The Tycoon Report

How to Identify a Great Technology

Wednesday, May 16, 2007 | Wayne Mulligan

When I check out a technology (as part of a company I'm thinking of investing in,) I typically see if it possesses any or all of the following three characteristics:

1. Different
2. Economies of Scale
3. Networked

So what does this all mean?

Let me explain …

1.  Basically, is this technology fundamentally different from anything else currently out there, AND is it difficult to duplicate?

Because in the world of technology, being different just isn’t enough.  If all it takes is two kids in a basement to copy what you’ve just invested millions to create, then the technology itself isn’t where the value is.

Let me give you an example ...

In the early days of the Microsoft (Nasdaq: MSFT) Windows Operating System, we had a piece of software that cost millions of dollars and thousands of man hours to create.  This was also before the Internet, and it was, therefore, almost impossible to get a bunch of “open source” programmers together to create a competing product like Linux.

So, at the time, Microsoft certainly had a technology that was different and difficult to duplicate.

Now, the story has changed quite a bit.  We have competition from a FREE Operating System known as Linux, and with the number of web-based software applications being launched, Microsoft is in serious trouble.

This illustrates two important points:

1. Investing in technologies that are different just isn’t enough.
2. We have to invest in technologies that are also difficult to duplicate.  In order to do that effectively we need to know the impact of other technologies.  For instance, it would’ve been impossible for Linux to have been created unless the Internet was around.

2.  Does the technology benefit from economies of scale?

Basically, this means does it get cheaper to produce the technology or does the technology get fundamentally better with more people having bought or used it?

This is actually much simpler than it sounds, so let me give you an example that I’m sure you can easily relate to …

Google (Nasdaq: GOOG) has a technology that benefits from more people using it.  Now, most folks think Google is just a way to find information on the web – in fact, it’s probably the most accurate way to find information on the web.

Why is that so?

It’s because every single time you search for something and find what you want, Google becomes smarter. 

That’s right, Google’s internal technology is built to teach itself what people like and what people are looking for, thus making future search results more accurate and relevant.

That’s why Google has the reputation for being the place to go when looking for information on the web.  It’s also why the company went from being worth $0 to over $100 billion in 8 years!

3. Does the technology benefit from what’s known as the “Network Effect”?

Unlike Microsoft and Google, many technology companies out there have products/services that are easy to duplicate and don’t get better the more users they have.  However, these technologies can still have a decisive advantage over their competitors by utilizing what’s known as the “network effect”.

Basically, the network effect states that each person who uses a particular service or product adds an exponential amount of value to the next person who’s using it.

For instance, the entire Internet is based upon the network effect.  Every single computer that connects to the internet is not worth much by itself.  But when all of these computers and servers are connected together at the same time, that collection of information and people becomes very valuable.

If you want to think about this in a commercial sense, then think about America Online (NYSE: TWX).  Here was a service that was able to maintain a dominant position in the Internet Service provider market – even with a ton of other competition flooding the space – all because it had a large, “networked” user base.

If my friends all had AOL, and I decided I wanted to get on the Internet, then there was a very high probability that I was going to get AOL, too – that’s the network effect.

What Companies have Great Technologies Now?

You didn’t think I was going to just leave you hanging with a couple of examples of great technologies of the past, did ya?

I want to go over some of the companies of today that I think are in a great position to capitalize on the superiority of their technologies.

Intel (Nasdaq: INTC) – Intel is finally surging passed AMD as it regains market share and cuts prices.  How?

By giving consumers access to superior microchip technology.  Now, how do I know this?

I do extensive research and read benchmark studies.  These are studies that are conducted by independent trade groups that measure the performance of Intel’s product versus its competitors.

Don’t get nervous, now.  You don’t have to scour the web for benchmark tests to find great technologies, but it will take some work.  I didn’t say it would be easy to find superior technologies; if it were that easy, then we wouldn’t be making any money over here at Tech Stock Insider, now, would we?

The easiest ways to find a great technology is to think about a product you use mainly because all of your friends use it.

This is part of the “network effect,” actually.

So what services or products come to the top of your head?

For me, it’s still AOL’s Instant Messenger product, or some of the newer communications products like Skype which was recently acquired by eBay (Nasdaq: EBAY). 

The eBay service itself is another perfect example.  The individual buyer or seller on eBay is worth considerably less than the entire user base.  Basically, the whole is worth more than the sum of its parts.




Wayne Mulligan
Contributing Editor
The Tycoon Report