The Gorilla Game, Revised Edition
eBook - ePub

The Gorilla Game, Revised Edition

Geoffrey A. Moore

Share book
  1. 384 pages
  2. English
  3. ePUB (mobile friendly)
  4. Available on iOS & Android
eBook - ePub

The Gorilla Game, Revised Edition

Geoffrey A. Moore

Book details
Book preview
Table of contents
Citations

About This Book

The Possibilities Are Staggering:

Had you invested $10, 000 in Cisco Systems back in early 1990, your investment would now be worth $3, 650, 000

Similarly, a $10, 000 investment made in Microsoft in 1986 would be valued at more than $4, 721, 000 today

$10, 000 invested in Yahoo! in 1996 would today be worth $317, 000

How do you get in on those deals—especially if you're not a Silicon Valley insider? How do you buy the high-tech win-ners and avoid the losers? How do you find the Yahoo!s, Microsofts, and Ciscos of tomorrow?

The answers are here, in this newly revised edition of the national bestseller The Gorilla Game. The book reveals the dynamics driving the market for high-tech stocks and out-lines the forces that catapult a select number of compa-nies to "gorilla" status—dominating the markets they serve in the way that Yahoo! dominates internet portals, Microsoft dominates software operating systems, and Cisco dominates hardware for data networks.

Follow the rules of The Gorilla Game and you will learn how to identify and invest in the "gorilla candidates" early on—while they are still fighting for dominance, and while their stocks are still cheap. When the dust clears and one company clearly attains leadership in its market, you'll reap the enormous returns that foresighted investors in high-tech companies deserve.

This new edition of The Gorilla Game has been updated and revised throughout, with new focus and new insights into choosing the internet gorillas—the companies that are destined to dominate internet commerce.

Bestselling author Geoffrey A. Moore is one of the world's leading consultants in high-tech marketing strategy. Here you'll find his groundbreaking ideas about tech-nology markets that made his previous books bestsellers, combined with the work of Paul Johnson, a top Wall Street technology analyst, and Tom Kippola, a high-tech consul-tant and highly successful private investor. Together they have discovered and played the gorilla game and now give readers the real rules for winning in the world of high-tech investing.

Step by step you'll learn how to spot a high-tech market that is about to undergo rapid growth and development, how to identify and spread investments across the potential gorillas within the market, and how to narrow your investments to the single, emerging leader—the gorilla—as the market matures.

High-tech investing can be extremely risky, but investors who learn to play the gorilla game can avoid many of the traps and pitfalls and instead start capitalizing on untold profits. Personal wealth is only a gorilla game away.

Frequently asked questions

How do I cancel my subscription?
Simply head over to the account section in settings and click on “Cancel Subscription” - it’s as simple as that. After you cancel, your membership will stay active for the remainder of the time you’ve paid for. Learn more here.
Can/how do I download books?
At the moment all of our mobile-responsive ePub books are available to download via the app. Most of our PDFs are also available to download and we're working on making the final remaining ones downloadable now. Learn more here.
What is the difference between the pricing plans?
Both plans give you full access to the library and all of Perlego’s features. The only differences are the price and subscription period: With the annual plan you’ll save around 30% compared to 12 months on the monthly plan.
What is Perlego?
We are an online textbook subscription service, where you can get access to an entire online library for less than the price of a single book per month. With over 1 million books across 1000+ topics, we’ve got you covered! Learn more here.
Do you support text-to-speech?
Look out for the read-aloud symbol on your next book to see if you can listen to it. The read-aloud tool reads text aloud for you, highlighting the text as it is being read. You can pause it, speed it up and slow it down. Learn more here.
Is The Gorilla Game, Revised Edition an online PDF/ePUB?
Yes, you can access The Gorilla Game, Revised Edition by Geoffrey A. Moore in PDF and/or ePUB format, as well as other popular books in Persönliche Entwicklung & Private Finanzen. We have over one million books available in our catalogue for you to explore.

