TCP/IP

TCP/IP (Transmission Control Protocol/Internet Protocol) is the foundational set of communication rules that governs how data is sent and received over the internet. Think of it not as the internet itself, but as its universal postal service and addressing system, all rolled into one. It’s the invisible magic that ensures the email you send from Paris arrives intact on a server in California, or that a cat video streams seamlessly to your phone. The 'IP' part acts like the address on an envelope, making sure the data packets are sent to the correct destination. The 'TCP' part is like a diligent postal worker who breaks down your message into smaller packets, numbers them, sends them off, and then checks that they all arrived at the other end and are reassembled in the correct order. This protocol is an open standard—not owned by any single company—which is precisely why it enabled the explosive, decentralized growth of the internet as we know it.

At first glance, a technical protocol like TCP/IP seems a world away from the concerns of a value investor. You can't buy shares in “TCP/IP,” after all. But just as you can't understand the 19th-century railroad boom without understanding the standard gauge track, you can't grasp the value creation of the digital age without appreciating its fundamental plumbing. TCP/IP is the ultimate example of a non-proprietary platform that unleashed trillions of dollars in commercial value. It is the public highway system on which giants like Google, Amazon, and Meta built their empires. For an investor, the lesson is profound: the most durable businesses are often those built on top of, or providing essential services to, an open, universal standard. Understanding this principle helps you identify where true, sustainable economic moats lie, separating the revolutionary platforms from the fleeting fads.

We can think of the business world created by TCP/IP in layers, moving from the physical to the purely digital. Each layer presents different opportunities and risks for an investor.

These are the companies that build and maintain the physical Infrastructure that allows TCP/IP's data packets to travel the globe. They aren't the internet, but they make the internet possible.

• Networking Hardware: Companies that manufacture the routers, switches, and other gear that direct traffic. They are the digital traffic cops.
• Telecommunications: The titans that lay the thousands of miles of fiber-optic cables under oceans and across continents.
• Data Centers: The physical warehouses that house the servers and computers where the internet lives.

From an investment perspective, these are often capital-intensive businesses with significant barriers to entry. The key is finding companies with scale, superior technology, and sticky customer relationships that can generate a good Return on Invested Capital.

Because TCP/IP is a universal language that anyone can use, it created the perfect conditions for businesses with powerful Network Effects to flourish. A network effect occurs when a service becomes more valuable as more people use it. These platforms don't sell a product so much as own the digital town square where everyone gathers.

• Search Engines: More searches provide more data to improve results, which attracts more users, creating a virtuous cycle.
• Social Networks: The value is the network itself. You join because your friends are there.
• E-commerce Marketplaces: More sellers attract more buyers, whose presence, in turn, attracts even more sellers.

For a value investor, these are the holy grail. Businesses with strong network effects can build some of the widest and deepest economic moats imaginable, often leading to spectacular profitability and immense generation of Free Cash Flow.

This layer includes the countless businesses that use the internet to deliver their specific service or product to the end consumer.

• Software-as-a-Service (SaaS): Companies that provide software solutions over the internet, from accounting to customer management.
• Streaming Services: Businesses that deliver content—movies, music, podcasts—directly to users.
• Fintech: Companies leveraging the internet to disrupt traditional banking and payment services.

Competition here can be fierce because the internet has lowered the barrier to entry. A Competitive Advantage is less likely to come from the technology itself and more likely to be found in brand, operational excellence, or a unique business model.

TCP/IP isn't just a piece of tech trivia; it's a mental model. It teaches us that foundational, open protocols can create the fertile ground for incredible value creation. When analyzing any new technological wave, whether it's AI, blockchain, or the metaverse, ask yourself:

• Where is the “TCP/IP” of this new ecosystem? What is the underlying, enabling protocol or standard?
• Who is building the “plumbing”? Who is selling the “shovels”?
• Who is building the “platforms” that can capture network effects?
• Who is just another “application” in a sea of competitors?

By thinking in these layers, you can look past the hype and focus on the fundamental sources of long-term value, which is the timeless core of the value investing philosophy.