Tough Sledding for Monopolistic Behavior
Times of uncertainty surrounding the widespread adoption of technological innovation are tough sledding for companies used to controlling the playing field through their monopolistic behavior.
The recent ChatGPT phenomenon, the poster child for so-called generative artificial intelligence (“AI”), brought on by the willingness of its parent, OpenAI, to unleash unmastered technology into the world in “beta” form (with all of the legal disclaimers, of course), has ushered in the age of AI in a way that is real for most people.
Admittedly, the implementation of AI technology is not a new phenomenon — it has been going on for years quietly (mostly) in the background. Suddenly though, with ChatGPT, integrating AI technology into most business processes regardless of industry focus (even without specific use cases) has taken on heightened importance — no one wants to get left behind.
Typically, during periods of disruption, normally confident incumbents–like Alphabet–find themselves confused and can be paralyzed by inaction, like a deer in the headlights. They’re used to getting their way. As a result, they go through some version of the five stages of grief as their monopolistic position is challenged:
Denial — Difficulty comprehending the reality of the situation. This is a fad – it will pass. We looked at that and decided against it. This is not a game changer, why is everyone excited about it?
Anger — Blaming someone else. How do they get away with this? We are held to a different standard! This is dangerous and irresponsible — some regulatory agencies should look at this!
Bargaining — Mental gymnastics to explain the loss of control. We had to defend our core business. We couldn’t bet the company on unproven technology. We hold ourselves to a higher standard. Our stock would have gotten punished by the market.
Depression — Feeling directionless, having difficulty making decisions. Is our offer good enough? Will we ever catch up? Do we have the right team?
Acceptance — Reality sets in. Getting practical. This is the new reality for our business. How do we implement this in a way to maximize financial success? Are there partners who can help us? Can we acquire the expertise to accelerate realization?
Sound familiar? Like Alphabet whose Google search dominance and ad-driven revenue model is being called into question by ChatGPT?
Alphabet claims they have always had similar technology to ChatGPT but were afraid to make it available because of the potential social impact, which is unknowable. Funny, they don’t seem too concerned about selling my search data to the highest bidder!
Call us a bit skeptical.
Alphabet, however, is more concerned about its 93% global market share in search (according to Statcounter GlobalStats) – after all, it’s only getting worse from here. ChatGPT and the blossoming competitive landscape puts its data advantage, advertising model, and fat profit margins at risk.
Who can blame them?
Should Alphabet have been willing to put their core business at risk (effectively “killing the golden goose”) before they had to, before the market made them, before the technology was vetted and adoption assured?
Twenty years ago, Google was the disruptor – Yahoo had an almost 50% share of search in 2000 – and they had nothing to lose. They were brave and fearless. They practiced some versions of “don’t ask for permission, ask for forgiveness” (much like ChatGPT does today). Today–despite all the talk about, and money spent, on “moonshots” –not so much.
Alphabet is by no means alone – yet it’s certainly convenient to hold them out as the current example. Facebook has faced the same dilemma in the social media space. For years, they have resisted the push to offer the benefits of the social network more explicitly – i.e. users paying a monthly subscription. Instead, they have relied on what has gotten them to the dance — an implicit model that grows users by giving away the service for free while selling their personal data on the back end to advertisers for the highest price.
Turns out that “free” may be too expensive.
Even as data privacy concerns have come to the fore and platforms like Apple have made it harder to target customer data, Facebook has failed to get the message – to pivot to a better model. Today, their advertising algorithms are less effective, and they have become the poster child for high-jacking personal data and feeding social addictions. They did pivot in the sense of directing attention to another supposedly big opportunity – the metaverse – and changing their name to META to make the point. That is one way to do it!
This transition is also difficult for the incumbents in terms of stock performance. In our experience, markets almost always bet with the upstart/disruptors – at least at first. Again, for the incumbents, massive market share, higher revenue growth, and attractive margins will not likely get better from here. The risk to fundamental metrics certainly seems asymmetrical to the downside, right?
Before going “all in” on the upstarts, never forget that execution is hard.
Incumbents have lots of capital and defend their turf aggressively – sometimes using questionable methods (i.e. Microsoft Internet Explorer crushing Netscape Navigator) – like a mother bear defending her cub. There is no guarantee of ultimate success just because you are first, early, or better. Tesla had a better vision, better business model, and better technology and still almost failed. Elon Musk had to fire up his reality distortion machine (ala Steve Jobs) to sustain the company as it battled to survive during its formidable years. And, it had to execute an expanding vision perfectly along the way. Today, all we remember is that Tesla took on the behemoths (GM, Ford, etc.) and soared while they languished.
We know from some direct experience. We invest in and work with earlier stage private companies — in early 2021, we invested in one that’s focused on applying AI technology to vision. Despite the massive opportunity (that seems to grow every day), things like — ironing out a revenue model that can be seamlessly applied across industry verticals — are not trivial. Right now, it’s “eyeballs” and “intent”, tomorrow it must be recurring revenue. And after a challenging 2022, a path to profitability is crucial for attracting additional capital needed to fuel growth as well.
What are you doing about AI in your clients’ portfolios?
Much like crypto/blockchain (which we wrote about in a previous blog Crypto Anyone?), maybe it’s OK to go slow, to let the hype subside, the dust settle, and the winners emerge. Do you have to have an answer? Even if dismissed, it would be good to have a take on AI and its potential impact. Or, like us, you can use structured notes to attack such a theme. While not perfect, you certainly can better manage the risk/reward and specifically define an outcome where appropriate for clients. Even if most do not have an appetite, at a minimum, providing a proactive solution to a perceived market opportunity will always serve you well.
One thing is for sure, disruption always leads to monopolistic behavior by incumbents, and this means challenges and opportunities for investors.
Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
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