These Are The World’s Biggest Disruptors (And How The Disrupteds Are Fighting Back)

Ask any “brick and mortar” retailer in the past decade what new development has had the greatest (and most adverse) impact on their business, and 11 out of 10 times the answer will be “Amazon” and eCommerce in general. Or ask legacy enterprise solutions companies, which used to rake in tens of billions of dollars every year with customer, client-facing IT and tech solutions, why their stock price has been tumbling in recent years (coughibmcough), and you will hear one word: the “cloud.”

Indeed, we live in a time of tremendous overhaul in legacy business relationships, and while much of this has been driven by the low cost of capital made possible by ten years of ultra low interest rates, much if not all of this deflationary technological innovation is here to stay, with a few (FAANG) winners and many losers, those unable to adapt fast enough to the changing times.

While investors in US equities have had to contend with several major cross-currents over the past year, including the gradual phase out of central bank intervention in capital markets i.e., “Quantitative Tightening”, the favorable impact of the “three arrows of Trumponomics” such as tax cuts, fiscal expansion and deregulation offset by growing fears about protectionism and GDP and EPS-crushing trade wars,  even as bank deregulation provides solace to bank investors, a key focus for investors, policy makers and businesses themselves across the globe has been the growing dominance of Internet-based companies as a result of a series of disruptive innovations sweeping across the U.S. economy, presenting investors with another major source of confusion: how to value, and trade, legacy businesses when confronted with disruptors. Alternatively, what is the upside for the disruptors.

As Barclays writes in a recent report, the disruptors (Internet and cloud-based companies, mainly the FAANGs: Facebook, Apple, Amazon, Netflix, And Google) are breaking down moats of the disrupted (legacy consumer businesses and IT hardware & software companies), by dominating the user experience and creating strong moats for themselves in the process. This, according to Barclays, is “leading to a shift in value from consumer discretionary and consumer staples to info tech.”

The various trends and conflicts between legacy industries and new businesses are broken down by Barclays into the following three key types of disruptions:

  • Internet is disrupting consumer focused businesses (retailers, cable TV⁄media, consumer staples, consumer PC industry): FAANG stocks are disrupting legacy consumer industries by either modularizing supply or distribution moats of the incumbents and creating strong moats for themselves by owning the user experience.
  • Cloud computing disrupting IT hardware and software companies: Amazon⁄Microsoft are the disruptors due to the flexibility and low cost of cloud’s pay-for-use model
  • Shale⁄fracking disrupting oil & gas industry and power companies: shale oil & gas revolution and well productivity disrupting oil & gas supply-demand balance

And while Barclays provides a detailed analysis of all three “disruption” modalities, we will focus on the first two – the role of the internet and “the cloud” in disrupting consumer-facing businesses and IT Hardware/Software– as that is the one transition that is of greatest impact to most US consumers.

The Internet as a Disruptor

According to Barclays, historically the competitive advantage of legacy consumer focused businesses depended on either: 1) creating a monopoly⁄oligopoly in supply (creating a “scarce resource” in the process), or 2) controlling distribution by integrating with suppliers. Here, the fundamental disruption of the internet has been to turn this dynamic on its head by dominating the user experience. Barclays explains further:

First, while the mega-tech internet companies have high upfront capital costs, their user base is so large that the capital costs per user are insignificant, specially relative to revenue generated per user. This means that the marginal costs of serving another customer is effectively zero, thus neutralizing the advantage of exclusive supplier relationships that were leveraged by legacy distributors. Secondly, the internet has led to the creation of infinitely scalable networks that commoditize⁄modularize supply of “scarce resources” (thus disrupting the legacy suppliers of those resources), making it viable for the disrupting internet company to position itself as the key beneficiary of the industry‘s disruption by integrating forward with end users⁄consumers at scale.

As a result of the disruption, the user experience has become the most important factor determining success in the current environment: the disruptors win by providing the best experience, which earns them the most consumers⁄users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. This is also why so many legacy businesses find themselves unable to compete with runaway disruptors, whose modest advantage quickly becomes an insurmountable lead due to the economics of scale made possible by the internet.

This has resulted in a shift of value from the disrupted to the disruptors who modularize⁄commoditize suppliers, integrate the modularized suppliers on their platform, and distribute to consumers⁄users with which they have an exclusive relationship at scale.

This further means that the internet enforces strong winner-take-all effects: since the value of a disruptor to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones. This, according to Barclays, makes it difficult to make antitrust arguments based on consumer welfare (the standard for U.S. jurisprudence), but ripe for EU antitrust regulation (which considers monopolistic behavior illegal if it restricts competition).

