Editor's note: this article is nearly 9000 words, it may take some time to read, after reading, you will know how difficult, how easy, how impossible what Palantir does, how high the barrier to entry in the field of Palantir is, and the cost for other companies to enter and replace Palantir will be very high, and almost impossible.

We counted that since the listing of Palantir, there are almost as many investors shorting and long Palantir in the US stock market, no matter how the company's share price fluctuates in the long-short war, we think everyone has ignored an important fact, that is: does Palantir have a sustainable competitive advantage? This question is worth thinking about by every investor.

Next, Beast Finance will talk about our views through our understanding of the company Palantir and our thinking.

What does Palantir do?

Palantir mainly helps customers engaged in data work by developing data-driven software.

Palantir mainly provides two data fusion platforms for large-scale integration, management and protection of any type of data, namely Gotham for government agencies and Foundry for business.

Together with the professional engineers of door-to-door service, Palantir converts a large number of different data into comprehensive data that reflects its operation, and applies it in layers on the Gotham or Foundry platform, making the integrated data assets accessible, operable, and fully interactive, manual-driven, machine-assisted products to solve problems.

Palantir runs an automation system called Apollo on the back end, which can update the Foundry and Gotham platforms without affecting customer operations. Apollo reduces the need for customers to frequently manage software deployments and enables Palantir SaaS to run efficiently in a very heterogeneous environment.

Looking ahead, Palantir will become the default data system for the US government and its allies. Palantir is also ambitious to become a data system for large enterprises and even the entire industry.

Competitive pattern in the data field

Big data's field is a huge field, and Palantir defines itself as a "platform in the data field".

From the picture above, we can see that there are many companies doing and providing services similar to Palantir in the field of big data. It can be said that the competition is very fierce.

1. For example, the traditional IT consulting firms Accenture PLC and Booz Allen Consulting, although these two companies also offer some services similar to Palantir, but mainly focus on their specific areas of focus, and more importantly, they lack technical skills, do not have technical genes, and are just traditional consulting firms, unlike Palantir, which is based on technology.

2. For example, IBM, a blue chip company in US stocks, also provides some services similar to Palantir, but IBM is too large and has too many businesses, unlike Palantir, which is only engaged in data business, and does not have an advantage in price if it competes with Palantir.

3. For example, Raytheon Technology Company and BAE Systems plc Company, which are engaged in national defense and military industry, can be popular and hot by engaging in arms alone. although they also have some businesses that compete with Palantir, they still mainly engage in military industry, so they do not pay as much attention to data as Palantir. Therefore, it can not compete with Palantir in terms of cost and customer response ability.

4. Some smaller companies are also competing with Palantir. Digital reasoning, for example, entered the field of intelligence analysis before Palantir even started its current business, much earlier than Palantir, and received investment from In-Q-Tel, a company owned by the CIA, but the company's boss was not good at management and lacked capital and talent.

5. We also learned that China's Mingluo Technology Company, which received US $300m investment from Temasek and Tencent, may pose a threat to Palantir's business, because the company not only has money and people, but also has a large number of Chinese customers and some Western customers, and claims to be a "global enterprise data analysis and decision-making intelligent service platform".

In terms of data system platforms, especially in the field of government agencies, Palantir is more or less dominant. In the business sector, Palantir's customers are also unrestricted by the industry, but it focuses on working with about 6000 companies around the world with annual revenues of more than $500m. Palantir says its real competitor is data products developed internally by its potential customers.

The characteristics of some large and successful enterprises

In our summary of some of the "characteristics of large and successful enterprises", put Palantir into the comparison, you will have a better understanding of Palantir. This is a group of enterprises from different industries. These types of enterprises have the following characteristics:

1. Have unique technology. This type of company generally accumulates and processes a large number of intensive data operations through its own unique technology, generating cyclical, subscription-based revenue from corporate or government customers.

2. There is a wide moat. This type of company generally occupies a monopoly or oligopoly position in the industry and has a huge threshold for entry. Such companies tend to have huge economies of scale, and customers will have higher conversion costs if they use the products and services of other companies. This gives this type of company a more sustainable competitive advantage over its competitors. Such companies tend to be resilient during industry crises.
3. Occupy a dominant position in your area of focus. This type of company is deeply rooted in their respective areas of focus, and some companies have been invested by giants since they were founded. When they have money, they expand to other industries in pursuit of economies of scale.

