Game-changers and disruptors

Buzzwords associated with this concept include:

• Collaborative software allows many users to share information by collaborating on a common platform e.g. Uber and Aconex;
• The network effect increases the number of users with a common denominator, usually location, creates an exponential increase in efficiency e.g. Airbnb and Domino’s online;
• First-mover advantage suggests that the first company to establish critical mass and meaningful scale gains an extremely strong position e.g. Google Search and Carsales;
• Global operational leverage refers to those businesses that can spread their cost base over a global customer base providing a cost advantage over localised competitors e.g. Netflix, Amazon and Aristocrat’s online games.

The preference at Pengana has been to find existing companies with proven robust business models and competent management at the right price who are using technology to either grow their addressable target market; lower costs through efficiencies or strengthen their customer service proposition.

Two pertinent examples come to mind.

ResMed, a home-grown global medical device company that designs, manufactures and distributes flow generators and masks to treat sleep apnea. By connecting each flow generator through a network similar to Amazon’s ‘Whispernet’ for the Kindle, the company has successfully connected patients, sleep doctors and equipment suppliers to a common database that enhances efficient and effective service at substantially lower cost. First-mover advantage has provided sales momentum in excess of 50% per quarter while simultaneously establishing a closer brand connection with its customers and end-users¹.

Tatts Group, the domestic lottery provider, has successfully increased its distribution of products by offering them online. Previously, lottery tickets were sold exclusively through news agencies. For every $109 spent by the consumer on tickets, $9 stayed with the Newsagent as a distribution fee, $60 went to [their?] players as prizes, $30 went to the government and $10 remained with the operator to cover costs and profit². The online offering has broadened the company’s target market without requiring an intermediary or increasing its associated distribution costs; while simultaneously creating a direct interaction with its customers.

The Darwinism of modern capitalism continues to allow the strong players to survive (and even flourish) while whittling away the inefficient. Our challenge as investors is to be able to identify and back the winners while reducing the risk of being led down an evolutionary dead end. Be careful, it really is a jungle out there!

¹. Resmed, March and June Quarterly Earnings Report.
². Numbers as per company meeting notes.

Any opinions or analysis expressed should not be considered a recommendation or solicitation to purchase or sell any security. It should not be assumed that any investment in this security was, or will be, profitable.