The Paranoid

“Just because you are paranoid doesn’t mean they aren’t after you.”

— Joseph Heller

Intel co-founder Andy Grove died on March 21 at the age of 79. On the occasion of his passing, we remember his seminal 1996 book, “Only the Paranoid Survive”.

Grove wrote that huge swings of fortune hung in the balance when sectors reached what he called “strategic inflection points.” These moments, he argued, happened when industries became subject to some “10x”, “supercompetitive” force. He also suggested that there were two related challenges for industry participants at such strategic inflection points: first, to understand that they were going through one; and second, whether to take action (and how).

However, so much of the current technology landscape has been invented or evolved in the nearly 20 years since his book was written — unleashed by the energy of vast, sustained increases in computing power predicted by Moore’s Law and the value of network connectivity observed by Metcalfe’s law — that the challenges identified by Grove have themselves been transformed.

Big AND fast

Randy White, Hall of Fame Dallas Cowboys defensive end (played from 1975–1988), Super Bowl XII co-MVP, tipped the scales at 257 pounds. A key member of the Cowboys’ Doomsday D, he had improved his speed in the 40-yard dash after an intense college weight program from 4.9 seconds to 4.65. Compare him to Malik Jackson, starting defensive end for the Broncos in February’s Super Bowl 50, who was a fifth round pick, 137th overall, in the 2012 NFL draft. Jackson weighs 293 pounds, and can still run the 40 in under five seconds (the Jacksonville Jaguars picked the free agent up this off-season in a six-year, $90 million deal).

Just like the hits being unleashed on NFL running backs and receivers, which can deliver approximately one ton more force than when defensive players were smaller and slower, the laws of physics also enabled the changes Grove have identified.

First, software and digital distribution have combined to permit the forces of change to occur literally at the speed of light (the speed of digital processes). There is no longer any obvious barrier to disruptive forces rising at near-instantaneous rates, and it can become evident just as quickly to an incumbent that a strategic inflection point has been reached. Legacy businesses can gauge the impact of a new competitor or substitute on their market share in real time. A decade ago, digital substitutes to newspaper advertising already were demonstrating these laws, surfing a supercompetitive force that cut the aggregate advertising revenue of a centuries-old newspaper industry in half in just three years.

Second, whether to take action, or how, is really no longer a choice for incumbents who wish to survive. The cost of developing technology to drive (or respond to) changes to existing consumer behaviors in media, marketing and related industries has become so low that the cost of deferring action is now higher than the cost to innovate. In other words, it pays to shoot first and ask questions later. The decline in print ad revenues noted above eliminated something in the order of $6 billion of anticipated EBITDA during this period. At a 7.5x EBITDA multiple (where the newspaper industry was trading during the aughts), this represents approximately $45 billion of value destroyed during this strategic inflection. What’s an appropriate amount to spend through investments or acquisitions to preserve or capture that kind of value?

Becoming Paranoid

More than perhaps he even imagined just two decades ago, Grove predicted the conditions in the media industry that would lead to the massive disruption of traditional strategies and business models by emerging technologies and the corresponding changes in the behaviors of marketers and consumers. There is ample proof in the intervening years that failure to invest sufficiently in emerging technologies or respond rapidly to these behavioral trends led to underperformance and dislocation among existing market competitors. It’s been painful for incumbents — and challengers now become incumbents who themselves become challenged within far shorter cycles (I’m talking to you, Google) — and yet there is a silver lining. Grove may have been a paranoid business leader, but it was for good reason. And he taught us to all to become paranoid, the first step to survival.