4. Capital and operational efficiency. This type of company typically develops saas products and solutions that can be installed or sold countless times only once. As a result, they have less capital and high operational efficiency. This type of company generally develops with strong profitability and brings high returns to investors.

From the characteristics of large and successful enterprises listed above, we can see that Palantir has the characteristics of these companies, which shows that Palantir has a broad prospect and is worthy of in-depth study.

Does Palantir have a sustainable competitive advantage?

In the field of the Internet, if a company that makes products for C-end users wants to successfully develop among many competitors, it must meet the following characteristics: including scale effect, technological advantage, brand influence, user conversion cost, the company's new attraction to talents, the ability of the management team and so on.
However, the competition for B-end customers is different. Due to the long customer acquisition cycle and decision-making process for B-end customers, it is impossible to achieve explosive growth like companies that make C-end user products.

For example, if you are a company that makes financial management software for enterprises, and your company's financial software is specially for the financial staff of the enterprise, then you have to find a large number of financial staff who work in the enterprise first. Then let them know the product, and then try the experience, no matter how good the trial experience is, it can really bring great efficiency to the work. But they are also part-time workers and have no decision-making power. in the end, the boss is in charge, and the boss says it is only when he spends money to buy. Then you have to go to the boss and introduce him to the boss to use the experience, and the boss is not a professional financial person. Even if you give him the experience, it may not be as deep as the financial staff, and you may not realize which pain points of the financial staff have been solved by this product. Although a product is for a post, but it needs multiple departments to make decisions, coupled with the fact that this product may have a lot of Bug, it does not solve the pain points and needs of financial personnel, and does not find many financial personnel, nor does it have brand awareness, so it is more difficult to get customers. Therefore, it leads to a long customer cycle and decision-making process for B-end products. Anyway, it is particularly difficult to develop a product for B-end customers. There are a variety of factors, any link is not good, can lead to the failure of this company.

It is not as easy as a company for C-end users to get customers. For example, you have to watch a movie in iQIYI, Inc., but you have to be a paying member to watch it. As long as you feel good about this product, you can decide to spend money to become a member. In this way, you will become a customer of iQIYI, Inc., but not a product for B-end customers.

No matter any product for B-end customers all over the world, as long as it is for B-end customers, it will take at least 3-5 years to launch the polished product (and to ensure that the company will not close down during this period), or even ten years, not to mention the later promotion, while the average life span of Chinese start-ups is generally only 1-3 years, most of which do not live to that time. Coupled with capital, talent, technology, brand, customer cycle, competition and other factors, it is even more difficult to make B-end products in China, which leads to the slow development of Chinese enterprise service products. So far, there has not been a company with a market capitalization of US $100 billion like Salesforce.com Inc (stock code: CRM) in China's enterprise service sector.

Therefore, these enterprises facing B-end customers generally compete in products, services, customer experience and so on. The strategy adopted by Palantir is to get customers by bundling offline sales and customer service engineers with their top technology, excellent products and good customer experience.

1. In the field of intelligence and defense, Palantir has been focused on developing the best data platform in the world, and its products can be created with attention to security rules, access privileges, and user operation logs. At present, there is no other product that allows customers to associate between different data sets and easily achieve fast and visual connections. Palantir's competitors, such as Booz Allen and Raytheon Technologies, are diversified companies that do not focus on this. From competitive results to customer experience, Palantir not only has obvious technological advantages, but also has more cost advantages than competitors. That's why Palantir believes that putting a product in front of the right person can prove its value.

2. However, the main reason why Palantir can get a large number of customers is the sales and customer service engineers sent by Palantir. The engineers sent by Palantir are not only the smartest engineers known to government agencies, but also respond quickly to customer needs and attach great importance to customer experience. These engineers understand the customer's needs, solve all the customer's questions about data sources and complexity, and build applications on Palantir. Once the application is built, they will provide on-site training to the customer until they are proficient in using the product. Engineers will also bring their experience in solving customer needs and problems back to the Palantir development center for internal training so that more engineers can remember and understand it so that they can get new customers next time.

