The Hunt for the Next Great Technology Platform

In March 2014, Facebook made what many would describe as an insane move when it announced its intention to acquire Oculus, a fledgling pre-release Kickstarter funded virtual reality (VR) startup for $2 billion dollars. This was only its third acquisition valued in the billion dollar range, the other two being Instagram (~ $1 billion) and Whatsapp (~ $19 billion).

Unlike Instagram and Whatsapp that had built best of breed solutions that had gained enough traction among mainstream and shared customer bases to threaten Facebook’s core photo sharing and messaging vertical businesses respectively, Oculus’s audience was still limited to VR geeks watering to build fully immersive experiences into this device that promised to go where no other piece of VR equipment had gone in the 30+ years that have passed by since the computer scientist and ‘Who Owns the Future’ author, Jaron Lanier, popularized the term ‘Virtual Reality’ in the early 80's.

Google also recently led a $500 million seed round in a mysterious Augmented Reality startup called magic leap in the shadow of its failed project Glass launch and also in January 2015, Microsoft announced its new Augmented Reality offering called Hololens, led by Alex Kipman (best known as the creator of the XBOX).

One might wonder why incumbent technology giants are beginning to make heavy investments in these technologies that are seemingly removed from their core businesses. Isn’t focus meant to be the key to success?

The short answer is that technology businesses that operate at the scale that Facebook, Microsoft, Google, Apple etc. operate with revenues above $10 billion cannot sustain growth in the long term by limiting their technological pursuits to incremental innovation on existing platforms that got them to where they are today.

High growth at those revenue levels can only be sustained by actively searching for new technological platforms that will seed new forms of innovation that can spur brand new technology verticals 10–20 years from with $100 billion+ monetization opportunities. If history is any indicator, we have seen a number of ‘too big to fail’ technology companies like Yahoo, AOL, IBM, Xerox who failed to keep up with the pace of technological innovation and eventually saw themselves relegated to the valley of the shadow of death as has beens struggling to get their groove back.

Every couple of decades, the market for existing platforms approaches saturation and incumbent corporations that rode such technologies through significant growth trajectories gradually begin to see a slow down in growth; If incumbents are to stay relevant in the coming decades and remain growth companies in the long run, they must find brand new opportunities and platforms that will help mask the decline in growth that they are bound to experience in the long term as demand for the existing platforms on which their core businesses are built evolves in a manner that cannibalizes existing and new revenue streams dependent on fading platforms.

Also every couple of decades, all the pieces fall together for the next truly revolutionary technology platform to come of age. In the beginning there are always the naysayers; Sometimes the strongest naysayers of truly innovative platforms are senior executives that are fully vested in the platforms that were at the center of the previous technological revolution. For instance, 40 years ago, a handful of ‘nerds’ led by Bill Gates and Steve Jobs ignored quotes from influential people such as this:

“I think there is a world market for maybe five computers.”

— Thomas Watson, president of IBM, 1943

and this:

“There is no reason anyone would want a computer in their home.”

— Ken Olsen, founder of Digital Equipment Corporation, 1977

These nerds committed themselves to building out the foundations of the personal computer, they built operating systems that became an indispensable part of the lives of millions of people worldwide. Steve Jobs also was popularly inspired to build the first graphic user interface into Apple’s Lisa computer after a 1979 visit to Xerox Parc when he immediately saw tremendous value in the GUI (graphic user interface) which existing Xerox executives could not see.

By the early 90's, it was clear to even the least technically savvy people around to world that there was a market for a lot more that five PCs and that average Joes and Janes of the world desired PCs in their homes. The operating systems built by Gates and Jobs had not only succeeded in establishing themselves as powerful forces to be reckoned with, they opened a gateway through which numerous multi-billion dollar desktop software businesses and suites of tools such as Microsoft Office, Lotus Software and Oracle were built.

Also in the very early parts of the 90's, a British computer scientist at Cern by the name of Tim Berners-Lee invented what we know as the world wide web as a side project. With Berners-Lee’s invention, any connected computer in the world could access the information on any connected server via hyperlinks to locations on different servers. Again there were very many executives of the old order that missed out on the internet because they did not explicitly see the value of next-generation platforms drastically outside of the scope of their core businesses right from the onset. For instance, Bill Gates famously wrongly prioritized the the internet in his list of things Microsoft focused on in the early 90's because he thought it was a precursor to the information super highway that he envisioned in his 1995 book titled ‘The Road Ahead’:

“… today’s Internet is not the information highway I imagine, although you can think of it as the beginning of the highway…”

Three years later in a speech he gave at the University of Washington, Gates admitted that he had indeed wrongly prioritized the opportunity that lay in the internet when he said:

“Sometimes we do get taken by surprise. For example, when the Internet came along, we had it has a fifth or sixth priority.”

