The Age Of Disruption Is Over

Incumbents have launched a come back as they take ground and win customers.

‘Disruption’ has been a tag line of the 21st Century. There’s arguing that the internet and the power of big data have changed the way we live. The hype about companies like Airbnb, Uber, Facebook, Google, Netflix and Amazon has grown into the stuff of myth and legend as they’ve stormed through and created new markets, products and services for consumers. Until now, major businesses have been paralysed and stuck looking on as their industries were ‘disrupted’ and their customers changed forever. The ‘Age of Disruption’ minted new billionaires like Mark Zuckerburg, Jeff Bezos and Elon Musk, but that time is coming to an end as incumbents have the resources, knowledge and capital to take back consumers.

Artificial Intelligence, Machine Learning and the Internet of Things have unleashed a productivity boom. The 2020’s could be the new ‘roaring 20’s’ as we embrace new technologies, and businesses focus on “disrupting themselves”. A hundred years ago we marvelled at the rise of electricity, the telephone, the car and the plane. Now we are awestruck at the amount of information and entertainment at our fingertips. Just think; how often do you use Google? How much is Google actually worth to you? Or better yet; when was the last time you used an encyclopedia?

The disruptors of the last ten years have paved the way forward and shown the world what is possible. The next ten years will be driven by established and profitable businesses that leverage this technology to develop new products, enhance operations, and win back their customers. The FAANG and WAAAX disruptors provided the blueprints for established companies like Disney, Toyota or Nestle. The incumbents are combining this ‘new’ knowledge of tech and customers, with their immense capital and big brands to disrupt the disruptors. The big difference between the incumbents and disruptors… profitability.

Where Incumbents Are Fighting Back

The Battle for Eyeballs aka ‘Streaming Wars’

Netflix was first to capture our love of bingeing tv and online streaming. They were soon followed by competitors around the world. Last quarter Netflix announced that they lost 100,000 customers. Why?

Existing businesses have seen what customers like, have learnt the value of their content and are now bringing out their own platforms. Disney+, Apple TV+, Amazon Prime Video, HBO and NewsCorp are all fighting in this space for our attention. Apple recently spent $6 billion in creating it’s own content just like Netflix Originals.

Existing businesses/Disrupted business have been waiting on the sidelines to see how the technology works, how they can augment their existing businesses and what ingredients they need to build a good platform that will enable growth now and into the future.

In the streaming wars it’s becoming obvious to customers that the platforms are almost perfect substitutes of each other. It’s hard for businesses to differentiate on the internet and the only way you really can in the streaming market is by having different content. Customers are using this to their advantage and are rotating, or swapping through platforms watching the content they like. When they finish watching all the shows they like on that platform they swap onto the next, and on it goes.

This change in customer behaviour will mean the industry will shift from focusing on customer growth to focusing on customer churn. For existing businesses that are already profitable and the churn isn’t a huge threat, but for companies like Netflix this could be an existential crisis.

The Future of Transport and the Electric Car

Tesla was revolutionary. Elon Musk was an eccentric visionary. Together they were going to change the car industry for a better and address the challenges of climate change. Now, Tesla has burnt through billions of dollars and Elon Musk has lost any semblance of a vision. Toyota, General Motors, Honda, Ford, Volvo, Volkswagen, BMW, etc. are bringing out hybrid, electric, and even hydrogen cars as they push the industry forward.

The existing manufacturers are able to pump out cars with new technology at scale, efficiently, safely and profitably. They have seen what technology works and what technology has cars bursting into flames while they sit in car parks. It took time and government legislation but it now looks like Tesla is a take over target rather than a great disruptor or winner in the car market. This is especially true when you consider that Toyota and Hyundai have partnered with the CSIRO and that GM and Honda have a joint venture in electric cars.

Electric and Hydrogren cars are coming whether we like it or not, the real question here is whether Tesla’s profits will ever arrive.

