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GUEST ARTICLE: The Web At 25 - Reflections From Rothschild


4 April 2014

The following comments are from Hugo Capel Cure, Mark Wallace and Rupen Patel, co-heads of Rothschild Wealth Management & Trust’s UK investment research team. This publication is grateful for permission to reproduce the comments about the impact of a technology that is continuing to transform how wealth managers, as well as others, do business.

Predicting the direction of markets may be popular, but then so are horoscopes; neither are particularly good guides when making important decisions. For our part, we are more interested in dealing with uncertainty than forecasting the future. Technological change makes our task harder, by adding complexity, challenging norms, and re-defining many of the ways in which we live, work and communicate. These themes are explored on the following pages, where we consider the impact of the internet on business and set out the implications for the way we invest.

“The most profound technologies are those that disappear. They weave themselves into the fabric of everyday life until they are indistinguishable from it,” said Mark Weiser, former chief scientist at Xerox PARC.

In March 1989, Tim Berners-Lee filed the proposal for what was to become the World Wide Web while working at CERN. Twenty five years on, the internet and the web (which are actually different things, but synonymous in everyday use) have become like electricity: almost-invisible technologies that we now take for granted.

Yet consider how much has changed. We have instant access to a library of information that is unprecedented in its breadth, size and rate of growth. Anyone with a smartphone can broadcast to a global audience, whenever they want from wherever they are, limited only by access to mobile reception. Email and social networks are re-shaping the way we interact and communicate. In some areas, automated systems are replacing humans (how many people have you spoken to at Amazon?) while digital products and services are changing the way we read, keep records, take photos and listen to music. At a deeper level, emerging research in neuroscience suggests internet technologies are likely to alter the way that we think, particularly for children growing up with touch screens.

Companies are at the forefront of these revolutionary changes and here we focus on the impact of the internet on business. Twenty five years in, we attempt to survey the landscape, identifying three major trends that have, are, and will continue to transform sectors and industries. We then outline the implications for our investment approach, followed by some specific investment examples.

Three powerful trends
“It is sometimes useful to remind ourselves,” the poet Philip Larkin wrote in an essay on modernism in poetry, “of the simpler aspects of things normally regarded as complicated.”

Like modernist poetry, the impact of the internet on business is complex. It has many dimensions, resists neat summaries and, like the work of Eliot or Pound, it challenges long-established norms. And yet there are still some simpler aspects. Amid the waves of disruption, transformation, explosive growth and dramatic declines, it is possible to identify a few big trends.

The first is access to information. Transparency is a defining theme of the internet era. Product and service reviews highlight the failings of bad hotels and unreliable laptops; the internet gives consumers more power and control, and their conversations are amplified on social media.

At the same time, price transparency is powerful. Comparison sites make it easy to evaluate a range of competing services or find the best deal on a particular item. High Street chains selling non-perishable commodity products – such as books and electronics – struggle to compete against online retailers with lower overheads and more efficient supply chains. Without strong brand differentiation, traditional retailers get dragged into a race to the bottom on price, a race they are likely to lose.

Where businesses provide access to factual content, the internet has been particularly disruptive. Wikipedia destroyed the business model of the Encyclopaedia Britannica, while the New York Times fell out of the S&P 500 index of US stocks in 2010, replaced by Netflix, a company best known for internet video streaming.

Yet it would be wrong to conclude that providing access to content can no longer be profitable. After 125 years, the Financial Times is flourishing, and digital subscriptions to now exceed the newspaper’s print circulation. Under a very different model, Time Out no longer charges for its magazine in London but instead distributes it freely to commuters. This is part of a strategy to create a global digital media brand: Time Out has local websites in more than 40 cities, attracting 15 million visitors each month.

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.

An electic mix
Bringing together the Daily Mail, Ryanair, Tesco and a basket of technology stocks may seem like an attempt to craft a bad joke full of Englishmen, Irishmen and Californians. Fortunately, these are instead four examples that may help to illustrate our investment approach.

US technology basket
On parts of the internet, it may be true that the winner takes all. Yet for every Google and Amazon there are many brands that only flourish for a season (Netscape and AOL) and many more that fail to live up to their early excitement (Tiscali and A technology fund manager today might rhapsodise over developments in the cloud, or the ‘internet of things’, or radical advances in 3D printing. These may all be fantastic, but they are not necessarily going to make money. Sometimes it is worth looking at what has been left behind.

Early last year, we noticed that many of the largest, established technology titans - firms such as IBM, Cisco and Oracle - were displaying a number of common characteristics. They were generating high levels of cash on their capital employed, had solid and conservative balance sheets and, crucially, were trading at low valuation multiples. Given the regular upheaval in the technology sector, we didn’t want to take concentrated investment positions in individual companies. Instead, we decided to follow a diversified approach focused on the sector as a whole. We assessed stocks according to objective criteria and using a quantitative screening, measuring factors including valuation, capital deployment and the quality and trend of a company’s profits.

We then created a ‘basket’ to invest in the most attractive opportunities, holding a total of around fifteen stocks.

The internet has an unpleasant habit of turning assets into liabilities. Tesco’s recent experience illustrates this well. The UK-based supermarket won a multi-decade “space race” against its competitors, resulting in a superior footprint of stores across Britain. This seemed to create a high barrier to entry, particularly on a crowded island. It should have proved a crowning triumph and a recipe for superior margins for decades to come. However, a superstore on the edge of every town doesn’t matter to shoppers online. The non-food items that were supposed to fill half of the shelf space of the larger stores can now be bought from Amazon, which has global purchasing scale that dwarfs even Tesco. What’s more, online grocery shopping is great for consumers but it is tricky and expensive for supermarkets to deliver. It currently generates much lower profit margins than traditional in-store sales. Early last summer, we sold our shares in Tesco, having decided that the rise of online shopping weakened the company’s competitive advantage.

The Daily Mail and General Trust (DMGT) may be a surprising example of successful adaption to technological change. The Daily Mail newspaper was first published in 1896 by brothers Harold and Alfred Harmsworth, later ennobled as 1st Viscounts Rothermere and Northcliffe. Under the leadership of the 4th Viscount Rothermere, the business has been re-shaped from a traditional newspaper company to a portfolio of digital and media assets, with new businesses built around providing access to information. DMGT owns the world’s most popular online newspaper in MailOnline, recruitment portal Jobsite, insurance risk-modelling firm RMS and has a controlling stake in property website Zoopla. At the DMGT investor day in the autumn, we were encouraged to hear from the leaders of many of the business units and to see a culture that supports entrepreneurial growth. We believe the portfolio of companies is very attractive.

In many ways, Ryanair is a child of the internet age. The airline’s business model is built around disintermediation. All bookings are channelled through the company’s website, eliminating the need for travel agents. The website, in turn, is a source of referrals to the providers of other services, from car hire to hotel rooms. As a result, the company has turned something that was a cost of doing business into a source of revenue. Even though the fares charged by Ryanair are the lowest of any European carrier, their low-cost model has resulted in strong cash flows. At a recent lunch, chief executive Michael O’Leary reminded us that the company had distributed more of this cash to investors over the past five years (as special dividends and share buybacks) than it had ever raised through public offerings. This is remarkable for any company, let alone an airline, and we remain shareholders.


In its first twenty five years, the web has re-shaped many industries, created new business models and unleashed bouts of rapid growth. When thinking about the internet and investing, we avoid the extremes of hype and complacency, instead sticking to what we do best: portfolio management focused on wealth preservation. The internet trends we have identified – access to information, lower barriers to entry and disintermediation – still have much further to run. Over the next twenty five years, they will create many challenges to manage and opportunities to grasp.