I often find myself thinking about the perfect business: one that exhibits all the qualities that will ensure a highly profitable operation for years to come. It must have certain qualities to distinguish it from all the other businesses out there. It mustn't need a whole lot of assets to make money. That's because assets need maintenance, and a pricey overhead will certainly hurt the bottom-line. It must generate sufficient cash at all times - good and bad, alike. And most importantly, it must boast an exceptionally high operating margin. If it's able to support such a margin throughout its years of operation, I'll know that it has a wide enough a moat. Otherwise, other competing businesses would have eaten its lunch.
One of the best businesses in the world
I believe the business of selling unbiased research and consulting services is one of the better businesses I know. And that's for the following reasons:
- Turbo- charged market: The segment of information technology (IT) is expanding rapidly. It's probably no surprise to you that our world is awash with enormous amounts of computer data. And it just keeps growing and growing. An eBay study says the amount of business data worldwide doubles about every 1.2 years. The Gartner Inc (NYSE:IT) Group predicts the amount of business data will grow 800% over the next five years. This information needs to be collected, maintained, and analyzed. Large companies want professional advisory on how to handle this amount of data.
- Recession proof: Companies and governments need data and services when they are growing as well as when they are downsizing. This makes the business of selling data and services lucrative in good and bad times alike.
Few assets: a research and consulting business isn't expensive to maintain. There isn't a whole lot of capital expenditures on a service oriented business.
Who's the leader in the research business?
Gartner Inc (NYSE:IT) is the world's largest information technology research shop, and a leading information technology and advisory consulting company. The company produces its own research on technology-related subjects, information technology in particular, and then goes and sells its services to executives in charge of making strategic IT decisions such as CIOs. You see, corporate budgets for IT are relatively very large, normally in the ballpark of tens of millions of dollars. A business executive usually won't think too much before commanding $70,000 (the average cost per customer) to pay for Gartner Inc (NYSE:IT) to assist him in handling IT within his organization. In a sense, Gartner gives corporate IT managers the same type of backstop Moody's gives corporate financial managers. If Gartner Inc (NYSE:IT) says do something and it goes wrong, the corporate manager can deflect blame. It's a win-win situation.
Gartner Inc (NYSE:IT), with a market cap of $5.7 billion is by the far the strongest rival out there with 60%of the total IT research market. Way after it, comes Forrester Research, Inc. (NASDAQ:FORR), an $800 million market cap research company and Xerox Corporation (NYSE:XRX). Xerox Corporation (NYSE:XRX) and Forrester Research, Inc. (NASDAQ:FORR), combined, control about 10% of the market of IT research. In other words, Gartner Inc (NYSE:IT)'s dominance in the IT market is equivalent to Wrigley's dominance in the market for chewing gum. That's a highly remarkable presence.