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The Gorilla Game, Revised Edition: Picking Winners in High Technology
The Gorilla Game, Revised Edition: Picking Winners in High Technology
The Gorilla Game, Revised Edition: Picking Winners in High Technology
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The Gorilla Game, Revised Edition: Picking Winners in High Technology

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The Possibilities Are Staggering:

Had you invested $10,000 in Cisco Systems back in early 1990, your investment would now be worth $3,650,000

Similarly, a $10,000 investment made in Microsoft in 1986 would be valued at more than $4,721,000 today

$10,000 invested in Yahoo! in 1996 would today be worth $317,000

How do you get in on those deals—especially if you're not a Silicon Valley insider? How do you buy the high-tech win-ners and avoid the losers? How do you find the Yahoo!s, Microsofts, and Ciscos of tomorrow?

The answers are here, in this newly revised edition of the national bestseller The Gorilla Game. The book reveals the dynamics driving the market for high-tech stocks and out-lines the forces that catapult a select number of compa-nies to "gorilla" status—dominating the markets they serve in the way that Yahoo! dominates internet portals, Microsoft dominates software operating systems, and Cisco dominates hardware for data networks.

Follow the rules of The Gorilla Game and you will learn how to identify and invest in the "gorilla candidates" early on—while they are still fighting for dominance, and while their stocks are still cheap. When the dust clears and one company clearly attains leadership in its market, you'll reap the enormous returns that foresighted investors in high-tech companies deserve.

This new edition of The Gorilla Game has been updated and revised throughout, with new focus and new insights into choosing the internet gorillas—the companies that are destined to dominate internet commerce.

Bestselling author Geoffrey A. Moore is one of the world's leading consultants in high-tech marketing strategy. Here you'll find his groundbreaking ideas about tech-nology markets that made his previous books bestsellers, combined with the work of Paul Johnson, a top Wall Street technology analyst, and Tom Kippola, a high-tech consul-tant and highly successful private investor. Together they have discovered and played the gorilla game and now give readers the real rules for winning in the world of high-tech investing.

Step by step you'll learn how to spot a high-tech market that is about to undergo rapid growth and development, how to identify and spread investments across the potential gorillas within the market, and how to narrow your investments to the single, emerging leader—the gorilla—as the market matures.

High-tech investing can be extremely risky, but investors who learn to play the gorilla game can avoid many of the traps and pitfalls and instead start capitalizing on untold profits. Personal wealth is only a gorilla game away.

LanguageEnglish
PublisherHarperCollins
Release dateOct 13, 2009
ISBN9780061845154
The Gorilla Game, Revised Edition: Picking Winners in High Technology
Author

Geoffrey A. Moore

Geoffrey A. Moore is the author of Escape Velocity, Inside the Tornado, and Living on the Fault Line.

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    The Gorilla Game, Revised Edition - Geoffrey A. Moore

    Introduction

    The Gorilla Game was initially released in March of 1998. It became a best-seller and was Amazon.com’s number one investment book for that year. Now it is March of 1999, and we are hard at work on getting out a revised edition. So here’s the question: if this book was so good, why is it necessary, a scant year later, to come out with revisions? Good investment books are supposed to have long shelf lives—so what’s up? In a word, the Internet.

    In the past twelve months, Internet stocks have performed totally unprecedented acts of appreciation in valuation, delighting their investors, astounding their analysts, and infuriating a whole raft of editors who have decried the mania and predicted certain doom, only to find it, quarter by quarter, yet again deferred. More importantly for us, however, is that Internet stocks pose a real challenge to the entire thesis of the gorilla game.

    Our thesis is that everyday investors should restrict their high-tech sector investments to a handful of companies that enjoy an extraordinary type of competitive advantage, one which makes their future success far more probable than that of any other type of company. These are the companies we call gorillas, and the criteria by which they are identified are tightly defined in the chapters that follow.

