Sunday, February 5, 2012

Technology Tremors

By Ned Barnett, APR
PR/Marketing Fellow, American Hospital Association
Adjunct Professor, MTSU & UNLV
Author, Finances for Non-Financial Marketers

There was a time when the horse-drawn carriage was the ultimate form of in-city and cross-country personal travel technology. That time, dating back to the invention of the chariot in roughly 3,000 BC, lasted for almost exactly 5,000 years, and during those five millennia, the “buggy whip” was as essential as axle grease to the proper function of carriages, chariots and horse-drawn conveyances of all kinds. Which meant that the buggy whip industry was steeped in a heritage – reflecting in market security – that was apparently as “eternal” as the wheel itself. However, in a period of little more than 20 years, the buggy whip went from being essential to being an anachronism, a reminder of bygone days.

Whenever technology changes, businesses built around “traditional” technology changes disappear, sometimes overnight. With the ever-increasing pace of technology change, products or companies are disappearing or transforming at a staggering rate. This has profound implications for investors, when once-powerful blue-chip stocks seem to hit the skids with little or no warning. The key word there is “seem” – those businesses all had ample warning, and some of the most traditional companies have been able to make dynamic transitions, while other once-flexible powerhouses collapse in Chapter 11, some never to rise again.

One of the first big victims of the transformation of technology – after the buggy whip, of course – was the railroad industry. For nearly 100 years, railroads dominated not only cross-country transportation but the stock market as well. Railroad corporations were seen as safe and unchangeable as public utilities, and though the industry was widely regulated, railroads still had profit potential which exceeded those utilities.

The peak of railroads’ industrial and economic power was also the watershed for its sudden collapse. In World War II, America went to war on rails, steel highways that connected the ports of the East and West Coasts, moving millions of soldiers and hundreds of millions of tons of the output of the Arsenal of Democracy. Yet the seeds of change in the transportation industry were found in World War II, and railroads were not ready to change.

Beginning in the mid-1930s, with the advent of the venerable DC-3 – the first commercial airliner capable of making a profit based on carrying passengers (prior to the DC-3, airlines survived financially by carrying subsidized airmail) began the transformation of passenger travel. An express passenger train that could average 50 mph cross-country would take 60 hours to cross America, while a DC-3, averaging three times that speed, could carry 20 passengers in reasonable comfort across the country in less than a day, coast-to-coast.

During World War II, planes were built that vastly exceeded the DC-3 in terms of both speed and carrying capacity, and during that same war, airfields were built in every city worth the name which could handle those new airliners. Within a decade after the war, passenger trains transformed from the primary means of travel to a footnote.

At the same time, as America conquered Nazi Germany, we discovered an innovation – the autobahn (the first super-highways) that allowed passenger cars, buses and semi-trailer trucks to travel between cities as fast as express trains, but with far more flexibility than was allowed by rail travel. Shortly after the war, General Eisenhower became President Eisenhower, and in the name of national security, he began the construction of the Interstate Highway system, intended to replace railroad travel in moving troops, tanks and military supplies swiftly and safely in time of war.

Had railroads seen themselves in the “transportation” business instead of the “railroad” business, they would have invested their impressive profits in airlines, trucking lines and inter-city bus lines. If they’d done so, they would have remained viable, profitable businesses, with their investors enjoying the benefits of a continuing stable industry. But they were so used to being “railroads” instead of “transportation companies” that by the time they collectively realized that they were being replaced by airlines and trucking companies, it was too late to change.

The technology tremor that changed the railroad industry forever took a quarter century, start-to-finish. However, more recently, dramatic industry changes spurred by technology tremors – changes that involved the eclipse of “traditional” manufacturing companies wedded to “traditional” technology by technological upstarts – have come about much more quickly. Here are a few examples:

· Radio (replaced by TV). The technological tremor that changed radio forever took place at the same time as the railroad industry change. National radio networks had, for more than a quarter-century, connected America as a nation, providing the kinds of communal experiences – think of Orson Welles’ broadcast of War of the Worlds, or the news coverage of the Hindenburg crash – that held us together.

However, in the immediate post-war world, TV was a bold new experiment, but all the experts expected that it would take fifteen years or more to even begin to impact radio. Instead, it took less than five years. Along with radio, TV all but killed the regular attendance at movie theaters (and especially movie newsreels), and had a major impact on big weekly national magazines such as Life, Look and Colliers.