3. Although other companies can develop technologies like Palantir, they can also use the same way of getting customers as Palantir. But Palantir focuses his technology and ways of getting customers on such a narrow area of providing data services to B-end customers, and only does this, not any other diversified business. It is good at helping customers solve complex data problems at a relatively low cost and attaches great importance to customer experience. This is not an easy task, from developing software, through responsive back-end support, to engineers and salespeople with expertise to go to customer companies to solve needs and problems. Palantir is more professional and has an advantage over its competitors in every aspect of this field.

This is why Palantir has gained a good reputation in the fields of intelligence and defense for its efficiency and ease of use. We believe that Palantir can enter the business world.

The brand influence of Palantir and its attraction to talents

Given that engineers who go to customer companies to solve needs and problems for customers play such an important role in the success of Palantir (back-end developers and other technicians are also important), if Palantir is to continue to maintain and expand this advantage, it is important to attract the smartest engineers in the industry to join Palantir. To this end, in terms of building the company's brand image, the founders of Palantir successfully turned Palantir into a company that seems to the outside world to be a very mysterious company. For example:

1. Helped the CIA successfully kill Ben. Osama bin Laden discovered former Nasdaq chairman Bernard. Madoff's Ponzi scheme.

2. Clients in the United States intelligence and military departments include: central Intelligence Agency, Federal Bureau of investigation, Department of Homeland Security, National Security Agency Special Operations Forces, Marine Corps, United States Army West Point, United States Navy, United States Air Force, and United States Space Forces.
The clients in the police department are: the New York Police Department, the United States ally Police Department, etc.
Customers in government agencies and commercial enterprises are: Ferrari, Airbus, BP P.L.C., Merck and JPMorgan Chase & Co.

3. Help NIH, CDC and NHS track COVID-19 virus, help the World Food Program stop famine, and help the National Center for missing and exploited Children to combat child exploitation

4. Prominent politicians such as former US Secretary of State Condoleezza Rice and CIA Director George Tenet, as well as celebrities Mike Kelly, David McNorton, Louis Mosley and Fabrice Briggill (the former second largest shareholder of Airbus) have also joined Palantir to lead its subsidiaries in Australia, Canada, the UK and France.

Building the company into a mysterious brand image has proved to be a very effective strategy and has a great advantage to Palantir's talent recruitment. This can successfully attract talents from many top universities to join the company, thus posing serious challenges to competitors such as large IT consulting firms, traditional defense contractors and small start-ups. Hiring the best people to join will certainly enhance the technological advantage of Palantir.

The barriers to entry in this field are extremely high.

The barriers to entry in the fields of intelligence and defence are extremely high. Even if an enterprise has the best customer experience and word-of-mouth, it may not be able to get customers in the defense field. Next, we will focus on these two factors.

Just to meet some defense customers, some defense contractors spend as much as $14 million a year on lobbying.

1. Palantir consulted Washington insiders long ago to get defense clients, and hired former senators John Broux and Trent Trott to formally lobby. Its spending on lobbying has been rising steadily, and over the past few years, Palantir has spent more than $1 million a year on lobbying by hiring about 20 lobbyists to lobby government agencies.

2. Palantir also hired former US Secretary of State Condoleezza Rice and CIA Director George Tenet as consultants.

3. Another challenge for Palantir is that even if high-level lobbyists hired at high prices can contact people in the defense field, they will be treated by the defense department as a software company, let alone respond to any data requirements of the defense department to the Palantir. Basically ignore the technical and cost advantages of Palantir.

4. Palantir allows customers to conduct free trials on its Gotham platform and provides free services before potential military customers make a purchase; it provides free or low-cost training to military units that purchase its software. The professional engineers of door-to-door service will also quickly adjust and implement the changes required by customers after they understand the needs of customers.

5. Palantir uses this way to make the Army military Intelligence Unit and the Marine Corps its customers.
Although Palantir has demonstrated the technical capabilities and cost advantages of Gotham to the defense department. However, the US Army still insisted on developing its own internal intelligence software, and issued a procurement tender to develop the software in December 2015, thus excluding Palantir, which is a huge blow to Palantir, because what Palantir does is the software to be done by the US Army through public bidding, and the cost is much lower, but the US Army excludes Palantir.

