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Trend 2: Innovation and Disruption

Investment Outlook 2016 – Trend 2 , Published Aug 31, 2016

This blog is part of Sanctum Wealth Management’s Mid-year Investment Outlook 2016. The Outlook gives us an opportunity to step back and look at the big picture to identify trends that have the potential to affect investment portfolios, both domestically and globally. We’re focused on six key trends and this week’s blog focuses on innovation and disruption becoming the new norm, set to alter competitive patterns of industries.

In the ’80s and ’90s, Microsoft and Intel innovated hard to unsettle the Sperrys and Tandems of the world with personal computers. Mobile phones, the Internet, news, social media, networking, e-commerce, travel, transportation… the list of disrupted industries is long. What’s notable though, is the speed with which recent disruptors have moved. Uber has disrupted the global taxi industry in the short span of a couple of years.

Winner Takes Most

Increasingly what we are witnessing with these models is a `winner take all’ type of outcome with enormous profits accruing to the winner and a fair share to the second and third place finishers. Some of the most innovative industries today are dominated by a few large companies, enjoying large market shares and returns greatly exceeding historical averages. Clearly, these winners are linked to technological sophistication and automation of existing cumbersome processes.

Global Profit Migration

Coupled with `winner takes most’ dynamics is another phenomenon: migration of profits. The world is fast becoming a homogenous village. What people want in Japan isn’t very different from what they want in India. The benefits of automation apply equally across economies, causing a disruption in the profit structure of an industry and a migration of profits away from the local provider. The sweeping nature of technology has altered the structure of competition in the global economy.

Startup Success Metrics

The concentration of profits makes angel funding and venture capital riskier. Venture capitalists have taken notice of this trend. Here is Marc Andreessen: “In normal markets, you can have Pepsi and Coke. In technology markets, in the long run, you tend to only have one…the big companies in technology tend to have 90 percent market share. So we think that generally these are winner-take-all markets.” Today’s new companies are operating in a ‘winner take all’ market for one reason: the Internet. Dominant players benefit from strong network effects – be it LinkedIn, Facebook or WhatsApp – the more users they have, the easier it is to distance themselves from peers. Strong network effects create natural monopolies and the competition tends to wither away on its own. Sanctum Wealth Management

The Ablest Succeeds

New technologies and markets provide growing leverage for the ablest companies. The inescapable side effect, however, is that even a small edge sometimes translates into huge advantages, helping winners capture most of the industry’s profits.

“New technologies and markets provide growing leverage for the ablest companies.”

The steam engine anchored the Industrial Revolution. Electricity ensured urbanisation. Information Technology secured the Information Revolution. The Internet and mobile phones moored the Digital Revolution. The future belongs to advanced software and automation; driverless cars, drone deliveries, self-aware devices, artificial intelligence, genomics and nanotechnology to name a few. This isn’t necessarily bad news; take for instance e-commerce which simply is the automation of existing physical tasks. It has attracted vast amounts of capital and generated massive wealth. Yet, the consumer has also been a net beneficiary. If anything, the trend is clear: deflation and a race to the lowest cost and ablest offering, doing more with less, scalably. This, ultimately, is at the heart of capitalism. The race for efficiency and productivity is eternal.

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Mid-Year Investment Outlook 2016