Then the smart mobile platforms with openly accessible developer ecosystem came along, with some companies from the old guard like Apple and Google taking charge and taking ownership of the platform layer with iOS and Android (acquired in 2005) respectively. Again establish internet players who like Yahoo and AOL who hadn’t learned from the mistakes of their predecessors like Microsoft, underestimated mobile and completely missed the opportunity as the technology market evolved.

Through his 13 year long tenure as Microsoft’s CEO from 2000 till 2013, Steve Ballmer grew the company’s revenues threefold from $23 billion in 2000 when Gates handed over the baton, to $77.9 billion when he departed in FY13, yet investors were constantly frustrated with his tenure and Microsoft’s stock remained stagnant throughout his stay in office.

The reason for the investor frustration?

While Ballmer did everything right by the books and grew revenue steadily, he was not very successful at exploring new disruptive opportunities with the potential to generate revenue streams large enough to keep Microsoft on a reasonable growth trajectory in the long run while also replacing the loss of growth in existing core businesses that the company will inevitably encounter in the future as its cash cow divisions (Windows, Office and the Server and Tools) approach market saturation. A lot of a new product lines that were released during Ballmer’s tenure were viewed ‘me too’ businesses by the market and it seemed to investors that Microsoft was spending too much time playing catch up with the competition.

The beauty of the platform approach for a company with tens of billions of dollars in revenue is that the monetization potential is virtually unlimited. Platforms like the PC OS, the world wide web, mobile OS and VR create endless opportunities for third parties to build businesses that could in turn create previously unimagined verticals with multi-billion and trillion dollar market opportunities.

For instance new PC OS platform like Windows spurned the emergence of players like Oracle (~$187 billion market cap) and ultimately the emergence of the world wide web which in turn created opportunities for new verticals that led to the emergence of the likes of Facebook (~$220 billion market cap) and Google (~$380 billion market cap) and then mobile application ecosystem which saw the emergence of opportunities for companies like Uber (~$40 billion market cap). It is not impossible to still find opportunities with 10 figure+ potential on existing platforms, but the longer a platform is in the mainstream market for, the smaller the window of opportunity for discovering new huge windfalls that can power growth in a behemoth with tens of billions of dollars in annual revenue. Remember that while a $5 billion market opportunity is exciting to a startup, such an opportunity is less exciting to a behemoth with $70 billion in revenue as the the investment involved in chasing such an oppotunity might not justify the returns when operating at such a scale. Behemoths need to think bigger.

For big companies with large bank accounts, the key to increasing the chances of finder larger opportunities lies in going long and investing heavily into trying to bring hard and futuristic technologies to the masses. Unlike with incremental innovation on older existing platform that tends to have lower barrier to entry due in terms of monetary cost and time commitment required, new platform exploration and build out requires huge cash investments into longer term plays that only big companies with huge cash runways can really afford. In the grand scheme of Apple’s $178 bn cash trove, a $4 bn investment into searching for new frontiers is a drop in the ocean.

This is what Sergey Brin is focusing on with his balloons and cars at Google X, and what Larry Page was thinking when he dropped half a billion dollars on a wacky AR concept product that the crazy scientist behind Mako Surgical is working on, and what Zuckerberg was thinking when he decided to go long on the Oculus Rift, and what Microsoft was thinking when it decided to invest heavily in the hololens, and what Cisco is doing chasing the Internet of things which it projects to be a $4.6 trillion opportunity.

This current breed of big company executive are not necessarily more brilliant that their Xerox and IBM counterparts from back in the day, the key difference is that they have access to more data than ever before about how the innovator’s dilemma has historically led to the demise of technology giants past and no one want to be part of a case study for a couple of Harvard Business school students 10 years from now looking into why big technology businesses fail at a Clayton Christensen class.

We don’t know which companies chasing new platforms like AR, VR, IOT opportunities etc. are going in the right or wrong direction, the only thing we know for sure is that big companies that don’t pursue innovation in new frontiers will see stagnation when existing market opportunities get saturated and will probably gradually go extinct as the existing opportunities dry up with consumer demand evolution in markets in the long run.