Moats #2
Exploring how the world's most durable businesses protect their profits and fend off competition.
Hey Folks 👋
Welcome to the second edition of the Moats series!
In this post, we’ll continue exploring economic moats by examining five more companies that have built seemingly unbreakable competitive advantages. From luxury goods to enterprise software, these businesses demonstrate how different types of moats protect profits in different industries.
By reading this post you’ll learn how brand power can command premium prices for decades, how software companies create lock-in that competitors can’t break, and why some businesses become more valuable precisely because they’re harder to access.
In case you missed the first post the link is below:
The Cocaine of Business
In 1985, Coca-Cola made one of the biggest mistakes in corporate history.
After years of losing market share to Pepsi, executives decided to reformulate their flagship product. They spent millions on taste tests. The new formula beat both Pepsi and original Coke in blind studies.
On April 23, 1985, Coca-Cola announced “New Coke” to the world.
The backlash was immediate and visceral. Customers stockpiled old Coke. Protest hotlines received 8,000 angry calls per day. One Seattle resident compared the reformulation to trampling the American flag.
Within 79 days, Coca-Cola brought back the original formula as “Coca-Cola Classic.”
Here’s what’s fascinating: the new formula actually tasted better according to objective testing. But customers didn’t care about taste. They cared about Coca-Cola.
That’s the power of a brand moat. When customers develop such deep emotional attachment to a product that they revolt against improvements, you know you’ve built something competitors can’t replicate with better technology or more advertising.
Brand moats are psychological, not rational. They live in customers’ minds, not on balance sheets. And once established, they can protect profits for generations.
Understanding how companies build and defend different types of moats is essential for identifying businesses that can compound returns over decades. In this post, we’ll examine five companies whose competitive advantages have proven nearly impossible to breach.
What Makes a Moat Defensible?
Not every competitive advantage qualifies as an economic moat.
Being first to market isn’t a moat. Having a talented team isn’t a moat. Even having the best product isn’t necessarily a moat, because competitors can always build something better.
A true moat must be structural. It has to be baked into the economics of the business in ways that make competition irrational, unprofitable, or impossible.
The key question is: how much would it cost a competitor to replicate this advantage, and would it even be worth trying?
Brand moats exist when customers develop such strong preferences for a product that they’ll pay more for it, even when cheaper alternatives are functionally identical. These moats are built over decades through consistent quality and emotional associations.
Network effect moats occur when each additional user makes the product more valuable for everyone else. Social networks, marketplaces, and payment systems all benefit when more people join.
Switching cost moats trap customers by making it painful, expensive, or risky to leave. Enterprise software, bank accounts, and industrial equipment often create high switching costs through integration, learning curves, and data migration challenges.
Cost advantage moats let companies produce goods more cheaply than rivals. This can come from economies of scale, proprietary processes, or access to cheaper inputs. Walmart and Costco have built empires on relentless cost control.
Regulatory moats arise when governments create legal barriers to competition through licenses, patents, or monopoly grants. Utilities, pharmaceutical patents, and government-mandated services fall into this category.
The strongest businesses often layer multiple moats. Google combines network effects (more searches improve results) with cost advantages (massive server infrastructure) and switching costs (integrated ecosystem). Amazon stacks network effects (marketplace) with cost advantages (logistics scale) and switching costs (Prime membership).
Identifying which moats a company possesses, and whether those moats are widening or narrowing, separates durable compounders from temporary winners.
Five Companies With Formidable Moats
Disclaimer: The companies discussed in this article are presented for informational purposes only and do not constitute financial advice. They are not a recommendation to buy or sell any security. Investors should conduct their own thorough research, consider their personal financial situation, and consult with a qualified financial professional before making any investment decisions. Past performance does not guarantee future results, and all investing involves risk, including the loss of principal.
1. The Coca-Cola Company (KO)
What it does: Coca-Cola manufactures and distributes non-alcoholic beverages, with a portfolio that includes Coke, Sprite, Fanta, Dasani, Minute Maid, and hundreds of other brands sold in more than 200 countries.
How it makes money: Coca-Cola primarily operates as a concentrate producer. The company manufactures syrup and concentrate, then sells it to bottling partners who add water, carbonate, package, and distribute the final products. This asset-light model generates extraordinary margins.
Type of moat: Brand and distribution.
Coca-Cola’s moat is one of the strongest brand moats in business history. The company has spent over a century building emotional associations with happiness, refreshment, and shared moments.
