Rapid and highly disruptive digital innovation is reshaping many industries as diverse as agriculture, entertainment and financial services. At Fidelity, we aim to identify both the digital disruptors and the secondorder companies that benefit from these innovations through unstinting bottom-up research. Our research focuses on evolving technological themes like the ‘Internet of Things’, big data and computing.
In the last 20 years we’ve seen huge digital disruption in various industries – this has helped to create some of today’s leading corporate giants such as Alibaba, Amazon and Google. As digitisation spreads and low start-up costs enable more entrants, we can expect to see accelerated disruption in the years to come.
Early-stage digital disruption starts with technological innovation. This typically follows a distinct development cycle from consumer awareness to actual market demand. Early technical developments can go relatively unnoticed until concerted progress, or more usually, the scope for substantial potential progress sees a hype phase. This is where the new technology moves into mainstream consciousness, attracting a range of excited forecasts and predictions.
The Internet of Things (IoT) is a potentially huge technological theme that’s garnering lots of attention. The worldwide IoT solutions market is estimated to grow from $1.9 trillion in 2013 to $7.1 trillion in 20201 and the number of active wireless internet-connected devices is forecast to increase from 16 billion in 2014 to 41 billion in 2020.2
Although devices like smart thermostats and wearable health monitoring bands are available to buy, it may be a few years before the IoT theme becomes deeply embedded in the market.
Incumbent leading companies not only need to be aware of the disruption that innovators can cause – they have to be ready to compete fiercely to maintain their lead. Back in the in 1970s, mainframe computer manufacturers were so focused on satisfying the needs of a few existing customers that they completely missed the untapped demand for personal computers. A number of innovating companies grabbed the opportunity to sell cheaper personal computers to businesses and individuals – a classic ‘disruptive innovation’ that came to dominate the computer industry.
Disrupt or be disrupted has become a popular mantra in digital industries. At the top of the US corporate pyramid, a typical S&P 500 company survives on the index for an average of 18 years, down from 61 years in 1958. By 2027, an estimated 75% of the S&P 500 is likely to have been replaced.3
While hindsight gives us a clear view of the history of disruption, it can also help to indicate the scope of further disruptions. Moore’s Law tells us that the number of transistors on a microprocessor doubles every 18 months, so by 2020 or 2030 microprocessors could be measured on an atomic scale, which could herald the age of quantum computing. It is clear this is going to lead to many opportunities – possibly for truly innovative existing companies and also for new entrants. Google, for example, has become a leading corporate brand that has been successful across a range of digital disruption areas that have grown out of advances in computer processing power.
Internet-savvy consumers have been quick to adopt innovative digital technologies that have had the effect of disrupting established businesses. For the millennial generation (18-35-year olds) and billions of emerging market consumers, their digital experiences are largely framed by smartphone and tablet screens. Mobile technology is now pivotal in the digital experience – mobile app downloads are forecast to reach 268 billion by 2017, generating $77 billion in sales, according to Gartner.4 This trend is set to increase as more wearable devices are launched. However, some firms have been slow to catch on to mobile. In the first quarter of 2014, 30% of Fortune 500 companies did not have a mobile app and less than 50% had a mobile website. While corporates around the world have to play catch-up, this will offer them and their competitors the chance to innovate.
The internet enabled new distribution models like the MP3 format, but it also facilitated peer-to-peer (P2P) file sharing – this impacted the music industry’s revenues. Digital revenues grew from $4 billion in 2008 to $5.9 billion in 2013 to account for 39% of overall industry revenues.5 Streaming platforms revenues are expected to increase from $848 million to $1.76 billion in the period 2014-2018 6 following recent rapid growth in demand for streaming services as paid-for subscription services such as Spotify gain in popularity.
Driven by the need for improved crop yields, prescriptive planting has the potential to disrupt the agricultural industry. This system uses big data applications to precisely understand where in one of the 25 million mapped agricultural fields in the US to plant specific types and volumes of seed to achieve the desired crop yield. Monsanto’s FieldScripts product combines a very detailed database of 150 billion soil observations, 10 trillion weather-simulation points and hundreds of thousands of seed-yield data points. FieldScripts uses this data to run machines made by Precision Planting, a company Monsanto bought in 2012, which makes seed drills and other devices. Farmers that have trialled Monsanto’s system claim it has increased yields by around 5% over two years.
The slower take-up rate of the internet in China by many companies (particularly small-tomedium size) compared to consumer adoption point to a market full of potential. Some analysts are predicting that a ‘great wave of digital disruption’ has just begun in China.7
Millions of Chinese businesses sell their products on Taobao, an Alibaba-owned online marketplace which operates on consumer-to-consumer and e-commerce platforms, but only 20-25% of small firms in China are actually internet-connected, compared with 75% of their US counterparts. China has more smartphone users and internet-connected households than any other – smartphone penetration in China at 54% (US is 69%) there is already a significant move towards mobile internet.8
Mobile internet use is disrupting aspects of the financial market, benefiting internet giants like Alibaba, which is seeking to diversify its e-commerce offering and leverage its brand, customer base and distribution network. Would-be disrupted services include lending and mobile payments. Tencent’s Wechat and Baidu are beneficiaries of mobile internet The country’s e-commerce industry, which turned over nearly $300 billion in 2013, is the world’s largest market, benefiting e-commerce giants like Alibaba. China still has very large scope for growth; less than 50% of the country is internet-connected (US is c.90%).
Digital disruption is an overarching, universal theme with the power to reshape almost any industry which benefits from digitisation, connectivity, and sophisticated data processing. At Fidelity we are in a strong position to identify disruptive themes well in advance of their market impact. Our analyst teams are dedicated to the specific task of identifying the second- and third-order beneficiaries of these innovations, as these often tend to be the more overlooked and lucrative investment opportunities in the long term.
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