Who remembers Remington Rand? Very few of the people reading this post, I’ll bet. Yet in 1952, Remington Rand was the biggest computer company in the US. It disappeared as part of the process of creative destruction which is the hallmark of the technology industry—and it’s happening again today.
Once every 20 years, the industry tends to move into a new era based on a different business model. Remington’s demise was part of a seismic shift that saw electromechanical accounting machines give way to mainframes in the 1950s, before they in turn were displaced by personal computers in the 1980s.
That technology is now being pushed aside in favor of what we call the “service-centric model.” Rather than depending on personal computers, new-era services work on a wide range of devices from tablets to televisions (and soon even eyeglasses and watches!). Rather than depending on inflexible standard software, they increasingly adapt to user requirements. And rather than communicating using modems and USB drives, they rely on the Internet, often delivered wirelessly over today’s ubiquitous high speed global networks.
As part of this process, yesterday’s fleet-footed predators quickly become today’s dinosaurs (display). The losers fall further and faster than anyone expects—as Nokia and Microsoft are currently finding out. And the winners—Google and Amazon at the moment—come out on top in all kinds of unexpected ways. Creative destruction makes investing in the industry particularly difficult—and also, of course, particularly rewarding, when you get it right.
We have identified a new wave of companies that we think are set to benefit disproportionately from this latest wave of disruption. They include, for example, online retail groups such as Japan’s Rakuten, as they continue to win business from traditional “bricks and mortar” businesses, like shops and newspapers. The same thing is happening to traditional suppliers of computer hardware and services. The winners here are companies able to offer software through the cloud, including Citrix Systems and Intuit, or business process outsourcing groups, such as Cognizant or Tata Consultancy Services. These “disruptor” companies typically offer better investment fundamentals than “disruptees.”
It is notable that the key disruptor industries—the Internet, IT services and software—have collectively outperformed the MSCI World Index over the past year (display). Disruptors also look nimbler on a number of fundamental growth measures than disruptee sectors—whether it be median year-on-year earnings revisions, median sales growth for 2012 or the latest median 12-month return on equity figures, for instance.
So while tech has been a dull sector of late—mainly because the smartphone market has started to mature—we believe that careful research can throw up some genuinely exciting areas. Our work has identified a whole series of cutting-edge service-centric areas of the tech market.
These include new ways of supplying tech infrastructure and software “as a service” (allowing users to access software and processing power over the Internet), big data (which involves processing the deluge of information generated by, for example, e-commerce) and the “Internet of Things.” In the latter area, it won’t be long before virtually every product we own—from our fridge to our sofa—has an Internet chip embedded within it, capable, for example, of ordering fresh milk when we are about to run out.
The new era has begun. Get used to it.
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