Why are financial analysts so dumb about technology?

We are in a curious time of the year. Software companies in the US seem to delay product releases to miss the first few weeks of the year — perhaps because so many take time off at the holidays — so I have seen a number of product updates that are coming out soon, but which I have been asked not to talk about until they are released. So, the things that are top of mind will have to wait.

Recently, we’ve seen a lot of financial and market results that — once again — underscore the trend lines in the ‘computications’ device business (see How fast and far can Intel fall?):

  • Intel announced numbers this past week that indicated demand is at best flat for personal computer chips, and this led to a fall in the company’s stock, and — in combination with other data — the S&P fell over 7%, and companies in related niches — VMware and Citrix — fell in tandem. Intel also announced plans to cut its workforce 5% a few days later.
  • On the other side of the companion device/PC divide, Apple and Samsung are projecting huge numbers of tablets for 2014: 80-90 million units and 60-70 million units, respectively.

I don’t get why the market can be ‘surprised’ by the slumping fortunes of Intel or the dinosaurs that are trying to sell access to cloud computing that is premium priced relative to Amazon’s. This is one example of the way that financial analysts seem dumb. My bet is they think change is happening slower than it is, or as McLuhan said

We look at the present through a rear-view mirror. We march backwards into the future.

The analysts feel the future should be like the past, but nowadays that means whenever some news comes out, you’re surprised.

A second indicator of the trend toward  the me-ization of work: Dropbox announced a $250 million round of investment — which might actually be as high as $400 million — at a valuation of $10 billion (see Dropbox, now valued at $10B, raises $250M). When I reported this, several folks responded on Twitter that it seemed a bit bubblicious. But the Wall Street Journal reported that the company expected sales to rise over $200 million in 2013, which is 50X valuation, but not based totally on signups: it’s serious bank.

Dropbox’s round might step up the competition with Box, which raised $100 million last month at a $2 billion valuation.

A second example of how the financial analysts are dumb about technology: they don’t get Dropbox and its competitors. Douglas MacMillan of the Wall Street characterized Dropbox as an ‘online storage provider’, which is like calling Instagram a photo storage company.

Dropbox is worth so much because it backfills a flaw in today’s operating systems. It provides a virtual distributed operating system that is lacking in OS X, iOS, Android, and Windows. One of the companies making those OSs would be well served to step up and buy Dropbox for a premium above that $10B — which would  have to be $20B or more, I bet — to bring those capabilities back into the OS layer.

So when Google buys Dropbox for $25 billion, expect the financial analysts to be surprises that an ‘online storage provider’ could command such a price.

A few trends that converge on a networked, unbundled, and connected world

William James once observed (although I can’t find the reference),

You can judge a man’s intelligence by how well he agrees with you.

This post is about some recent thoughts by two very smart people, by that measure. Williams also stated that

Our view of the world is truly shaped by what we decide to hear.

Which is presumably why you are reading this post in the first place, and why I read nearly everything by Fred Wilson and Benedict Evans.

Fred Wilson spoke recently at Le Web in Paris, and laid out three megatrends that his venture firm, Union Square Ventures, follows closely and which guide their investment philosophy. Niv Dror was there and captured his talk. The three trends are these:

  1. Networks
  2. Unbundling
  3. Smartphones

In brief, Wilson argues that bureaucratic (and inefficient) hierarchies everywhere — in business, in government, in all institutions — are being displaced by networks, and those networks are inherently based on internet communications technologies. His examples include Twitter disrupting the newspaper business, YouTube pushing aside the hollywood studio model, and Soundcloud (and now Beyoncé) bypassing the record labels.

This is reflected in the world of business, the internals and externals of business. The third way of work is predicated on exactly the same disruptive force: social networks that are fully reliant on internet communications — not just the ‘collaborative’ tools of the late 20th century and the first few years of the 21st — are corrosively unmaking the bureaucracies of business. And just as Fred is investing in the disruptors in media and entertainment, we can expect that upstarts like Dropbox, Box, Editorially, and Asana — to name only a few top-of-mind examples — will accelerate that trend, and displace the creaking, aging tools predicated on a very different form factor of work and shape of organization.

[Note that it’s important to make the distinction between the disruptive technologies being developed today that are based on the central role of social networks, and not the earlier collaboration technologies that often have no networks at all, but only hierarchies, based on groups, and fairly authoritarian models of work.]

Fred talked about the formerly high costs of bringing products and services to market, and how that led to bundling. For example, opening a bank branch was expensive, so it would be sensible for it to offer a wide spectrum of services in the same place: savings accounts, CDs, auto and home loans, and so on. But today, the internet explodes that, and we will see (are seeing) the unbundling of that, with examples like Lending Club (peer-to-peer lending) and C2FO (a global collaborative exchange for working capital).

In business technologies, we are seeing the shift from broad technology platforms and tools — like SAP, IBM, and Oracle suites — to narrow and deep tools, well suited for specific kinds of workers, like Github for developers, and Adobe Social for marketers. And in particular, the emergence of small-and simple tools — especially those that play well on companion devices (smartphones, tablets, and wearables) — is the next wave.

And that brings me to Wilson’s third point: smartphones, or more generally, companion devices. He polled the audience in Paris, asking if they had to choose between their laptop and smartphone — where they could only have one — what would they pick? Approximately 80% picked the phone.

And why? The sensors, the location-aware apps, and because we are always within three paces of it: it’s with us all the time. We are connected — for the first time — all the time. We are nodes in the global social network of connected people, all of the time, and that — as Wilson makes clear — is important. Or to my way of thinking, revolutionary.

Benedict Evans wrote an important post this week, too, in which he makes one observation about the meaning of mobile scale, one that paints a bright red line across the timeline of human civilization:

Some time in the next six months, the number of smartphones on earth will pass the number of PCs.

Screen Shot 2013-12-18 at 17.51.51

These inflection points are critical, because it means that we can make inferences about the entire civilization a few years from now based on the behaviors of those most involved in the use of the new technology, today. And the interactions between the two sorts of devices, because PCs, smartphones, tablets, and soon, wearables all interact.

As Evans points out, that graph shows an enormously expanded internet, one that has almost doubled in size since 2010. Yes, doubling in three years. And the chart suggests it could double again in the three years following.

And he points out that smartphones aren’t connected to the web — the browser– to any extent like the way PCs have been. We’ve seen an explosion of nation apps using the internet as their backbone, but operating outside the browser.

That alone may explain the interest in small startup enterprise apps that really get the mobile behaviors — like Orchestra’s purchase by Dropbox, or this week’s acquisition of Collaborate.com by Cisco (see Cisco acquires Collaborate.com, but not a peep about Webex Social).

2014 is really looking like the year of these trends all crash together, a perfect storm: an always connected population and workforce, new apps that fill the corners of our totally connected lives and work, and the dissolution of institutional hierarchy by the corrosive and subversive nature of networks.