“The Key Issue Is How Vulnerable They Are To Such Waves Of Creative Destruction”

At the New Yorker blog, John Cassidy tries to handicap which company will likely be around in 20 or 30 years, Microsoft or Facebook. I suppose my answer is it doesn’t really matter since there’s little chance either will be influential even if they’re still in business at that point. But it’s still a fun exercise. From Cassidy:

“As Brian Arthur, an economist at the Sante Fe Institute, explained many years ago, the technology industry is different from most other businesses, where incumbents, such as Toyota and Hilton, build up franchises that are difficult to dislodge but which don’t take over the entire market. The tech industry, on the other hand, is defined by successive waves of innovation, and it operates more like a long-running lottery, with the prize for each drawing being a temporary monopoly. Microsoft is Microsoft because, back in the eighties, it won the lottery for the operating-system market. Facebook is Facebook because it won the lottery for the social-networking market.

In the technology world, market leaders, generally speaking, don’t get dislodged by competitors who build a better or cheaper version of their product. Eventually, though, they do tend to get displaced by companies that create, or popularize, a new technology that shifts the entire industry in a different direction. (Look at what digital cameras did to Eastman Kodak.) In assessing the long-term prospects of technology firms, the key issue is how vulnerable they are to such waves of creative destruction. And in conducting such an assessment, short-term indicators, such as growth rates and recent movements in stock prices, can be misleading.

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