Finance

AfterPay, SplitIt, Sezzle and the rest have burst through the noise onto customers phones and into shops all over the world. The micro finance and ‘Buy Now, Pay Later’ products have unleashed a world of spending and a dramatic change in how customers use credit for shopping. Companies that solely focus on Buy Now, Pay Later have over 6 million customers but compare that to Bank of America who has over 50 million customers or Commonwealth Bank of Australia that has 16 million.

The Commonwealth Bank of Australia (CommBank) recently spent $100m buying a 2% stake in Klarna, and both Citi and Visa have announced Buy Now, Pay Later products. The existing financiers already have the infrastructure, governance and knowledge to provide the product and as many are quickly realising all they need to do is figure out the tech and pricing to deliver it to customers. This can be done through buying up existing providers or developing their own products and augmenting existing offerings. If Bank of America develops an option that ‘approved customers’ can simply tap a button on their phone to split up payments for a product, then AfterPay should be very afraid.

Food

Beyond Meat has caught the world by surprise since its IPO. Not only have investors been loving the stocks meteoric rise but customers have been loving the product. This feel good story has drawn competitors from everywhere, and Nestle has even signed a deal with McDonalds to supply plant based burgers.

The fake meat market flooded quickly and big deals seem to be going to existing relationships and distributors that can provide more than just one item in the supply chain. This doesn’t mean that it’s not a great idea or that it hasn’t changed the world or our lives but it demonstrates the huge power, resources, capital and brands that major companies have at their disposal.

Where we go from here

The example markets are only the beginning of resurgent incumbents. These phenomena are happening across countries, markets and geographies. This isn’t to say that we are at the end of disruption, that disruptors will fail or that companies shouldn’t ‘disrupt themselves’. What these examples highlight are the changing nature of the world we live in, and that these are trends and factors you should be thinking about for the future — especially if you are investing.

Risks To Disruptors

Incumbents have an edge over disruptors in several key risk areas.

1. In a downturn or recession unprofitable companies are more likely to go bankrupt. Incumbents that are already profitable have a lot more space to breathe if share markets tank or if consumers stop spending. Disruptors that are losing money and can’t generate growth because the economy’s in a slump are probably headed for bankruptcy or take-over.
2. Regulatory catch up. Regulators, law makers and politicians haven’t been able to keep up with technological growth. As they do start to create laws around privacy, data security and consumer lending the disruptors entire business model may be at risk.
3. Privacy breaches. Much like oil leaks they spill out and damage a wide environment that is expensive to clean up, have a severe impact on brand and trust, and prioritising or preventing them will be a complex and expensive process. Disruptors may not have the brand or resources to resolve such issues.

That being said; disruptors have shown that they can win business and become permanent features of peoples daily lives if they have great customer offerings, good leadership, and if incumbents are slow to act or regulators mark them as anti-competitive/anti-trust.

Investing for the Future

The next decade looks to be the decade of the well established incumbents that are profitable, innovative and able to incorporate technology. There is still lots of upside and a big future for disruptors but investors need to become very careful when putting their capital at risk.

The next decade will be great for consumers as more products, platforms and services come to market. That is of course assuming that Trump and ‘Trade Wars’ don’t destroy it all.

There are great companies to invest in and they typically focus around niche markets where SaaS businesses are able to become critical to industry. Much like traditional companies there should be significant focus on moats and acquisitions. It may be a decade that is better looked at through a lens of where not to invest. Avoiding companies that don’t embrace technology or internal disruption. If you do choose to back a disruptor then it might be wise to stay in until there are 2 consecutive quarterly drops in customers or a threat of an incumbent with a good proposition. It would also be wise to think about how a business will survive when the customers stop spending or the music stops.

If you have any questions then please feel free to comment, and if there is anything you’d like to see analysis on or read about in the future then let me know.

Also, please note that this article does not represent financial advice or the views of any organization; it is only the opinion and analysis of the writer.

Thank you for reading.

Yours,
Chris Leeson