This past week, in a discussion group with a top Indian tech executive, I raised the question: Isn't innovation for the mass market, by which we mean driving technology down to a price where billions can afford it, a ticket for valuation destruction? And if so, can we expect leading corporates to spearhead that innovation?
This might seem antithetical to the visitor's India model, which is all about extreme value for the customer. But in much of the world, the pursuit in high-tech seems directed at the top-margin trade, not the volume one. In fact, outside of social media and search, where the virtuous circle of mass adoption helps a Facebook or Google, it is hard to find cases in which democratization of use meant soaring stock prices. At least, that is my hunch--no one seemed to buy it the other day.
Maybe the Facebook IPO is too close and too real. Or maybe I'm wrong.
Consider, though: As innovation drives volume, it also drives down price. An acute recent example is high-definition flat-screen monitors. "Everyone" has one now, and "nobody" is making money selling them. Even in the now-ubiqitous smart phone market: margins are falling fast, with only Apple seemingly immune--and even that case is an anomaly. Apple is a marketing and (it is often said) design sensation, but its production is outsourced, largely to a Taiwan-China company called Foxconn. As Foxconn (aka Hon Hai Precision) has swollen to be a mass purveyor, it has suffered many issues but foremost financially is its falling returns. It used to be a mainstay of Forbes Asia's Fabulous 50 list of best, bigger companies, but has gone missing for awhile.
Image by AFP/Getty Images via @daylife)
At the lower levels of mobile technology, which soon will include 3G, the outright mimics as represented by the shanzhai market quickly wipe out nearly all margins for brands and suppliers alike. This phenomenon may partly explain the curse for Taiwan's amazing hardware-technology innovators in general: few of them turn out to be very good stocks for very long. Like their big brother Foxconn, they are scarce on our "best-performing companies" lists.
How about the telecom carriers that connect so many of these wonderful devices? Even though a mass market is apparently heaven for such an operator, which can amortize costs broadly (at least until wireless spectrum constraints impinge), the record of recent years is not encouraging. When there is avid competition to tap into that bigger usage, the margins go poof! This is epitomized, in fact, in India, a minefield for carriers. And, to return to the larger-device sector for a moment, remember when DSL lines for the home connections were so expensive for a relative few? Check out the prices for Verizon's FIOS service in many parts of the U.S.
In the middle of the telecom-device continuum, tablets occupy another domain with challenges as they go mass--even for an advanced patents machine like Qualcomm.
And software? Well, if you're Microsoft or Oracle, you still do well serving the "enterprise space." Corporate or institutional customers are by nature select, tend to be customized and have difficulty switching vendors. A wide consumer market is different, and it is the subject of much fretting when it comes to once-mighty Mister Softee's stock valuation. The problem is hardly limited to pirated operating systems. Even in Oracle's lofty business serving more complex organizations than the household, more off-the-shelf rivals like Salesforce are a threat to margins, and where cloud computing has created new stars with their own precious market capitalizations, these in turn will be pressured in the future as "everybody" gets into the act.
Likewise, although giants such as IBM and Accenture (disclosure: minor shareholder) have walled off their valuations, to a great degree, by transformation away from commoditized products and services, they won't be able to escape the spread of access and capabilities. (You might say that brings the argument back to India, and its outsourcers.)
It's not my point that there will cease to be innovators who envision serving all of humanity. One way or another, the blessings of digital technology and its Moore's Law will spread across the planet and improve lives. In the process, some companies will capture premiums as transitions occur. But over time, the evidence to date suggests, this is not how corporate capitalizations are built to last. Or, as one saw has long had it about biotechnology, everybody wins but the stockholders.
How sobering for those of us who would prefer that markets widen human progress. The finance-capitalism part of markets may not be suited to the task. I will close with a current and controversial example. If--if--it is a good thing that "everybody" have a solar-energy panel, is anybody going to invest in a rival to the Chinese state-subsidized producers? Not very well and not for very long.
