Inteliquent, Inc. (IQNT) : Network Effect, Barriers to entry

  • Introduction

M. Cap: $540 million

The company helps competitive carriers (wireless, wireline, cable and broadband telephony companies) exchange traffic between their networks without using an ILEC tandem for both long and short distance calls. Each competitive carrier that connects to the company’s network generally gains access to all other competitive carriers’ switches connected to the company’s network. The company claims it to be the “first mover” in the industry.

 

  • SIGN OF COMPETITIVE ADVANTAGE

What did the competitive carriers do before the introduction of the service by the company?

Competitive carriers relied only on ILECs to exchange traffic. As per regulation, ILECs are required to provide local transit service to competitive carriers, which come with “geographical restriction”, “switch capacity shortage” and “competitive tensions” which is a direct result of ILEC losing market share to competitive carriers.

Network effect

The value of the service offering increases with the number of carriers and non-carriers connected to the company’s network. The addition of each new customer to its network allows the new customer to route traffic to all of the company’s existing customers and allows all of the company’s existing customers to route traffic to the new customer. In a 2013 proxy fight by Clinton group, the activist noted in its filing that, “It was a pioneer in a “network effect” business, with a clear lead, a wide competitive moat and recurring revenue“.

Barriers to entry  

Difficulty for new entrants to overcome strong network effect: The company believes that its head start in establishing network and interconnecting 891 competitive switches gives it a significant advantage over new entrants who do not have such connections in place.

Inability to replicate “Shelf Space” within a customer’s switch: The company believes that obtaining new interconnections from competitive carriers may be difficult for new entrants. Each interconnection requires the use of switch ports from the competitive carrier. Switch ports are capital intensive and are traditionally purchased on a just-in-time basis. Competitive carriers may be unwilling to provide switch ports without significant traffic or savings opportunities.

 

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PGT, Inc: Market leader in impact resistant windows & doors

  • Introduction

M. Cap: $450 million

PGT, Inc. is a manufacturer and supplier of residential impact resistant windows and doors.

  • SIGN OF COMPETITIVE ADVANTAGE

Brand

PGT WinGuard® is synonymous with impact resistant windows and doors.

 

Market leader in Florida

PGT has the #1 position in the market for impact resistant windows and doors in Florida. It has approximately 60% market share in Florida.  More than 80% of total sales are generated in Florida. There are some areas in Florida where building codes require impact resistance.  In 2014, as per Karen Clark & Company’s report, four of the top eight US cities that are most vulnerable to major storms are located in Florida.

 

Proven track record

Over 3.5 million WinGuard® units have been installed and Zero (0) reported impact failures. It is hard for a new entrant to create this track record.

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Silicon Laboratories (SLAB): Switching cost

  • Introduction

M. Cap: $1.8 billion

Silicon Laboratories, Inc. is a provider of silicon, software and solutions for the Internet of Things (IoT), internet infrastructure, industrial control, consumer and automotive markets.

  • SIGN OF COMPETITIVE ADVANTAGE

Switching cost

  • A design-win occurs when a customer has designed the company’s ICs into its product architecture and ordered the product from the company.
  • The amount of time required to achieve a design-win can vary substantially depending on a customer’s development cycle, which can be relatively short (such as three months) or very long (such as two years) based on a wide variety of customer factors.
  • Once a completed design architecture has been implemented and produced in high volumes, customers are reluctant to significantly alter their designs due to this extensive design-win process.
  • The company believes that this process, coupled with its intellectual property protection, promotes relatively longer product life cycles for its ICs and high barriers to entry for competitive products, even if such competing products are offered at lower prices.

Patent

As of January 2, 2016, the company had approximately 1,208 issued or pending United States patents.

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