Core investment theses (II) - Disruption

Our second core investment thesis is around "disruption". The key question is what happens when the $1 Trillion +/- global wireless ecosystem begins to overlap with other ecosystems (or industries). Our argument is that the clash of ecosystems will generate some very interesting results. If you believe that wireless is a pervasive technology similar to electricity or the Internet, you can assume that disruption of various sorts will be happening for a long time.

Following on this thesis, we can already observe what has been happening when wireless meets the PDA business or the Music business.

• For example, the PDA was a nice little market dominated by Palm (and where notably Apple had failed). It hybridized with wireless to become the smartphone space, in the process wiping out Palm (notwithstanding its latest attempt to return); propelling RIM into stardom, and eventually providing one element of Apple's own mobile offering. The hybrid smartphone sector is already 10x the size of the standalone PDA, and will clearly be setting the norms for a significant part of the mobile industry.


• Another example is Music. This was a digital market widely understood to be in decline due to pressure from online downloads. It was also clear that mobile was going to become a major play in Music, all the way from vast heaps on ringtones (priced at a premium to full online tracks), through to the inevitable incorporation of mp3 players and storage into cell-phones. You could argue that Sony's venture with Ericsson to create SonyEricsson, was in part a response to these pressures. Another player that felt pressure was Apple (back when it was not in the phone business). Had they failed to ACT, they would by now be facing a dwindling role in the music business as the mobile ecosystem offered for free what they were charging for with their iPod. Apple's entry into the phone business can be seen as much a defensive as an offensive move.

What these two examples illustrate are the following:

• It is not pre-determined who will win and who will lose when this ecosystem clash happens. If we roll back the tape to 2000, Palm at the time seems to be in a perfectly good position to have become a major player in the smartphone game, but perhaps it made some mistakes in not understanding what it needed to do or failing to execute well.


• It is not about hardware or software or apps but about the system and the customer experience. The PDA/wireless hybridization clearly has hardware components but software/content/apps has clearly been an important part of the success of RIM and Apple. Similarly, the Music/Wireless story combines various elements.


• Wireless Incumbents are not necessarily well positioned to benefit. Again, looking forward from 2000 and knowing what we now know, we might think that there are some great growth opportunities for incumbent operators and OEMs. However, in 2009, it is at the very least a mixed bag. Some OEMs have probably benefited from disruption - say Samsung; maybe some of the operators who have aligned with iPhone have benefited. But for example, RIM seems to mostly benefit itself and actually commodify the status of incumbent operators by shifting the purchase decision to the handset/software combination and away from the network.
  
• The value swings are pretty big. As with any disruption, the cost of missing the game or missplaying it can be pretty substantial. At the point of disruption the rules of the game may change completely and those that do not understand can be left on the sidelines.

So with all of this as preamble, how does this impact our investment thinking?. I would say, honestly, that we are still trying to figure it out. We have made some investments that clearly are bets on some sort of disruption. For example, Zeemote is ultimately a bet on what will happen when the $50B global gaming ecosystem bumps into wireless (since this is the subject of another blog I will not elaborate). We have also made bets around wireless + gambling (BettyMovil in Spain), and have looked in depth at wireless + navigation (wave 2 will be premised on smart, predictive navigation); wireless + video (still mulling that one)' wireless + health (us and a million other groups), and so on. Since we are a fairly small fund, we are very careful in not going into situations where we cannot stay all the way through.

Some of the rules that we are developing as we wade into this space are:

1. Disruption is ultimately driven by highly deterministic laws - so for example, as Moore's law continues to grind away, it becomes increasingly relevant to wireless because it enables the expansion of processing capability, graphics and storage on cell-phones, and the progressive improvement in the size (smallness) and quality of the machines built into the phone.
2. Just because something is logical does not mean its going to happen now, though if you have understood the core dynamics it will eventually happen.
3. Any disruptive idea is going to require highly lateral and cross-functional thinking, something that is outside of the scope of most incumbents and manager-led organizations. It is not an accident that two of the boldest moves in disruption were led by Jobs and Bezos, who have the ability to drive a vision all the way from the top. Back to my segmentation blog - that bold play was also driven from the top at GM by Sloan.
4. Ultimately, it is all about delivering basic consumer needs in a better way (that is what all business is about). So, for example why has mobile + photography not become an interesting play: because the camera-phone has not really changed customer utility except in a few niche areas. There are some interesting uses - mblogging, mobile-camera scanning, and so on, but we are not there yet. However, by 2010 it is expected that the quality of camera-phones will equal that of Digital Cameras; some of the transfer issues will have been worked out (e.g. models such as EyeFi); and some of the end-use models may be more mature so perhaps this hybrid space will be ready for take off.

As indicated, the story here is hardly written, so would very much welcome a spirited dialog and debate.