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In Technology Markets, the Safe Money is On Disruption

· January 21, 2016

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It’s that time of year again.  After the ball drops, the hangovers wear off and the thermometers dip even lower, pundits and columnists invariably turn their pens to bold predictions for the year ahead.  As I write, the east coast of the U.S. braces for a predicted “colossal” winter storm, while at the same time “thought leaders” offer contradictory opinions about Donald Trump’s inevitable collapse / triumph in 2016. It’s either going to be a great year for the markets, or we are headed into a catastrophic downturn that will put the recent recession to shame.  Or, it could just be meh.  Oil prices have either bottomed out or are primed to sink even lower.

Tech journalists are no exceptions.  At this time last year, after the Fire phone flop, the consensus opinion was that Amazon was in trouble.  The company was “trying to do too much” and doomed to never turn a profit.  Some predicted Netflix’s demise after a run of successful growth. Well, needless to say, be wary of predictions.  Amazon and Netflix were the top two S&P stocks in 2015.

In this great tradition, Farhad Manjoo of the New York Times has written a prediction piece about the future of tech.  His main prediction is that the tech giants of today (Google, Amazon, Facebook, Apple, and Microsoft) will dominate the tech landscape for the foreseeable future.  (Ironically, at this time last year, he predicted that Google was spiraling towards its inevitable demise, in a piece entitled, “Google, Mighty Now, but Not Forever.”)

Before I disagree with Manjoo’s article, I should say that I think he is one of the better mainstream tech columnists (take this piece on Popcorn Time as an example.)  And in between the bold predictions and alarmist adjectives, he actually makes some more nuanced points. However, I also understand why Manjoo undertook the inherently fraught process of bold predictions about the most unpredictable of markets — technology.  From the Oracle of Delphi to Miss Cleo, humans love bold prognostication.  In the classical era, trusting them too much could get your civilization destroyed.  At least In the Internet era, they generate traffic; also, they might cost investors some money or lead to bad regulatory policies.

As we frequently discuss on DisCo, the characteristics of the Internet, such as low barriers to entry, make for turbulent markets in the long run.  As I have argued before:

On the Internet, consumers can flock to the best product or service en masse almost instantly. This means the best product or service often quickly gains impressive market share. However, the same dynamics that precipitated the rise of companies like Google and Facebook also place extreme competitive pressure on them.

Consumer technology categories change frequently and market leaders fail to deal with disruptive changes. In short, the evolution of consumer tech has pretty much tracked with Clayton Christensen’s thesis in the Innovator’s Dilemma.  Not long ago, for example, Nokia was the unquestioned mobile phone leader and Apple was an also ran struggling to survive.

If Manjoo had turned his gaze to the pharmaceutical industry, for example, and said that the top five Pharma companies were going to be dominant for the foreseeable future, I would be more inclined to agree.  The highly regulated, high capital cost market in which they live tends to lock in incumbents and shield them from competition. As I have noted before, 8 of the top 10 pharma companies trace their roots back to the 19th Century.  Technology markets are much different.  This is why the first case studies on which Christensen tested his disruptive innovation hypothesis were companies in the hard disk market, which, given their short life times, he referred to as the “fruit flies” of the business world.

So, here’s my less bold prediction.  Five years from now, the five companies that Manjoo discusses will not all be dominant tech players. A couple might be, but they will all go through ups and downs. They will face inflection points that will determine if they will adapt and thrive or simply peter out.  Some might reinvent themselves and stay relevant, much like how IBM and Apple reinvented themselves, and how Microsoft is currently drastically altering its course.  The purchase of Android in 2005, which at the time was both highly speculative and panned by many, ensured that Google remained a leader as the Internet world’s nexus shifted from desktop platforms to mobile ones.  The Android play was a Hail Mary pass, and without hindsight, there was no guarantee that it was going to pay off (ahem, Dodgeball).  Given the commoditization and competition in the smartphone space, Apple could be in trouble after failing to develop an Internet advertising business or struggling to build a reliable mapping product  – attempts that included several Hail Mary investments of their own. The predictions of Internet companies on where markets are going, and how to avoid disruption, are as hit or miss as the predictions of tech columnists.  (Manjoo himself, arguably the most well known “future tech” columnist, has a mixed track record: compare his “Chrome is Doomed” and Google is in trouble predictions, to his “Facebook is not a fad” prediction.)

To be fair to Manjoo, my prediction is, statistically speaking, an easier one to make.  He is making the parlay bet of predictions.  He is picking five favorites to win for the “foreseeable future.”  Any one of them might be a good bet, but saying all of them will be winners a decade from now is highly unlikely.  In tech, as in football, upsets happen frequently.  Google overtook Yahoo, Microsoft overtook IBM, Apple overtook Microsoft, and Facebook overtook Myspace.  All of those “winners” were long shots in the years preceding their rise, and all of the incumbents enjoyed the same type of advantages in resources that Manjoo points to as likely to entrench the current incumbents.  Whether in Vegas, or in in a New York Times tech column, the parlay bet is never a good idea.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.