Thomas Kuhn, the American physicist and philosopher, is perhaps best known to the public for the phrase “paradigm shift.” In his book The Structure of Scientific Revolutions, he describes the differences between ordinary scientific problem solving -- what he termed “normal science” -- and scientific revolutions. His concept of nonlinear evolution became so widely adopted by popular culture and business that today the phrase he coined has become a cliche.
That is a shame because, despite its well-worn status, it is still a very useful construct. Every so often, a business totally upends its industry and the phrase is wholly applicable. Beyond mere iterations or gradual progress, these companies completely change how they and their competitors do business, from what they sell, to how they generate a profit.
Apple Inc., Amazon.com Inc., Alphabet Inc. (Google) and Uber Technologies Inc. certainly qualify. Other companies, such as Netflix Inc., Tesla Inc. and WeWork Cos., are doing the same.
Let’s consider a few of these companies. Perhaps we might discern a pattern that investors might find useful.
Apple
The world’s most valuable company -- and my bet for first with a trillion-dollar market capitalization -- has revolutionized so many businesses that it is difficult to keep track. Co-founder Steve Jobs remade entire industries -- creating the first successful digital music store; turning mobile phones into portable computers; and most recently smart watches, which seem to be devastating Swiss watch manufacturers. In a challenging era for retail stores, Apple stores have higher revenue per square foot than just about anyone else. The list of companies damaged by Apple is astonishing. The only other company close to Apple in terms of this disruptive paradigm-shifting destruction is...
Amazon
Delighting customers? Free delivery? Cloud computing? Rethinking retail? Logistical efficiencies? None of these are paradigm-shifting.
What really makes Amazon unique is its virtually unlimited access to capital at almost no cost. This minimal cost of capital has allowed Amazon the disruptor to identify and exploit market inefficiencies that form the basis for other businesses’ profits. This is what Amazon founder and Chief Executive Officer Jeff Bezos meant when he said, “Your margin is my opportunity.”
My Bloomberg Gadfly colleague Shira Ovide, writing in Businessweek, observed that “executives at the biggest U.S. companies mentioned Amazon thousands of times during investor calls last year, according to transcripts -- more than President Trump and almost as often as taxes.”
The unique patience that Amazon investors have shown during the past 20-plus years has been rewarded. Despite only modest and not very consistent profits, Amazon is now the third-most valuable company, and is headed by the world’s wealthiest person.
Alphabet
Most people have the wrong idea about what makes Alphabet’s Google core search engine product such a game-changer: Yes, Google’s search is good, better than most. But what set Google apart was AdWords, its revolutionary method of automated search monetization.
In 2017, Alphabet’s revenue was more than $100 billion; almost all of that came from advertising, the majority of which was AdWords. It has had a devastating effect on traditional media companies and advertising firms. Calling this a paradigm shift may be understating it.
Uber
Perhaps the most interesting paradigm shift the past few years has been Uber’s ride-hailing app. Ignore for the moment the company’s numerous scandals and the trending #DeleteUber campaign on Twitter, and consider what the company has accomplished in less than a decade: 2 million Uber drivers have taken 40 million riders on 5 billion trips in 77 countries and 616 cities worldwide. As of today, Uber completes 10 million trips every day. Those are astonishing statistics.
Whether it deserves to be the world’s most valuable closely held company is another question entirely. Still, no one can say Uber hasn’t changed the rules of the transportation industry.
Tesla
I am a big fan of the company, and its fast, beautiful rides. There is a counter-argument that Tesla isn't truly a paradigm-shifter. Yes, it sells cars direct to consumers, without the need for middlemen dealers, a fairly unique arrangement. So too is the company’s auto-upgrading software a first for a mainstream vehicle. But its core product -- an all-electric car with self-driving capabilities -- is far from unique. Many other companies have produced either electric-only or electric-hybrid cars.
What’s interesting is that Tesla has forced the rest of the automotive industry to go along with it. Other carmakers, perhaps having learned a lesson from watching Apple and Amazon destroy competitors, have switched rather than fight. Instead of ceding the electric-vehicle market to the Silicon Valley-based interloper, they have responded aggressively to the e-threat. Every major automaker -- from General Motors to Volvo to BMW to Toyota to Porsche and Mercedes -- has aggressively embraced electrification of their fleets.
Tesla is not yet a stock-market darling --it ranks No. 317 among the world's most valuable companies, with a market cap of about $58 billion -- but it has already changed the entire industry. The supreme art of war is to subdue the enemy without fighting, wrote Sun Tzu. Regardless of what happens to Tesla’s stock, it has already won the war over fossil-fueled vehicles.
The companies discussed above were a fraction of their size a decade ago, and Uber didn’t even exist. Yet all found ways to exploit pressing problems. More than simply executing their founders’ visions, they have all continuously, with fits and starts, reinvented themselves.
It looks much easier in hindsight to see what these companies got right than it is to say which companies will be their equivalent in the future. Nonetheless, if you can manage to identify the companies that will cause the next paradigm shift, you might have a budding career as a venture capitalist ahead of you and possibly as a very good investor.
by Barry Ritholtz
