Moats and Market Structures

An economic moat is the structural reason a business can sustain above-average returns without being competed away.

Five sources are commonly identified: intangible assets (brand, patents, licenses), switching costs, network effects, cost advantages, and efficient scale.

Moats are not static. Kodak had one. Blockbuster had one. The question isn't just whether a moat exists today but whether it will widen or narrow. Look at returns on invested capital over a full cycle — sustained ROIC above cost of capital is the financial fingerprint of a real moat.

When analyzing a business, ask: what would a smart, well-funded competitor have to do to take this customer? If the answer is 'a lot,' you may be looking at a moat.