End-Users The Winners of Tech Wars, Not Equities Owners

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I like using tech a lot more than investing in it. My principle enterprise is totally dependent on video hardware and software, computer capabilities, storage, and the Internet as both a delivery system and for advertising. This may be a case of love-hate.

I have found that a corollary to Murphy’s Law is: the next big thing will be announced the day after you buy the last big thing. This is frustrating for users, but deadly for investors.

I have upgraded my video cameras every other year. I have alternated between SONY and Panasonic, which seem to leapfrog each other year after year. So, anyone want to buy a 2000 technology camcorder that is not worth what it weighs in scrap metal? At the time I bought it, it was state of the art. Now it’s a relic that shoots only NTSC in an HD world.

I’ll donate it to the local middle school and be satisfied that it has been a good investment during its useful life. Now, let’s look at the stocks. SONY is down from a 2000 high of $156 to its current price at around $25. Panasonic is down from a 2000 high of $30 to around $11.50. Not so satisfying.

The software providers have fared better. Adobe was $38 in 2000; now it’s about $33. Avid, the former video software leader, was at $67 as recently as 2006; now it’s at $16. Apple is the exception but they are not making their money selling Final Cut for video editing. So software stocks, at least for video, have been as lousy as hardware.

All video editing is now done digitally on suped up PC’s using huge storage as the size of files keep getting bigger to accommodate HD. Everyone knows Microsoft has been a dog for a decade and now that almost everyone in the industry is converting to Mac, their PC business is not going to be getting a boost from the video business anytime soon.

As for storage, it’s a story of an outclassed technology doggedly hanging in a race they know they will lose. Mechanical hard drives used to be a pretty good business. In 2000, I paid nearly $4000 for a 9 gigabytes drive. Today, I can buy 6 Terabytes of greatly improved mechanical technology for $750. That is amazing innovation to keep an old technology going, but it’s been hell on margins. Western Digital has moved from $48 to near $35 in ten years. Seagate has fallen from a high of $29 to around $15. They are in a race they can’t win.

They are up against Flash memory chips, a storage medium that has no moving parts and keeps getting cheaper per gigabyte every year. So, I should buy the inevitable winner right? SanDisk has had a nice run of late, but they were at $61 in 2000 and are now only $43. Micron Technology bought Lexar Media and got into the Flash business but they have fallen from $80 to about $10 since 2000. Worse, just as they are about to defeat mechanical storage, the next new thing is out there. Can anyone say cloud storage?

The Internet keeps growing but how are the companies providing the plumbing doing? Cisco peaked at $69 back in 2000 and has flat lined at around $16 ever since. They are a hell of a great company but a stock corpse. The providers are doing better and most of them pay a good dividend.

Have I learned anything from my ten years of experience with digital technology? Yes, it’s a wonder and the principle driver of our economic increased productivity but it is a tough place to make money in the stock market. Just when you think you have the game beat, the game changes.

The winners of the tech wars will be the end-users, not the equities owners. The exception is Apple but they are the X-Men of tech and a good example of no one else. The users that will benefit are those companies who adopt technology that greatly increases their productivity. Medical devices come to mind. There seems to be no pricing pressure on their margins. There are lots more winners from adoption of new tech on the horizon. They’ll be the ones who enhance what is currently relatively low tech. There is nothing new about the world’s need for gas and oil. What’s new is the way we’re getting it. Oil sands in Alberta offer almost unlimited oil reserves and gas fraking technology is about to explode (financially). Suncor is my favorite play in this space. Buy it and hold it.

The bottom line: tech is great and changing the world for the better but can you make money buying Silicon Valley tech stocks? Unless you know a guy who knows a guy, don’t bet on it.