Information

Part 1

SETTING THE CONTEXT

1

The Private Investor and the High-Tech Sector

You are having one of those dreams when you are back in college taking a final exam for a course you never actually managed to attend. This one is in economics, and there is just one question on the final. It reads as follows:
In 1998 the “Big Three” automobile manufacturers in the United States—General Motors, Ford, and Daimler Chrysler—employed 1,381,000 people to create combined revenues of $453 billion and combined earnings of $30 billion. Their combined market capitalization was $213 billion. The Microsoft Corporation, by contrast, employed a mere 27,000 people to create revenues of $14.4 billion and earnings of $4.5 billion. Its market capitalization was $342 billion. In other words, the stock market value of Microsoft exceeded that of the Big Three combined!
Explain.
You look at your watch. Okay, I’ve got two hours, I’m smart, I can do this. Think. What’s so special about Microsoft? Well, it’s a software company, of course. And cars are, well, hardware. That’s it!
But wait, there’s a second part to the question. It reads as follows:
What is so surprising in this comparison, of course, is the ratio of Microsoft’s market capitalization both to its sales (called the price/sales, or P/S ratio) and to its earnings (called the price/earnings, or P/E ratio). As you know from your readings and lectures in this class (How could I have missed all those classes? What was I doing?), the higher these ratios are, the more they show that investors are expecting a very bright future for the company. Microsoft, of course, is not an isolated example, as the following table of other leading companies in the high-tech sector, all taken from 1997 reports, will indicate:
Table 1.1
table
Please make ample use of this data in your answer.
Right. Who are these people? Intel I’ve heard of, but who’s Cisco, and is there a Pancho? Oracle? Ascend? Is this a spiritual thing?
You notice your heart rate is accelerating, and you commence deep breathing exercises. No need to panic. I can figure this out. It’s all high tech, right? High tech wins, low tech loses. That’s the answer.
You turn to the next page of the question, and you are delighted to see the following table of stock price performances outside the high-tech sector, noting that these are some of the best-managed companies in the world:
Table 1.2
table
Source: Bloomberg
Revenues, shares, and market cap are in millions.
That’s it. That’s the answer. Just gimme some of that good old high-tech stuff they’re drinkin’, and I’ll get to writin’.
But wait, there’s more! (You have long since realized this is going to be one of those dreams that’s going to drag on and on.) You turn the page one final time to one final table for a number of other high-tech companies, along with more instructions from the professor:
Table 1.3
table
Source: Bloomberg
Revenues, shares, and market cap are in millions.
Needless to say, given the data for these other high-tech firms, you will not make the mistake of thinking that high tech equals stock market success. (Never even considered it.) Instead, you will make abundantly clear why Microsoft and why not Apple, why Oracle and why not Informix or Sybase.
Okay, I’m hosed. I’ll just go up and tell the prof that for one reason or another I missed every one of his classes, read none of the books, and can I get an incomplete?
And then you wake up. It was the Arabic. What a relief. Back to the real world. I’m in control.
Well, yes and no. You can let go of the Arabic, all right, but until you can answer the exam question in your native tongue, you should neither buy nor sell a high-tech stock.

CRASH COURSE

The first objective of The Gorilla Game is to help you correctly answer this test question. We don’t think it’s going to take a semester. In fact, we think we can get you there by the end of Chapter 4. At that point you should have the necessary knowledge to explain in detail why high tech is treated so differently from other market sectors by the stock market, and why some companies end up big winners while others don’t. You will have the understanding needed, in other words, to buy and sell high-tech stocks.
After that, we want you to put your newfound knowledge to work to play the gorilla game, to build personal wealth for you and your family while following a conservative, not an aggressive, investment strategy. Enabling you to do so is the second objective of this book. We’ll teach you the rules of the game in Chapters 5, 6, and 7, helping you to build a comprehensive map of the high-tech terrain and then, within that context, to stalk and capture gorillas. To sum all this up, Chapter 7 closes with the “Ten Rules for Playing the Gorilla Game” which we expect you to photocopy and pin to the wall (zealots may wish to tattoo them on their wrists, but we are concerned about how that might affect the handling of future revisions). To lock in these lessons we will then play out three separate case study gorilla games—one historical, one recent, and one still in progress—in Chapters 8, 9, and 10, respectively. And finally, we will close our description of the gorilla game proper in Chapter 11, by looking into the processes and the tools you need to “play along at home.”
The twelfth and final chapter will address investing in the Internet. In the first edition of this book, we sought to carve out the gorilla games within the Internet space. That was interesting to us, but feedback from readers said it was off the mark. The question they have raised again and again since the book’s first publication is, How does all this apply to investing in the “real” Internet stocks—Amazon, Yahoo!, AOL, E*Trade, eBay, and the like? How “real” these stocks are won’t be fully determined, we believe, until the Internet stocks undergo a major shakeout, but the question is still well taken, and so we have recast this final chapter to tackle it directly.
To do so, however, we have had to construct additional models and structures that are not part of the gorilla game per se but help to build an intellectual bridge between it and these Internet investments. Our overall conclusion is that Internet stocks in the public market are just too volatile for any investment strategy that puts a high premium on not losing capital, and thus we do not consider them part of the gorilla game proper. On the other hand, for strategies which can put capital significantly at risk, there are ongoing opportunities for huge rewards that we believe will persist for the next decade, and we will be outlining criteria for understanding which stocks are most likely to deliver on that promise.
Finally, we invite all our readers to come to our Web site at www.gorillagame.com and to sign up for the free gorilla-game mail list service at [email protected]. The “gglist,” as it is called, has more than a thousand active subscribers as of this revision, and continues to be a superb source of industry insider information about the development of high-tech market sectors in light of the gorilla-game models.
So that’s where we’re headed. Now let’s get back to this exam question and see where it is leading us.

