Key points to remember about technological MOAT:
- MOAT refers to a structural barrier that protects a company’s profitability.
- The concept was popularised by Warren Buffett and formalised by Morningstar.
- A wide MOAT allows high margins to be maintained over a long period of time.
- Traditional sources include network effects, intangible assets and switching costs.
- This logic also applies to technological assets.
- In tech, barriers often rely on architecture, data and ecosystem integration.
Origin and definition of MOAT
Let’s return to the metaphor of the moat and examine how it applies to the business world.
A metaphor that has become a tool for analysing future resilience
Warren Buffett compares successful companies to castles protected by a moat. The wider and deeper the moat, the more difficult it is for a competitor to attack their position.
In his 1999 letter, he states that he looks for companies with a “wide and long-lasting moat”. The challenge is not immediate performance, but the ability to maintain superior returns over a long period of time.
Morningstar has institutionalised this approach by linking the depth of the MOAT to a company’s ability to generate returns that consistently exceed its cost of capital.
Beyond simple competitive advantage
A MOAT is not just about product differentiation. It is a structural and sustainable barrier.
We generally distinguish between:
- Wide MOAT: defensible advantage over the long term
- Narrow MOAT: limited protection over time
- No MOAT: profitability quickly exposed to competition
The wider the MOAT, the longer profitability can be maintained. Conversely, an easily replicable advantage tends to erode quickly.
The main sources of economic MOAT
Strategic and financial literature identifies a limited number of economic mechanisms that repeatedly enable companies to build a sustainable advantage. The MOATs observed in the markets are thus based on comparable foundations.
Among the most common we find:
- Network effects: the value of the product or service increases with the number of users (platforms, marketplaces, social networks).
- High switching costs: replacing the supplier involves significant financial, organisational or operational costs.
- Intangible assets: patents, trademarks, regulatory licences or proprietary and legally protected technologies.
- Structural cost advantage: the ability to produce at a lower cost thanks to high volumes or a more efficient organisation.
- Scalability: dominant position in a niche market, limiting the economic interest of a new entrant.
These mechanisms have one thing in common: they make it more difficult for a competitor to enter the market or more costly to gain market share, thereby protecting profitability over time.
Now, do these principles apply in the same way to the analysis of a technology asset to determine its ability to generate value for investors?
MOAT applied to a technological or software asset
Technological MOAT is based on the same economic logic: protecting future profitability. However, in tech, barriers take specific forms.
Intellectual property and proprietary code
Patents, proprietary code or specific algorithms can be assets that are difficult to reproduce. Their value depends on their technical depth and their ability to generate a tangible differential.
Architecture and cumulative complexity
In SaaS models, architectural scalability plays a key role. An infrastructure capable of absorbing rapid growth, built over several years of successive developments, creates cumulative complexity that is difficult to replicate.
Data MOAT and network effects
The accumulation of proprietary data can strengthen competitive differentiation. Machine learning models improve with increases in data volume and quality, gradually enhancing product performance and widening the gap with new entrants with more limited histories.
Locking in its technological ecosystem
When a solution is deeply connected to its customers’ information systems, replacing it involves technical migrations, organisational adjustments and operational risk.
The more dense the integration, the more costly and complex the transition becomes. It is therefore not only the product’s features that protect the company, but also the set of technical dependencies built around it, which deter customers from changing suppliers.
In tech, MOAT therefore goes beyond product functionality. It includes the entire ecosystem, the depth of integration and organisational dependency.
Illustration: HubSpot and Salesforce
The CRM market is a good illustration of the concept of technical MOAT.
Salesforce has developed a complete ecosystem: AppExchange, certified partners, multiple integrations. This depth creates high exit costs and reinforces organisational dependency.
HubSpot, initially focused on SMEs and inbound marketing, has gradually expanded its platform and now offers a complete range of integrated solutions to facilitate lead generation and conversion.
For a new entrant, the barriers are significant:
- Access to comparable volumes of data
- Ability to integrate with existing systems
- Building a network of partners
- Significant marketing investments
- Support for long implementation cycles
MOAT lies less in an isolated feature than in the depth of the ecosystem built up over time.
MOAT: a dynamic that must be maintained
A MOAT is not a fixed position. It can be reduced by technological innovation, the emergence of new business models or changes in the regulatory framework.
In the technology sector, where innovation cycles are short and technical barriers can be circumvented, the MOAT must be constantly reinforced. Its depth depends as much on the quality of the architecture, technical governance and data management as on the initial idea.
Identifying what really constitutes its technological MOAT is therefore not a simple strategic exercise. It requires a structured analysis of technological assets: code, architecture, open source dependencies, ecosystem integration, development governance and data maturity.
This is precisely the role of tech vendor due diligence. By objectively assessing technical barriers and distinguishing between truly defensible advantages and more fragile elements, it enables the sustainability of performance over time to be evaluated.
In a transactional context, this ability to qualify and measure MOAT becomes crucial for assessing the strength of a technological asset, an issue we will explore in more depth in a future article.
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Sources
1. https://www.berkshirehathaway.com/letters/letters.html
2. https://www.morningstar.com/articles/703680/what-is-an-economic-moat.
