Moat

• 5 sources of moats 
1. The network effect
2. Customer switching costs
3. Intangible assets
4. Efficient scale 
5. Cost advantage
• The network effect
• when you have customers that start using a network, that network suddenly becomes more valuable for all the other users of the network
• e.g. eBay - It has the most buyers, and therefore it has the most sellers.
  And it has the most sellers because it has the most buyers.
• e.g. Facebook -  When you or I join Facebook, Facebook suddenly becomes more valuable for all of our friends and as more of our friends join Facebook, it's more valuable for us.
• Infrastructure:  We move our stuff faster, cheaper and more reliable than you.  E.g. Visa (V) or MasterCard (MA)
• Customer switching costs
• These are the inconveniences that customers would have when they switch from one product to another
• Time is money and money is time. It may not cost money to switch from one service provider to another, but if it costs time that's the same thing.
• Intangible assets
• These are things like patents, basically an explicit monopoly, government licenses that explicitly block competition. 
• Or [this can be a source] if a company has a strong brand that allows it some pricing power for that particular brand. 
• Patents:  Even if you wanted to, you legally can’t do what we do.  e.g. APPL
• Branding:  We are trusted to do the job and you’re not. e.g. KO
• Efficient scale
• You have a limited market that is being efficiently served by one or a very small number of competitors.
• Some markets are just natural monopolies or natural oligopolies.
• E.g. airport companies like the Mexican airports - it doesn't make economic sense to have more than one
• Geography:  We have our stuff in the right places and you don’t.  E.g. Union Pacific Railroad
• Cost Advantage
• A company that can provide a better service at a lower cost than the competition.
• A fatter profit margin or the same profit margin as the competitors
• Higher volume and higher asset turnover. 
• Economies of Scale:  We’re so big, not using us will cost you.  e.g. Wal-Mart
• Low Cost Resource Base
• The moats are not impenetrable. But it still makes life easier when you have a moat.
•  Union Pacific Railroad still has to compete with trucks.
• Visa and MasterCard compete against cash, PayPal,
• Apple’s patents are constantly challenged and becoming obsolete at a rapid pace.
• Coke can easily fall out of favor. 
•  Wal-Mart is in a constant price war with Target and other retailers.
• How to identify moat? Look for Gross Margin 
• [1] consistency [2] the higher the better
• Company only able to charge premium price when customer willing to pay for the value added product / service.
• It cannot be replicate by the competitor, else it it becomes a price battleground.
• Wide Moat
• Intagible assets - health care (patents) & consumer sectors (brands) - the best returns on capital.
• Look for the sustainability and not the absolute level. 
• Random fashion retailer that happens to get lucky, hit some fashion trend and has a 50% return on capital for a year or two..
•  Railroad or a pipeline, 10% ROC - the sustainability of that return is exceptionally long
• Narrow Moat 
• Efficient scale - lowest ROC. They have a moat because of positive economic profits, and thus attract new competition into market. 
• Stability of earnings
• Network effect company have the least stability in term of their earnings.
• Cost advantage & intagible asset firms did relatively well.

References:-

• The 5 Sources of Moat - Morning Star
•  What Gross Margins Can Tell You About a Company’s Economic Moat