Prior to the advent of commercial TV networks, the three common shared experiences that linked Americans from Portland, Maine to Portland, Oregon were network radio, theatrical movies and weekly general interest magazines. Within the single decade of the 50s, TV all but replaced all of these cultural mainstays, and with that replacement, TV changed the radio industry, Hollywood and the entire periodical magazine field. Millions of investors who’d bet on those staples found out that they’d bet wrong. Broadcast television was here to stay (although that three-network industry was changed as dramatically by the relatively abrupt appearance of cable as TV itself changed radio, print and Hollywood).

Investors who saw this change coming – and they were relatively few, for this change was both dramatic and historically unprecedented – won, big-time. However, millions of investors lost billions of dollars by holding onto radio, publishing and film-production stocks beyond their prime.

· Fax machines. Though initially developed in Japan in the 1920s, this “cutting-edge technology” first began to emerge as a useful and widespread business technology in the mid-80s, and peaked in the mid-90s, when affordable fax machines could be found even in small and home-based businesses; but, within another decade, they had almost completely been replaced by scanners and email. There were a handful of market-dominant fax machine manufacturers which burst upon the scene, soared for a decade, then either evolved or died. Investors who weren’t ready to jump onboard – and jump off before the crash – missed an opportunity or were crushed by the change.

· VHS recorders and players. Once VHS commercially won its technology war with Betamax format in the mid-80s, it had a decade-long run as the dominant home playback video technology, but that was quickly replaced with DVD technology. DVD is being challenged by Blu-Ray, but because of the consistent price difference, standard DVD has held on as a viable format. Some of the manufacturers of VHS made an agile shift to DVD, but a whole range of new manufacturers arose to replace VHS producers (both of the hardware and the “software”), making slow-moving investors wondering what hit them.

· Typewriters. You remember those devices, don’t you? For more than 125 years they were the one essential office machine – they used to be found at every secretary’s desk in businesses large and small across America. The ultimate version of the typewriter was the IBM Selectric II, which remained a strong seller into the early 80s – yet by the mid-80s, because of a profound technology tremor, they were being replaced by IBM PC “word processors,” and within a half-decade they had begun to disappear entirely.

Related to the disappearance of the typewriter was the “need” for a computer on every executive’s desk and the replacement of the business letter with the email, and with that, the disappearance of the Secretary as a viable career path. While a relatively few executives still require “executive assistants” to handle things other than typing letters and reports, the “every executive must have a secretary” idea began to quietly disappear sometime in the late 90s.

While IBM made a seemingly easy transition, other major typewriter makers – Royal and Smith-Corona come to mind – didn’t make the transition to word-processing computers and either found new markets or went the way of buggy whips, and their investors either made the transition or suffered the consequences.

· Vinyl records. The standard audio playback technology for more than a half-century began to be replaced in the late ‘60s by 8-track tape players (reel-to-reel may have begun the replacement, but it never caught on as a format for the commercial sale of recordings), which were soon replaced by cassette tapes (remember the Sony Walkman?), but those were also fairly quickly replaced by CD digital recordings.

As a technological platform, CDs have lasted far longer than many expected, but as a commercial means of delivering music and other recordings, they were replaced by iPods and digital downloads. Few turntable manufacturers made the transition, and each time the music technology changed, there were new investor winners and losers.

· Movie film. The 35mm celluloid film that has been the staple of projected films in movie theaters for more than a century has suddenly all but disappeared. Chicago Sun-Times film critic Roger Ebert recently (Nov. 2, 2011) wrote about the sudden death of 35 mm film in Cineplexes, replaced in commercial movie theaters by digital projectors:

I didn't see the death of film coming so quickly or so sweepingly, and I imagine the manufacturers of film stock didn't either … Who would have dreamed film would die so quickly? The victory of video was quick and merciless … New 35mm movie projectors are no longer manufactured, for the simple reason that used projectors, some not very old, are flooding the market …A great many multiplexes are no longer capable of projecting the 35mm format that has served faithfully since about 1895.

