Investors are underestimating and underpricing digital disruption

Investors are underestimating and underpricing digital disruption

Ed Lascelles, Partner, Head of Technology Investment – Albion Capital

In 1943 the Chairman of IBM at the time famously said “I think there is a world market for maybe 5 computers.” In 1999 the then Chairman of IBM said “Amazon is a very interesting retail concept but wait till you see what Wal-Mart is gearing up to do…IBM is already generating more revenue, and certainly more profit, than all of the top Internet companies combined”. At the time of writing, IBM market cap: $157bn, Amazon market cap: $378bn.

It is not just chairmen of IBM whose predictions have been so inaccurate. Consider the response of Western Union in 1867 when offered the chance to buy the patent for the telephone: “What use could this company make of an electric toy?”

What is particularly exciting is the breadth, pace and magnitude of the digital disruption currently seen across so many industries. Yet, even though the mainstream press now comments on the impact of disruption, and old economy multi-nationals develop innovation units and accelerators, many people still underestimate the level of change that we will see over the next 10 years.

In a widely read article in Wired in 2004, Chris Anderson noted the effect of the ‘Long Tail’ in the new economy: sales of books outside Amazon’s top 130,000 accounted for a quarter of Amazon’s total sales. For many, the major point drawn from this observation was the aggregate size of the long tail, and what this would mean for markets that migrated online. However, of more significance is the figure 130,000, which was how many titles the average Barnes & Noble stocked. Ecommerce meant that niche markets could be served profitably due to the significant reduction in distribution costs.

It is this latter point which underpins the enormous disruption we are now seeing across multiple industries. Sure, new business ideas and markets are created as we become ever more connected. But the greater change is the impact on incumbents whose old economy barriers to entry are crumbling: location, distribution costs, infrastructure costs, access to skills, information asymmetry etc. are no longer sufficient to maintain leadership. Indeed the significant investment in legacy infrastructure and incentive structures are a major impediment to change.

This is creating huge opportunity for agile, digital-native businesses which can now be built and delivered for a fraction of the cost compared to even 10 years ago. In a world in which 90% of an enterprise-class service can be built on open source software, and delivered using infrastructure rented on a pay-as-you go model, it has never been cheaper and easier to take a new  idea to market.

Companies that are leading the charge in the digital economy are winning big: on 1 August 2016 the 5 most valuable businesses globally were tech companies (Apple, Google, Facebook, Microsoft & Amazon). Notably, two of these are just over 10 years old, and one 20 years old. By contrast, the five largest companies in the UK at the end of 2016 were Shell, HSBC, BP, BAT and GSK. Indeed, Europe’s 100 most valuable companies have an average age of 123 years.

There is so much more to come. It’s a great time to be investing.