All Economic Moats Dry Up

Warren Buffett is known for talking up economic moats and the need for a business to create competitive advantages. Now, with the internet, moats are drying up left and right because of change. Change is the enemy of competitive advantages. For example, in the 70’s, Eastman Kodak’s moat was almost as wide as Coca Cola’s. Cameras hadn’t changed that much from the early days, but by 2010, everyone had a smartphone with a better camera built in. Technology changed and another moat was dry.

Coca-Cola has sold the same basic product (today minus the cocaine) since 1886, and as long as the ingredients are available at prices that they can make money on, the company will continue to sell it. However, even Coke’s moat is drying up, which is why they continue to make acquisitions. Its competitive advantage in the soft drink industry isn’t eroding as fast as Kodak’s did, but it’s under attack. From a purely financial perspective, since 2012 Coca-Cola has produced less earnings on lower revenue, and now pays out 80% of its earnings as dividends.

Remember how Microsoft had a massive advantage on its operating system? It literally made Bill Gates his first billion. Then, the company pivoted into office and eventually expanded its reach, but does it matter that it is still the dominant player in the OS market? Not as much anymore, because the market changed.

The one constant in business is change, yet that’s the biggest risk to an economic moat / competitive advantage.

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