Each of the key companies in the consumer tech market has its fans and its detractors – those who believe the company is destined for future success, and those who believe it’s doomed to fail. Some of these beliefs are founded in facts and figures, while others stem from gut feel, emotional investment in a company, or something else entirely. But ultimately backing any one of these companies requires faith that certain things are true.
This has been borne out to me by recent coverage of Amazon, which has focused on its supposed ability to ‘flip a switch’ to shift from breakeven to profitability at some future point. Some of the smarter commentary makes clear that the picture is a little more complex, but it also illustrates just what you have to believe in order to have faith that Amazon will eventually be able to pull off that sort of a transition.
The stories yesterday about Snapchat turning down a $3 billion cash acquisition offer from Facebook also highlighted divergent opinions about whether Evan Spiegel was right. Though most observers seemed to think Spiegel was nuts to turn down an offer, whether you believe that depends on whether you believe in Spiegel’s vision for how high Snapchat’s valuation could go. He – and presumably his investors – have faith that a certain series of events will play out in a certain way, ensuring Snapchat’s eventual profitability and thus an even higher valuation.
Each company in this market has a similar story that it tells investors, and your view on these companies and their futures ultimately depends on your ability to have faith in those stories. Some of these stories are told explicitly, whereas others are secret (either because the companies are private and have no obligation to share their strategies with the world, or because of some perceived secret sauce they would rather keep to themselves). But ultimately, each tech company has what you might call articles of faith you’re required to sign up to if you want to believe in its long-term success:
Article of faith – n. something that people who support a particular religion or idea believe completely, although it has not been proved
Let’s look at those articles of faith for some of the most important companies in this space:
In order to back Amazon over the long term, you have to believe:
- That it can reach a point where its current level of investment in infrastructure can either flatten out, or even be scaled back, while maintaining similar revenue growth.
- This, in turn, requires a belief that Amazon has a sustainable competitive advantage which will last long enough to fund it until it reaches this point, and beyond that point too, in order for those profits to start rolling in.
- That its current growth in certain key markets can be replicated in the others it chooses to enter over time, since sticking to its current markets only would limit its long-term growth.
In order to back Apple over the long term, given the slowing growth in iPad and iPhone, you have to believe that:
- Apple will release one or more major new product lines in the next year or so which will allow it to offset slowing growth in iPad and iPhone 1
- Not only that, but you have to believe that these product lines will have reasonably high ASPs (iPhone ASPs are in the high $500s and iPad ASPs in the $400s) or sell in much larger numbers than either iPhone or iPad, and that Apple will capture a large chunk of the addressable market, if it is to sustain current growth rates.
- It can sell both these new products and existing product lines at high enough margins to maintain the current trajectory on profit growth.
Articles of faith for Google:
- That the addressable online advertising opportunity – which continues to be the source of the vast majority of Google’s revenue – and Google’s share of the advertising opportunity – will continue to grow at the rate it has, because this funds essentially all of Google’s activities.
- That the tension between users’ needs for privacy and Google’s need to expose and use its users’ data will never be pushed too far, either alienating users or inviting government regulation in one or more countries that significantly affects its ability to pursue its current business model 2.
In order to believe that Microsoft’s future is rosy rather than gloomy, you have to believe:
- That a large chunk of IT buying will continue to be driven by company IT departments rather than end users, and driven by the need to be productive rather than by more personal and individual considerations.
- That buyers will continue to perceive enough of an advantage in Microsoft’s operating systems and productivity suites to persuade them to pay hundreds of dollars for these when competing offerings are priced at zero.
- That it will be able successfully to make the transition to becoming a hardware, and not just a software company – i.e. that its organic efforts (Surface) and inorganic efforts (Nokia) will pan out better than they have so far.
You know the drill – with Samsung you have to believe:
- That it can grow its expertise in software and services to match its hardware assets.
- That it can continue to set itself apart from other Android smartphone and tablet vendors even though its marketing spend advantage will soon begin to hit diminishing returns (if it hasn’t already).
- That it, like Apple, can continue to find new categories in consumer electronics to enter, take significant share in, and sell at decent margins.
We could go on with many other companies in this space, but you get the idea. The irony is that sometimes the companies with the least explicit faith stories, such as Amazon, command far more faith than companies with much more established track records, such as Apple. But that’s precisely what makes faith such an appropriate word to use – it’s almost religious in nature, as a sort of conviction in things not seen.
- Others have suggested that Apple has maintained a roughly 6-year period between major innovations, but this ignores the fact that the iPhone has been unusually successful, and dominantes company revenues today. The iPad so far hasn’t shown signs of matching it, and it’s unlikely than anything else will either. As a result, it needs new products sooner rather than later, which explains Tim Cook’s frequent references to new products coming soon. This is something I hope to pick up in a future post. ↩
- this is a problem for all ad-funded companies, and it’s something I plan to cover in a future post ↩