In a market economy, a highly profitable company attracts competitors, who drive prices and margins down. Unless it is protected. Warren Buffett popularised the image of the “moat”, the ditch around a castle: the barrier that durably protects profits.
The four main families
- Brand: the customer pays more for the same functional product (luxury, drinks, entrenched software).
- Cost advantage: producing more cheaply than anyone else (scale, logistics, access to resources).
- Network effects: each new user increases the value for all the others (marketplaces, social networks, payment systems).
- Legal barriers or unique assets: patents, licences, concessions, irreplaceable infrastructure.
Switching costs: the discreet moat
A fifth moat, often underestimated: when changing supplier is expensive, slow or risky (enterprise software, a bank, a system embedded across production), the customer stays, even without enthusiasm.
How to spot it in the numbers
A moat is not declared, it is proved: profitability (ROE, ROCE) that is high AND STABLE over ten years, margins that hold up through crises, and market share that does not erode. Persistence is the signature.
No moat lasts forever
Kodak, Nokia and Blockbuster all had a moat. Technology and habits can fill it in within a few years. A moat is watched, never taken for granted.
À retenir
- ✓Without a moat, competition always ends up eroding margins.
- ✓Five sources: brand, costs, network effects, legal barriers, switching costs.
- ✓A moat is proved by persistently high profitability, not by a narrative.