Disruption and Nonsense

Transformation, or euphemistically, “disruption,” creates great opportunities to capture newly created wealth. But, as industries are transforming and strategic disruption is occurring, quite a lot of absurdity and certainly enough terror are associated with some of these extraordinary opportunities to require much greater analysis and understanding.

There are extraordinary risks associated with anything disruptive and transformational. The first disruptor isn’t always the one who creates the most value or is even a sustainable competitive entity.

Innovation is Not a Business

Innovation does not mean competitive sustainability. Digital platforms, ranging from the internet to digital assets and cryptocurrency are transforming industries globally. But, along with that comes a lot of hyperbole and typically that is followed by little substance.

Transformative technologies are often overhyped at the outset – the internet was overhyped initially with expectations of historical disruption and radical changes to all businesses within a short time. That overly optimistic hyperbole drove the dot.com bubble and crash. But, the internet is now pervasive globally and has enabled disruptive companies and extraordinary value creation.

Some of the most valuable companies today did not exist less than 30 years ago, and their value is built on a foundation of global high-speed data and those very initially overhyped internet-based connections.

Profound changes are impacting all industries ranging from healthcare to currency and the foundation of every economic transaction.

Life Sciences

CRISPR, gene editing, DNA sequencing, personalized medicine, mRNA, distributed medicine, and telemedicine, among others, are transforming life sciences. These disruptive forces are changing healthcare, will restructure competitive life-sciences businesses, and create invaluable products – whether it’s tackling a global pandemic in record time or developing personalized genome-based therapies to handle otherwise untreatable diseases

No doubt all this potential is overhyped, overvalued, and will ultimately create extraordinary investment opportunities.

Artificial Intelligence

Artificial intelligence, one of the current flavors of the month for hype, overpromising, and under-delivering, has great substance at its foundation. Of course, one cannot escape some of the hype that says artificial intelligence will turn digital structures into a thinking sentient being. That is not going to happen (it doesn’t seem obvious to many – but there is always an “off” switch), but AI and machine learning are becoming pervasive and irreplaceable tools to deliver transformative products and services.

While skepticism about AGI (“artificial general intelligence”) and its ability to replace humans at all levels of professional services and product development is appropriate – the software cannot reason, be creative, solve complex seemingly unrelated problems with thoroughness and clarity – is an especially useful tool to enable advancements not otherwise possible.

Artificial intelligence is predicted to be as pervasive as electricity. However, it is not a single unified thing like electricity (an electromagnetic wave) as it has been described, but it does enable unique and otherwise unattainable breakthroughs. Simple examples include predicting protein folding (an otherwise intractable complex problem), extremely accurate near-term weather predictions (saving many lives by more accurately identifying violent and destructive weather patterns), and more accurate medical diagnoses (“medical errors” can cause up to 1 million excess deaths in the United States alone). AI is an extraordinary tool enabling lifesaving and enhancing breakthroughs.

AI must be specialized, dynamic, and agnostic about what it learns. The system needs new inputs so we can learn better, and there is a natural bias because machine learning only learns from its data. While there is a lot of data, there is rarely enough good data. The systems naturally need to reinvent themselves and any static assessment will prove inadequate.

But that is no reason AI systems cannot be deployed, be given better access to data, develop more refined and focused algorithms, and create a better learning process (“a closed-loop”) that will enable the profound transformation of almost any industry.

Digital Assets

Digital assets are another overhyped, misunderstood, and mischaracterized opportunity. More than anything, it represents everything people don’t understand about currency combined with everything people don’t understand about computers – which includes a lot of people and even more misinformation.

Transacting digitally in verifiable and seamless processes is globally transformative. The most important and pervasive industry in the world – finance – is being fundamentally disrupted via the digitization of money, contracts, verification, and access. This enables finance and capital from any lender or investor to reach any business, person, entrepreneur, or entity anywhere in the world. This can ignite an unprecedented economic disruption that can be an engine for development, prosperity, and greater individual freedom.

Cryptocurrencies like Bitcoin have been lumped into this category, but it is a sideshow compared to the fundamental transformation happening within the finance industry via digital assets. Cryptocurrencies are not currencies because each is not a stable source of value, cannot be depended upon for global liquidity, ownership is too concentrated, and value swings too wildly. It’s a speculative asset owned by a few, and while that asset may be more pervasive, and have some level of sustainable value, it is not important.

What is important is that anything can be transacted with anyone anywhere with a digital record that is secure (for the most part – a problem to be solved later) and enables access to products, services, contracts, and technologies that are developed locally but now available globally – that is the big breakthrough and the transformative opportunity.

Predictability and Instability

A clear understanding of the long-term impact of the transformations and disruptions to certain industries, and then understanding which entities will emerge as the competitive leaders with a sustainable advantage, is the challenge. It is often clouded over by hype, superficiality, and a basic lack of understanding about what is really happening.

Stable predictability is anachronistic. Every company or industry is either going to be a disruptor or disrupted. For example, the leading growth companies of today need to be dynamic and evolve, otherwise, industry leaders today become memories quickly.

Apple and Amazon

Examples include two of the most valuable companies in the world right now: Apple and Amazon. Each evolved dynamically and needed dramatic transformations, or they may not have survived.

Apple is known for its innovative culture and its unique products, but it was also almost out of business in 1997. It was innovations such as the iPod and the iPhone – truly disruptive products creating new economic models that became pervasive globally – that enabled Apple to transform and create tremendous value via these disruptive technologies and products. Apple created a convergence of multiple technologies and thus innovative, new, and valuable products.

Amazon would not be a valuable company today if it kept its initial business model. While it was disruptive and has helped transform commerce into a distributed global network if Amazon remained a large e-commerce retailer delivering products to people at razor-thin margins, that business would not be sustainable.

