06 August 2019
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Amid an accelerated pace of disruption that has transformed industries, understanding the economic and market impacts is imperative.
We live in a world where the pace of change is rapid. Disruption is omnipresent, accelerated by low interest rates and easy credit. Often, it has a "winner takes all" dynamic, with early movers grabbing the lion's share of the spoils. It can also be explosively fast, particularly where innovation combines with enthusiastic consumer demand to pave the way for blockbuster products that transform an existing market. Old business models can be blown out of the water by new entrants that can compete better on cost and quality. Meanwhile, the time needed to develop a nascent idea into an established business has narrowed sharply, making it difficult for incumbents to react and adapt.
For investors, understanding the economic and market impact of these changes is imperative. At the individual stock level, it is even more crucial as the return differential for stocks on the right and wrong sides of these dynamics has been, and will continue to be, substantial.
Innovation And Natural Monopolies Create Divergent Outcomes
The dynamics of disruption create divergent outcomes across a range of industries and come at the expense of many incumbent competitors. Among them, slow‑moving brick‑and‑mortar retailers, traditional media companies reliant on dwindling users and advertising revenue, as well as consumer companies whose products are losing long‑established brand monopoly advantages.
Even simple products like toothpaste have struggled to adapt and compete. Incumbent providers of these commoditized goods have suffered as the model that governed how they were once marketed and purchased has fundamentally changed. While e‑commerce has infinite shelf space, traditional distribution methods have more limited scope on supermarket shelves. Advertising and consumer engagement patterns have also changed. Established television and print advertising techniques are losing out to modern promotional activity on Instagram or YouTube, which also enable instant purchase responses and next‑day delivery.
Meanwhile, innovation in streaming and Web delivery of home entertainment has enabled on‑demand services to challenge traditional cable TV companies in both the delivery and production of entertainment content. Web‑based broadcasters have achieved global scale and attained unprecedented access to viewer analytics to identify the needs of audiences. By contrast, traditional cable providers and content producers reliant on bundled channels for much of their revenue have suffered. Crucially, the winners from disruption have been winning big, while the losers have suffered badly.
All this has been exacerbated by the amount of liquidity and excess credit available in this low‑growth and low interest rate world. Investors have been taking excess credit and, in their search for yield, have poured even more money into these disruptive and innovative companies.
