To The Moon

In 1997, 20% of U.S. households had access to the internet.

A dozen years later, owners of iconic newspapers like the Los Angeles Times, Chicago Tribune, Philadelphia Inquirer, and many more had filed for bankruptcy.

Disruption came quickly for newspapers once publishing online became trivial.

Contrast that to streaming, which has taken much longer to disrupt traditional TV and film media. $Netflix(NFLX)$ launched streaming in 2007, and 19 years later, one of the companies that should have been disrupted the most, $Warner Bros. Discovery(WBD)$ , is being acquired by Netflix itself for $83 billion.

Disruption happens at different speeds in different industries, and there are good reasons why. Different industries have different:

• Barriers to entry

• Switching cost

• Ability for incumbents to respond

Take the media business as a great example. The gating factor wasn’t what people wanted to consume that determined the timeline of disruption; it was the size of the files being passed around.

It took a decade for the internet to hollow out the newspaper business (text) and a few years longer for music to catch up, although much of the legacy industry is still intact, even if it looks different than it did.

20 years after Netflix launched streaming, incumbents like HBO, $Walt Disney(DIS)$ , NBC Universal, and others are not only still in business, but they’re extremely valuable and growing their own streaming services.

A similar dynamic has happened in the auto business.

I write this in the same week that $Tesla Motors(TSLA)$ , which was supposed to bankrupt the traditional auto industry, reported negative revenue growth and another decline in margins.

Disruption came for the auto industry, but the long timeline to design a car, build a factory, build brand awareness and distribution, and ultimately generate sales was so long that incumbents could respond.

$General Motors(GM)$ not only fended off Tesla, but it’s also now growing faster than Tesla, the once disruptor.

How Incumbents Respond

When we look at disruption, we have to ask three key questions.

• Can incumbents respond?

• Will incumbents respond?

• Do incumbents have time to respond?

The answer for each will depend on the industry. I’ll highlight how I look at disruption in the auto, medical, housing, and financial industries.

Auto Industry: In the auto industry, for example, incumbents can respond and have lots of time to respond because factories take time to build and an automobile purchase is made every few years, at most. The question is, will they respond?

Medical Industry: Doctors, pharmacies, medical device companies, and insurers are all intertwined in an industry that makes it nearly impossible for incumbents to respond or be willing to respond. Disruption will take time, but I doubt incumbents will have the ability to react even when they see disruption coming.

Housing Industry: What companies like $Zillow(Z)$ are disrupting in the housing industry is the local monopoly that agents have on a market. Given the existing structure, agents have little ability to respond and are incentivized to be unwilling to respond (why cut commissions from 6% to 1% if you don’t have to?), despite having ample time to adapt to a digital paradigm.

Financial Industry: Can credit card companies give up a 3% fee in order to stave off disruption from the blockchain and stablecoins? I think they can, but won’t, given their profit motivations, and by the time they do, it’ll be too late.

Investing in disruptors that can disrupt is important for investors. If incumbents can and are willing to respond, innovation may just sustain the incumbent’s power (see $Alphabet(GOOG)$ $Alphabet(GOOGL)$ and OpenAI).

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