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The law of acceleration

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Summary

The speed of innovation is picking up and investors have to move increasingly quickly to grab the opportunities when they arrive

2 min read

Innovation is, and has always been, what drives the technology sector. But at the same time, technology has and continues to have an impact on innovation. 

Technology is now so firmly rooted in every aspect of our existence, and so central to the evolution of the global economy, that new opportunities are developing at a profound rate.

For example, the recent developments in information and communication technologies (ICTs), such as the arrival of high-speed affordable internet, the development of ‘big data’ and the rise of cloud computing have had two significant effects on today’s innovation landscape.

Firstly, they facilitate innovation by making it quicker and easier to exchange information, collaborate and spread innovative technologies, reduce production costs and increase productivity. Secondly, they extend the geographic reach of markets and provide opportunities to develop new products and services, new processes and new business models.
 

Change at the speed of thought

However, while innovation in the technology sector has traditionally manifested itself as ‘more for less’ – be it computing power, storage or bandwidth - this cycle is changing. Today, we are seeing profound reinventions of business models that are disrupting other industries through asset-light operations and disintermediation.

In addition, the pace of innovation is accelerating as the availability of cheap hardware and software, access to cloud computing and the rapid spread of ideas have started to punch holes in the barriers to innovation. This is a key enabler of the so-called digital transformation - the imperative of businesses to respond to the needs of a new generation.

The demands of customers, partners and suppliers, are all rising. There is now an expectation that transactions will be seamless, real-time, Facebook-like in experience and Amazon-like in reliability. In this new data-driven world, “software has evolved from being a method of modernisation to a source of differentiation” (William Blair, Appian Corporation Initiation).

What does this mean for investors?

a) Every company in every sector of the economy is now, somehow and in some way, a technology company

b) The pace of innovation is forever changed

“There is now an expectation that transactions will be seamless, real-time, Facebook-like in experience and Amazon-like in reliability.”

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Eight Disrupters

We see eight core disruptors that are creating opportunities for investors:

  1. Ecommerce and digital payments – the shift from offline to online continues unabated.
  2. Digital marketing and advertising – better targeting enabled by better data, driving better bang for the marketing buck.
  3. Cyber security – a wider potential attack surface due to the spread of mobile devices and cloud computing necessitates better security. The regulation of personal data – such as the recent introduction of the EU General Data Protection Regulation (GDPR) - should help drive demand.
  4. Cloud computing and artificial intelligence – about 20% of the computing workload has shifted to the cloud, suggesting sustainable growth ahead and allaying fears of storage constraints.
  5. Software as a service – worth $58bn last year, the rental delivery model for software – rather than one-time purchase - is expanding quickly, with expected growth of greater than 20% in the foreseeable future.
  6. Digital content and gaming – at over $100bn, this market is being driven by video game downloads, digital content and eSports. 
  7. Robotics and automation – sensors, reduction gears and data re-architecting the supply side.
  8. Rising semiconductor complexity – manufacturing complexity drives higher capital intensity and industry profits.

For specialists focused on researching the technology sector and sustainable business models, todays environment is providing a wealth of opportunities. But, as always, when innovation disrupts the status quo, being informed about the risks and being able to quickly assess unintended consequences as they emerge is essential.

We know from history that innovation in technology can generate significant societal change, such as shifts in employment patterns or the distribution of wealth, which is often difficult to predict in advance. While different sectors will be affected in very different ways there are some common factors that can emerge. One example is increased regulatory scrutiny: when a sector becomes too large or too profitable it tends to draw the attention of regulators. We’ve seen examples of this in the past with tobacco, oil and financial services.

As an investor, being alert and informed is essential. New technologies can destroy existing profit pools. When technology companies move into new markets, they often do so with a disruptive new business model that is different from those of the established players. Investors who don’t pay attention can find themselves heavily invested in obsolete business models.

Many non-tech companies are alive to this risk and have become aggressive acquirers of technology assets in the hope of defending themselves against disruption. But for technology incumbents who need to acquire new assets in order to replace lost revenue, this could make their strategy much more costly going forward.

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Key Takeaways

As new opportunities arise as a result of innovation, we believe that the investors who are quickest to adapt to the changing landscape will be successful. At Coutts we are constantly improving the way in which we invest our clients’ money in order to continue providing top tier performance.

Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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