The notion of an economic moat, popularised by Warren Buffett, is still central to the world of business and investment. But the nature of what constitutes an economic moat has been transformed in recent times.

🗣 Patents: While once a formidable shield, patents are becoming increasingly viewed as the legal licence to print money. In many fast-moving industries, especially technology, the life of any single patent is becoming much shorter. Companies need to innovate continuously to stay ahead, and patents are becoming less useful as long-term protection.

🪢 Partner agreements: While exclusive partnerships can offer advantages for a time, they are rarely seen as a strong moat since partners can be fickle, contracts can expire, competitors can cut new deals, and so on.

🧲 Modern moats: What investors are looking for?

• Network effects: The more users a platform attracts, the more valuable it becomes, as in social networks (Facebook), marketplaces (eBay) and operating systems (Microsoft Windows).

• Data moats: Accumulation of large amounts of user data can create barriers to entry for competition. This relates to the AI and machine learning-based economy.

• Ecosystem lock-in: Customers are so embedded in a company’s ecosystem of products and services that switching costs don’t make sense. Take Apple, for example.

• Brand power: A great, emotive brand can command high prices and retain loyal customers. Premium consumer goods and some consumer products fit in here.

• Regulatory moats: For some industries, regulatory barriers can be extremely high, making it costly and time-consuming for new entrants to gain market share. That’s good news for investors. But watch out in case regulatory changes hit the industry. 

• Scale economies: In some industries, the increasing size of a company can give it some cost advantages not available to small competitors.

• Intellectual property portfolios: While individual patents might be unimpressive, an ever-changing and ever-growing IP portfolio can confer lasting advantages. 

Today's investors look beyond surface-level competitive advantages. They seek:

• Durability: How likely is the moat to withstand technological shifts and market changes?

• Expandability: Has the firm shown the ability to use its moat to enter adjacent and/or more distant markets because of its moat?

• Quantitative proof: The moat needs to be reflected in financial metrics, such as higher margins or lower customer acquisition costs. This is the perspective of investors.

• Flexibility: In fast-shifting markets, can it repurpose its moat to meet new challenges?

• Compounding effects: What’s a good moat? How does it improve over time? And what is compounding in this context? A virtuous cycle of competitive advantage.