It seems the time a tech giant dominates the landscape just gets shorter and shorter. Sorry, another post that has Google (GOOG) in it. I Promise it will be the last for a while, barring anything dramatic.
IBM (IBM) was the dominant tech company for over two decades before Microsoft’s (MSFT) Windows relegated them to the also ran status in the early 90’s. Microsoft took the mantel and dominated the landscape for about 14 years, give or take.
Enter Google. After its IPO in mid 2004, it became the wonder-child of Wall St. as its share price zoomed from the $85 a share it went public at to a high of $711 in November of 2007 (shares now sit nearly 40% below that at $440).
It’s brand has become a verb. Even my four year olds’ now know to ask when I do have the answer to a question, “daddy, why don’t you just Google it”. This is powerful and yet it would seem the staggering growth Google enjoyed in its ascent is now a thing of the past and investors are stuck wondering why margins are shrinking and with it, the stock price.
There are a few reasons:
1- No barrier to entry: Berkshire’s (BRK.A) Warren Buffett, when asked about tech investing once said “I cannot invest in something that two teenagers writing code in their parents garage can destroy”. The statement does have merit as Micheal Dell started Dell (DELL) from a Texas dorm room, Google itself was a Stanford University project by its founders and Microsoft was started by college dropout Bill Gates. That being said, tech has moved into ideas, not things. Whomever has the best idea will win and there is no cost involved with that.
2- Opportunities: Those good ideas today have little trouble finding the funding they do need to grow and expand on them. We are not talking about a new way to produce steel that would cost US Steel (X) hundreds million plus to implement, not to mention the prohibitive R&D cost. We are talking PC’s and ideas…cheap..
3- Desertions: This is the single largest reason and the genesis of the post. Look at what has happened to a slew of key people at Google.
When IBM reigned, people began there, worked there, and retired there. Today employment at a tech company is a way station for the next opportunity. The cost and effort required to repair the damage due to the constant churn of key people is staggering. It both interrupts the flow of current work and may derail future projects as the new folks may not share the vision of the old. The disruption to the “finely tuned engine” cannot be quantified. No matter what the business, replacing people is laborious and disruptive. As you move up the skill set level, that effect is amplified.
Now, this is not to say that Google by any means is in trouble. It also does not mean current shareholders cannot still make money in the stock (those of you who bought at the end of 2007, well, it will be a while). It does mean that the company is facing challenges to its dominance on every front. Challenges that up until the past year, it had not.
The most severe of those challenges comes from those who know it the best and can emulate its best practices into their ideas. Most will not succeed in taking the mantel, but, history does show us that the time at the top for tech is growing far shorter.
It is growing shorter not due to competition from other companies, but, competition from within its own ranks..
One can only guess that before my boys hit the 5th grade, the answers they may be looking for may come from another verb……
Disclosure (“none” means no position):None
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