    According to these criteria, no Internet stock can ever be a gorilla. However, Internet stocks are outperforming everything else on the market by an order of magnitude! So, now what, smart guys?

    The simplest answer for us would be to side with the editors—it’s only a matter of time, we could say, and then the bubble will burst. Then those grasshopper types will be sorry, and we ants will be rewarded for our disciplined, if uninspired, ways. What a wonderfully righteous position! Unfortunately, however, we don’t believe that’s what will happen. There is simply too much genuine value and deep-seated competitive advantage accruing to Internet companies to dismiss them as a passing fad. So we let this approach pass us by.

    Another fairly quick way out for us would be to say, Hey, take a flier—everyone else is. When stocks IPO at $20 and reach $70 on the first day of trading, how bad can this advice be? But alas it too goes against our grain. The goal we have set for ourselves is to provide a reasonably safe, reasonably predictable investment mechanism for generating long-term returns to families who simply cannot afford to put their capital severely at risk. And while there are huge rewards, there is also huge investment risk in the Internet category. In particular, while we do not believe the Internet as a category is currently overvalued, we definitely do believe that many individual Internet stocks are, and that investors who put their money in those stocks will be punished severely.

    So we are stuck with a much harder task, which is to expand our model of the high-tech sector and its valuations to incorporate the performance to date of Internet stocks. We are going to do this in two ways.

    First, we have completely rewritten Chapter 12, Investing in the Internet. Rather than try to carve out a gorilla game within Internet investing, this chapter now focuses instead on the most popular and visible Internet stocks and builds a model for understanding their present and, hopefully, their future valuations. We conclude this chapter with a discussion of the investment strategies this model implies, making clear that while it bears clear similarities to the gorilla game, it in fact describes a very different beast.

    Second, in every other chapter of the book, we have inserted a running commentary on the Internet wherever it impinges on the arguments we are pursuing. In this way we are actually able to highlight the uniqueness of the gorilla game while keeping in view the popular attention on the Internet.

    The net of all these revisions and insertions is that the Internet has generated so much stock appreciation so fast that it has numbed the sensibilities of everyone associated with the high-tech sector. No one has a clear sense of how much the world has really changed and to what degree it is simply temporarily off its axis. As a result, no one with integrity is speaking with confidence about what investors should or should not do. At the same time, people lacking in integrity are challenging everyone to double their money every 90 to 120 days. For people who care about truth, it is a scary time.

    In this context, we continue to affirm our original gorilla-game investment strategy. We think it is a great approach to building wealth, and we encourage people to adopt its models to guide their high-tech investing. In our view, the advent of Internet stocks does nothing to devalue or alter this course. It does add opportunity incremental to the strategy, but it adds incremental risk as well. So we will show how investors with varying risk/reward profiles might integrate gorilla-game investing with Internet investing, keeping the two disciplines separate. But first and foremost, we want to ground our readers in the basics of high-tech sector stock market dynamics, and for that we want to turn our attention to a select few companies that have a decade’s worth of proven value creation behind them, beginning with one whose valuation by itself exceeds the sum of the top five Internet stocks combined!

    That company, of course, is Microsoft.

    Starting life as a PC software company at a time when there wasn’t really a PC market, it has in less than twenty years catapulted itself into the most powerful company in the computer industry, making Bill Gates the richest man in the world, and making a whole lot of Microsoft millionaires along the way. Hey, I could use a million dollars, volunteers a voice deep inside each of us—How do I get in on this action?

    It is the goal of The Gorilla Game to answer that question in some detail.

    At the same time, there is another trend at work in our society that is driving increasing interest and engagement in stock-market investing. In the last ten years we have all gotten a wake-up call in the form of a decade’s worth of downsizing and corporate decommitment from the once-firm offer of lifetime employment and retirement security. This in turn is driving a shift in our society from institutional trust to self-reliance.

    Hey, I know what you mean, offers up that same voice inside us. I might need that million dollars.