After the protest submitted to the Government Accountability Office was rejected. Palantir sued the Army in the Federal claims Court in June 2016, alleging that the Army violated the Federal Procurement streamlining Act of 1994 and did not conduct the necessary market research to determine whether the product met its needs, but directly excluded Palantir. Even if protected by the Federal Procurement streamlining Act, Palantir's approach is very bold, because defense contractors are usually afraid to sue their biggest customers, and if they fail to cooperate, how dare you sue your clients? And the United States Army? It seems that I don't want to do business in this industry. But the judge ruled on Palantir in October 2016 and upheld Palantir's view that the army violated the 1994 Act

After the court decision, the Army reconsidered its procurement plan and launched a bid in March 2018 for intelligence analysis platforms provided by military giants Raytheon Technology and Palantir. Then, in March 2019, the U.S. Army announced that Palantir beat Raytheon Technologies' FoXTEN system to win the first delivery order worth $20 million, and this was only part of a 10-year contract.

Comrades, through what we have listed above, you can see how high the barriers to entry are and how difficult it is to do business in this field. Going back to the question we started with, do you think Palantir has a sustainable competitive advantage?

Beast Finance believes that Palantir's efforts to enter the intelligence and military markets prove at least one thing: there are huge barriers to entry in this area. Faced with such a huge threshold, few ambitious people are determined and willing to spend the time and resources to enter the field and make themselves the de facto leader in the field.

For more than 15 years, Palantir has invested at least billions in software development to provide customers with free products and services, or charge a small fee to level the playing field through lobbying and prosecution, but there have not been any major mistakes in these years.

We think that those who mock that Palantir is still losing money 17 years after its establishment do not realize how impossible the strategic goal that Palantir has set for itself is to become a software supplier to the US government and its allies.

Conversion cost and scale effect of Palantir

After winning the contracts in the field of intelligence and defense, Palantir can be said to have become one of these government customers, and the threshold set to enter this field is very beneficial to Palantir. Gotham has been deployed to the data integration platforms of various intelligence and military units, replacing the existing systems of the defense department, and has developed a large number of applications for agents and trained thousands of customers. Enables it to use these applications at mission-critical and battlefield tactical levels. After doing this, if the products of other companies want to replace Palantir, then the conversion cost for the defense department is very high, and it will only get higher and higher, and it is almost impossible for other companies to enter this field.

As more and more contracts are signed with the US government and its allies, Palantir is also beginning to reap the benefits of economies of scale.

According to Palantir's plan, Gotham will be used to share different data sets among different government agencies. Once these isolated data sets are all integrated into Gotham, there will be huge economies of scale, further strengthening the existing barriers to entry. Under such economies of scale, a newcomer to the field may get a government customer, but we can't understand how the newcomer persuaded dozens of government agencies to abandon the full-featured Gotham platform at the same time and install unverified software instead, driving out Palantir. That's why we believe that Palantir's competitive advantage in acquiring government customers will prove sustainable.

Business field

As we discussed above, large and successful enterprises generally expand to other vertical areas in order to achieve economies of scale. Palantir's expansion in the business world is also for this purpose.

After being deployed and used in the field of national defense, Palantir's products and technologies can also be applied to the commercial field. Apollo is a back-end system that automates the deployment of software updates, and its use doubles the economies of scale of Palantir because it supports Foundry in addition to Gotham. Palantir's resources are shared between the two departments, thus reducing administrative costs. The sales team will also cross-sell products to some commercial customers. Diversified expansion into other industries can reduce the risk of a slowdown in a single industry. But business tends to have more competitors than the high threshold in intelligence and defense.

Economies of scale in business

In the long run, Palantir estimates that the entire potential business market includes about 6000 companies with annual revenues of more than $500m. Palantir developed Foundry products specifically to enter the business sector in 2012 and launched in 2016.

In Palantir's plan, Foundry will become a data system that can provide services not only to individual companies, but also to the industry as a whole. Foundry, for example, struck a five-year $300m partnership with Airbus in 2017, making Foundry a platform for aviation that now connects data from more than 100 airlines and 9000 aircraft around the world.

If successful, industry-wide data systems will produce extensive economies of scale. To achieve this goal, Palantir needs to rapidly expand its revenue in the business sector. Foundry's revenue was $340 million in 2018 and $397 million in 2019. Revenue in the business sector grew by 35% from the third quarter of 2009 to the same period last year. So how does Palantir further accelerate growth in the business sector?

