by Cato 10/7/14
Former hedge fund manager Andy Kessler has been writing about technology for at least the 20 years I’ve been reading him, and probably longer. He’s unique among tech pundits in that he’s not a ‘fanboy’; he isn’t google-eyed about tech, to fashion a 2014 pun out of 1930s language. He is in fact something of a hard sell, making his insights worth consideration.
Kessler’s central tenets in this October 7th WSJ opinion essay (paywall may apply) are:
1) There have been three technological ages: mainframe, PC, internet;
1) The fourth age is mobile; there are now more mobile users than desktop users;
2) Companies are figuring out that they need a mobile and cloud platform;
3) Such overhauls take time and have caused a lull in capital spending in the last five years;
4) This technology transition to a mobile and cloud world will soon be installed and when completed will drag the global economy onto a more vibrant growth path.
This article has the feel, for me, of a watershed. To get a sense of what this could mean to the economy and our political future it will be helpful to look in the rearview mirror.
Dial back 25 years. Fortune magazine I think it was, or maybe Forbes. A Merrill Lynch guru named Robert Farrell … you can read his ten rules here … wrote an article similar to Kessler’s. In it Farrell wrote of the changing landscape of technology in the late 1980s. His emphasis was on ‘productivity’. His investment thesis was ‘sell the armies and buy the arms suppliers’, where the suppliers were new firms whose products deployed the new technology in novel ways and … very importantly … created, for the buyer, increased productivity.
This doesn’t sound revolutionary today but at that moment it was 180° from the prevailing ‘buy the revenue ramp’ valuation model that ruled in the 1980s. Revenue ramps were measured in absolute dollars, so huge firms growing slowly, generating lots of cash, were kings. The firms that were selling new, innovative productivity-enhancing products were all small, very profitable but growing rapidly, consuming lots of cash. LBOs (leveraged buyouts), using massive debt to merge massive companies to create even more massive companies were the headliners of the day. Then Farrell’s revolution began.
Small firms with products that cost them $1.00 to make, but were worth $3.00 to a buyer because of the productivity increases they created, are margin rather than revenue driven. Huge margins … 50% minimum, up to 75% in a few like Linear Technology … were a new phenomenon. Overnight, LBOs became dinosaurs. We live in that margin-driven world today and have for the last 25 years, and Bob Farrell was the first guy I know of to see it coming.
To me, Kessler’s thesis echoes Farrell’s. The ‘productivity & margin-driven’ model investors gradually adopted as they embraced Farrell’s insight still works, but like all strategies it needs to be revamped and updated. I’ve been looking for a new “Farrell moment”, something that rang true on the level not of tactic but of insight. This article has that smell. Kessler isn’t trying to be detailed, although I’d love to see him expand it. This is more pensée than battle plan, given the limits of the op-ed format.
So we can’t say yet what companies will be emblematic of the 4th mobile wave. It’s a good bet Google is to this next wave what Microsoft was to the last. I think there is a decent chance Xilinx and ARM and Broadcom will collectively become the Intel of this next wave; SanDisk the next Seagate; Samsung the next Apple (which is fighting hard to transition, with the jury still out); “cloud” firms as a group the next EMC. But that may be half-blind, as it only includes established firms, and one hallmark of a all new technological ages has been invasive, highly disruptive new competitors.
We can say that all deep, fundamental shifts in the core drivers of commerce and trade and more generally of industry begin with the disruption of the existing order. Not coincidently the WSJ on October 7th also featured an article reporting how large, diversified companies … Dupont, EMC, GE, 3M, Hewlett-Packard, and many more that aren’t household names … are being shredded, broken up, narrowed and reshaped. The goal is to make them faster, leaner, more focused; to cull out the embedded bureaucracy and thereby increase market valuations. Seen from the perspective of Farrell and Kessler this is yet another indication of a tectonic shift in the landscape. The Titanic class ships are being dismantled.
This is worth pondering. Worth noting as well, if you live at the intersection of Politics Ave. and Economics Blvd. as I do, is that the last times … in the mid 1990s (internet), and the time before that in the early 1980s (PCs), and the time before that, in the mid 1950s (mainframes) … we experienced this deep shift in the underlying technology strata of the economic world we also experienced a huge shift back to smaller government; back to more conservative principles and practices.
Roosevelt’s liberalism became Eisenhower’s conservatism. Carter’s bureaucratic state and hyper-regulated economy became Reagan’s reversal of both. Clinton’s 1992 win became Gingrich’s policies in 1994. Correlation isn’t causation. But it seems like that time again. As huge businesses are been shredded so too, one hopes, will huge government. I like the smell of that.
Cato blogs at Cato’s Domain.
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