    And indeed we might. As our life expectancy increases, and as society’s solutions for supporting its aging citizens reveal themselves to be increasingly limited, we face a requirement to create far more wealth for ourselves and our families than what used to be considered sufficient. This need in turn is putting pressure on our financial plans to generate unprecedented rates of return, well in excess of those that traditional investment instruments can provide. And that pressure, in turn, is leading more and more investors to look more seriously at the high-tech sector. How can I leverage the upside opportunity in high tech and still protect my family’s nest egg?

    It is the goal of The Gorilla Game to answer that question in some detail as well.

    As a pair of goals, these are ambitious to say the least—some would even say presumptuous. At the very least they raise a couple of immediate questions for the authors, which might be put this way:

     •   Just who do you think you are? As in, why would anybody in their right mind pay the slightest bit of attention to what you are saying?

     •   Just who do you think I am? As in, who is this book really written for, and what expectations do you have for me as one of your readers?

    In short, as readers and authors, it’s time for us to get introduced.

    We’ll begin with us. We are three professionals who spend every working day either creating or analyzing business strategies for high-tech companies.

    Geoff Moore is a business strategist for high-tech companies, a venture partner at Mohr Davidow Ventures, and author of two best-selling books on the subject, Crossing the Chasm and Inside the Tornado. He and Tom Kippola are part of The Chasm Group, a consulting practice based on the framework of ideas in these books. The framework itself describes how high-tech markets develop in characteristic ways that set them apart from other markets, all of which can be traced back to the challenges of the Technology Adoption Life Cycle. The way in which the market overcomes these challenges has the side-effect, in many cases, of catapulting a single company into an extraordinarily powerful position that is surprisingly long-lived. These companies are called gorillas, and The Gorilla Game is about how to build a complete investment strategy around buying and holding their stocks.

    The chasm/tornado framework has gained broad acceptance within the high-tech industry. Both of Moore’s books are featured in graduate school curricula at Harvard, MIT, Stanford, and other leading schools of business and engineering. Venture funds such as Institu-tional Venture Partners, The Mayfield Fund, Atlas Venture, and Mohr Davidow have made them required reading for their portfolio companies’ management teams. They are also standard reading for the executives at Cisco, Hewlett Packard, Microsoft, SAP, and Digital Equipment Corporation. All this, in turn, has led to consulting engagements for The Chasm Group with these and a host of other Fortune 500 technology companies, as well as with numerous start-ups and small-cap companies that intend to become the next generation of high-tech leaders. The end result is a wealth of experience about the dynamics of competitive advantage in high-tech markets which has helped form the basis for this book.

    Paul Johnson is a senior technology analyst at BancBoston Robertson Stephens, a leading investment bank in the high-technology industry. He has teamed up with Geoff and Tom to help convert their business strategy framework into a framework for an investment practice. Paul’s credentials took a big step forward when in 1990 he was the first analyst on Wall Street to write a BUY report for Cisco Systems. Since then he has been the one who has made the first call to buy Cabletron, Ascend, and Pairgain, and more generally, the one who first outlined the consolidation trend in the networking sector and explained what it meant.

    In 1993 he and a colleague, Michael Mauboussin, a Managing Director at Credit Suisse First Boston, developed a model for understanding how the stock market values competitive advantage, and ever since Paul has used this work to explain why gorilla stocks have a valuation that is so far in excess of their competitors. It is called the Competitive Advantage Period model, and it is part of the courses Paul teaches as an Adjunct Professor of Finance at the Graduate School of Business, Columbia University. A simplified version of this work, presented in Chapter 4, lies at the core of this book, where combined with the market development models from Inside the Tornado, it provides the essential stock market context for the gorilla game.

