Episode Summary
Executive Summary: The episode launches a new season focused on AI, barriers to entry, and modern value investing, then features James Bessen on how technology is reshaping competition. Bessen argues disruption has slowed, innovation and R&D are increasingly concentrated in large firms, and proprietary software creates competitive advantage through complexity and customization. The discussion also covers diffusion, platform regulation, interoperability, AI’s labor effects, productivity measurement, and antitrust.
Main Topics: Modern value investing and barriers to entry (Priority: 5/5): The hosts frame the season around a broader view of value investing: firms create durable value when they have barriers to entry and can reinvest at high returns in large addressable markets, echoing Charlie Munger’s insight. Disruption has slowed despite visible technological change (Priority: 5/5): Bessen explains that while technology is everywhere, the specific Schumpeterian measure of disruption—incumbents being displaced by new entrants—has declined since peaking in the late 1990s/early 2000s. Concentration of R&D and proprietary software as competitive moats (Priority: 5/5): The conversation emphasizes that R&D and custom software investment are highly concentrated among a relatively small number of firms, helping them sustain advantage and reduce disruption. Complexity, customization, and intangibles in modern competition (Priority: 4/5): Bessen argues software enables mass customization and operational complexity, letting large firms like Walmart tailor offerings at scale and compete in ways that were impossible in the mass-production era. Diffusion, ecosystems, and platform openness (Priority: 5/5): The guests discuss why useful technologies diffuse more slowly now, how firms sometimes open technologies to expand markets (IBM, Amazon, Apple), and how regulation can influence openness and interoperability. AI, skills, and labor-market effects (Priority: 4/5): The discussion turns to AI as potentially 'IT on steroids,' with uncertain distributional effects: it may boost mid- and lower-skill workers more than top performers while increasing demand for hybrid data-plus-domain skills. Antitrust, regulation, and the broader economy (Priority: 5/5): The episode argues antitrust scrutiny should go beyond big tech to banks, retailers, and other sectors where data access, interoperability, and platform rules can suppress competition and innovation.
Key Arguments: Disruption is not absent, but by Schumpeter’s measure—incumbent firms being displaced—it has declined sharply since the late 1990s. Industry concentration has risen alongside a concentration of R&D and custom software investment, suggesting innovation is becoming more centralized. Most corporate software spending is internal/proprietary, not sold on markets, and it functions as a competitive weapon rather than a tradable product. Software allows mass customization, letting firms handle large product variety and individualized customer needs at low marginal cost. Large firms can create ecosystems by opening platforms selectively, but they often pair openness with restrictions and rent capture. Diffusion is slower today because firms have less incentive to license or spread technologies that differentiate products rather than expand the market. AI may not simply advantage the already-elite; some evidence suggests it helps weaker workers and changes the demand toward hybrid skills. Measured productivity growth may understate gains because current statistics struggle to capture quality improvements, variety, and service-sector scale effects. Antitrust should focus less narrowly on big tech and more broadly on practices that block data sharing, interoperability, and startup growth across sectors. A healthy innovation economy depends on a diverse “gene pool” of sources for new ideas; excessive concentration risks choking off future innovation.
Data Points: Top-four firm persistence / disruption rate: About half of its late-1990s/early-2000s peak - Bessen’s measure of disruption based on whether a top-four industry firm remains in the top four over time R&D concentration: 90% done by 200+ firms - Bessen says a very small number of firms perform the vast majority of corporate R&D Corporate R&D spending: Close to $1 trillion - Tano Santos references the approximate scale of corporate America R&D spending Proprietary software investment: About $235 billion (few years ago, likely higher now) - Santos cites Bessen’s book on the scale of internal software spending Walmart internal software spending: $10 billion a year - Example of a large firm investing heavily in proprietary software for competitive advantage Walmart SKU count: 140,000 stockkeeping units - Used to illustrate software-enabled product variety in supercenters Dollar General SKU count: 10,000–12,000 stockkeeping units - Contrasted with Walmart’s much broader assortment and different strategy Walmart market share in general merchandise: From 2%–3% to 50%+ - Used as evidence of the scale of advantage from logistics and software Big tech share of the economy: 2%–3% - Bessen argues antitrust attention is too focused on big tech relative to broader concentration issues Skill premium trend: Stopped growing about 10 years ago - Bessen notes the education wage gap’s increase has leveled off
Pivotal Quotes: "the rate of disruption is about half of what it was back then" — James Bessen: Explaining that incumbent displacement has slowed materially since the late 1990s/early 2000s "we're getting away from the mass production model into a mass customization version" — James Bessen: Describing how software enables firms to tailor offerings and manage complexity at scale "we're increasingly concentrating innovation in a few companies, ultimately you're throttling the potential gene pool" — James Bessen: Warning about the long-run risk of concentrated innovation and weaker startup growth
Implications: For investors and policymakers, the key issue is not just technology’s pace, but who controls it. Durable winners may be firms with software-driven moats and platform power, yet broader competition, diffusion, and startup formation may weaken without better openness and interoperability.
About Value Investing with Legends
Value investing is more than an investment strategy — it's a fundamental way of thinking about finance. Value investing was developed in the 1920s at Columbia Business School by professors Benjamin Graham and David Dodd, MS '21. The authors of the classic text, Security Analysis, Graham and Dodd were the very pioneers of their field and their security analysis principles provided the first rational basis for investment decisions. Despite the vast and volatile changes in the economy and securities markets during the last several decades, value investing has proven to be the most successful money management strategy ever developed. Value investors' success over the second half of the twentieth century proved not only the validity of the value approach, but its preeminence over even the most widely taught and practiced modern investment theory, which was developed in the 1950s and '60s and remains dominant even today. Our mission today is to promote the study and practice of Graham & Dodd's original investing principles and to improve investing with world-class education, research, and practitioner-academic dialogue. In this podcast you will hear from some of the world's greatest investors, their views on the investment management industry, how they developed their investment process and how they see the field changing over time.