The brand commands pricing power that defies logic. In blind taste tests, many people prefer Pepsi. Yet Coca-Cola outsells Pepsi by a significant margin globally. Customers aren’t buying a beverage. They’re buying familiarity, nostalgia, and identity.
This brand power translates directly to shelf space. Retailers know that customers expect to find Coca-Cola. Not stocking it means losing sales or disappointing customers. This gives Coca-Cola negotiating leverage and distribution access that upstart beverage companies could never afford to replicate.
Warren Buffett, whose Berkshire Hathaway owns over $25 billion of Coca-Cola stock, once explained the moat simply:
“If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”
2. Microsoft Corporation (MSFT)
What it does: Microsoft develops software, cloud services, and hardware, including Windows operating systems, Office productivity suite, Azure cloud platform, LinkedIn, and Xbox gaming.
How it makes money: Microsoft generates revenue through software licenses, cloud subscriptions (Azure, Microsoft 365), LinkedIn subscriptions, gaming hardware and software, and advertising.
Type of moat: Switching costs and network effects.
Microsoft’s moat is built on software that’s so deeply embedded in business workflows that switching would be unthinkably expensive and disruptive.
Consider Microsoft Office. Workers have spent decades learning Excel formulas, PowerPoint templates, and Word formatting shortcuts. Files are saved in Microsoft formats. Companies have built entire processes around SharePoint, Teams, and Outlook.
Switching to Google Workspace or another competitor would require retraining every employee, converting millions of documents, rebuilding workflows, and risking productivity losses during the transition. Even if a competitor offered better software for free, most companies wouldn’t switch. The disruption simply isn’t worth it.
This creates a durable annuity. Microsoft converted Office from a one-time purchase to a subscription model (Microsoft 365), and customers kept paying because the switching costs were too high.
Azure cloud computing adds another layer. Once developers build applications on Azure infrastructure, migrating to Amazon Web Services or Google Cloud requires rewriting code, reconfiguring databases, and testing everything from scratch. The deeper customers build on Azure, the more locked in they become.
In 2023, Microsoft reported over $211 billion in revenue. Much of that comes from customers who considered switching years ago but decided the risk and cost simply weren’t worth it.
3. Amazon, Inc. (AMZN)
What it does: Amazon operates an e-commerce marketplace, cloud computing platform (AWS), streaming service (Prime Video), advertising business, and logistics network.
How it makes money: Amazon earns revenue from retail sales, third-party seller fees, AWS cloud services, Prime subscriptions, and advertising.
Type of moat: Network effects, cost advantages, and switching costs.
Amazon’s moat is a flywheel with multiple reinforcing competitive advantages.
The marketplace creates a two-sided network effect. More customers attract more sellers seeking access to buyers. More sellers mean wider selection, which attracts more customers. Each side makes the other more valuable.
Amazon combines this with a massive logistics infrastructure that generates cost advantages competitors can’t match. The company has built hundreds of fulfilment centers, delivery stations, and sorting facilities. This dense network allows faster delivery at lower cost per package. A smaller competitor trying to replicate this infrastructure would need to invest tens of billions while operating at a disadvantage for years.
Prime membership adds switching costs. Once customers pay $139 annually for Prime, they’re incentivised to consolidate purchases on Amazon to maximise value. The longer someone remains a Prime member, the less likely they are to shop elsewhere.
Jeff Bezos understood moats intuitively. In a 1999 interview, when asked about competition, he said:
“There are two kinds of companies: those that work to charge more, and those that work to charge less. We will be the second.”
That obsession with low prices, enabled by scale advantages, has built a moat that grows stronger every year. Amazon now captures over 37% of U.S. e-commerce sales, and AWS powers nearly a third of the cloud computing market.
4. Hermès International (RMS.PA)
What it does: Hermès designs, manufactures, and sells ultra-luxury leather goods, silk scarves, ready-to-wear clothing, accessories, and perfumes.
How it makes money: The company sells products directly through its own retail stores and website. Unlike many luxury brands, Hermès refuses to discount or sell through department stores, maintaining strict control over distribution.
Type of moat: Brand and manufactured scarcity.
Hermès has built perhaps the most powerful luxury brand moat in the world by doing something counterintuitive: making its products harder to buy.
