Disruptive technology

A disruptive technology is one that, when introduced, either radically transforms markets, creates wholly new markets or destroys existing markets for other technologies.

For an investor, disruptive technologies represent both opportunities and threats. A disruptive technology will be an opportunity for at least those who bring it to market. It may also boost related markets. On the other hand change is usually bad for some - especially the dominant suppliers to the market being disrupted.

Examples of disruptive technology (current and historical) include:

  • VOIP, which is destroying voice telecoms revenues while increasing data revenues. The internet in general has both created and destroyed many markets.
  • Digital cameras, which are destroying the market for photographic film, but at the same time creating markets for storage devices and photo printers.
  • Railways, which displaced many forms of transport such as canals while creating demand for fuel, steel and other materials they needed. They also encouraged the emergence of new services.
  • Video recorders and television hugely reduced the cinema industry, but the film industry benefited from new income streams.

There are many other obvious examples such as electricity, telephones etc.

It can be very difficult to foresee the impact of a disruptive technology. Investors in the 1990s rightly thought that the internet was a disruptive technology that would have a huge impact. Investors over-estimated how much money could be made from the change and how quickly. At the same time investors misjudged who would make money. For example, many bought media stocks, such as recorded music companies, that now look likely to lose revenues as a result of lower barriers to entry from the introduction of new channels of distribution.

Investors who do successfully call the impact of a disruptive technology can make extremely good returns and save themselves losses on the losers.

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