The company business cycle is speeding up. In the 1920s companies could expect to remain in the US S&P500 Index for approximately 70 years. Today companies are averaging a life in the US S&P500 of approximately 15 years. One of the main reasons for this shortening of the company business cycle is the impact of Digital Disruption.
Peter Diamandis, the creator of The X- Prize Foundation and Singularity University, probably describes the process of Digital Disruption best when he describes the stages of this disruption as; Digitalisation, Deceptive, Disruptive, Demonetize, and Dematerialize.
Digitalisation effectively means the representation of something by the computer language of zero and one, where the product or service becomes information-based technology, and can then be subject to exponential growth.
A good example of Digitalisation can be seen in the music industry that went from records to tapes, to CDs to full digital streaming and a fee for service model.
The Deceptive component is “deceptive” because at this stage demand growth can come off a very low base, humans have difficulty factoring in the pace of new technological advancement, and additionally, this “sideways” period can be extended before the exponential upward move occurs. So graphically this stage tends to look like an almost straight line on a chart potentially for a long period.
digital disruption graph
Areas of technology currently experiencing this pre–exponential turn stage are potentially electric cars, battery technology, CRISPR genome editing, robotics, artificial intelligence, quantum computing, 3D printing, energy, energy storage, [solar and wind power], driverless technology and areas of healthcare such as human genome sequencing.
The first human genome sequencing cost $2.7 billion and took almost 15 years to complete. The cost to sequence a human genome in 2008, was almost $10 million. Currently the cost is approximately $1 000, and there are estimates that this cost could fall to $100 over the next 10 years, in which case it would be possible for doctors to order an individual patient’s genome and to design treatments specific to that patient, including potentially the ability to turn on or off certain genes or even edit genes using, CRISPR technology.
The first digital camera was patented in 1975 by Eastman Kodak. It weighed about 4kg, and took 23 seconds to record a .01 megapixel digital photograph, to make matters worse it was also a very expensive product. It would have been hard for Kodak management to envision that they were looking at the product that would one day end the 100 year old company, as photos became Demonetized. Consider that it was not so long ago that getting a photo developed cost approximately $1.00 each, now to take a photo that can be viewed and circulated to everyone on the internet is essentially free.
Of course the mobile phone is significantly responsible for Dematerializing many products for example the fixed phone, flashlights, doorbells, diaries, letters [email], television, cameras, cheque books, the fax machine, the telex machine, maps, encyclopaedias, tape recorders, books, to name only a few things. Interestingly the technology in a mobile phone of today was worth millions of dollars in the 1970s.
This digital trend is very important for investors to understand because whole companies and sectors can have their businesses disrupted or demonetised and in unusual ways. Take Uber and the disruption of the taxi industry and Airbnb and its disruption of the hotel industry.
There are in reality very few companies on the ASX stock market that are not going to be disrupted in some way over the next 10-20 years. It is possible that the mining industry becomes even more automated and electric focused cutting out labour and costs to a point where humans are not allowed on mine sites. Already some ports in parts of Europe and China don’t allow humans, given they are fully automated.
How may this affect port operator Qube [QUB] in future? Consider that electric ships are already being developed and companies such as Google are working on an entire logistics system without human involvement.
Another company that may face disruption is Cleanaway [CWY] with Volvo already testing driverless rubbish trucks an offshoot of work being done on driverless cars and trucks.
Thus investors will need to assess companies on the basis for their potential to be disrupted and assess management’s ability to implement new technology into the business. It is likely that digital disruption and other forms of disruption are going to increase in future, bringing with it both risks and opportunities, an open mind to the future and change will be very important.