Blessed with change, or cursed by it?

Think about effect of technology before investing

by Larry Sarbit, National Post Published Monday, October 16 2006
It is not necessary mandatory. - W. Edwards Deming to change. Survival is not going to be lousy. The money still wont come to you. All of the advantages from great improvements are going to ow through to the customers. Buffett and Munger have talked at length about their negative experience in the textile manufacturing business. The industry, as Munger points out, is a terrible commodity business. According to Munger, Buffett knew this was a lousy business, earning substandard returns. Putting the required huge amounts of new capital into such a business made no sense, in his mind. He perceived that the huge productivity gains would all go to the benet of the buyers of the textiles, with none of the gains, ...to stick to our ribs as owners. One industry impacted greatly by technology that has been discussed at length by Buffett and others is the newspaper business. In the April, 2005, annual meeting of Berkshire Hathaway, Buffett points out the local newspaper, ...had an absolute lock on the economics of the community, because it had the megaphone through which sellers had to talk if they were going to get their message across to their audience. At the same time, both circulation and advertising rate increases were something that were almost a yawn to most publishers. Buffett noted this world has been turned upside down -- the industry has become highly competitive and price increases dont stick as in the past. The Economist, in its Aug. 26 edition, had a special report on the newspaper industry. The article noted the tremendous impact of the Internet on the industry. The Internet offers so many specialized sources of information and entertainment that readers can pick exactly what they want from different Web sites. The big problem the article points out, is that readers online bring in nowhere near the revenues that print readers do. All but a handful of papers offer their content free online, so they immediately surrender the cover price of a print copy. People look at fewer pages online than they do in print, which makes Web editions less valuable to advertisers. According to a consultant, newspapers need between 20 and 100 readers online to make up for losing just one print reader. The article also points out another dangerous phenomenon

2006

The only thing that appears to be permanent in our world is change. Occasionally, transformation can be helpful to business and industry economics. But, if Ive learned anything in my observations of businesses, it is that change can often hurt or even wipe you out. For example, the late 19th century saw the introduction of trains across North America that helped speed up the settlement of the West in both Canada and the United States over a few short decades -- and spelled the death of the stagecoach. One can think of investments and technology/change in two ways: 1) how will it impact a business or industry, or, 2) investing in the eld of technology directly -- those affected by technological change and those creating the tech revolutions. Investing directly in companies creating new technology is something I have written about, especially during the Great Tech Bubble of 2000. These businesses in general have characteristics I like to avoid: a structure built on constant change, high capital reinvestment requirements, and eeting market domination -usually followed by intense competition and an unpredictable future. Warren Buffett, the investment icon of Omaha, placed technological change and impact in perspective speaking at the Berkshire Hathaway annual meeting in 2000. ...we should be thinking all the time about whether developments in the tech area threaten the businesses that were in now, how we might counter those threats and how we might capitalize on opportunities because of them. Its a very, very, very important part of business now. And it will become more important in the years to come... In Poor Charlies Almanack--The Wit and Wisdom of Charles T. Munger, Charlie Munger, Berkshires vice-chairman, said The Great Lesson in microeconomics is to discriminate between when technology is going to help you and when its going to kill you. And most people do not get this straight in their heads. Munger adds, ...there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot of money in a business thats still

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Probity. Discipline. Independence.

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-- the wild success of free dailies. In Europe, they currently make up an amazing 16% of daily circulation. Technological revolutions such as the Internet have apparently fundamentally changed the newspaper industry from a secure, predictable and highly protable past to an unsure future. On the ip side, a great business is one that uses technology to enhance their business, to build bigger competitive advantages and to lower costs. One example is Clear Channel and its huge outdoor advertising division. The recent development of giant colour TV screens is likely going to enhance this business tremendously, as static billboards, with only one advertiser over a month or more, are transformed into moving ads with multiple advertisers on a minute-by-minute basis. Although its impact is likely a few years out, the company, which has a lock on its locations in outdoor displays, will see its revenue per site potentially explode. One thing we certainly know -much more change is on the way, probably at a faster pace. All investors must look at the shares of businesses they either own or are contemplating ownership in and give careful thought as to whether technology will end up being a friend or foe.

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