    Meanwhile, while Geoff and Paul were busy teaching and writing, Tom Kippola and various members of his family with whom he co-invests were just quietly amassing wealth. (Geoff and Paul know there is a lesson in this somewhere, but they are still struggling to grasp it.) Tom had intuitively come up with the rudiments of the gorilla game without any of the underlying theory and began practicing it the day in 1990 when he finally convinced his dad to put $7,000 into Oracle. In the following year Tom and various other members of his family acting on his advice put similar amounts of money into Microsoft, Intel, and Novell, and a couple of years after that into Cisco Systems and Bay Networks. More recently they have been focused on customer support and sales force automation software, as Tom will discuss in Chapter 10. Tom has recently shifted much of his investing attention to a variant of the gorilla game—one that is played at a much earlier stage with privately held companies. Many of these earlier stage investments are made through or in conjunction with two separate investing vehicles, Voyager Capital and Internet Capital Group. Tom is an investor in, and serves on the advisory board for Voyager Capital, the premier information technology venture capital firm in the Pacific Northwest. In addition Tom is an investor in, and sits on the advisory board of Internet Capital Group, a company that identifies, invests in, operates and manages business-to-business e-commerce companies. Tom joined The Chasm Group in 1994 and has subsequently become its managing partner.

    So that’s who we are—a high-tech strategy consultant and venture capitalist, an award-winning Wall Street investment analyst, and a private investor with a strong track record for picking high-tech winners. Together we have tried to create a book that will transfer to you a coherent approach to high-tech investing that is easy to understand, straightforward to execute, and rock-solid in its approach to building personal wealth. All of which leads us to your second question: Just who do we think you are?

    One way to answer is to say we think you are a potential gorilla-game investor. Here’s how such a person appears to us:

    Figure 1.1

    GORILLA-GAME INVESTORS

    As a gorilla-game investor, we think you have or can readily acquire medium knowledge both of the high-tech industry and of investment principles. That is, on the industry knowledge side, we think you have or can gain a knowledge of the industry that is better than your retail stock broker’s but not as good as, say, a venture capitalist’s. And on the investment side, we think you can—and if you continue reading this book, will—know more about investing than, say, most writers for the business press, but not as much as a professional fund manager.

    Finally, and perhaps most importantly, the you that we have uppermost in our minds is a private investor who is turning to the stock market to provide for your family’s future. Far from being independently wealthy, we expect you to have modest capital at the outset and to be deeply concerned about not losing it. As a result, we are going to define an investment strategy that has significant upside potential but that is, at its heart, inherently conservative. That is to our mind the real purpose of the gorilla game—to help private investors participate in the rewards of high-tech stock gains while standing clear of the market’s unnerving volatility. To the degree that this notion speaks to your deepest concerns and needs, you are directly in our sights.

    There are three other audiences in this grid who also have claims to our attention—and they are all from the top row where, like us, they make their living in the high-tech sector. For these readers our wishes are as follows:

    HIGH-TECH MANAGEMENT EXECUTIVES

    We hope you will rejoice in a coherent framework within which to discuss the stock-price impact of your business strategies. Increas-ingly, stock options represent the upside of most management compensation programs and in the case of start-ups, the overwhelming bulk of it. Moreover, our culture has moved in recent years to make shareholder value preeminent among management objectives. In light of both these developments, it is more important than ever to have clear interpretations of the impact of business strategy on stock price and vice versa. The models and vocabulary presented in this book are intended to serve that end, and we hope they will help you and your team communicate better with Wall Street, with employees, with customers, and with each other.

    VENTURE CAPITAL PARTNERS

    In one sense, venture capitalists are the preeminent gorilla gamers—it’s just that they play the game much earlier in the Technology Adoption Life Cycle, where an IPO is treated more as an ending than a beginning. In this context the various gorilla-game scenarios—gorilla, chimp, monkey, king, prince, and serf—are the most important thing to take away from the book. Each defines a different valuation end game in the public markets and thus implies a different attitude toward IPO pricing and to alternative liquidity events along the way. In addition, when venture-backed firms are bought by public companies, there is often a cash vs. stock choice to make. When the public company is a gorilla like Cisco, the value of the stock is more likely to appreciate during the lock-up period, and thus makes for an attractive currency—otherwise, lock-up can feel a lot like jail.

