2004: How can regulations shape a company's competitive advantage?

AUDIENCE MEMBER: Good afternoon. It’s James Tarkenton of Durham, North Carolina.

Current examples, including discussion of media ownership rules, FCC regulation of the telecom industry, and proposed oversight changes for mortgage giants Fannie Mae and Freddie Mac are all examples of the legislative, regulatory, and lobbying process as an influence in shaping and reshaping economic moats.

We would be interested in your comments on these and other examples of how competitive advantages are shaped by government.

In general, how do you incorporate the impact of regulation on the size and ferocity of economic moats for various businesses?

WARREN BUFFETT: Well, that varies enormously by the business. I mean, there’re some businesses that we think that it’s not a very big factor, and there’s other businesses we’re in — the energy business, the insurance business — where regulatory change could have a huge impact.

You know, we don’t have any one-size-fits-all type arrangement. We just try to think intelligently about any business we’re in. And if it’s — when we bought GEICO in 1995, or bought that last half of it or whichever year it was, the question, you know, whether the regulatory climate would change in some major way, you nationalize auto-insurance — well, all of those things go through our mind and we evaluate them.

But there is no — there’s no formula. You know, if we’re — if we’re in furniture retailing, you know, that is not something we’re going to worry about. We’re going to worry about plenty of things, in terms of competition, but there are different variables that apply with different intensity to each business we’re in. And it’s up to Charlie and me to try and think about any of the variables that might hit those businesses, and to weigh them appropriately, and to crank that into our evaluation.

Charlie?

CHARLIE MUNGER: I think it would be fair to say that in our early days, we tended to overestimate the difficulties from regulation. We refrained from buying television station stocks for a long, long time because it seemed like such a peculiar asset when anybody could just ask to have your license jerked away from you each year and they could ask a government agency to do it. And — but it turned out, the way the system evolved, that almost never happened.

WARREN BUFFETT: Yeah, Tom Murphy figured that one out before we did. (Laughs)

CHARLIE MUNGER: Yeah, and we had it — we were slow on the learning curve. Murphy was way better at it than we were.