INTERESTING ARTICLE THAT I DON"T UNDERSTAND THAT WELL FROM MSN MONEYCENTRAL
Jubak's Journal
The 7 next big things in tech
The biggest winners in technologies are the ones that change the game completely, sending rivals to the scrap heap.
Want to find the next big thing in technology? Follow the destruction.
No truly big change takes place without overturning traditions, sending competitive rules to the dustbin of history, and destroying formerly flourishing companies. Avoid the victims and own the agents of change and you'll retire richer, buy that house in Tuscany, and still send the kids to the college of their choice even if they don't win that lacrosse or flute scholarship.
Today I'm going to help you along to those goals by giving you my list of seven disruptive technologies that are cutting a wide path of destruction. It should get you started in putting together your own list of destructive opportunities.
Change is a good thing. A faster and more powerful graphics chip sends me to the store to buy a new PC … to buy new games that take advantage of the chip … to upgrade my display so I can see the full glory of those new graphics. See the news
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And that's all good news for Nvidia (NVDA, news, msgs), which made the graphics chips, for Electronic Arts (ERTS, news, msgs), which distributed the games, and for Dell (DELL, news, msgs), which sold the display. A steady stream of new products -- what we often call progress -- is the lifeblood of technology companies.
And, as I wrote in my last column, "What's the matter with tech stocks?," when this kind of change-as-usual dominates the technology sector, the sector tends to do well, driving the stock market as a whole higher.
But too much change is a bad thing. It can make obsolete a company's entire product line. I'd tell you to go ask minicomputer maker Digital Equipment, except that, well, it's out of business. It can force a wrenching shift in direction that crushes a company's momentum for years. Just think of how long it has taken IBM (IBM, news, msgs) to come up with a strategy to replace the tiny mistake it made when it let Microsoft (MSFT, news, msgs) grab control of the new operating system for PCs. (Microsoft owns MSN Money.)
Obviously, disruptive change creates huge problems for investors. But disruptive change also presents huge opportunities for investors. EBay (EBAY, news, msgs) and Google (GOOG, news, msgs), for example, have done pretty well by investors by rearranging the landscape for online retailing and advertising.
Once you've identified a promising patch of destruction, how do you find the profitable opportunities? I'd offer three general rules:
Look for companies that actually have a plan for profiting from the disruptive shift in technology. Innovation is neat, but for investors it's not nearly as important as a profitable business plan.
Don't pay too much. Yes, it's notoriously hard to value the stock of a truly disruptive technology company. More than 20% of the readers who responded to my pre-IPO survey on Google thought the stock was worthless. But since the odds are that at least 30% of the stocks that you pick as disruptive opportunities will head south, the key is not to pay so much for them that the successful picks can't put your portfolio comfortably in the black.
Don't ignore established companies that are willing to cannibalize their existing business in order to reap the potential profits of disruption. Since these companies aren't betting the store on the disruptive technology, the returns to you, the investor, won't be as high as with a home-run-or-bust bet. But the losses won't be as large either.
Now, on to my disruptive opportunities.
The "Cell" microprocessor. A product of a joint venture between IBM, Sony (SNE, news, msgs) and Toshiba (TOSBF, news, msgs), this chip will power Sony's PlayStation 3 and high-definition TVs from Sony and Toshiba. The chip combines nine cores, a big leap from the two-core chips just being introduced by Intel (INTC, news, msgs) and Advanced Micro Devices (AMD, news, msgs), to provide extremely fast rendering of computation-intensive graphics for uses that range from military displays to consumer electronics. I see this chip putting more pressure on Intel and AMD, which are both struggling to expand beyond their role as makers of chips for PCs. Who's the winner? Too soon to tell.
The home-entertainment gateway. Who is going to control how entertainment media, from music to movies, gets into the home? This is a big deal for the cable companies and for the phone companies. Cisco Systems (CSCO, news, msgs), a name that most investors don't associate with home entertainment, has made the most interesting moves in the sector recently. The company's acquisition of cable-box maker Scientific-Atlanta (SFA, news, msgs) puts Cisco right in the middle of efforts by the cable and phone companies to roll out video on demand and video over the Internet.
