Today’s Profit Watch begins with an ode to a man the world just lost — Clayton Christensen. He died on 23 January.
It may not be a name that jumps out at you. But his spirit carries a warning or two for the Aussie market.
He penned what many consider to be one of the greatest business books of all time, Innovator’s Dilemma.
It came out in 1997 and caught the world’s imagination. The tech boom at the time was in full swing.
I have the book somewhere…it’s not the easiest read, but the core tenet of the book is one to keep in mind.
Mighty firms can fall from what first appear to be an innocuous and niche competitor.
Think Nokia losing its huge dominance in the mobile phone market. Or Blockbuster in videos…
The threat no one sees coming
Often these big firms have their dominant market share ripped away from them because they face an almost impossible choice.
Do they dare sacrifice their current business model when a new competitive threat appears?
This threat is often on the margin, and not yet anywhere near the mass market.
Netflix is a case in point.
I have it on the brain currently. I’m reading the memoir of the man who co-founded the company.
Netflix began selling and renting DVDs over the internet.
But you have to put this in the tiny context of the times.
In 1997, hardly anyone owned a DVD player.
They were monstrously expensive, and there was few DVDs to buy anyway.
Nobody was 100% sure whether this format would even take off.
But this very obscureness was also Netflix’s opportunity.
You could ship a DVD much cheaper than a standard video. And it opened up a niche Netflix could use to differentiate itself.
On Netflix’s launch day, it only had to stock around 900 films as there were only that many films available on DVD in North America.
Then, of course, there was the problem of the internet.
It was new. It was slow.
Netflix had to run their own servers and build everything on the web from scratch. The website crashed a lot.
The questions were endless. Would people rent or buy over the internet? How to ship it? How to get it back?
Netflix began in a rented office full of DVDs, pizza boxes and exhausted staff.
How far it has come over the last 23 years…
Not only is it part of the destruction of the original video rental market, streaming now looms over cinemas, television and even Hollywood.
Pray, why dwell on this?
The big Aussie banks look ripe for this type of destruction.
Death by a thousand cuts
They look so dominant — but the Innovator’s Dilemma proves capitalism’s core function…‘creative destruction’.
There is a suite of ‘neo’ and ‘non’ banks nibbling at the big banks market share.
Credit card debt is unlikely to enjoy the high margins of the past.
Foreign exchange is a profitable division of banks — and everybody knows they rip us off. It’s ripe to be ripped away from them.
The regulators are pressing them to hold more capital against their mortgage loans, and be less aggressive in lending to investors.
Plenty of other firms can take their market share.
Facebook’s crypto Libra, or even more importantly, central bank currencies, threaten to upend the entire financial system.
And God forbid — if you hold bank shares — Apple or Amazon get a sniff at a banking license.
The tremor through the market would send the bank stocks diving.
All this does make me wonder what the Aussie market will look like in 5–10 years.
Currently it’s top heavy with banks and miners. This is not two industries with the brightest outlooks going around.
It’s not something to worry about today.
But the key to creating wealth in the future is going to be identifying the firms most likely to replicate Netflix on the Aussie market.
It’s certainly not expecting the huge capital growth the banks delivered over the last 20 years.
It’s probably fine to hold them for the dividend at the moment.
But spare a thought for the spirit of Clayton Christensen too when you think about the future.
That dividend in your pocket is money they’re not investing back into the business.
Nothing is more vulnerable than the sitting duck.
PS: Our publication Profit Watch is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here