Investing Insights

The Next Big Tech Breakthrough

Can you foresee the next big tech breakthrough? It’s not that easy…

If you cast yourself back to the 1989 film ‘Back to the Future II’ Marty McFly was transported 26 years forward in time. Here he found hover boards had replaced cars and recreational drones, flat screen TVs and video conferencing were all the norm. Although we are no closer to replacing cars with hover boards than we were in 1989, the filmmakers made some apt predictions about the future – no mean feat considering how difficult it can be to foresee the next big tech breakthrough.

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The last 10 years of tech breakthrough

10 years ago, you’d never imagine we’d be watching our favourite television programmes during our commute and enjoying shopping sprees in our living rooms. Or that we could order our dinner without speaking to anybody, and hail taxis to drive us from the middle of nowhere to the middle of anywhere.

But for forward-thinking companies and tech-savvy start-ups, dreaming up these changes – and/or taking advantage of their consequences – is their lifeblood. Over the past 10 years, businesses have sprung up to solve problems that didn’t exist a decade ago, and consumer needs and demands have evolved accordingly. This has created a range of opportunities for investors looking for new fuel for their portfolios.

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How has distribution innovation changed the game?

The evolution of distribution has been one of the huge drivers of change. Viewers no longer require a television that is plugged into an electricity outlet and an aerial socket to watch an episode of their favourite soap, and retailers don’t need a high street presence to grow their customer base.

Netflix continues to grow internationally

Netflix’s worldwide streaming subscribers at the end of the respective period*

*Q4 2018 figures as forecast by Netflix in October 2018. Source: Netflix

Changes to distribution have created challenges for many incumbents, but they have also made some previously-unattractive industries appealing, presenting opportunities to invest in a growing pool of thriving, forward-thinking firms and emerging businesses.

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Success story: The video gaming industry

Ten years ago, the video gaming industry was an unattractive proposition due to hardware and software cycles, coupled with poor margins. Production and distribution ate into cash flow – CDs needed to be burnt, stored in a warehouse, and distributed to retailers.

But the advent of the Cloud has overhauled the industry. Gaming studios can directly distribute to the consumer – and effectively “own” them by offering add-ons for their games. The concurrent evolution of smart phones, tablets and TVs has also expanded the market for the games, which is no longer restricted to the owners of a specific console.

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Lagging behind: Traditional business software providers

The Cloud has affected business software providers in much the same way, but some incumbents have met challenges. Legacy systems that are installed on computers do not allow for real-time viewing, and in some cases, offer poor functionality compared with their open-architecture competitors.

A large gulf has opened between traditional software providers, and those that have adapted – or just entered the market. The entrants have an opportunity to grow their market share through conversions; at present, just 5% of the developed world uses an online accounting solution.

What does this mean for investing?

The pace of technological breakthrough and change will only continue to accelerate. Investment strategies should be adjusted accordingly. Barriers to entry are constantly being eroded, sending industries into flux, creating waves of disruption and leading to potential new opportunities.

  • We can no longer rely on old economic moats, and must seek opportunities with an open mindset globally; disruption is everywhere.
  • We must listen to the management teams at forward-looking firms to get a better understanding of current and future driving forces, and how these developments impact many aspects of a business and it’s competitors. This should help us better identify the potential winners and weed out the losers.

We may have a while to wait before one of them perfects the hover board, but we believe there are businesses out there that have the potential to effect previously unthought of changes.

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