But if you combine the video processing power of Scientific-Atlanta's set-top boxes with the home networking products of the company's Linksys, you start to get a home entertainment business that isn't dependent on any specific pipeline into the home. If you still think that Cisco Systems doesn't have ambitions in this space, I suggest you look at the July purchase of KiSS Technology of Denmark, a maker of DVD players and recorders that can be connected to the Internet. The game certainly isn't over, but Cisco suddenly looks like a major player. (About 23% of company revenues now come from the Advanced Technology division that includes Linksys and Scientific-Atlanta.)
The home-entertainment hub. Lots of folks are going after this one because the potential here is to develop something that would replace or combine the TV, the PC, the family stereo system, etc. with a single device that can store and route media in the home. I'll bet that Cisco has this market in mind. So do Microsoft, Sony and Apple Computer (AAPL, news, msgs), just to name a few. The takeaway lesson of Apple's iPod is that ease of use rules. (Think software and design as key to a successful product.) I think this category is still wide open with the disruptive powers still to be fully unleashed.
Internet telephony over mobile phones. Voice Over Internet Protocol (VOIP) hit the mobile phone industry in late February, when Nokia (NOK, news, msgs) introduced its first mass-market phone capable of sending and receiving calls over the Internet. Think of it: No more per-minute charges or limits on your wireless calls. (That's the model at Skype, the VOIP company acquired by eBay, where users can talk for free as long as they pay a flat monthly fee for a broadband connection to the Internet.) Nokia, which owns 48% of Symbian, the biggest supplier of operating systems to high-end mobile phones, is one company to watch in this space. Symbian's latest software supports VOIP. So does Microsoft's Windows Mobile operating system.
Electronic, networked health-care records. Just because President Bush talks so much about the need to put patient records on a national computer network and actually does so little about it, don't assume this won't happen. They're actually building such a system in the United Kingdom at a cost of $11 billion. The goal of the system, due for completion in a decade, is to enable patients and their doctors to access an electronic health-care record, to access prescription records and digital images such as MRIs, and to make appointments. In the U.S., such a system would cost $100 billion to $200 billion, according to government estimates, but it has the potential to save $700 billion a year. The disruptive potential of such a system is huge. For example, all the data would be available in such a system to compare mortality rates at individual hospitals and for consumers to compare prices for various procedures. While we're all waiting for a national solution, take a look at an interesting project from Johnson Controls (JCI, news, msgs) and Emergin. To produce something that Johnson Controls calls the "future-ready" hospital, the company will add Emergin's software communication solutions to the wireless capabilities in Johnson's building-control systems.
Mapping everywhere. I love to look at the new digital maps offered by Google and Microsoft on my PC. But that's only the first stage of a huge increase in digital navigation. The move is toward adding mapping and route-finding software to smaller and smaller devices, a transition from car-based systems, for example, to those in wireless phones and personal digital assistants. According to research from IDC, by 2008, 383 million wireless handsets will be equipped with GPS capability that will allow the delivery and use of digital mapping. That would be six times higher than in 2004. What is clear is that more devices mean more, and more detailed, maps. And that's good for the few companies that supply digital maps to this market. There are two major players: Tele Atlas (TLATF, news, msgs) and Navteq (NVT, news, msgs).
Batteries. They're a key bottleneck for all kinds of products -- and nowhere more so than in the auto industry, where the sudden popularity of gas/electric hybrids has just highlighted the heavy weight and inefficiency of current battery technology. Hybrid vehicles now rely on nickel-metal-hydride batteries, which are a problem looking for a solution. Whether that solution is a better nickel battery or something new -- such as an improved lithium-ion battery (which now has better energy storage but is a fire hazard in a collision) -- the transition will shake up the ranks of auto suppliers around the globe. One stock to watch on the technology front is Johnson Controls (again -- see No. 5 above), which has recently teamed up with Saft, a company with 10 years’ experience in lithium batteries, to develop a new generation of battery for hybrid vehicles. The results of that research probably won't bear fruit until the end of the decade. In the meantime, Johnson Controls has been making inroads into the global auto battery market, thanks to its acquisition of the battery business of Delphi (DPHIQ, news, msgs).
