I have previously written an article on Apple’s iPhone sales and the adverse competitive environmental in which it finds itself. Read it at Is Apple Rotting? (1)
Unlike many others, technology industry usually gives rises to “the next big thing.” The success in the tech industry is analogous to winning a lottery ticket: a few make astronomical amount of money in an extremely short period of time, all while the overwhelming majority fails with no gain. Wealth that usually takes decades and even generations to build, is now possible given a popular idea and just a few years.
The idea that revolutionizes the world is almost always grossly profitable, at least speaking from recent years. Uber, Amazon, Apple, Facebook, and Google all saw incredible results. Therefore, everyone and their aunt in the tech game is trying to find “the next big thing”. I believe that for the time being, we are more looking for the next trend, than actually working on it. Smart phones have been unbelievably successful in the past decade or so, and they are now developed to quite an advanced level. With the development, comes the expectation. We now expect cameras to improve, phones to be faster, batteries to last long, and etc. Therefore, it is made easy for companies since they know exactly which direction they need to go and what specifically they need to work on. The flip side is that it is difficult for any one company to get ahead, since anyone with a relevant brand and enough cash (which is easy to get because the tech industry has the reputation of making banks quickly) can hire engineers and make incremental improvements to their existing products, just like other companies. Thus, in order to make money, you need to do something others cannot do. In order for that to happen, you need to be thinking things that others are not thinking. This is not only true in tech, but also true in life.
Some have indeed succeeded in the recent years and have become innovators of a niche. The best examples are Uber and Snapchat. Both companies tapped into a very specific need (respectively conveniently getting rides and the need to record and share one’s own life), and build businesses that complement the core. I believe that is the ultimate way to run a business: build a solid core and protect it with complementary parts.
It is an interesting time right now. There seems to be many ideas that have the potential to be the next revolution: self-driving cars, virtual reality, and electronic wearables. Self-driving vehicles and VR are barely developed and have only the rawest form of products to offer. The VR headset today to what we will see in 20 years may very well be like an IBM Simon to an iPhone 6. Wearables have not been successful. It turns out people aren’t too crazy about the idea of carrying more things on their body.
Hence the overall landscape is rather confusing. Consumers cannot provide guiding feedback because they do not know what to expect. Therefore, I would advise against investing in most tech companies in general. Many of these companies have short financial history and focus 100% of the money and energy on one type of product. If it does not turn out well, then it is really the end of the company. Two examples that come to mind are Fitbit and GoPro. Both make high quality products in their respective fields, but neither is happy with the recent sales. As a result, FIT and GPRO shares both plummeted heartbreakingly, wiping billions of dollars off shareholders’ hands.
On the other hand, Apple seems to be in every business and working on every one of those ideas. With its tremendous size, it does not have a choice. It was spending about 4.4 billion dollars on R&D in 2013, and 2 years later, the figure had doubled. The obvious down side is that it is making large expenses fighting wars that might not even have any winner. Going back to the lottery analogy, Apple is buying millions of shares of lottery. While it increases the chance of winning, it also may come with a large sacrifice. Furthermore, Apple is facing an increasing number of competitors that are becoming ever specialized in one niche. With a way too dispersed focus, Apple is forced to play catch-up ball. It is an option for now due to its enormous cash pile, but I do not see this strategy being anywhere near sustainable.
To summarize: I believe the technology industry is unhealthily speculative for the time being. Small companies from every corner are focusing on finding the next big thing, while big guys like Apple are forced to fight battles on multiple fronts. It is clear that most of these companies will fall short of the founders’ expectations, and just like a lottery, a few will come home with Forbes-list amount of wealth. Considering the fact that most of these public companies in question have short history of financial records, and the majority of players are privately financed, it is unwise for regular investors to invest in any companies that focus on a product that either has not been maturely developed, or worse, an idea that may or may not become “the next big thing”.