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Hot Stock Economic Moats in the Software Industry
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Given the rapid pace of technological change, "wide moats are tough to build in the software industry. Because barriers to entry are low, today's winner can quickly become tomorrow's loser if a competitor can develop a more innovative product and the industry leader can't successfully keep up. This is what makes investing in software companies difficult. Not only is it tough for investors to assess how successful a product will be, but knowing how long that technology will remain is virtually impossible for technology novices.

The trick is to look for companies that have gone beyond superior technology in creating their competitive advantages. Look for the following characteristics.

High Customer Switching Costs

High switching costs make it tough for customers to use a competitor's prod­uct without significant hassle. For example, Autodesk has a lock on the architecture and construction design software market because architects and engineers are trained to use the software early in their careers. Switching to a competing program Isn't very attractive to folks who have been working with Autodesk for years. For the most part, software companies that benefit from this moat have products that are either too expensive or too time-consuming for customers to stop using.

Network Effect

Adobe Is an excellent example of this economic moat at work in the software Industry. With more than JOO million copies of Acrobat Reader downloaded, Acrobat has become the standard for creating and viewing documents electronically. People are more likely to create documents using Acrobat because they know the majority of personal computer users already have the Acrobat Reader installed. Likewise, people download Acrobat Reader because it's the most popular way to share and view documents online.

Brand Names

Some software firms have managed to create strong brands that deter competitors. For example, Intuk's QuickBooks and TurboTax are two of the most well-known names in retail software. When people think of small business or tax software, they think of Intuit. Despite the fact that people come into contact with software every day, this moat is rare because the majority of software has very little consumer appeal.

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