Moat meaning in business: a lasting edge
In business, a moat is an advantage that keeps competitors away from your customers and your profits. It works the way water around a castle kept attackers off the walls. Warren Buffett made the word common in investing.
Last updated
Filed under M and N jargon.
Warren Buffett’s moat
From castle mound to Buffett
Moat comes from Old French mote, which meant a mound. The word started out as the castle mound you defend and ended up as the ditch you dig around it. Warren Buffett made “economic moat” popular. His 1993 shareholder letter already described a moat around an economic castle.
Some accounts say he coined the idea in 1999, six years after that letter. Nobody has traced who first used it in business.
Most moats aren’t worth a damn
Buffett judges a moat by how long it lasts. He asks whether the castle will still be standing in 5, 10 or 20 years. Most moats, he says, “aren’t worth a damn”.
Types of business moat
The five moats
Morningstar rates companies’ moats for investors. It names five sources a moat can come from:
- Network effects: more users make the product more useful.
- Intangible assets: patents, trademarks, licenses, a brand.
- Cost advantages: you make it for less than anyone else.
- Switching costs: leaving you costs the customer time and money.
- Efficient scale: a newcomer couldn’t serve the market as cheaply.
Wide, narrow or none
Morningstar grades each company’s moat as wide, narrow or none.
| Moat grade | How long the advantage should last |
|---|---|
| Wide | More than 20 years |
| Narrow | 10 to 20 years |
Moats inside a company
Inside an office, a moat is turf. The team that holds the only working deploy script has one. Most office moats last until somebody writes the documentation.
Moats in pitches and meetings
Moat meaning in business meetings
In a meeting, “What’s our moat?” asks why a company ten times your size couldn’t copy you by next quarter. An honest answer names one of the five sources listed above.
Moat is the strategy word in our corporate jargon dictionary that an investor will ask you to prove. A moat won’t move the needle on its own. It protects the customers you already have from a rival who wants them.
The moat slide at the all-hands
At an all-hands, the moat slide gets the applause, and the hard question about it gets taken offline. The side chat answers it anyway. Customers stay because moving their data out is a pain, and that’s a switching cost.
Moats that aren’t
“We move faster than them” describes a head start, and a head start lasts only until a rival speeds up. A feature every rival already has is table stakes. “Our moat is our data” holds only if a rival can’t buy or collect the same data.
If the moat slide reads like the output of a corporate bullshit generator, treat the moat as missing.
An investor email about a moat
Subject: Follow-up from Thursday
Thanks for the demo. Before the partner meeting we need one slide on
the moatwhy nobody can copy you. Say what stops a company ten times your size shipping this in a quarter. Switching costs and data count. Culture doesn’t.
Moat in a sentence
Our data is the moat. Nobody else has ten years of it.
The investors liked the demo, Luca, but they asked what our moat is if a big player copies it.
Kavya keeps calling our customer support the moat. Nobody else answers the phone in under a minute.
Our moat is the switching cost, Emeka. Leaving us means retraining 3,000 staff on new software.
Questions about business moats
What did Warren Buffett mean by moats?
A lasting advantage that protects a profitable business from rivals. He looks for "a terrific economic castle" with a wide moat that holds for years and an honest lord in charge. By the lord he means managers he can trust.
What is the moat of Coca-Cola?
Coca-Cola's moat is its brand. All over the world, many people pick Coca-Cola over cheaper drinks, so the company can charge more. Buffett has praised that moat many times, and his company, Berkshire Hathaway, has long been a major shareholder.
What is the moat of Apple?
Apple's moat starts with products that didn't exist before, the iPod, the iPhone and the iPad. Its marketing, its design and an interface that's easy to use add to that moat. Apple also counts among the companies with a brand moat.
What is moat in startup?
A startup's moat is the reason a bigger company can't copy you once you've shown the idea works. Early on, the usual answer is a head start. That only becomes a moat if you use the time to build switching costs, a network or data nobody else has.
What are the five moats?
The five moats are network effects, intangible assets, cost advantages, switching costs and efficient scale. An investment research firm checks for them when it grades a company's economic moat as wide, narrow or none. Efficient scale means a market with room for only one or a few companies.