Technology, where to start? To help understand one of the most prolific effects of technology, I thought an analogy (inspired by Ben Rogoff, Polar Global Technology Fund) would help with the Network Effect.
In 1958 the Little Chef was born with a single outlet, I hesitate to use the word restaurant. By 1970 they had 25 outlets and it was acquired by Trust House Forte. In 1958 cars were slow and the first part of the first motorway only just completed. Little Chefs were on ‘A’ roads and when journey times were long, stopping for a sit down meal was part of the journey. By 1986, Little Chef had merged with Happy Eater and by 1999 we’d seen ‘peak’ Little Chef with 439 outlets. By now though, cars were faster, motorways had become a proper network and journey times tumbled. Little Chefs on ‘A’ roads had effectively been bypassed, even as car passenger growth had gone up nearly six fold. Motorways provided a new network on an unprecedented scale and the Little Chef became almost obsolete, ceasing trading in 2018. In technology terms, the network moved from ‘A’ roads to motorways and the car became the smartphone.
The number of people in the world with landlines is approximately. 2.2bn, the number with a mobile phone is 5.4bn, and the latter number is higher than the number of people with bank accounts, running water, even electricity1. Facebook has 2.3bn monthly users, 29% of the world’s population. Young people spend an average of 5 hours on their phone, checking every 12 minutes. The disruption effect is far reaching, big brands are being nibbled to death by direct to consumer up-starts.
Think of Dollar Shave Club for example, a subscription model for ‘ok’ razor blades to counter the high cost of replacements from Gillette et al. Unilever bought Dollar Shave Club for $1bn in July 2016. It was founded in 2012 thanks largely to a YouTube video that went viral. In 2015 it had 3.2m customers and turnover of $152m, its market share was 5%. This was a hugely disruptive, direct to the consumer brand and the incumbent, Unilever, bought it effectively as a defensive measure2. This disruption is far reaching, Spotify now accounts for around 30% of the music industries revenues!
So how do we tackle this from an investment perspective? We use experts. Technology is structural theme in our funds and portfolios and included within our US Equity weighting. The fund we use has eight core themes; e-Commerce, Digital Marketing, Cyber Security, AI, SaaS (Software as a Service), Games Software, Robotics and Semiconductor Complexity. They have a strong bias towards profitable, cash generative companies. They want companies with simple business models, strong management teams, high barriers to entry, pricing power and balance sheet strength, they don’t buy ‘blue sky’ investments . But in a world where the biggest acquisition for a tech company in 2018 was by a company you will know, IBM, but for a company you probably won’t, Red Hat, and at a 63% premium3, we use external experts for this specialist sector.
Simon Nicholas // Senior Fund Manager
Source: 1 Cisco, 2 FT, 3 CNBC.