    TECHNOLOGY FUND MANAGERS

    In many ways, your everyday practices are far more sophisticated than those advocated in this book. Nonetheless, we hope you will find value in its insights, in particular our attempt to build causal connections among management actions, market responses, marketplace status, and stock price. In addition, while we expect you to find our investment rules for the gorilla game far too conservative and limiting, we think you will be quick to spot more subtle variations, opening up the possibility of even better returns by extending the game along lines we deliberately block off. Indeed, we hope to use our Web site to engage you in an ongoing dialogue around some of these alternative games.

    INTERNET DAY TRADERS

    Actually, this book is not for you, not unless you are looking to kick the habit. In our view day-trading is a loser’s game, period. The only condition under which it pays off at all is in a bull market where, on average, you make money because everyone else is making money. Even in this case you would make more money if you took a buy-and-hold strategy. In effect, day-trading is like refinancing your house in an up market on a daily basis and taking the capital gains out as income—and that’s on a good day. In anything other than a wildly rampant bull market, your chances of making money are no better—OK, and no worse—than going to the track. The point is, day-trading really is more like gambling than investing and in any event has nothing to do with the goals or methods espoused in this book.

    So much, then, for introductions. There is, however, one more issue to address before we move on to our first chapter. There is an element of the gorilla game as an investment strategy that will prove extremely frustrating to anyone who spends the bulk of their time in high tech—the game almost never advocates investment in any stock that you are interested in! That is, the specific set of rules we ask private investors to follow, the ones we describe in detail in Chapters 6 and 7 of this book, exclude all but a hundred or so of stocks. Ours is deliberately a hyperselective investment strategy which calls for investing in as few companies as possible. The number of hoops a stock has to jump through to get into the final set is so great, and the criteria are so restrictive, that perhaps 100 of the 8,000 or so public companies—and no private companies—will qualify.

    So please let it be understood that this does not mean we think all these other stocks are undeserving of investment. We have enormous enthusiasm for the prospects of several hundred high-tech firms we know, and we think many of them will (may?) generate extremely attractive returns. But for the gorilla game proper, to meet the specific needs of a risk-averse and capital-constrained investor, we have imposed a much tighter set of constraints than govern the bulk of high-tech investors currently in the market. We ask our more sophisticated readers to respect that game, therefore, even as they go about finding ways to get around it.

    Finally, as the previous paragraph can only begin to hint, we expect from time to time to create a bit of controversy. We also expect, from time to time, to say things that are flat out wrong. We have tried very hard to get things right the first time, but our experience as authors and analysts is, nothing is 100% right ever, and certainly not at the first release. In that light, we have made a commitment to maintain a Web site at www.gorillagame.com, where readers can raise challenges, pose questions, share results, and generally pursue further the topics and strategies outlined in this book. We encourage both active gorilla-game investors and all other interested constituencies to use this Web site as a way to learn, as well as to teach, so that we all can become better at the gorilla game.

    Part 1

    SETTING THE CONTEXT

    1

    The Private Investor and the High-Tech Sector

    You are having one of those dreams when you are back in college taking a final exam for a course you never actually managed to attend. This one is in economics, and there is just one question on the final. It reads as follows:

    In 1998 the Big Three automobile manufacturers in the United States—General Motors, Ford, and Daimler Chrysler—employed 1,381,000 people to create combined revenues of $453 billion and combined earnings of $30 billion. Their combined market capitalization was $213 billion. The Microsoft Corporation, by contrast, employed a mere 27,000 people to create revenues of $14.4 billion and earnings of $4.5 billion. Its market capitalization was $342 billion. In other words, the stock market value of Microsoft exceeded that of the Big Three combined!

        Explain.

    You look at your watch. Okay, I’ve got two hours, I’m smart, I can do this. Think. What’s so special about Microsoft? Well, it’s a software company, of course. And cars are, well, hardware. That’s it!

