GUEST ARTICLE: The Web At 25 - Reflections From Rothschild

Rothschild , UK, 4 April 2014


Good digital marketing allows small businesses to reach both mass and niche audiences.
The second main way in which the internet is re-shaping business is by lowering barriers to entry. A small retailer can use eBay or Groupon to compete in a specialist area or challenge established and well-recognised brands in ways that wouldn’t have been possible before the web. Lean online businesses with low distribution costs can target niche groups in the ‘long tail’ and the internet makes it possible – through blogs, online communities, display and pay-per-click advertising – to find and sell to everyone from hand-gliding fanatics to tortoise owners.

Mass marketing is also much more accessible. An email marketing campaign can reach 100,000 people at a fraction of the cost, time and effort of direct mail delivered through the post. In the 1980s, the high cost of advertising on TV, radio and in print held small new businesses back. Today, companies can create interesting, useful or amusing content on a low budget and distribute it cheaply online, boosting brand awareness and sales.

At the same time, the cost of much IT and communication infrastructure has also fallen sharply, removing this as another barrier to entry. A start-up in San Francisco can run on inexpensive but powerful laptops, access servers and software in the cloud, and collaborate over Skype with developers in Pakistan or designers in Russia.

This lowering of barriers helps facilitate disruptive innovation which, online, can lead to spectacular growth. As an example, consider photo-sharing app Instagram. In the nine months from December 2010 to September 2011 it grew from 1 million to 10 million users. Six months later, in April 2012, that figure had trebled to more than 30 million users. Facebook then bought the company for $1 billion in cash and stock – at the time, it had just 13 employees, no revenues, and was less than two years old.

Disappearing middlemen
Easier access to information and lower barriers to entry have contributed to our third internet trend: disintermediation, or cutting out the middleman.

This speaks for itself. In some sectors – including travel, general insurance and classified advertising – the process is already advanced. In others, disintermediation is only just beginning. Emerging areas include lending and access to capital (with the rise of peer-to-peer networks), real estate (where property websites are dominant, but estate agents haven’t yet been cut out of the loop), recruitment (where LinkedIn challenges traditional agencies), publishing (everything from open-access academic journals to thrillers self-published as ebooks), education (where “massive open online courses” may re-shape the role of traditional universities) and television (online video is already supplanting free-to-air and subscription TV in China, a trend that may follow in the US and Europe).

Yet not everything changes
What does all this mean for the way we invest? The internet is important, but it doesn’t change the fundamental disciplines of our investment approach. We are not technology zealots, nor are we Luddites. In practice, the trends we have identified are simply an addition to our existing research process. They provide another lens through which we can view opportunities and risks and assess the prospects of businesses that we invest in.

Given the perennial danger of internet hype, it is also worth making an obvious point: the impact of the internet isn’t uniform across sectors. Demand for chocolate, medicine, beer and shampoo won’t disappear in a digital world. Firms such as Nestlé, Unilever, GlaxoSmithKline and AB InBev will continue to adapt their marketing to changes in consumer behaviour, but their actual products are unlikely to change a great deal. These firms own strong brands in generally-stable industries. This helps make them resilient businesses and, in our view, attractive investments for the long term.

Put another way, our goal is to preserve and grow the real value of our clients’ wealth. Technology doesn’t change that. Every investment – old economy or new – still has to earn its place in a client’s portfolio.

It is also worth stressing that the internet is an extremely complex system where innovation and progress are not steady or linear but volatile, rapid and unpredictable. As the technology research firm Gartner has highlighted, three “elemental forces” – the drive for profit, for freedom, and for control – are competing for the future of the internet. One of these three forces may eventually dominate; perhaps two will share power at the expense of the third. There are at least a dozen plausible scenarios, with a whole spectrum of implications for businesses and investing. As Gartner put it, the future of the internet is best seen as a series of parallel strands “each starting from a different point and taking a potentially different route at different speeds toward a probable plethora of future states.”

In this context, extrapolating current trends is naïve. Placing too high a degree of certainty on any assumption about the future is dangerous. In our view, it is no basis for prudent investment decisions.

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