As Ebert noted, makers of film stock, along with the makers of film projectors didn’t anticipate this change. They have been replaced by digital projector manufacturers, especially those who produce 3D projectors. On the stock market, a change of this nature has its winners, and its losers.

Some technology tremors occur with dramatic upgrades in the same technology, making the older version obsolete. While a ’57 Chevy or a ’65 Mustang is still technologically viable, operating systems such as Windows 95 (or Win 98, or Vista or …) have become obsolete, not because they no longer worked but because you can’t get tech support for what would otherwise remain viable. And of course, Windows in all of its many formats replaced DOS, which beat out CP/M (which many, including me, felt was a superior OS), just as the various MAC versions superseded what were otherwise still-workable Apple operating systems.

Another current example of this trend toward unsupported obsolescence is taking place right now in the USB market. As Scott A. May reported in an article last summer in the Columbia Tribune:

A good example of leapfrog technology is USB, today’s industry standard for connecting myriad devices to computers, stereos and TV. Early adopters, in the late 1990s, paid a premium price for connection speeds that topped out at 1.5 megabytes per second. Within a few years, USB 2.0 was out, increasing the speed to 60 megabytes per second. That angered a lot of people who jumped too soon on the older, slower technology. USB 2.0 ruled the roost for almost a decade, currently replaced by USB 3.0, with speeds of 640 megabytes per second.

“There still are plenty of new computers and peripherals being sold that utilize USB 2.0.” May continued. “They function just fine but are technically obsolete and therefore not a wise investment. On the other hand, just because USB 3.0 is 10 times faster than USB 2.0, that doesn’t mean you must upgrade all your equipment, unless you have the need or desire to always ride the cutting edge.”

However, while the older USB is “obsolete,” the manufacturers of this technology just upgraded what they were building. It is the end-user who may feel left behind,

Of course, not all sudden industrial obsolescence is a matter of new technology. Some of it involves market-shaking price changes, rather than innovations in replacement technology. For instance, in the middle of the last decade – in the 2007, The History Channel informed its cadre of independent program producers (who, in turn, generally used independent camera crews, who provided their own equipment), that in the future, all production video would have to be shot and produced in Hi-Def.

At that time, a simple Hi-Def sound-on-video camera cost in the range of $50,000. Today, seven years later, better equipment can be had, new, for about $1,600. Manufacturers of conventional sound-on-video cameras who didn’t transition to Hi-Def were put out of business, and those which tooled up to produce $50,000-plus cameras quickly found that their market had disappeared; they either adapted to profitably producing equipment for professionals at a cost home hobby cameramen could afford (though they were using their phones and iPads, the amateur flip video cameras having died off as well), or went out of business.

All of this brings us to our most recent technology tremor, one that has shaken a blue chip to its very core.

Eastman Kodak is 131 years old, and in late January it filed for Chapter 11 after an amazing run as one of the most powerful technology-based companies in the market. Although they could have (read “should have”) seen the coming demise of film-based photography as long ago as 1980, they nonetheless seem to be caught off guard. To many, this seems incredible, especially for a company built around technology and technological innovation. For instance, in the ongoing bankruptcy, Kodak – which received $3 billion in licensing revenue from 2003 to 2010 (but only $98 million last year) is trying to sell off 1,100 digital patents in order to generate enough money to stay afloat.

Some would contend that they even saw the change from film to digital photography coming – they had become a powerhouse in the manufacture of digital cameras, including digital versions of traditional SLR (single-lens-reflex) cameras, the ones with interchangeable wide angle and telephoto lenses. What they did not anticipate was the replacement of those finely-engineered devices by the high-resolution still and video cameras built into smart phones and iPads. Kodak wasn’t alone in this – Cisco recently shut down the manufacture of the (until very recently) popular flip portable video cameras.

Clearly, when betting on technology, it’s becoming more of a short-term bet than ever before. Almost by definition, technology tremors cannot easily be predicted in advance. Not all “sure thing” technologies actually work out in the marketplace. Consider Betamax, arguably a superior technology to VHS. Backed by market powerhouse Sony, many thousands of users and investors bet on Betamax, but the public embraced VHS and made Betamax a footnote.

When it comes to betting on either an established technology or a new technology tremor-driven start-up innovator, the rules that apply in Las Vegas casinos apply in Wall Street, too. The dice have no memory, and the house always wins.

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