The myth of disruption

Disruptors aren’t visionaries, just people that give the customers what they want. Capitalism has been doing it for centuries. 

If there was a gong for buzzword of the year, then this year my bet would be on ‘disruption’.

There’s nothing new about disruption. History is full of examples of businesses superceeded by better ways of doing things. The car replaced the horse, putting an entire trade out of work – blacksmiths - but creating panel beaters, mechanics and the rest.

Scribes who once did a roaring trade producing books for the wealthy but were eventually replaced after Gutenberg hit the market with his printing press. In 1991, Kodak (NYSE:KODK), considered one of the world’s most innovative companies, had revenues of over $15 billion. Digital cameras and smart phones have reduced that sum to $1.8 billion, and only then after a brief fling with bankruptcy.

Disruption is a fact of life, a central plank of capitalism and technological development. All those hipster start-ups thinking they’re changing the world are having themselves on. Uber is disrupting taxis in the same way that taxis disrupted the hansom cab. Everyone is walking in other people’s shoes. Their eyes should look a little lower than the navel.

And yet there is something different about the modern use of the term. Cabcharge (ASX:CAB) is a good example of what it is like to be on the other end of business model that has been disrupted. The days of it earning profit margins of around 30% are over. Revenue has been declining and in the last six months Cabcharge share price has fallen around 40%.

Uber hasn’t just chipped away at this business, it has destroyed the barriers that once kept customers beholden to a desperately poor service. The Internet offers a potential way to challenge the power of monopolists and rent seekers – and Cabcharge was up there with the best of them – like no other. Think AirBnB and hotels, Amazon and book retailers, Seek and newspaper empires.

The sheer pace and size of this change can lead investors to think that every business will be disrupted in some way or other. This isn’t necessarily the case.

Consider the Australian banking industry, another rent-seeking business based on technology. Surely this industry is ripe for disruption?

There are many innovative financial services or ‘fintech’ solutions that could disrupt particular niches of the banking system. The banks, though, are using their monopoly profits to outsource their research and development to fintech start ups. Once a successful new technology emerges, if one of the big four isn’t already a shareholder a fat cheque will be waved in front of the founders and it will be theirs.

Disruption didn’t begin with the invention of the internet and Silicon Valley. Technology may increase the chances of a new solution successfully challenging incumbents but it doesn’t guarantee it. In fact, in many industries it’s likely to lower the costs base of the established players and offer opportunities for them to increase their margins. The banking sector – which has already played this hand replacing expensive tellers with cheap machines and then charging us more for the privilege of using them – is but one example. Supermarkets are another.

Disruption isn’t anything other than competition with a more marketable name. The clever incumbents – and the banks are in that category – are already taking out their insurance policies, investing in those companies that may one day threaten their profitability, and using technology to improve their services.

It’s the lazy, self-entitled monopolists like Cabcharge, a company truly wedded to mediocrity, that are threatened. But to assume that every established industry is under threat is a mistake. Some will do well from disruption because they see it for what it can be – a cheap way of outsourcing R&D. The banks are among them. 

To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles