Moats in the Age of Disruptions
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“When people say that an entrant is disruptive in an industry, what they really mean is that customers are adopting that new way. At Amazon, we’ve had a lot of inventions that we were very excited about, and customers didn’t care at all. And believe me, those inventions were not disruptive in any way. The only thing that’s disruptive is customer adoption. If you can invent a better way, and if customers agree that it’s a better way, then they will use that.”
– Jeff Bezos, emphasis ours
We live in interesting times. There have been significant advances in automation, artificial intelligence and robotics. Experts are of the view that these advances have the potential to dramatically increase the velocity of change and that the rate of innovation has already increased substantially. As investors in high-quality businesses, we seek to invest in those that possess durable competitive advantages. Clearly, as these advances achieve their expected outcomes and the pace of innovation quickens, they will result in disruptions to many existing business models and give rise to a few new durable ones.
However, as Bezos’ quote highlights above, technologies and innovations are not disruptive on their own. Disruptions occur because of customer adoption. In that respect, potential disruptors are no different from any other business. They have to identify customer’s pain points and offer a way of satisfying the customer’s needs in a manner that appeals to the customer.
Smartphones, social media and the road to consumers
Proliferation of smartphones globally and the increasing use of social media platforms have resulted in new means of reaching consumers by bypassing traditional channels. The effect of these technologies has been to dramatically increase the rate of adoption. This in turn allows businesses to scale up relatively quickly, especially those that don’t need large physical infrastructures to scale up. As is seen in Figure 11, whereas it took nearly 75 years for the telephone to reach 50 million users and it took 14 years for the television to reach that milestone, it took all of 35 days for Angry Birds to reach 50 million users.
Figure 1: Declining adoption rates
Innovators, equipped with advanced technological systems are able to innovate rapidly and by employing digital distribution mediums, are able to garner market share far quicker than was possible in a largely physical age. Figure 2 shows the impact of Whatsapp on the traditional SMS businesses2. Whatsapp customers a a better way to communicate than preexisting technology. Its adoption rate was heightened by smarphones and social media.
Figure 2: SMS Business Gets Disrupted
Digital disruptions: Increasing recognition
Not surprisingly, disruptive innovation has occupied an increased amount of the mindspace. As is seen in Figure 3, the term ”disruptive innovation” has acquired increased significance over the last few years.
Figure 3: Interest in Disruptive Innovation
This same behavior is seen in the expectation of business executives. As seen in Figure 4, an increasing proportion of companies are starting to recognize that digital disruption will have a significant impact on their industry. Nearly 30% of executives surveyed expect digital diruption to be transformative as compared to a near dismissal fo such a prospect two years earlier.
Figure 4: Increasing recognition of digital disruption risk