WHY IS HIGH TECH DIFFERENT?

First of all, it is not the bits and bytes that make high tech so special, so you don’t have to be technical to understand what is going on. Instead, as we will explain in detail in the next chapter, it is the discontinuous innovations that make the difference. Innovation is a concept we are all familiar with—new stuff makes us happy, we buy it, sellers sell it, it’s called an economy. Discontinuity is the new idea. It means not compatible with the existing systems. Electric cars, video telephones, and Web TV, for example, all make exciting promises, but none of them can be used without much of the world changing the way they do business. Prospective customers are attracted to the compelling new benefits, but to get them, a whole lot of existing systems will have to change. That creates a battle in the marketplace whose outcome is uncertain.
Sometimes the battle is lost, and the proposed discontinuous innovation simply disappears. The technology lives on, to be sure, finding its way into other products in a later decade, but the products themselves go to that same burial ground wherein lie the eight-track tapes, laser disc stereos, videophones, and pen-based laptops of yesteryear. Other times the battle is won, but only inside a few niche markets. The established vendors retreat grudgingly, giving up to the new paradigm a defined space, but no more. This is how IBM dealt with Apple’s Macintosh’s innovations in graphics, how Sun treated Silicon Graphics’ work in 3D imaging, and how Digital Equipment Corporation responded to Tandem’s nonstop fault-tolerant computing. If these niche markets are as far as the innovations get, if the traditional technologies can hold the line, the establishment breathes a sigh of relief. No new market, no major shift in power, just more business as usual. For the establishment, this is good.
But at other times, the technology leaps out of its niche markets and into the mainstream. It becomes a mass market phenomenon the way PCs, local area networks, laser printers, relational databases, cell phones, voice mail, electronic mail, Web browsers, and Web sites all have since 1985. When this occurs, a massive shift in spending accompanies it, with a whole new set of vendors coming out of nowhere to produce stunning economic returns. That is, it is not just a new market coming into existence but also a whole new system of commerce to support that market. Business schools call these systems value chains or supply chains—an interdependent collection of companies working together to assemble the various product and service offerings needed by the new market. It is a revolution, and typically it does not favor the establishment, which historically has tried to resist rather than coopt new technologies. Instead, it throws into prominence a whole raft of new companies that suddenly appear on investment analyst charts because they have begun dramatically outperforming the rest of the stock market.
So that is how a high-tech boom gets going. But why a boom? Why not just a modest growth gradually displacing the old with the new over time?
The answer has to do with the dynamics of change, specifically the dynamics of the Technology Adoption Life Cycle, and more generally the dynamics of evolution and the idea of punctuated equilibrium. In dynamic systems—a term that describes both ecologies and marketplaces—change does not happen linearly. Instead, systems plateau and resist change until enough stress builds up to break the old system and bring in the new. The actual changeover happens in very short order as the systems race to a new plateau where they can again stabilize and start the cycle all over again. This period of rapid change is called hypergrowth, and it happens only once in the history of any particular species or market.
From an economic point of view, when hypergrowth hits, the market simply explodes. Companies in hypergrowth markets experience revenue and earnings growth that goes through the roof—30% to 40% quarter-over-quarter growth is not untypical. Stock prices catapult as the market tries to catch up to what is a seemingly never-ending sequence of upside surprises. This catapult effect is the basic attraction of investing in high tech and the beginning of anyone’s interest in the gorilla game.