Amazon had to improve and create business models, including Amazon Web Services – a very profitable business adding multiple dimensions to the core company and, most importantly, sustainable high-growth cash flows very dynamically. Amazon is a world leader because of its dynamic business model, constantly reinventing itself (and very famously “failing fast”) and, most importantly, knowing that, outside of only a few business decisions, most decisions are reversible. This enables positive dynamism, creativity, and the core of a sustainable business model.

But, Google and Microsoft, along with many others, have seen cloud services and other web-based businesses as profitable opportunities. While Amazon Web Services had a 4-to-5-year head start, a commanding position can no longer be statically defended. Web services are among the most dynamic business sectors, and a static competitive advantage is becoming increasingly irrelevant as a result. Stability does not last.

Competitive Moats are Meaningless

“Moat businesses” are anachronistic. This idea implies building defenses around a business model that needs to be static (if there’s a moat, you can’t go anywhere either). Competition is too dynamic, and every industry is positioned to change and morph into new forms of products and services delivering greater value to customers. Businesses building and delivering products are morphing into service providers delivering on-demand. Traditional barriers are inadequate and useless.

Static competitive advantages are also meaningless because completely different industries are evolving to serve your customers and responding to this disruption is impossible behind high walls.

Digital transformations spark disruption everywhere – from basic consumer products to healthcare to commerce to finance. There is no competitive moat that is sustainable without the need to tear down that barrier for any business to stay relevant.

Hyperbole or Value

Understanding true value is challenging because pervasive communication via social media, the internet, etc., creates a tsunami of hyperbole typically adding up to absurdity. Transformation is difficult, creative destruction means that, while value is being created, value is also being destroyed. Most people are on the wrong side of the “creative/destruction” curve. Transformative innovation creates value, but transformation means something is left behind to wither.

Overhyped and non-dynamic businesses end up in the same dustbin.

Digital assets are exemplary of hyperbole, transformation, and anachronism. All commerce can potentially be this intermediated and transacted digitally. But the foundation still must be a stable currency, and legal enforcement of contracts and business agreements. Just because things can be transacted or contracted digitally, doesn’t mean there’s any legal enforcement or property rights associated with this disintermediated process.

Enforcement, regulation, property rights, and the rule of law still govern everything – and that means suddenly government has a role.

We Need the Enemy

Hyperbolic crypto and other digital asset evangelists are saying now that government and other regulatory structures have been disintermediated. There is disintermediation happening, but the government needs to play a role to stabilize any currency, whether it is a digital currency or a more traditional dollar or euro. The government also needs to enforce legal contracts, whether they are in a digital format or not, and regulation is needed to allow for proper disclosure, verifiable business, and frictionless flow of global commerce.

Transformation is evolution. Disruption is a badly used term that does not accurately describe what’s taking place – creation is a process, and so is destruction. There is no “year 0” where everything suddenly changes.

Absurdity and, often terror, come from not thinking beneath superficial concepts. It takes infrastructure, cooperation, verifiable systems, property rights, legal enforcement, and other legacies to enable transformational value creation.

Destruction Along with Creation

Creative/destruction means that something is destroyed when something is created. It also means that no transformation is “all good.” Everything comes with a cost, and it is this cost/benefit analysis that is sometimes ignored.

The transformation may have real benefits but there is always a cost. Digital assets require massive computing power and energy usage – is this worth it? Amazon and other e-commerce providers are clogging roads and infrastructure to deliver products to individual residences and businesses – do we need that much convenience? There is a significant price to bricks and mortar businesses as well as general community functioning.

Transformation is a net benefit – but there is always a cost – so as the positives and negatives are tallied, getting both disruption, destruction, transformation, and value creation right is trickier than most believe. Great wealth can be captured If you get it right, but most will not get it right.

It is easier to lose because there is significant risk and volatility to every specific situation and each situation changes dynamically. There is no simple formula or broad sweeping conclusion that gets this right. Those general statements are typically a waste of time. Dynamic and global transformation quickly escapes any simple formula or generalization. However, these generalizations get way too much attention and guide people irresponsibly.

Meme Stocks and Nonsense

Social media plays an acerbic and often destructive role because it reinforces these general meaningless statements. The playground of the superficial and the stupid leads the masses to irresponsible decisions and economic disaster.

Social media has created the meme stock, a euphemism that is more accurately described as a waste of time and most likely a ticking time bomb for any investor. While it can create demand – and price is simply supply and demand – social media-driven demand is not sustainable. A spark of demand delivers a price spike, but as that price gets more attention and its irrational level and superficial beliefs that sustain that demand evaporates, the price craters. We know what happens to the price of anything when everyone wants to sell and there are no buyers. That is the fate for most, if not just about every, meme stock.

Winners are Rare

While every industry is being disrupted by a combination of scientific breakthroughs, digitization of all assets, and communication, there is a notable risk of not being appreciated by most investors. Disruptive risk creates tremendous value, but disruption is dynamic and, as we’ve established, transformation is challenging and rare. The winners capture value, but most participants are losers.

There is no simple formula for determining where value is being created. Certainly, volatility will be more intense and more frequent, and great opportunities to capture value will be created, but also with that creation comes additional risks and dynamism.

What is valuable today may not be valuable in the future. We have learned this lesson over and over again, and we will continue to learn it.

Great companies use technological disruption, innovation, and transformation to establish themselves and thrive. But they rarely last. Every company, even the most valuable companies such as Apple, Apple, Amazon, Facebook, Netflix, etc. must dynamically transform to stay competitive and valuable.

Transformations are certain. New entities become unbelievably valuable (often literally), legacy companies diminish (often), and a handful transform and thrive.

Transformation and sustainability create and capture great wealth, but are far more challenging to identify, and even more challenging to sustain.