(4) Comparables
The transformations catalyzed by massive, rapid adoption of digital technology in every economic segment have been central themes in this series, with emphasis on financial and valuation consequences. In this fourth installment the focus is on competitive analysis, as this reflects the same fast adoption and consequent big changes.
Competition in a vacuum
As the peer group of a business matters to it when assessing its competitive positioning and formulating a plan, so it also matters to the financial analyst when estimating the value of the enterprise. In finance, the analyst typically extracts comparable ratios from a designated group of similar types, making adjustments for size or growth rate, and applying some appropriate range of results to the subject company’s metrics. This can be done with current data, as a multiple of revenues or earnings for instance, or it can be applied to a future estimate in order to derive a future value. This is standard practice, and, as mentioned, may parallel strategic planning and competitive assessment in the enterprise itself.
When competition is evolving, reflecting perpetual changes in technology or the customer expectations that track such changes, the described comparisons, whether for strategic planning or financial evaluation, assume a more intricate texture. For example, it is not the case anymore that a retail operation can be quantified by changes in square footage and same-store sales and seasonal merchandise and so on, because now there are also issues of e-commerce and mobile applications and social media and Amazon, which, formerly a retailer, is now also an entertainment outlet with its eye on payment technologies, among other things. Thus, whether Amazon is more comparable to Walmart than to, say, Apple, or whether it is competitive with Google as an online commercial destination, is no longer a straightforward call for it, for Apple and Google, and increasingly less so for Walmart. The “field,” in other words, is not zoned and fenced in anymore, and if it is, the fence is probably eroding.
They say that one should skate to where the puck will be, not where it is, but the hockey analogy falls apart when the puck is (or could be) everywhere and move in all directions. For reasons suggested, and because value is based on what will be rather than what is, the discussion is not merely theoretical or limited to the digital technology segment proper, in its current form. Our competitors are always around to meet us, we only must know who they are.
Attention and its reference points
In typical commentary about new technologies and platforms, language has served as a frame of reference for purposes of comparison within and between isolated segments. For instance, we call some of these adtech or fintech in advertising and finance, or we refer to the cloud and SaaS models and mobile applications, and we call some of these bots and often refer to media connectivity as networks. But these are mainly software assets and the segments, as labeled, are flawed categories: There is overlap between them, and within each there are sub-segments that don’t have as much in common with one another as the shared label implies.
For a more correct perspective, perhaps, we could instead revert back to basics and take in all these emerging areas of digital bits and systems through a lens of supply and demand. If we define the supply-side as, more or less, data (or, as was referenced broadly in the second installment here, “information”), this is, as was argued, infinite, or, if you prefer, vastly sizable and perpetually replenished from a seemingly endless trove. Demand, on the other hand, is much more limited because it is bounded by available time and capacity to process. We could think of the demand-side as attention, and although this may not be the perfect name it serves an important purpose in establishing perspective and parameters.
In an information economy, especially one centered around the mechanized flow of bits, competitors (or comparables) — whether today, in five years, or into implied “perpetuity” — are going to be those suppliers of product who fight for the same finite demand (i.e., the same attention). For purposes of current discussion about ways to categorize a given digital business and to understand its competition, there are some qualifying questions that further the thought process. Here is a sample:
- Whose attention does the business, or asset, or system seek?
- By what means does it do so, (and by what means preserve it)?
- Whose attention may be sought by it in the future using the same or similar means?
Even if segmentations are blurrier now and the contrasts not as sharp; even if attention is not necessarily associated with human consumption directly, but with another system along the supply chain of information flow; and even if supply and demand can be circular or reflexive in nature, one might still argue as follows:
The more similar a given subject is to another in the types of questions listed, the more comparable and thus the more competitive are the two.
Comparisons of Presence
The bigger comparables in traditional financial analysis have tended to be valued at a premium, reflecting the market influence that size can perpetuate. Bigness as a competitive edge has not diminished in significance, but the way we measure it and the way we think about its likelihood to last is different when digital assets are the subject. The bigger “comps” may not always be measured by revenues or assets, but could instead (or in addition) refer to the size of data sets, to the depth of systems, and to a presence in the gathering and distributing of bits: or, stated differently, a presence of market attention.
(The “winner take all” perspective that many in the venture capital community have adopted to measure a startup’s potential is a manifestation of the presence concept here considered, and this is often predicated on attention rather than revenue or asset quantification. The rationale is not unsound: In the contest for attention in an economic system of plentiful digital supply, presence can sometimes breed demand in a circular fashion. Also implied in this way of seeing things is a general tendency to commoditization and deflationary economics, as has been considered in this series before and will again.)
A key distinction between the old and new economies, at the root of changes in comparison and competitive reference points described, is that the software core of the new enables its participants (with effort) to expand, contract, change form and seek to target different areas in new ways, at almost any time. This represents both opportunity and challenge in business building — the opportunity enhanced by presence and the challenge magnified by a never-ending contest for attention. In both cases, the threat of digital disruption is perpetually hovering, and altering one’s perception of who is, or who may become, a competitor.
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In the next installment the significance of disruption will be considered, when innovation is no longer a surprise, but is expected.
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