Rewriting history
It looks unlikely that Apple, Amazon or Google’s march can be stopped in its tracks
It looks unlikely that Apple, Amazon or Google’s march can be stopped |
Thomas Kuhn, the American physicist and philosopher, is perhaps best known to the public for the phrase “paradigm shift”. In his book The Structure of Scientific Revolutions, he describes the differences between ordinary scientific problem solving — what he termed ‘normal science’ — and scientific revolutions. His concept of nonlinear evolution became so widely adopted by popular culture and business that today the phrase he coined has become a cliché.
That is a shame because, despite its wellworn status, it is still a very useful construct. Every so often, a business totally upends its industry and the phrase is wholly applicable. Beyond mere iterations or gradual progress, these companies completely change how they and their competitors do business, from what they sell, to how they generate a profit.
Apple Inc, Amazon.com Inc, Alphabet Inc (Google) and Uber Technologies Inc certainly qualify. Other companies, such as Netflix Inc, Tesla Inc and WeWork Cos., are doing the same.
Let’s consider a few of these companies. Perhaps we might discern a pattern that investors might find useful.
Apple: The world’s most valuable company — and my bet for first with a trillion-dollar market capitalisation — has revolutionised so many businesses that it is difficult to keep track. Co-founder Steve Jobs remade entire industries. In a challenging era for retail stores, Apple stores have higher revenue per square foot than just about anyone else.
The list of companies damaged by Apple is astonishing. The only other company close to Apple in terms of this disruptive paradigm-shifting destruction is ...
Amazon: Delighting customers? Free delivery? Cloud computing? Rethinking retail? Logistical efficiencies?
None of these are paradigm-shifting. What really makes Amazon unique is its virtually unlimited access to capital at almost no cost. This minimal cost of capital has allowed Amazon the disrupter to identify and exploit market inefficiencies that form the basis for other businesses’ profits. This is what Amazon founder and CEO Jeff Bezos meant when he said, “Your margin is my opportunity.”
The unique patience that Amazon investors have shown during the past 20-plus years has been rewarded. Despite only modest and not very consistent profits, Amazon is now the third-most valuable company, headed by the world’s wealthiest person.
Alphabet: Most people have the wrong idea about what makes Alphabet’s Google core search engine product such a gamechanger: Yes, Google’s search is good, better than most. But what set Google apart was AdWords, its revolutionary method of automated search monetisation.
In 2017, Alphabet’s revenue was more than $100 billion; almost all of that came from advertising, the majority of which was AdWords. It has had a devastating effect on traditional media companies and advertising firms. Calling this a paradigm shift may be understating it.
Uber: Perhaps the most interesting paradigm shift the past few years has been Uber’s ride-hailing app. Ignore for the moment the company’s numerous scandals and the trending #DeleteUber campaign on Twitter, and consider what the company has accomplished in less than a decade: 2 million Uber drivers have taken 40 million riders on 5 billion trips in 77 countries and 616 cities worldwide. As of today, Uber completes 10 million trips every day. Those are astonishing statistics.
Whether it deserves to be the world’s most valuable closely held company is another question entirely. Still, no one can say Uber hasn’t changed the rules of the transportation industry.
Tesla: I am a big fan of the company, and its fast, beautiful rides. There is a counterargument that Tesla isn’t truly a paradigmshifter.
Yes, it sells cars direct to consumers, without the need for middlemen dealers, a fairly unique arrangement. So too is the company’s auto-upgrading software a first for a mainstream vehicle. But its core product — an all-electric car with self-driving capabilities — is far from unique.
What’s interesting is that Tesla has forced the rest of the automotive industry to go along with it. Other carmakers, perhaps having learnt a lesson from watching Apple and Amazon destroy competitors, have switched rather than fight.
Tesla is not yet a stock-market darling but it has already changed the entire industry. The supreme art of war is to subdue the enemy without fighting, wrote Sun Tzu.
The companies discussed above were a fraction of their size a decade ago, and Uber didn’t even exist. Yet all found ways to exploit pressing problems.
More than simply executing their founders’ visions, they have all continuously, with fits and starts, reinvented themselves.
It looks much easier in hindsight to see what these companies got right than it is to say which companies will be their equivalent in the future. Nonetheless, if you can manage to identify the companies that will cause the next paradigm shift, you might have a budding career as a venture capitalist ahead of you and possibly as a very good investor.