"Legend has it, the first Gold Rush Millionaire wasn't a miner. He sold pickaxes and shovels." -- World Poker Tour, Season One, Episode 5.
That was taken from the World Poker Tour's presentation of last November's "Gold Rush Tournament" at the Lucky Chances Casino in Colma, CA, a town near San Francisco, where they know something of the matter. Whether legend or fact, it couldn't ring more true.
There is value in providing the means to getting at the goods -- especially if you can dominate your layer of the supply chain.
Leading chip-equipment maker Applied Materials' (NASDAQ:AMAT) tools allow its customers to seek semiconductor gold. Dominating this layer of the supply chain, Applied Materials benefits from the growing need for semiconductor materials, without staking its entire future on one mine.
Intel (NASDAQ:INTC) made its name dominating the personal computer microprocessor market, profiting while its customers -- Dell Computer (NASDAQ:DELL), Gateway (NYSE:GTW), and Hewlett-Packard (NYSE:HPQ) -- rushed after end consumers. Microsoft (NASDAQ:MSFT) has a similar story.
Even slot-maker International Game Technology (NASDAQ:IGT) fits the mold. By far the dominant provider of the guts of the casino floor, IGT benefits as gaming spreads, but leaves to customers like MGM Mirage (NYSE:MGG), Harrah's Entertainment (NYSE:HET), and Park Place (NYSE:PPE) the rewards and risks of fighting over patrons.
Applied Materials, Intel, Microsoft, and IGT have two things in common:
- They provide the means for their customers to get the gold, avoiding the hardship and risk of going bust while doing it.
- They dominate their layers of their respective supply chains.
The lesson is that exceptional businesses can be found further up the supply chain. The secret is gaining a competitive advantage, especially if that means controlling a layer of that chain.
Jeff Hwang can be reached at [email protected]. Talk this over with a free trial on our solid-gold discussion board community.
