I spent the last few days in Hong Kong at a conference discussing the smartphone industry. The participants were mainly investors or investment managers. One of the most frequently asked questions was how to spot investable trends in this notoriously unpredictable sector.
The data I presented did not offer much of an answer. If anything, it showed just how much the industry has changed and how unlikely it is to remain a facsimile of what it is today.
But theory allows us to still make some bold claims. Grounding your investment thesis in pattern recognition rather than extrapolation should be the better strategy. So here are the telltale signs I recommend watching for investable ideas.
- In hardware look for what’s not good enough. The smartphone is great. But it’s not good enough for many jobs that we can recognize with little effort. For example, smart devices never seem to have enough battery life. Storage, screen quality and speed are pretty good, but battery life is worse than what voice phones offered years ago. Companies dedicated to improving battery technology or charging technology should be worthy of a bet. Breakthroughs in power saving will be much more valuable than breakthroughs in storage or processing speed or screens.
- Pricing needs innovation. Phone pricing is opaque, user unfriendly and often leaves buyers confused and angry. I use the word innovation instead of reduction because it’s not about making prices necessarily lower, but removing complexity and defining value clearly through price. The challenge is not just for devices but for service providers as well. Companies innovating by abstracting pricing complexity will do very well. Interestingly, pricing innovation is not as easily copied as it may seem. It is often coupled with business model innovation and cost restructuring.
- Applications currently conform to platform needs but there will come a time when platforms will need to conform to application needs. By applications I mean not just apps but the app/service bundle that will drive consumer purchasing behavior. If we consider social media, entertainment and shopping as applications, it will make sense for those applications to eventually take some control or equity in the platforms. Android is the first sign of this: search and services associated with search and advertising sought control over platforms. Perhaps Facebook, Amazon and Baidu will feel a similar need.
- As a new medium, apps will eventually be more valuable than the tools used to render them. The global app brands are probably not yet born, but some day they will be as important as Disney, News Corp and Universal Pictures in their heyday. The App Store is the incubator for these embryonic megabrands.
I realize that these are not specific enough investable ideas but casting your eye on patterns should yield better returns than selecting winners from a set of “current players”. After all the great returns from smartphones to date have come from bets on entrants (HTC, Apple, RIM) and not from incumbents (Nokia, Microsoft or Motorola).