Berkshire Hathaway, Alphabet & Why Warren Buffett Should Be Worried

Warren Buffett (through NV Energy) and Elon Musk (through Solarcity) are currently battling in Arizona; one wants status quo and the other wants the government to continue providing subsidies to homeowners with solar panels who want to sell their power back to the grid (it’s known as net-metering). NV Energy has fought the subsidies using lobbyists, and won this round by getting the laws rewritten making solar cost prohibitive  for new customers and uneconomical for current solar panel owners. Apart from the creepy image of half naked Buffett and half naked Musk, Bloomberg Business magazine shows a myopia that I doubt Warren Buffett himself has. 

Sidenote: The battle actually highlights a systems thinking trap that actors fall into called Policy resistance; various actors try to pull a system towards various goals (most of the time conflicting as in this case), the result is an outcome no one likes but everyone spends considerable time and money maintaining. Point is, no one benefits from this war.

See, this battle might be between Warren Buffett (Berkshire Hathaway or BRK) and Musk (Solarcity, Powerwall) but the real war is actually between Berkshire Hathaway and Alphabet (formerly known as Google).

A simple look at Berkshire Hathaway’s portfolio of companies shows a heavy tilt towards companies that provide (according to Maslow's Hierarchy) safety, physiological needs and a huge dose of self esteem. The graph below shows how BRK companies are heavily skewed towards these needs we have - the desire to house, clothe, feed and affirm our families; in the form of home construction/ownership, protecting those homes and our livelihoods in the form of insurance and the things we do when we have security and comfort, boating/jewelry and the like.

Crazy thing is Alphabet is not just borrowing the holding company model from BRK, Alphabet is competing directly. Here are the 3 segments of competition below. Some clear areas of overlap and competition: 

  1. Energy (safety and security): Apart from NV energy (the entity battling with Solarcity above), Berkshire Hathaway has made a lot of investments in traditional energy (coal, natural gas etc). As I mentioned in an earlier post about Alphabet/Google’s ambitions in the utility space, is fully focused on where the industry is going. Point is, for Alphabets bet to succeed to the heights we expect of Alphabet/Google bets, BRKs bet on NV Energy etc has to fail. 
  2. Infrastructure~40% of the manufactured homes in the US are owned by Marmon  a BRK portfolio company but these are traditional homes. According to Zillow more people are renting longer and less consumers are buying. What BRK has done is ‘own’ the resources required to give consumers the sense of ownership of a home, that’s the bet BRK has made. On the flip side Alphabet has made a bet on the new definition of a home not being the four walls; Nest and it’s suite of products, combined with the energy story above, enables Alphabet to own ‘inside’ the home. Again, opposite sides of a bet with the changing demographics and behavior trends giving an indication of who might win these bets. 
  3. Esteem (and maybe even self-actualization): The ‘vanity’ bucket of BRK’s investments are expressions of wealth from a time fast fading; jewelry, luxury boats and jets. While some of these might still be signs of affluence the demographic trends point to a move towards experiences. I’ll also suggest that as much as Calico is about extending life, it is the new ‘vanity’ desire, with the goal being to live long to enable us continue to have more experiences.

Larry Page has taken Warren Buffett’s playbook and modified it for the next century. Alphabet is a Berkshire Hathaway for the next 20 years, with a focus on advanced technology to satisfy our basic needs. 

I’m not a fan of trite general statements but ‘Software is eating the world’ by Andreessen Horowitz, might be apt here; the software guys are eating Warren Buffet’s world. Alphabet will be sharing their numbers for Q4 2015 today but Larry and Sergey are about to be even more embedded in our lives (and a lot richer) than we can imagine at this point.