Thursday, 19 July 2012

The business of technology (2)

Disruption dynamics

Pricing power? Growth markets? Asset light models? scalable businesses? Great!

So what's the catch?

The catch is that a week is a long time in tech. The market and the industry is so fast moving that we can see empires rise and fall (Yahoo, Nokia, RIM anyone?) in the blink of an eye. In a nutshell, technology companies grow so quickly because they have disruptive products which customers want to buy. However by the same token they themselves are vulnerable to disruption by the Next Big Thing.

Put another way, growth rates are high but barriers to entry are often low.

Consider MySpace and Friendster, once the darlings of the social networking world but since immolated by fast follower Facebook.

Consider Nokia, which built an empire on bringing Nordic cool to the world of handsets, which in the past five years been reduced to close to an irrelevance by the rise of iOS and Android.

Consider TomTom, which built a small but profitable niche selling $600 satnav devices. Well unfortunately Google does it for free, and its hard to compete with free.

So one last aspect which sets apart the business of technology. You have fast growth, beautiful business models and constant innovation. But you also have horrifically low barriers to entry and the constant threat of disruption.

2 people who love disruption

So if there's a ten horse race where one horse suddenly streaks ahead (whilst convenient machine-gunning all the other horses as it does so with a hidden gatling gun), who benefits? 2 guys.

The guy who's riding the horse, and the guy who can jump onto the horse.

The first guy is the management of the guys leading the pack. It's a great job for them (well until another horse comes along convenient stocked with nuclear-tipped missiles).

The second guy is the common stock investor, who can buy and sell whatever technology company he so chooses (so long as it's publically traded of course). In essence disruption dynamics creates massive opportunities for the smart investor. It can create huge moves in the prices of large, liquid assets.

Funnily enough, the hard part isn't spotting them. The hard part is being able to stand back far enough to see them. The market is frequently so obsessed with the niceties of quarterly numbers and earnings guidance (an equally bonkers metric to assess and to run a business, but that's another story) that they almost always fail to see the woods for the trees.

Part of my job with this blog is to take a look outside the wood, and chop down some trees.

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