ITWeb: What brings you to SA?
Kippola: Two reasons really. Firstly, I have been brought here by our company`s SA affiliate Espi'al Consulting to present at an Investec seminar. I will talk about the book and hi-tech investments. Secondly, I am also here to meet the local Espi'al team.
ITWeb: What is the objective of the book?
Kippola: To help people understand the unique dynamics of hi-tech markets and how competitive advantages are formed in these markets so that they can make better informed investment decisions.
ITWeb: What is competitive advantage?
Kippola: Some hi-tech categories eventually evolve into so-called "winner takes all markets" where one company becomes overly dominant in its space. Microsoft, Intel, Cisco and Oracle are just some examples. These companies were able to create such huge competitive advantage by having product architectures that have high switching costs associated with them.
When you as an end-user start using Microsoft Windows and plug all kinds of other software into it, it is pretty hard for you to switch to someone else`s operating system, because you have spent so much time and money on that environment. As a result you are unlikely to buy a competitor`s product and in fact, you are likely to stick with that operating system through all the versions and keep buying more.
ITWeb: What makes the hi-tech marketplace different from the consumer market?
Kippola: Let`s look at Coca-Cola for example. Its competitive advantage is brand. Yes, the distribution channel is important, but brand is key in this market.
In hi-tech companies, competitive advantage is very broad. The key here is to find the product category that has the characteristics of a strong competitive advantage. And we have seen proprietary architectures time and again in the hi-tech arena. You get locked in - once you buy a specific product it is difficult to switch to a competitor because it is too expensive.
ITWeb: How do you know which companies are going to get to that competitive advantage and become a "gorilla"?
Kippola: You don`t. In fact, in our book we say that in the early stages of the market you can probably determine the two or three gorilla candidates. At some point in the life of product categories there are usually two, three or sometimes four companies that have the chance of becoming a gorilla. What we say is, invest in all of them. Ultimately in these types of markets the upside return that you get from holding the eventual gorilla far outweighs the losses that you might take from the followers. And often with the followers you don`t lose money - you just don`t make as much money as you would have on the gorilla. These followers on average do very well.
The book offers you ideas to use as a framework for investing in hi-tech companies. But, ultimately what counts is superior knowledge and an in-depth understanding of the marketplace. You can use the book, but you still need to do your homework in order to figure out what categories are the next hot categories and which are the hot companies within those categories.
ITWeb: So what is the next technological trend?
Kippola: There is a huge trend of what I call business-to-business digital marketplaces taking shape. What we see is that companies are developing online marketplaces where multiple buyers and multiple sellers come together to buy and sell business goods or services.
At the moment there are almost 300 of these business-to-business digital marketplaces for mundane things. And it is expected that by the end of the year there will be as many as a thousand. To me, this is probably the hottest, coolest trend I`m seeing in the entire technology universe. I think it is going to reinvent many areas of the world economy.
ITWeb: Can you give us an example of how these marketplaces work?
Kippola: Let`s look at three telecom companies that have formed such a marketplace to sell off excess long-distance capacity. In any given month, the 100 leading long distance carriers in the world have excess capacity on their networks. Also in any given month these companies are buying and selling capacity to each other even though they are competitors. Historically, the process of buying and selling capacity was to get on the phone and call other telcos until your company has found more capacity. This was a very inefficient process.
Three telecoms companies have now formed a digital market where instead of me making 60 phone calls, I can now just put one request on the Web saying that I need so much capacity for November, for example. The marketplace then figures out who has that capacity available for November and allows me to make the transaction on the Web site. It will then switch the telephone lines when the time comes so that it works seamlessly. And I as the buyer don`t even know where I got the capacity.
ITWeb: How do small companies become gorillas?
Kippola: By finding a market that has not gotten to hyper growth yet. By getting into the market early, they get a first mover advantage. The small companies get a number of key customers, which gives them momentum. It works like a snowball effect, so that by the time the product gets into the mainstream market, the mainstream adopter doesn`t want to go with anybody other than the leader.
The mass-market is much more likely to follow than lead. They say, let`s go with a Microsoft or Cisco.
ITWeb: Talking about Cisco - how did it become a gorilla?
Kippola: Firstly, Cisco had one real success which created that momentum. It was in the router product category. After it won this war it had the opportunity to take a shot at becoming the gorilla of the larger networking space.
The issue in computer networking is that you have many different networking technologies - routers, switches, hubs, Ethernet and DSL. These technologies are too complex for many companies to buy one part from Cisco, another from Nortel and then piece it all together.
If there is a vendor that provides the entire solution, companies, especially the medium-sized ones, would rather buy that solution from one vendor because that vendor can probably make the parts work together better than several vendors selling you separate parts.
ITWeb: Finally, where do best-of-breed products fit into this? Can they become gorillas?
Kippola: What generally happens here can be divided into two issues. Firstly, when a new product category comes out, the early adopters are willing to go ahead with best-of-breed because there are no complete solutions available. So if you are an early adopter you almost have to by definition choose best-of-breed.
Secondly, only very large corporations can afford best-of-breed. It is very expensive to weave these different products together. So the only companies that can economically justify weaving different products together are very large companies. Medium-sized companies probably find it more economically rewarding to go with an overall solution from one vendor rather than stitching pieces together.
So what happens to these products? They usually get bought out by large companies and are incorporated into their systems, or they stay small.
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