Back in the 1990s, a plethora of technology companies were funded and many went public. The stock market took them all to atmospheric highs and then it crashed. Some survived; most did not. The companies that crashed relied on "eyeball" valuation, or were valued based on how many people viewed the sites. It made sense because so many of the early websites were "brochure-ware," meaning that they were a digital representation of what they had previously printed in lovely brochures.
Today feels a little like the 1990s when so many companies are able to attract funding or positions in incubators. While the 1990s seemed to promote brochure-ware, the 2000-teens seems to promote point tools. It is far easier for start up companies that to do one thing really well – a "point tool" – to get funding than other types of companies. Why? Perhaps it is the allure of finding the next Instagram. Recall, Instagram is photo sharing, is very popular amongst teens, had not developed a revenue model and yet was able to garner a $1B purchase price by Facebook. Nice payback. Now, everyone strives to be the next Instagram. But are the multitude of point tools sustainable?
What about this for a controversial statement: Technology companies that become platforms or ecosystems are sustainable and, therefore, attractive long-term investments. Following are a couple examples in order of their maturity.
Apple was a great example. It created a new paradigm – consumer technology – at a time when the world looked to corporate IT (think: Cisco) as the technology bellwether. Apple was the sole model for establishing a consumer technology platform. Apple was the first to (very successfully) focus on a closed-IT system for the consumer and it was radical to Wall Streer in its approach. Its first success was the iPod, and Apple leveraged this to create an iPlatform, an ecosystem built around its closed operating system and closed products. The result: a ten-year stock run from $7.10 to $705, a hundred times return.
Amazon started as an online bookseller. It developed its own infrastructure to facilitate e-commerce. Its first major contribution is "One Click" to purchase which is now a ubiquitous essential e-commerce tool. Subsequently, Amazon developed a broader infrastructure for any type of digital properties, not just e-commerce, called Amazon Web Services. Amazon has transcended from an online bookseller to a platform company. Since its May 1997 IPO (split-adjusted) price of $1.50, the platform company has appreciated to $260, or 17,233%.
eBay was the first and most successful company showing how the internet would obliterate geographic limitations and transform super old-school staid business of classified ads and transform that into a $74B business. The story is similar to Amazon: In order to facilitate its underlying business, eBay purchased PayPal in July 2002 for $1.5B. Today, PayPal facilitates $14B in payment volume, up over three times since last year, and accounts for 39% of eBay's revenue. This represents 19% of global e-Commerce and just 2% of global commerce, leaving generous room for upside. eBay itself is becoming a formidable third-party reseller or marketplace ala Amazon in its own right. eBay has moved beyond a person-to-person auction site to become a formidable marketplace and mobile payment platform. eBay has appreciated from its IPO over 7,000%.
Google, the search platform that delivers ads, has transformed itself with an operating system powering an ecosystem, ala Apple, and its goal is to ubiquitous. Its potential market share will depend on partners like Samsung, but this strategy worked superbly well for Microsoft for decades with the powerhouse of Wintel, Dell, Hewlett-Packard and IBM. Google has now become the market share leader in mobile operating systems, powering more mobile devices than any other company. In fact, Google, on a high level, appears to be more like two companies: Search and Mobile Operating Systems. And, both operate as platforms. In Search, Google's challengers are Facebook and Microsoft and, in mobile, it has taken on Apple. In both cases, Google appears to be winning, at least for the time being. Google, similarly, has appreciated 830% since its IPO.
Facebook connects people to each other. It is the pioneer in social networking. It needs something more because now that people are accustomed to this, they will want something more, different, cooler, more customized, etc. Think of Apple and its loss of gloss to Android. This was Apple's Achilles heel and it could happen to Facebook. Challenges are popping up all over to Facebook's "broadness" – such as private social networks, or what I expect to see, special-interest networks. While Facebook has impressive metrics, Facebook has yet to prove how it can transform itself into a platform or infrastructure beyond a tool to connect friends with each other. It is attempting to do so with Facebook Search and Facebook company pages. It must find its ultimate platform. Since its IPO, Facebook has depreciated 28%.
Clearly, those companies that create or have created infrastructure platforms have returned investors the greatest appreciation. Investors should be looking at companies today that have the ability to transform an industry from analog to digital or have the ability to create the infrastructure to facilitate digital properties or transactions. Point tools may have enormous short-term success but may not be sustainable as attractive, outsized long-term investments.
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