The Cloud as a Disruptor

Back in the “old days”, on-premise IT Hardware and Software companies built high barriers to entry by creating integrated suites of hardware⁄middleware and application software involving multi-year relationships with enterprises, complete with licensing & support contracts and cash-rich streams of maintenance and service costs. High switching costs and entrenchment through customization of on-premise hardware and software based on enterprise-specific needs resulted in outsized profits for the incumbents. Fast forward to today, when Amazon⁄Microsoft commoditized data center infrastructure, effectively transforming computing resources into storage, computing, database, and application software components running on centralized servers which could be used on an ad-hoc basis not only by their internal teams but also enterprise customers. Here’s Barclays:

The cloud is becoming a disruptive force for IT hardware, software, and the services industry as the cloud’s greater efficiency, flexibility, and lower cost is reshaping IT spending patterns and vendor incumbency. Cloud displacement risk is high for companies participating in storage and servers, followed by managed services and application⁄middleware software as competitive pressures mount from elongating replacement cycle and greater price discounting.

Even for large enterprises and governments, where decades of IT infrastructure and applications make the move from on-premise to the cloud difficult, the cloud’s pay-for-use model is changing how these enterprises evaluate and deploy on-premise IT workloads, and increasing the use of modular and customized IT solutions, which stands to hurt the cash-rich services and software maintenance streams of the disrupted legacy IT hardware and software businesses.

Summarizing these various trends while also highlighting how the “disrupteds” are fighting back, Barclays lays out the following chart below which illustrates:

  1. The key disrupted industries that have been disrupted by the internet-based companies,
  2. What were the moats of these legacy businesses,
  3. How the disruptors commoditized those moats,
  4. How the disrupted legacy businesses are adapting, and
  5. Whether the value will continue to shift from the disrupted to the disruptors.

 

To be sure, assessing the net impact of these innovations on each sector is difficult as in some cases the disruptors and the disrupted belong to the same sector - for example, Amazon and retailers are both in consumer discretionary while Microsoft and IT hardware and software companies are both in info tech. With that caveat in mind, the Barclays summary of the net impact of the affected disrupted sectors is laid out below.

Comments

Utopia Planitia monk27 Sun, 06/17/2018 - 23:52 Permalink

You're not even in the nearest universe.  Many (not all) produced fields are amenable to fracking.  Ever heard of Saudi Arabia? Their old (produced) fields are largely amenable to fracking.  They are not doing that today because of production costs.  Why spend $50/bbl when you can just pump lots for $5/bbl?  Once the day arrives where it is practical for them to frack do you think they won't start doing it?  And there are lots of other large players who can do the same.  Fracking is just getting started, it is not "over".

In reply to by monk27

VK Utopia Planitia Mon, 06/18/2018 - 00:14 Permalink

Your name says it all - utopia. Infinite growth on a finite planet is impossible. Fracking is scraping the bottom of the barrel, poor quality oil (it sells at a discount to WTI), that's derived by blowing up rocks to release the liquids. Only tar sands are lower. US oil imports are rising, upto 7 Mn bpd now. Boomers used up all the good stuff, children and grandchildren to be screwed royally. 

In reply to by Utopia Planitia

ShadowHedge monk27 Mon, 06/18/2018 - 02:59 Permalink

I bet 10 years ago, you said that in 5-7 years, we would run out of cheap oil

 

I bet 5 years ago, you said that in 5-7 years, we would run out of cheap oil.

 

I bet in 5 years you will still keep on peddling the whole "we're exhausting our resources" line.

 

I wonder how all of you "we're living on a finite planet with finite resources" people deal with being disappointed year after year, decade after decade?

In reply to by monk27

Memedada ShadowHedge Mon, 06/18/2018 - 06:39 Permalink

The price of oil is – like everything else in todays’ ”economy” – fictitious. Oil as a source of energy is extremely expensive if you count the devastation it causes into its price (the so-called externalities – like destroying the eco-system and the wars fought to maintain and gain control over it/the countries and people destroyed because of it).

Oil is – again, like everything else in todays’ “economy” – only benefitting the ownership class.

In reply to by ShadowHedge

pigpen Seasmoke Sun, 06/17/2018 - 23:09 Permalink

If it is digtal advertising funded, I'm amazed why every person in planet isn't using mobile adblocker.

I use brave as brave blocks advertising malware and tracking by DEFAULT on any device and operating system rendering digital advertising model useless

Download brave or another equivalent mobile adblocker today.

Amazing the most valuable companies in world are digital surveillance companies. Good luck tracking me using brave and trying to send me an ad.

Cheers,

Pigpen

In reply to by Seasmoke

DipshitMiddleC… Sun, 06/17/2018 - 22:51 Permalink

translation: ZOG wants to solidify their control over everyone by making one mega corporation that does everything 

 

amazon and google are pretty much the same shit 

 

 

tunetopper Sun, 06/17/2018 - 23:15 Permalink

Forced Ubiquity- definition: patent farms and mega tech firms like IBM, Oracle, Qualcomm, Google, Apple, Facebook use the farce known as the "sharing economy" to make our lives totally dependent on the Spy Network... And we paid for it. This was all done with our Congress' consent.
If you want to know how a guy like Trump can get elected- it's because Steve Bannon figured out how to bring a single voice to this issue.

tunetopper Sun, 06/17/2018 - 23:15 Permalink

Forced Ubiquity- definition: patent farms and mega tech firms like IBM, Oracle, Qualcomm, Google, Apple, Facebook use the farce known as the "sharing economy" to make our lives totally dependent on the Spy Network... And we paid for it. This was all done with our Congress' consent.
If you want to know how a guy like Trump can get elected- it's because Steve Bannon figured out how to bring a single voice to this issue.

tunetopper Sun, 06/17/2018 - 23:17 Permalink

Forced Ubiquity- definition: patent farms and mega tech firms like IBM, Oracle, Qualcomm, Google, Apple, Facebook use the farce known as the "sharing economy" to make our lives totally dependent on the Spy Network... And we paid for it. This was all done with our Congress' consent.
If you want to know how a guy like Trump can get elected- it's because Steve Bannon figured out how to bring a single voice to this issue.

