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How Long Will It Last?
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Our next topic is assessing the longevity of an economic moat, so we know how long a firm is likely to keep its competitors at bay.

Think about an economic moat in two dimensions. There's depth—how much money the firm can make—and there's width—how long the firm can sustain above-average profits. Technology firms often have very deep but very narrow moats, so they're incredibly profitable for a relatively short period of time until a competitor builds a better product. A niche firm such as WD-40 is just the opposite. It's never going to make an enormous amount of money in any one year by selling cans of household lubricant, but it has such a solid franchise that its excess returns are likely to persist for quite some time.

Estimating how long a moat will last is tough stuff, but you need to at least give it some thought, even if you can't come up with a precise answer. Just being able to separate firms into three buckets—a few years, several years, and many years—is very useful.

In general, any competitive advantage based on technological superiority— real product differentiation—is likely to be fairly short. Successful software firms, for example, can generate huge excess returns because they have high profit margins and they don't need to spend much money on fixed costs such as machinery. However, the duration of those returns is typically very short because of the rapid pace of technological change. In other words, today's leader can quickly become tomorrow's loser because the barriers to entry are so low and the potential rewards so high.

Cost leadership, brands (perceived product differentiation), customer lock-ins, and competitor lockouts can each confer competitive advantage periods of varying lengths—there's no good rule of thumb, unfortunately. To give you some guidance in what separates a wide moat from a narrow moat and what kinds of companies have no moat at all, I've listed 27 well-known large-cap companies in Figures 3.1, 3.2, and 3.3 and included an explanation as to why each firm's moat is "wide, narrow, or does not exist. Having these examples will, I hope, help you analyze economic moats when doing your own

Del ! Classic low-cost producer: lean operating structure and direct Internet-based sales allow the companyto run circles around its rivals.

eBay Network effect: The more buyers and sellers the network has, the

more attractive it becomes to prospective users and the tougher it becomes for competitors to contend with.

PepsiCo By far the market share leader in salty snacks and sports drinks,

the diversified food company boasts a stable full of strong brands, innovative new products, and an impressive distribution network.

Comcast Intel H&R Block Wal-Mart

Controls roughly one-third of cable households in the U.S. This gives it unparalleled leverage with content providers and equipment suppliers.

Chipmaker's dominant position gives it significant economies of scale. Brand name and patents are also significant intangible assets.

Dominates the U.S. tax preparation market. One in every seven tax returns filed is prepared by Block.

Largest retail company in the world is also the preeminent low-cost provider. The firm flexes its muscles with suppliers in negotiating prices and passes the savings down to consumers.

United Technologies Operates in a selection of concentrated industries. Buyers of elevators,

cooling systems, and helicopters don't switch brands often.

Adobe High customer switching costs: graphic designers are trained early

in their careers to use the company's software and can't do their job without it.

Paychex Vast sales network provides access to new accounts and scale

gives it a cost advantage. Plus, it has pricing power over its diverse and unorganized client base.

Nokia Although the Nokia brand is strong, cell phones are

becoming commodities.

Kraft Despite a portfolio of familiar consumer brands, there isn't much

breathing space between Kraft and its competitors, which has made it difficult for the firm to exert any pricing power.

Waste Management Network of 300 landfills creates a wide-moat disposal business,

but lack of brand loyalty in its collection business — where customers flock to the lowest price — earns this company a narrow moat.

Disney Owns some of the most valuable intellectual property in the world,

but increasing competition and an absence of creativity have eroded some of the brand's appeal.

ExxonMobil Enjoys enormous economies of scale, but still operates in a

commodity industry.

Target "Cheap chic" strategy has helped it carve out a moat and differentiate

itself from Wal-Mart. However, Target's strategy depends partially on accurately guessing fashion trends, which is more difficult than merely being the low-cost provider of everyday items.

Best Buy Dominates home-electronics and entertainment-software retailing,

but operates in a very economically sensitive industry.

AOL Time Warner Still has some great media properties, but bungled attempts

at formulating a successful broadband strategy have left the AOL business vulnerable.

mediocre quality puts it at a competitive disadvantage relative to most peers.

Micron Memory chips are essentially commodities, which leads to product

price volatility and lots of competition.

Circuit City Main competitor Best Buy has higher profit margins, better

inventory turnover, and twice the per-store sales numbers.

Staples A saturated industry, lack of product differentiation, and intense price

sensitivity prevent this company from digging a moat.

Maytag Low-cost Asian producers have forced the company to focus on the

premium appliance market, where competition is fierce and product differentiation is difficult to achieve.

Delta Not the low-cost provider and doesn't offer a differentiated product.

In a commodity industry where competition revolves largely around price, its business model is unsustainable.

research. I've also included at the end of the book a list of all the companies Morningstar follows that we consider to have wide economic moats.

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