Tech Barbarians at the Gate?

As the global economy rapidly digitizes, the threat from radical new business models is critical for investors to understand. Plans to attack sectors from energy to banking are advancing rapidly and on my trips to Silicon Valley I’ve noted that the smartest software coders and entrepreneurs are often driven by an almost messianic libertarian zeal to overthrow the existing order. The top down, centralized paradigm from utilities to telecoms and banking will be gradually eroded by these new models which only have to take a tiny market share to create disproportionate damage on incumbent margins and valuations. Indeed, the smarter companies in vulnerable sectors like banking are already trying to co-opt Silicon Valley to improve their relative competitive position.

However, most corporate boards are thinking like French generals as they huddled behind the Maginot line in 1939, oblivious to the risk that German generals would simply outflank them. The role of rapid shifts in technology as a driver of macro trends in recent years remains largely overlooked, but as noted previously it has been a key factor driving weak corporate capex (as fast deflating IT gains a larger share – more data servers, fewer fixed structures to generate incremental revenue) to disinflation and weak wage growth/rising inequality.

In this new era, an unprecedented amount of economic power is concentrating in no more than 20-30 global tech companies through whose servers the key raw material of the information age passes i.e. consumer profiling data which can be process via proprietary algorithms to do anything from inferred credit scoring to targeted location based advertising. They’re driving tanks at breakneck speed while much of the non-tech corporate world is still digging trenches…
With the explosive growth in cheap smartphones and ubiquitous Wi-Fi bringing hundreds of millions of emerging economy consumers online every year for the first time, we’re entering an era when messaging platforms may dominate, as ubiquitous smartphones/free Wi-Fi mean that operating systems and carrier networks matter far less. The gatekeepers are companies like Tencent and Facebook collecting behavioural data on approaching 2bn potential customers between them. It’s not a question of if but how these huge audiences will be monetized.

The biggest issue for investors outside the tech sector to ponder on a 3-5 year view remains the trend toward tech enabled ‘unbundling’ in many sectors i.e. the value proposition underpinning many blue chip non-tech companies is disassembled and rebuilt as supposedly impregnable barriers to entry tumble (from wireless bandwidth to utility grids). The hugely complex logistics of ‘sharing economy’ models like Uber or Air BnB are only possible because of ever more advanced smartphones and fast advancing artificial intelligence and ever cheaper cloud based data analytics – those models can be extended to many more sectors as what works for taxis will also work for say parcel/food delivery.

In many ways, the popular  ‘secular stagnation’ thesis is largely missing the point as much innovation is now focused on radical new business models to optimize the utilisation of existing resources and the software platforms that support them, which thanks to the smartphone boom can explode to global scale at astonishing speed and low cost.  Like the horsemanship and mobility of the Barbarian tribes ravaging the outposts of the late Roman empire, that will eventually change everything…