Shovel sellers

During the California Gold Rush, it was not the gold diggers that made a fortune. It was a man called Sam Brannan who sold shovels to all the gold diggers. You see, every prospector needed a shovel whether he was going to strike rich or not. And therefore, the shovel seller came to be a more certain and more profitable business model.

So what is the shovel seller business model?

1. The shovel is an important ware
2. This ware is needed by multiple players who themselves compete for market share
3. So irrespective of whether the players win/ lose, the shovel seller wins
4. The shovel seller’s business has a moat which protects her from competition
5. If there is competition in selling shovels, then the business deteriorates to become commodity like. The key is to ensure that the business model stays protected.

During the PC revolution of the 80s, Dell, HP, Compaq, Digital all were competing intensely for market share. Yet, they were all buying their shovels from the same 2 guys – Microsoft (Windows OS) and Intel (chips). As a result, Windows and Intel were far more profitable as compared to the PC makers.

CDSL and NSDL together are shovel sellers in the depository services. Discount brokers and full service brokers are competing to add more clients (investors). Now, whether, those investors and brokers make money or not, they have to use the depository services for every buy and sell transaction. And therefore added revenues for CDSL and NSDL.

TransUnion CIBIL is another shovel seller in India. Every bank and NBFC before giving out a loan do check the credit score of the borrower. CIBIL is the largest credit bureau in India and therefore every bank and every NBFC needs to use the shovel provided by CIBIL. For CIBIL, the cost of servicing each request is almost 0; but there is an incremental revenue for each request. Like the shovel seller, CIBIL makes a profit on each sale and it takes on no risk by itself if the loan goes bad etc.

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The world of business is not fair. Some have more advantages than others; some have it easier than others. As an investor, the market is your oyster. And you can buy any company you want. So why not go for the shovel sellers or the toll roads or those with network effects or those with scale economics. In the world of business and in life, you don’t score more just because you attempt a difficult problem. It’s unfair, but I would rather exploit it than crib about it.