The iconic Birkin bag, introduced in 1984, epitomises this strategy. Hermès deliberately produces fewer Birkins than demand warrants. You cannot simply walk into a store and buy one. Customers must build relationships with sales associates, purchase other items, and wait months or years for the opportunity to buy a Birkin at a store’s discretion.
This manufactured scarcity creates intense desirability. Birkin bags regularly sell for $10,000 to $500,000 depending on materials and rarity. Some styles appreciate in value over time, outperforming stocks and gold.
The scarcity isn’t just marketing. Hermès craftsmen handmake each Birkin, with a single artisan working on one bag from start to finish. This takes 18-24 hours. The company refuses to automate or accelerate production because doing so would dilute the brand.
This moat protects extraordinary profitability. Hermès operates at roughly 40% operating margins, among the highest in luxury goods. While competitors chase volume, Hermès grows by raising prices and maintaining exclusivity.
The waiting list itself becomes part of the moat. Wealthy customers who’ve spent years building relationships with Hermès aren’t going to abandon the brand for a competitor. They’ve already invested too much time and money to walk away.
5. VeriSign, Inc. (VRSN)
What it does: VeriSign operates the registry for .com and .net domain names, maintaining the authoritative database of all registered domains under these extensions.
How it makes money: VeriSign charges an annual registry fee for each .com and .net domain. The company currently charges around $9.59 per .com domain per year, collecting fees from domain registrars who sell domains to end customers.
Type of moat: Regulatory monopoly.
VeriSign operates what might be the purest regulatory moat in public markets.
The company has an exclusive contract with ICANN (Internet Corporation for Assigned Names and Numbers) to operate the .com registry. This contract, renewed periodically, grants VeriSign monopoly control over one of the internet’s most valuable assets.
There are over 160 million registered .com domains. Every single one pays VeriSign an annual fee. The company doesn’t compete for this business. It can’t lose market share. There are no substitutes.
The contract even allows VeriSign to raise prices by up to 7% annually, effectively guaranteed revenue growth built into the agreement.
This creates an extraordinary financial profile. VeriSign operates with minimal capital expenditure requirements and generates free cash flow margins exceeding 60%. The company has no meaningful competition because competition is legally impossible.
The moat is so strong that VeriSign returned over $1 billion to shareholders in 2023 through buybacks and dividends, despite generating only $1.5 billion in revenue.
Of course, this moat depends entirely on maintaining the ICANN contract. If that relationship ever changed, the business would evaporate. But for now, VeriSign operates as close to a legally protected monopoly as exists in modern capitalism.
Key Takeaways
The companies we’ve examined demonstrate that moats come in many forms, but the strongest share common characteristics.
First, they’re difficult to replicate. Microsoft’s enterprise integrations took decades to build. Hermès’s brand heritage spans nearly two centuries. Amazon’s logistics network required tens of billions in capital investment. Competitors can’t simply decide to copy these advantages.
Second, the best moats strengthen over time. Microsoft’s software becomes more entrenched as companies build more workflows around it. Amazon’s logistics network becomes more efficient as density increases. Hermès’s scarcity becomes more valuable as the brand grows more iconic.
Third, durable moats provide pricing power. Coca-Cola raises prices regularly without losing customers. Hermès increases prices annually and watches demand intensify. VeriSign has contractual pricing power built into its business model.
When evaluating companies, always ask: what would it cost a competitor to replicate this advantage, and would they even make money if they tried? If a well-funded competitor could quickly build a similar business and profitably steal market share, the moat probably isn’t strong enough.
Also watch for moat erosion. Technology can destroy moats overnight. Ask whether changes in consumer behavior, regulation, or innovation could weaken the competitive advantage you’re betting on.
Conclusion
Economic moats are what allow exceptional businesses to deliver exceptional returns over decades rather than years.
The companies we’ve examined today, from Coca-Cola’s century-old brand to VeriSign’s regulatory monopoly, demonstrate that sustainable competitive advantages come in many forms. But they all share the ability to fend off competition and protect profits, even when rivals have more resources, better technology, or lower prices.
Charlie Munger once said:
“The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.”
Finding companies with wide, durable moats is how you get the odds in your favor.
The real challenge isn’t just identifying moats. It’s buying them at prices that make sense, having the patience to let them compound, and knowing when a moat is widening versus when it’s beginning to crack.
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Do you think Helion's 2028 timeline for Microsoft is realistic given they still need to hit 200 million degrees for their actual fuel, or is that Sandia neuromorphic breakthrough the "secret sauce" needed to speed everything up?
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Jorrit