So we can often see some major anchors change platforms and take away a large number of users. Unless one LVB platform can integrate the whole industry, regardless of the number of VJs and users, the LVB industry will never form a scale effect.

In addition to the scale effect, the speed of change of a track is too fast, which will also affect the competitive landscape.

Take e-commerce as an example, the nature of e-commerce is in fact the same as retail, both have economies of scale, and should be an industry in which the strong are always strong. Whose operation is more efficient, the cheaper things are, the more people come to buy things; the more people there are, the more the platform costs are shared, and the prices can be cheaper.

However, looking back at the history of e-commerce in China, it has been impossible to settle down because the form of e-commerce has changed many times.

At the beginning, people will go to shopping malls and supermarkets, and online shopping is limited to small goods, so C2C is the mainstream mode, and Taobao is the dominant one.

With the progress of logistics and network technology, many brands have strengthened online sales, and B2C mode has gradually become the mainstream. JD.com sees the opportunity in the wave of B2C, crowding out competitors such as Dangdang and excellent Amazon.Com Inc, and becomes a new force in e-commerce.

Then with the rise of social e-commerce, Pinduoduo seized the opportunity of Wechat traffic to become bigger and stronger and quickly seize the sinking market. The recent rise of decentralized e-commerce may help Youwei League to change the e-commerce landscape once again.

Generally speaking, the Matthew effect of the Internet industry is actually very strong.Generally speaking, when the scale is up, it is almost impossible for newcomers to overtake around the corner.

Unless there is a major change in the industry.

When will the pattern change?

Buffett often says that the companies he likes are those with long slopes of thick snow and a moat wide enough. Whether it is Apple Inc, Xi Shi Candy or Coca-Cola Company, they are basically of this type.

For the same reason, he doesn't like the technology industry because it is changing so fast. In the past few years alone, the hot spot of science and technology investment has gone through many iterations, and countless enterprises have risen because the tuyere has come and fallen because the tuyere has gone.

But on the other hand, change actually means more investment opportunities.

For example, Vipshop Holdings Limited in 2012, explored the tail product discount track, turnover from 200 million to 40 billion, venture capitalist Wang Xu Xin cleverly seized the opportunity and got a 50-fold return.

It doesn't matter if you miss Vipshop Holdings Limited. With the start of the live broadcast wave in 2014, Momo Inc and JOYY Inc's share price has basically risen several times.

The Internet seems to have a strong Matthew effect. Once the first comer forms the Matthew effect and the Super Platform takes shape, it is difficult for the latecomer to re-enter.

But the Internet happens to have a large number of subversive innovations that can instantly change the competitive landscape.

The first is technological innovation.After sorting out dozens of cases large and small of the Internet, the success or failure of most enterprises comes from technological changes.

For example, with the mobile wave brought about by smartphones, Baidu, Inc. and other enterprises failed to start falling behind, and TMD successfully got the boat ticket to become a new giant. The arrival of 4G has accelerated the development of short videos and live streaming, and Douyin Kuaishou Technology and various live streaming products have become a new outlet.

In the coming 5G era, there may be a new generation of unicorns.

However, the cycle of technological innovation is generally 3-5 years. In the technological cycle, it is more about the innovation of business models.

The most important change in the business model on the Internet is the pay-to-free model. The giants of the game industry first opened the mode of free games and charging for props, rubbing a group of competitors on the ground; 360 of the security industry did the same thing, preferably using antivirus software free of charge, thus frantically occupying the market, and then realized through browsers and searches.

Change has been a key factor in investing in the Internet industry in the past 20 years, and I believe it will be the same in the future.For investors with less funds, the value of Internet research is still very great, if you can find the right time for the pattern to change, it is possible to obtain huge returns.

How the competitive pattern affects the value of Investment

At present, about 100 Internet companies are listed in Hong Kong and the United States. In terms of revenue, there are only four companies with more than 100 billion yuan, namely, Tencent, BABA, JD.com and Baidu, Inc..

There are Meituan, NetEase, Inc and Vipshop Holdings Limited in the 50 billion-100 billion RMB range, and eight in the 15 billion-50 billion RMB range, including TRIP COM GRP LTD, Pinduoduo, iQIYI, Inc. and so on.

Among the top 10 revenue companies, four are e-commerce companies (BABA, JD.com, Pinduoduo, Vipshop Holdings Limited) and two main game companies (Tencent and NetEase, Inc). It can be seen that investing in Internet companiesThe track is still the most important.Throw to a track with huge capacity, even if it is the second or third place in the industry, there will be a good living space.

And the remaining four companies, with the exception of iQIYI, Inc., basically monopolize the whole industry. For example, Baidu, Inc. has a 90% share of the search market, Trip.com has more than 60% of the OTA market, and Meituan is the king in the O2O field.

From this point of view, the competition pattern is very important.

If you vote for the wrong track, choose an industry with a not-so-high ceiling, but because the competition in the industry is good enough, there is still a chance to come out of a hundreds of billions of companies.

For example, search, in 2019, the size of China's search advertising is about 100 billion yuan, the scale is not large, but Baidu, Inc. occupies more than 90% of the market share, so he can still achieve 100 billion revenue.

But if the industry ceiling is not very high and the competition pattern is not good, then the probability of this investment to be outstanding is very small.

Take live broadcast as an example, it is also about 100 billion of the market size, but because the pattern is too scattered, so the income of each family is not high. JOYY Inc Momo Inc's income is 25.5 billion yuan and 17 billion yuan respectively is not bad, HUYA Inc. DouYu International Holdings Limited pepper Yingke's income is even lower.

Summary

From the perspective of market capitalization, the company's market capitalization and revenue are basically linked.

There are three Internet companies with a market capitalization of more than one trillion yuan, namely Tencent, BABA and Meituan, and eight Internet companies with a market capitalization of more than 100 billion yuan, namely JD.com, Pinduoduo, NetEase, Inc, Baidu, Tencent Music, iQIYI, Trip.com and Vipshop Holdings Limited.

It can be seen that if you want to win a company of hundreds of billions of dollars, the first condition is that the track is good. If the track is average and the competition pattern is good enough, then you can still do it if you vote for the first place.

And if you want to vote for the next trillion giants, good tracks, good patterns, and good players, all three are indispensable.

Especially for Super Platform like Tencent and Meituan, once the competitive advantage is established, the valuation can be sky-high.

After all, there are only a few good companies in the market, and you can get a good return if you feel at ease to hold them.

If you miss these stocks, it doesn't matter. Xu Xin, the queen of venture capital, once said:The waves of the Internet are not created, but wait.

As long as investors are prepared to find a well-competitive track when the next wave comes, they can get excess returns by betting their money on the best entrepreneurs.