Accelerate economies of scale in the business world through sales strategies

In the short term, Palantir plans to focus on building partnerships with companies that dominate the industry, which are often willing to make structural changes within them, once a partnership is reached
Palantir's technology can reorganize its operations.，So as to bring more revenue to Palantir in the business field. If the leading companies in the industry use Palantir's products, it will further bring economies of scale to Palantir. For example, JPMorgan Chase & Co, Palantir's first client in the business field, introduced Palantir to JPMorgan Chase & Co because Palantir has a good reputation and relations in government departments.

In the past, Palantir's policy was not to hire salespeople directly. In Palantir's view, intelligence and military contracts were obtained through state-of-the-art technology and good product experience, not through sales.

However, products for B-end enterprises can not grow as explosively as C-end products. The common practice of large and successful enterprises is to maintain a large number of sales staff, expand the sales area, find customer needs, coordinate technical engineers, ensure technical support to customers, and customer relationship management. Palantir began recruiting direct sales staff at the end of 2018. Revenue growth in the business sector in 2019 seems to prove that the idea of direct sales is feasible, so Palantir plans to triple the number of salespeople.

Historically, companies with demand for data have either developed products internally or purchased off-the-shelf products from other third parties to meet their needs, but both methods have proved inefficient in a rapidly changing and increasingly uncertain world. Foundry provides a third and better option for these organizations. However, Palantir has come to realize that in the short term, organizations will stick to their own in-house software.

Therefore, Palantir completely modularizes its solution so that customers can "take what they need and develop on the basis of what they already have." This flexible way can not only solve the problem that customers can not meet the demand even if they buy third-party off-the-shelf products, but also accelerate the progress of customer development. as a result, Palantir has created a new mode of cooperation with channel partners.

Palantir also plans to work with cloud hosting channel partners such as Amazon.Com Inc to drive revenue growth in the business sector.

Previously, Amazon.Com Inc helped promote cooperation between Palantir and the Colombian government. Palantir developed visorcovid-19, a Foundry product developed by Palantir based on Amazon.Com Inc AWS, which uses Colombia's largest open and epidemiological data integration to provide the Colombian government with a unified, near-real-time dynamic view of the epidemic.

By the third quarter of 2020, international revenue had accounted for 46 per cent of Palantir's total revenue. As part of its international growth plan, Palantir has set up subsidiaries in Canada, Australia, the United Kingdom, France and other countries over the past few years.

In Japan, Palantir took a different approach, choosing a joint venture with Sompo Holdings, which then invested $500m in Palantir. The joint venture, called "safe and healthy Real data platform" and provided by Foundry, aims to accelerate the digital transformation of Japanese government agencies and industries such as healthcare, automotive and manufacturing.

Risks faced by Palantir

Palantir's negative news in public relations may damage its image in the eyes of engineers. Palantir is now a listed company and should invest resources in the field of public relations to maintain good public relations. For example, the "Prism Gate" incident like Snowden will seriously affect the image of Palantir, customer relations and employee morale.

Palantir must quickly capture its market, expand customer switching costs, expand economies of scale, and raise barriers to entry to prevent competitors from challenging the government sector or other smaller companies from seizing their customers in the business sector.

Conclusion

We believe that Palantir has a competitive advantage that has been established since its inception, which is like a moat to protect its business from competitors. Judging from the new developments since PalantirIPO, this advantage seems to be expanding.

In the field of providing data systems to government agencies, Palantir has clearly provided customers with an unparalleled customer experience by combining with professional engineers and technology who provide door-to-door services.

Gotham has become the default data system for the data of some US government agencies. If others want to replace Palantir products, then the conversion cost for customers will be very high and basically impossible.

Palantir has successfully established its brand image by showing its mystery to the outside world, which can constantly attract top talents to join, thus ensuring its technological advantage.

Now, Palantir has won a lawsuit against the US military, opened the door to US government agencies, and is expected to enter the market quickly.

Gotham is increasingly being used to integrate isolated data sets between different government agencies, which will eventually produce huge economies of scale and further raise the barriers to entry for competitors.

Palantir is actively diversifying into the commercial sector and international markets to achieve economies of scale. Revenue growth in the government and business sectors will bring more revenue to Palantir.

Palantir's share price seems to be a little ahead of time at the moment-which we'll talk about later. Investors are taking risks to bet that Palantir will successfully dig out this broad moat and achieve profit growth over the next few years.

Investors bullish on Palantir may patiently wait for Palantir to build its own moat. For such investors, it is time to buy Palantir when the market is bad or when the crisis is in the face of a massive sell-off.