Technology: an enabler not a sector part 3

The internet has become so central that nowadays it’s no more than one of the tools in our daily lives. Indeed, so few companies earn revenue from the web itself that I find it surprising to still hear the internet described as a technology ‘sector’.

When I first joined Baillie Gifford more than two decades ago, I covered US technology. We had three subsectors: hardware which consisted of companies selling kit; software which was dominated by a newish company called Microsoft, and services. A fourth sector in non-US businesses was the semiconductor manufacturing chain across Asia and Europe making components for the kit.

 

Things have moved on a lot since then. Today, many companies which operate under the tech banner have nothing to do with selling technology. Take Ctrip (or Booking.com or TripAdvisor), whose business is almost exclusively conducted over the internet yet relies on success and profitability in the travel industry.

 

Likewise, think of the current spate of ride-hailing companies such as Uber, Lyft, Didi and Grab. These businesses could not exist without the mapping functions, location services, payment options and platform services the internet provides. But they derive their revenues by transporting people, food or freight from A to B.

 

Even Amazon is not a technology company in its retail operations, although technology plays a major part. At heart, it is a logistically-excellent retailer aided by the reduction of friction – a consequence of the internet.

The chief requirement for success is being open-minded.

For me, understanding the internet paradox gets to the core of how I try to think about this whole area, and perhaps explains my irritation at being asked about technology as a sector. The internet is an enabler on a scale that means any industry can now be disrupted. In many ways, every company is a technology company now – or perhaps none is. This is why I think the term is vacuous.

 

Of course, it’s difficult to stay away from the nomenclature of markets when the terminology is so widely used by participants, commentators and companies themselves. Personally, I would ban the use of the term technology as I see it as lazy shorthand or, worse, a closed-minded dismissal of a disruptive opportunity. The pre-requisite to investing well in companies labelled technology is no different to other areas. The chief requirement for success is being open-minded.

 

There are still lots of things I need to push myself to imagine. For example, I can’t see my wife being satisfied with a bunch of virtual flowers on our anniversary. However, most of Tencent’s users have never been used to receiving the physical version, so they enjoy sending and receiving them online. It is my job not to judge such utility but to analyse it, in the same way, I would for physical flowers, albeit the online version offers much higher gross margins.

 

As a long-term fan of football, I’ve also struggled with the concept of e-sports. But this is a great example of where being open-minded helps – what’s the difference between watching skill and competition on a screen to seeing it on a court or sports field? Looking 20 years into the future, the FIFA e-World Cup may be bigger than the corrupt version played on grass.

 

I think it is fantastic for us that so many people continue to view technology as different. It presents us with opportunities that others are missing. In fact, I will happily put up with more questions on this area if it facilitates us assessing the prospects for such companies in the same way that we would any other. And, hopefully, we will continue to add value for our clients through such an agnostic approach.

 

This is the third blog in a three-part series. You can read part one here and read part two here.

 

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Mark Urquhart

Partner

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