The invisible hand of disruptive technology brings structural change swiftly, creating opportunities for companies that foresee the promise of new markets and investors who invest in a sound business model to tap these markets. The revolution in technology, especially communications technology, has radically changed the way business is done across the world.
The Impact of Disruptive Technology
Unlike the gradual adjustments brought about by the changes in physical availability of raw material and factors of production, the invisible hand of technology brings structural change by a swift disruption of the old order. The 1990s boom in the technology sector made a host of products obsolete – from typewriters to cassette tapes; and opened up new markets for new products. Companies that were unable to adapt or prepare themselves for the new wave of technology driven disruption, like Kodak, have virtually gone out of business.
An Internet-Based Economy
The launching of public internet access in India and Philippines in the mid-1990s led to the setting up of companies that pioneered the concept of Business Process Outsourcing. Over time, maturing of the internet-based economy made it possible for nations in different time zones to do business with each other.
Today, Information and Communications Technology (ICT) services exports account for more than 65% of total service sector exports for India and the Philippines – a reflection of their comparative advantage. During the 2000s, the development of smartphones and social networking sites created yet another churn in the tech sector. Well-established phone manufacturers like Nokia and Blackberry, which were slow to transition their products to the new technology, have since lost their dominance.
Companies like Facebook (FB:US), Twitter (TWTR:US) and LinkedIn (LNKD:US) tapped into the vast market for social networking and ultimately added value to their founders and private investors when they went public. Beyond the realm of business, this new phase of technological advancement showed its ability to shape world events when smartphones and social networking sites helped people unite against autocratic governments during the ‘Arab Spring’ revolution.
Boom In E-commerce Sector Dominated By Disruptive Technology
The past two years have witnessed a revival in tech stocks with companies in the e-commerce sector being at the center of the disruptive technology boom this time. China, the US and the UK are the top e-commerce markets and have shown increasing levels of activity. Online sales during 2015’s Thanksgiving and Black Friday holidays in the US garnered revenue of US$4.45 billion, up 18% from 2014. China’s (and the world’s) largest online retailer Alibaba’s ‘Singles Day’ shopping festival sale in November garnered US$14 billion, up 60% from 2014. In UK, online sales over the four day period from Black Friday to Cyber Monday are expected to be around US$4.8 billion, up 107% from 2014. India’s largest e-tailer Flipkart’s five-day long Diwali sale in October garnered sales of US$300 million, up 300% from 2014.
While Flipkart’s absolute figures pale in comparison with the above markets, its sales growth so far has been rapid and the potential for e-tailing remains huge for India.
There has, however, been a lot of skepticism around the boom in technology stocks and the proliferation of e-commerce companies. Tech unicorns, i.e. companies valued above US$1 billion and held privately, such as Uber, and Airbnb, are constantly being evaluated for the long run sustainability of their business models. While Alibaba (US:BABA) did have the world’s biggest IPO, raising US$25 billion in September 2014, wary investors already have the precedent of over-exuberance for tech IPOs in the late 1990s, which ultimately ended in the ‘dotcom bust’ of 2000-2002.
If history repeats itself along the lines of the dotcom bust in the early 2000s, there will be a consolidation in the sector and only disruptive technology players that have a sound business model and sustainable demand will survive.
Alibaba (US:BABA) itself is an example. It has been selling goods online since 1999 and has outlived the dotcom bust. Facebook (US:FB) is another example. The company’s better focus on addressing issues like online privacy and improving user experience made it outlive an older incumbent (Google’s Orkut).
As an investor, it is important to keep a tab on evolving trends in disruptive technologies. However, one needs to be careful not to throw caution to the winds and follow the herd blindly driven by a fear of missing out. Technologies and companies may change the way we lead lives – using new products and services. Nevertheless, these companies are running a business at the end of the day and there needs to be clear path to profitability for it to make a good investment.
Janki Sharma is a freelance economist based in Singapore and writes for Macrovue.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.