The installed base: the economic moat that generates decades of revenue?
In the world of investments, the term "Installed Base" is considered one of the strongest and most stable moats a company can build for itself.
The idea behind it is simple yet very powerful: a company sells significant capital equipment or a technological platform, and this system becomes so deeply embedded in the customer's daily operations that it becomes an inseparable part of it.
And once the installation is complete,
the company begins to enjoy a stream of recurring revenue with exceptionally high profit margins.
These revenues come in over years, and sometimes even decades, through the sale of parts, consumables, software, and related services.
Additionally, the customer finds it very difficult to leave, because switching to a competitor requires operational downtime, retraining of personnel, new certifications, and heavy financial expenses, which turns the installed base itself into a moat protecting the business.
Here are several leading companies that have successfully implemented this model in an exceptional way:
Intuitive Surgical ($ISRG): The robotic "da Vinci" system installed in hospitals is a huge long-term revenue source; every surgery performed requires unique tools and accessories,
and because surgeons have already been trained on the system and the hospital has built its workflows around it, switching to another technology is almost impossible.
General Electric ($GE): While jet engines are sometimes sold at low-profit margins, the real business lies in services, maintenance, and spare parts.
These last for decades for every engine installed in a commercial or military aircraft, so one engine generates secure revenue for a long time.
ASML ($ASML): The EUV lithography equipment installed in the world's most advanced chip factories ties customers to the company's ecosystem, which includes unique software and services. Today there is no real substitute for these machines, making its global installed base irreplaceable.
Lam Research ($LRCX): Many chip manufacturing plants around the world are physically built around the company's etching and deposition equipment. However, once the system is approved and integrated into the complex manufacturing process, switching costs are simply enormous, and the company's installed base continues to grow every time a new factory is built.
IDEXX ($IDXX): The company operates on a razor-and-blades model in veterinary clinics. After the diagnostic device is installed, it generates a continuous stream of revenue from the sale of consumables and exclusive tests, ensuring consistent profitability over time.
Danaher ($DHR): By selling diagnostic and life science instruments to laboratories and research centers, the company creates a strong anchor for its operations. The installed instrument serves as a basis for high revenues from services, consumables, and software subscriptions that continue for many years to come.