NOT SMOOTH SAILING

The problem for investors, of course, is that this period of change is chaotic—literally. Chaos, as it has come to be defined, is a property of dynamic systems. Its central principle is that essentially insignificant differences at the outset create hugely different consequences later on, and there is no way to rationally predict outcomes based on inputs. Why did IBM mainframes win and not Burroughs, or Univac, or NCR, or Control Data, or Honeywell? Why is Microsoft Windows on our desktops and not Unix or Macintosh or OS/2? Why is Yahoo! the portal of choice and not Excite, Lycos, or Alta Vista?
These are not academic questions. As the tables shown earlier in this chapter indicate, you can easily lose the bulk of your capital by investing in the losers in these competitions. Indeed, the volatility of high-tech stocks is so dramatic that, in the absence of a framework such as the one this book provides, private investors have typically, and we would argue rightly, shunned the sector. What else can you do in markets where, when a company misses its revenue projections by a few percentage points, it is routine for their stocks to lose 30% or 40% of their value in a single day? So, once again now, why is it Intel’s microprocessors instead of Motorola’s or National Semiconductor’s or MIPS’ or Sun’s SPARC or HP’s PA RISC? Why is it Oracle and not Ingres or Sybase or Informix? Why is it Cisco’s routers and not Bay Networks’?
At one level, there is no good answer to these questions. If there were, we could predict the winners from the outset, and instead of writing this book, the three of us might be sipping Chateau Margaux atop a penthouse on the Via Tornabuoni in Florence, contemplating which continent we should cruise to next. The fact that we are not shows that we have no way of knowing the winner at the outset. But just as the TV news networks covering national elections can declare the winners long before the last votes are in, so there are ways of predicting the outcome of hypergrowth market competitions early in the game. This we believe we do know how to do, and we will share this knowledge in detail in the chapters to come.
The Cliff Notes version of these chapters is that hypergrowth markets, in order to scale up rapidly, will often spontaneously standardize on the products from a single vendor. This simplifies the issues of creating new standards, building compatible systems, and getting a whole new set of product and service providers up to speed quickly on the new solution set. In short, it makes it much easier for the new value chain to form. The vendor on the receiving end of this spontaneous act of standardization enjoys an extraordinary burst in demand. Everyone wants its products because they are setting the new standard. Its competitors, by contrast, must fight an uphill battle just to get considered. It makes for a huge competitive advantage.
This huge competitive advantage, in turn, comes during a period of intense buying activity—something akin to what the purveyors of Cabbage Patch dolls, Tickle-me-Elmos, and Power Rangers experienced in their respective blockbuster Christmas seasons. But whereas the Christmas toy season brings us examples of eye-popping but quick-fading fads, high-tech hypergrowth markets result in long-standing institutions. This means that the big winners in these markets not only profit from immediate spikes of demand, but even as the initial demand gets fulfilled, are creating dominant market shares that will support them for years and years to come.
These big winners are the gorillas of the gorilla game. They represent the most rewarding investments on the planet, and our goal is to help you build a long-term portfolio made up of these stocks.

STOCK MARKET INVESTING—MASTERY OR MYSTERY?

That brings us to the matter of buying and selling stocks. There is a huge amount of lore about the stock market, and there is no lack of people who will explain to you why it is all wrong and why their theory is the right one. This might make for some entertaining comedy if we all were not so dependent on the market for building the personal wealth needed to provide for ourselves and our families. Since we are very much in that state of dependence, however, it is no laughing matter.
We believe that there is a large body of conventional theory about the stock market that is substantially correct, and while our intent in this book is to make an original contribution to it, we are hoping that our ideas are neither controversial nor disturbing. Indeed, when it comes to sophisticated investors reviewing our work, the comment we would be most gratified to hear is, “Well, duuuhhh!”
The fact is, however, many people who need to invest—and indeed are investing today—are not all that sophisticated when it comes to understanding the stock market. Lacking an understanding of its dynamics, they have no formal basis for knowing when to sell or when to buy. We believe this can be extremely dangerous, and our intent is to use Chapter 4 of this book to change all that. It is not an easy chapter to read, and you may have to read it twice, but surely that’s a lot better than being thrown back into your nightmare exam, or worse still, setting out to provide for your family’s future with an incomplete understanding.
To give you a head start: The stock price of any company is based on the present value of all its anticipated future earnings. A share in the company is simply a share of its future profits. Any buying or selling of shares requires the buyer and seller to come to an agreement as to that value. The stock market is nothing more than the accumulation of a whole lot of those agreements, and a company’s stock price represents the current point of equilibrium between those who would take it higher and those who would take it lower. The company’s total value is simply its stock price, or price per share, times the number of shares outstanding, or what is called its market capitalization, or just market cap for short.
What will be obvious by the end of Chapter 4 is that the market caps of companies selling into an ...

Table of contents