There has been a great deal of argumentative discussion regarding which consumer tech companies will dominate the marketplace in the next few years. I used to fall into the Microsoft (MSFT) camp. I even went so far as to put together a lengthy analysis for Seeking Alpha on how Microsoft will take the smartphone and tablet market by storm with the upcoming release of Windows 8 and Windows Phone 8. I formulated a thesis based on historical data and examples of how other electronics companies have come from out of the blue to usurp entrenched foes. I then compared this with the market positions industry leaders, Google (GOOG) and Apple (AAPL), and my perception that Microsoft would soon have the strongest product in the mobile operating system market. Overall, I thought I put together a strong conducive argument that Microsoft would come out as a winner over these two industry leaders.
But I never tried to publish that article. It dawned on me that every statement I made was based on one of three speculative assumptions:
- I assumed that people would like Windows 8.
- I assumed that the launch would go off without a hitch.
- I assumed that Google and Apple or some unseen competitor would not come forward with a comparable product.
Although up to now, I do not feel like I have been vindicated. I know that even if Microsoft comes to dominate the consumer mobile market it can just as easily be dethroned and lose more shareholder value than it would have created. It has certainly happened before and it is bound to repeat itself. Just look at former market leaders like Research in Motion (RIMM), Nokia (NOK), and HTC (TPE:2498). Both RIM and Nokia are prime examples of how users can so easily abandon one operating system or product line for whatever new flavor has hit the market. Nokia went from dominating the landscape with Symbian while HTC used to produce some of the most beautiful hardware on the market. Now Symbian has been abandoned in favor of Google's Android and Apple's iOS and HTC has been cast off in favor of Samsung's more attractive hardware designs. This led to HTC reporting Q3 Year/Year profits down 79% and Nokia burning cash every quarter just to stay afloat.
Just look at the table below and you can see how fickle consumers have been in this market over the past year alone. It is hard to find another market as competitive as the smartphone market where one company can grow double its position while another is cut in half.
Top Smartphone Operating Systems, Shipments, and Market Share, Q2 2012 (Millions)
Q2 2012 Shipments
Q2 2012 Market Share
Q2 2011 Shipments
Q2 2011 Market Share
Windows Phone 7 / Windows Mobile
Source: IDC Worldwide Mobile Phone Tracker, August 8, 2012
This line of thinking applies to the behemoths of Apple and Google as well. They have both seemingly shown strategies for conquering this fickle market, but their daily efforts to be innovative will eventually slow. The cracks have already begun to show through the shortcomings in Apple's iOS 6. If Microsoft or another upstart manages to launch a more innovative product then it is clear that these two companies could go the way of Nokia or HTC.
Because the smart-mobile industry is still in a high growth phase, it is impossible to predict which company will come up with the most innovative product tomorrow or even a year out from now. Each of these companies are led by great management and picking one over another is merely a speculative guessing game over what the future will hold.
What's a Better Bet?
Rather than focusing on speculation over tomorrow, investors should focus on buying companies with stable market positions and the classic competitive moat. Although sectors such as consumer staples and industrial goods are less dazzling, they will not leave one questioning the validity of their long-term investment thesis on a daily basis. These sectors are not trying to impress anyone. Instead, they focus on developing pricing power and specific competitive advantages.
Companies that fall in this category are already deeply engrained in the marketplace. You couldn't imagine living without Colgate toothpaste could you? Buy Colgate-Palmolive (CL). It's certainly a boring company, but it has outperformed the S&P 500 in total return by 43% over the last 10 years. How about a company like United Technologies (UTX) that sells industrial goods based on long-term contracts? United Technologies could not possibly see net income down 79% in one year, but in total return, UTX has outperformed the S&P 500 by 116.3% over this 10-year span. I don't mean to cherry pick stocks; however, these two companies serve as good examples that even though a company is not offering a speculative story, its forward-looking stability can still lead to outsized returns.
The point to be made is that speculating on consumer sentiment can lead to fantastic returns. However, it can all come crashing down in a moment and it is impossible to predict which company the next Nokia or RIM will be. There is certainly no margin of safety in an industry where earnings can fall 80% in one year.