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Big Tech dominates the global investing landscape like never before.
Today, the world’s four largest technology stocks – Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT), Alphabet (Nasdaq: GOOGL) and Amazon (Nasdaq: AMZN) – account for 23% of the market capitalization of the S&P 500.
Put another way, just 0.8% of the index’s companies account for close to a quarter of its value.
Such dominance of technology in the stock market may be unprecedented. But investors’ focus on the promise of the technology sector certainly isn’t.
Most investors equate the first technology boom with the dot-com era of the 1990s.
Few are old enough to recall the tech boom of the 1960s and early 1970s.
Yet that period was also flush with innovation. It witnessed the invention of the first video game console, the computer mouse, LEDs, lasers and even the first email.
In the 1960s, the “Nifty Fifty” – the 50 fast-growing large cap stocks – were all the rage.
And the one-decision leading tech stocks of the era were IBM (NYSE: IBM), Kodak (NYSE: KODK), Polaroid and Xerox (Nasdaq: XRX).
But how many of those names are still relevant?
Today I want to review the rise and fall of these former tech giants – and what their journeys teach us about the dynamic nature of tech investing.
Xerox: The Dynamic Upstart
Founded in 1906 as the Haloid Company, Xerox was the Google of its day.
For instance, Xerox’s dominance turned its name into a verb. And just as they did with Google, early investors made a fortune in Xerox.
One hundred shares of Xerox, purchased for $20 each on April 17, 1936, turned into 108,000 Xerox shares by 2000.
At their peak price of around $155 in April 1999, those shares were worth about $16.8 million.
Xerox was a cutting-edge innovator. In the late 1950s, it approached IBM to help fund and sell its copier post-launch. IBM rejected Xerox, saying its copier was too heavy for IBM’s typewriter salesmen to carry.
Xerox was forced to market it alone and launched the first office copier – the 914 – in 1959.
Cleverly, Xerox charged customers a nominal monthly fee covering the first 2,000 copies. After that, the company billed $0.05 a copy – Xerox’s copy machine was practically printing money.
Xerox quickly locked up a 90% market share of the copying market.
Alas, Xerox got too big for its breeches.
In 1968, the U.S. Federal Trade Commission charged Xerox with monopolistic practices. As a result, Xerox signed a consent decree in 1975, under which the government forced Xerox to grant competitors patent licenses.
IBM introduced its office copier in 1970. Xerox sued IBM for patent infringement. It won the case. But it was awarded only $25 million.
Xerox’s monopoly on its money-printing machine was broken.
But then in 1973, Xerox’s Palo Alto Research Center developed the world’s first personal computer, called the Alto.
The Alto boasted a mouse, a user-friendly interface and networking capabilities.
The problem is Xerox never marketed it.
Why? According to former Xerox employee Mike Tubbs, Xerox’s top managers were from Ford. As a result, they believed in making modest improvements to existing products instead of launching innovative new ones.
Instead it took upstarts like Apple and Sun Microsystems to develop personal computers modeled on the Alto. Xerox had long lost its innovative edge.
Xerox is still around today. But with a market cap of just $3.6 billion, it has morphed into a small cap stock.
Kodak Versus Polaroid
IBM was Xerox’s fierce rival, and Polaroid played that role for Kodak.
Kodak was the market leader in photographic film.
Polaroid invented polarizers for sunglasses and 3D imaging.
In that era’s iPhone moment, scrappy Polaroid launched the “pocket-sized” SX-70 color instant camera in 1972.
The SX-70 single-lens reflex instant camera produced a fully developed color print in one minute.
It was an instant success.
Not surprisingly, Kodak promptly copied Polaroid’s technology. As a result, Polaroid sued Kodak for patent infringement in 1976. Polaroid won an astonishing $925 million in damages.
The size of the settlement forced Kodak to abandon all instant cameras and films.
Meanwhile, Steve Sasson, a Kodak engineer, invented the first digital camera in 1975.
How did Kodak’s management react?
“That’s cute – but don’t tell anyone about it.”
After all, the digital cameras would cannibalize Kodak’s massive revenues from film photography.
But the digital photography cat was out of the bag.
In the end, Polaroid declared bankruptcy in 2001. Kodak lasted until 2012.
Three Lessons for Today’s Tech Investors
What are the lessons for today’s tech companies – and investors?
First, the life cycle of technology firms can be remarkably predictable. The names may change. But the plot of the story invariably runs something like this…
An entrepreneurial upstart develops a novel technology that becomes a hit. Established players copy it. Lawsuits ensue as rivals battle it out in the court system.
If the upstart becomes too dominant, the government clamps down.
In the meantime, the upstart itself becomes an established player. It fails to reinvent itself. Its success story fizzles.
Once you understand this story arc, you can make money on technology companies on the way up and on the way down.
Second, there is no such thing as a one-decision tech stock.
Today, few believe that any company will ever rival the power and influence of Apple, Google or Amazon.
Yet investors thought the same about IBM, Xerox, Kodak and Polaroid. And as recently as 2007, BlackBerry and Nokia boasted unassailable market positions. Today, of these companies, only IBM remains of any consequence.
Third, technological progress is messy and chaotic.
Technology companies must reinvent themselves constantly. If they don’t, their demise is not a matter of “if” but “when.”
Xerox ignored the PC. Kodak buried digital photography.
Yes, new technologies will cannibalize sales of existing products. But that’s just the way technology works.
On April 9, 2007, Apple sold its 100 millionth iPod, which accounted for the bulk of Apple’s revenues.
Today, the iPod does not exist.
Apple was smart enough to reinvent itself. Time will tell whether that relentless commitment to reinvention will continue.
I can’t tell you which of today’s tech giants will still be around 40 years from now.
But I can tell you that the list of the world’s most valuable tech companies will look very different.
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