GeoffreyT Sun, 06/17/2018 - 23:51 Permalink

Apple does not belong in any list of disruptors - it sells overpriced mid-spec monotasking consumer hardware, with a deliberately-insecure, non-configurable *nix kernel installed... in other words, it's currently a beneficiary of low interest rates and easy access to consumer credit.

 

Change FAANG to include someone who makes server hardware or internet infrastructure, and maybe I'm on board.

 

Apple's just a firm that managed to get fake geeks to queue for overpriced shit. It gets to overprice its shitware because it is a beneficiary of patent and IP law - so it's a GSE  - aka a welfare recipient. (It's also a patent troll, but patent actions cost more money than they make).

 

And why do "bricks and mortar" firms deserve our tears? They can't compete, so fuck 'em - I would like to lick the tears from the cheeks of their shareholders as they go out of business. Margin destruction is a good thing - always and everywhere.

 

Plus, it frees up land previously used for sprawling malls.

GooseShtepping Moron Mon, 06/18/2018 - 03:27 Permalink

This article is a total fucking joke. Nothing but a reheated, 20-year old sales pitch for how the internet is going to totally transform our lives. Well, here's a wild tip for whoever wrote this: It isn't 1998 anymore, and these pitches fall rather flat in the light of subsequent experience.

All of these "disruptors" are simply catabolic companies that exist by strip-mining the capital base of a matured economy. Without the massive experiment in financialization over the last 15 years, most of the internet would not exist today, Amazon and Facebook certainly would not exist, and the tech industry would be about 10% of its present size.

This is where it should be, and this is where it's heading. The internet is on its way out, not on its way up. If you want to see a textbook example of capital misallocation, just look at the piles and piles of tech junk in everyone's possession. Look at boondoggles like Tesla, Theranos, and the multitude of green energy scams. Look at make-nothing companies like Facebook and Twitter valued at hundreds of billions of dollars. Look at Silicon Valley and its cavalcade of unicorn startups. Look at the enormous number of politically correct, make-work jobs distributed throughout the huge tech companies, which exist solely to spread the largess of financializtion to one's cronies. Look at the colossal waste in the educational system, the healthcare system, and the entire FIRE sector, much of it justified and enabled by tech. Look at the profitless beast known as Amazon and the untold billions of investment capital that have been poured down this rat-hole, never to be seen again. Look at that depreciation engine called Uber and its stellar business model that nets out to less than minimum wage for its witless drivers. Look at the shale industry that loses $280 billion and is hailed as a transformational new technology. Look at the misery and desperation bred by the gig economy, the collapse of living standards, the appalling fertility decline, the social rot, and the lost generation of lame-brained millennials who will never exceed the net worth of their parents. Look at all of this and ask yourself, is this really worth it?

Absolutely none of this crap is sustainable. This will all come to its inevitable and natural end. It will all be liquidated in time, it's only a question of when. It should be obvious by now that the bill of goods sold to us by the deeply intertwined complex of globalization, financialization, and techno-utopianism has amounted to nothing but a heap of empty promises leaving only poverty and destruction in their wake.

Nowadays, in order merely to prop up the charade a little longer, the mavens of illusion have been scraping the bottom of the barrel with two of the most ridiculous tropes imaginable, crypto-currencies and automation, the one a gigantic fraud that burns through a small nation's worth of scarce energy reserves in order to produce nothing but a string of encrypted digits, and the other a Rube Goldberg scheme that "improves" efficiency by replacing a $9.00/hr burger flipper with a machine that costs four times his annual salary. This is truly the end of the technological "moment" we've been experiencing since Al Gore invented the internet in 1993 or thereabouts.

As with so many things that are true of this time, the passing of the Baby Boomers will definitively put the kabosh to the whole wretched experiment. The unpayable debt left by that generation means that after them, there simply will not be enough money, enough energy, enough time, enough resources, or enough people to carry on in this vein any longer. And that's not even including the possibility of another major war, which will only accelerate the process.

roddy6667 Mon, 06/18/2018 - 04:02 Permalink

I remember way back, maybe 5 years ago, when WalMart was the unstoppable juggernaut. It was like Mike Tyson on his way up. "Things will never be the same!"

Now it's Amazon. In 5 years it will be something else.

Fear Porn is boring. 

arrowrod Mon, 06/18/2018 - 07:50 Permalink

If Amazon was so amazing, there would be copies*.  By the way, every product on Amazon can be purchased for less, if you look.

 

*Ignore AliExpress, it takes two weeks to get your stuff.