    But wait, there’s a second part to the question. It reads as follows:

    What is so surprising in this comparison, of course, is the ratio of Microsoft’s market capitalization both to its sales (called the price/sales, or P/S ratio) and to its earnings (called the price/earnings, or P/E ratio). As you know from your readings and lectures in this class (How could I have missed all those classes? What was I doing?), the higher these ratios are, the more they show that investors are expecting a very bright future for the company. Microsoft, of course, is not an isolated example, as the following table of other leading companies in the high-tech sector, all taken from 1997 reports, will indicate:

    Table 1.1

    table

    Please make ample use of this data in your answer.

    Right. Who are these people? Intel I’ve heard of, but who’s Cisco, and is there a Pancho? Oracle? Ascend? Is this a spiritual thing?

    You notice your heart rate is accelerating, and you commence deep breathing exercises. No need to panic. I can figure this out. It’s all high tech, right? High tech wins, low tech loses. That’s the answer.

    You turn to the next page of the question, and you are delighted to see the following table of stock price performances outside the high-tech sector, noting that these are some of the best-managed companies in the world:

    Table 1.2

    table

    Source: Bloomberg

    Revenues, shares, and market cap are in millions.

    That’s it. That’s the answer. Just gimme some of that good old high-tech stuff they’re drinkin’, and I’ll get to writin’.

    But wait, there’s more! (You have long since realized this is going to be one of those dreams that’s going to drag on and on.) You turn the page one final time to one final table for a number of other high-tech companies, along with more instructions from the professor:

    Table 1.3

    table

    Source: Bloomberg

    Revenues, shares, and market cap are in millions.

    Needless to say, given the data for these other high-tech firms, you will not make the mistake of thinking that high tech equals stock market success. (Never even considered it.) Instead, you will make abundantly clear why Microsoft and why not Apple, why Oracle and why not Informix or Sybase.

    Okay, I’m hosed. I’ll just go up and tell the prof that for one reason or another I missed every one of his classes, read none of the books, and can I get an incomplete?

    And then you wake up. It was the Arabic. What a relief. Back to the real world. I’m in control.

    Well, yes and no. You can let go of the Arabic, all right, but until you can answer the exam question in your native tongue, you should neither buy nor sell a high-tech stock.

    CRASH COURSE

    The first objective of The Gorilla Game is to help you correctly answer this test question. We don’t think it’s going to take a semester. In fact, we think we can get you there by the end of Chapter 4. At that point you should have the necessary knowledge to explain in detail why high tech is treated so differently from other market sectors by the stock market, and why some companies end up big winners while others don’t. You will have the understanding needed, in other words, to buy and sell high-tech stocks.

    After that, we want you to put your newfound knowledge to work to play the gorilla game, to build personal wealth for you and your family while following a conservative, not an aggressive, investment strategy. Enabling you to do so is the second objective of this book. We’ll teach you the rules of the game in Chapters 5, 6, and 7, helping you to build a comprehensive map of the high-tech terrain and then, within that context, to stalk and capture gorillas. To sum all this up, Chapter 7 closes with the Ten Rules for Playing the Gorilla Game which we expect you to photocopy and pin to the wall (zealots may wish to tattoo them on their wrists, but we are concerned about how that might affect the handling of future revisions). To lock in these lessons we will then play out three separate case study gorilla games—one historical, one recent, and one still in progress—in Chapters 8, 9, and 10, respectively. And finally, we will close our description of the gorilla game proper in Chapter 11, by looking into the processes and the tools you need to play along at home.

    The twelfth and final chapter will address investing in the Internet. In the first edition of this book, we sought to carve out the gorilla games within the Internet space. That was interesting to us, but feedback from readers said it was off the mark. The question they have raised again and again since the book’s first publication is, How does all this apply to investing in the real Internet stocks—Amazon, Yahoo!, AOL, E*Trade, eBay, and the like? How real these stocks are won’t be fully determined, we believe, until the Internet stocks undergo a major shakeout, but the question is still well taken, and so we have recast this final chapter to tackle it directly.

