One of the great paradoxes of innovation is that in many cases, advances that have a tremendous effect on society make very little money for the innovators. Consider Warren Buffett's comments on new technology:

Sizing all this up, I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough -- I owed this to future capitalists -- to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did.

I won't dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

While there can be no doubt that online video is the future, there are still tremendous questions about whether it will ever make any great amount of money for anyone. The Wall Street Journal (registration required) recently discussed the future of the online video industry, and quoted Brahm Eiley of Convergence Consulting as saying that "It's not much of a business model to give up television at the end of the day." But as companies like Viacom Inc. (NYSE: VIA) are learning, it may happen even if it isn't a good business model.

I would caution investors to always remember Warren Buffett's words about the Wright Brothers when considering investments in sexy new technology. When buying stocks, the question must always be: "How will this company make money?"

Internet video and the paradox of innovation originally appeared on BloggingStocks on Sat, 31 Mar 2007 17:10:00 EST. Please see our terms for use of feeds.