Part 2: Founder's Detailed Notes on Types of Moats
Understanding various types of Moats with their impact and examples
In the preceding article (link below), we detailed what is a moat and some types of moat.
In this article, we will deep dive into moats.
Following are the types of Moats:
Community : Building community is a new way of building a strategic barrier to entry for firms that are yet to build a community. Hugging Face developed a huge fan following and community of people using its BERT module.
Data as an Operational as well as Strategic Moat: CEOs and CDOs need to be close to the data on daily basis to understand “why”, “when” and “what” of the metrics being tracked. Taking it a step further organizations can democratize data, as uber did. Anyone at uber can query the data and extract relevant insights from the data. This strategy is particularly useful when people see metrics and the impact of actions on those metrics. This drives higher degree of strategic direction, clarity, speed and accountability.
Data as an Data - AI Moat: Firms that collect of data and channel that data into strategic products based on AI have an inherent advantage over rest of the firms. It has been said Data is the new oil and this is specially true in this case. Google has grown its products range and made its products a unique offering, such as text completion in emails, primarily because of the collection of user data and application of AI.
Network Effects: Network Effects is the phenomenon where a product becomes more valuable to its users as more people use it. This can create a "moat" around a business, making it difficult for competitors to gain a foothold in the market. For example, social media platforms such as Facebook, Instagram now have a large user base which it turns makes it may be more attractive to new users than a competing platform with a smaller user base. This in turn serves as a moat to prevent new entrants with similar products from entering the social media space.
Integrations with other Systems: Current state of integrations with other systems as well as the speed with which new ones are rolled out can form a moat around the product as competition plays the catch up game. Zapier is an example of this moat. Integrations provide for better user experience, improved data sharing and collaboration, increased efficiency for the users.
Platform : Platform involves a network of users and businesses that are interconnected and dependent on the platform for their success. Companies like Apple’s iphone and Google’s Android with their play stores enable developers to develop applications for the platform. This acts as a lock in for the customers who thrive with number of applications available to them. This in turn acts more developer apps to the platform, resulting in a active ecosystem.
HIPPA/SOC-2 Complaint: In the enterprise market, if your data and software infrastructure is complaint with various protocols, you have raced ahead in “battle of trust” in the minds of the customers. Since its time and money consuming activity, newbies will find it difficult to disrupt the company from its vantage point.
Brand/Cultural Moat: Brands like Coke and Marmite are entrenched in the minds of customers. New entrants will find it hard to dislodge a company that has a established brand. In the battle of “zillion” of choices, established brands win the mind space of the customer.
Switching Cost : High switching cost to a new product, can form a strong moat. Customers develop inertia in changing the time tested solution they have been using. Switching costs can also come and bite the customer in form of stickiness through standardization, through integrations to other apps and data collection by the product. A product with high stickiness will have higher barriers to entry for a new player.
Economies of Scale : There are two types of economies of scale, one is supply side economies of scale and the other is demand side economies of scale. Supply-side economies of scale, which were a formidable barrier to entry in the industrial age, suffer from diminishing returns as the incumbent scales its production and distribution network. On the other hand, demand side economies of scale, such as in the case of Facebook, depend on network effects. Demand side economies of scale are subject to increasing returns to scale since more users create more value for other users in a self-reinforcing positive cycle.
References:
Part 1: Moats and why do we need one?