    To do so, however, we have had to construct additional models and structures that are not part of the gorilla game per se but help to build an intellectual bridge between it and these Internet investments. Our overall conclusion is that Internet stocks in the public market are just too volatile for any investment strategy that puts a high premium on not losing capital, and thus we do not consider them part of the gorilla game proper. On the other hand, for strategies which can put capital significantly at risk, there are ongoing opportunities for huge rewards that we believe will persist for the next decade, and we will be outlining criteria for understanding which stocks are most likely to deliver on that promise.

    Finally, we invite all our readers to come to our Web site at www.gorillagame.com and to sign up for the free gorilla-game mail list service at gg@webcom.com. The gglist, as it is called, has more than a thousand active subscribers as of this revision, and continues to be a superb source of industry insider information about the development of high-tech market sectors in light of the gorilla-game models.

    So that’s where we’re headed. Now let’s get back to this exam question and see where it is leading us.

    WHY IS HIGH TECH DIFFERENT?

    First of all, it is not the bits and bytes that make high tech so special, so you don’t have to be technical to understand what is going on. Instead, as we will explain in detail in the next chapter, it is the discontinuous innovations that make the difference. Innovation is a concept we are all familiar with—new stuff makes us happy, we buy it, sellers sell it, it’s called an economy. Discontinuity is the new idea. It means not compatible with the existing systems. Electric cars, video telephones, and Web TV, for example, all make exciting promises, but none of them can be used without much of the world changing the way they do business. Prospective customers are attracted to the compelling new benefits, but to get them, a whole lot of existing systems will have to change. That creates a battle in the marketplace whose outcome is uncertain.

    Sometimes the battle is lost, and the proposed discontinuous innovation simply disappears. The technology lives on, to be sure, finding its way into other products in a later decade, but the products themselves go to that same burial ground wherein lie the eight-track tapes, laser disc stereos, videophones, and pen-based laptops of yesteryear. Other times the battle is won, but only inside a few niche markets. The established vendors retreat grudgingly, giving up to the new paradigm a defined space, but no more. This is how IBM dealt with Apple’s Macintosh’s innovations in graphics, how Sun treated Silicon Graphics’ work in 3D imaging, and how Digital Equipment Corporation responded to Tandem’s nonstop fault-tolerant computing. If these niche markets are as far as the innovations get, if the traditional technologies can hold the line, the establishment breathes a sigh of relief. No new market, no major shift in power, just more business as usual. For the establishment, this is good.

    But at other times, the technology leaps out of its niche markets and into the mainstream. It becomes a mass market phenomenon the way PCs, local area networks, laser printers, relational databases, cell phones, voice mail, electronic mail, Web browsers, and Web sites all have since 1985. When this occurs, a massive shift in spending accompanies it, with a whole new set of vendors coming out of nowhere to produce stunning economic returns. That is, it is not just a new market coming into existence but also a whole new system of commerce to support that market. Business schools call these systems value chains or supply chains—an interdependent collection of companies working together to assemble the various product and service offerings needed by the new market. It is a revolution, and typically it does not favor the establishment, which historically has tried to resist rather than coopt new technologies. Instead, it throws into prominence a whole raft of new companies that suddenly appear on investment analyst charts because they have begun dramatically outperforming the rest of the stock market.

    So that is how a high-tech boom gets going. But why a boom? Why not just a modest growth gradually displacing the old with the new over time?

    The answer has to do with the dynamics of change, specifically the dynamics of the Technology Adoption Life Cycle, and more generally the dynamics of evolution and the idea of punctuated equilibrium. In dynamic systems—a term that describes both ecologies and marketplaces—change does not happen linearly. Instead, systems plateau and resist change until enough stress builds up to break the old system and bring in the new. The actual changeover happens in very short order as the

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