This is an excerpt from a great article by Joe Magyer “A Failure of 244 Years in the Making” which was published by share advisory service “The Motley Fool”.
My parents bought a cultural icon to grace my childhood home: the Encyclopedia Britannica. By showcasing the set on a shelf just inside our front door, they hoped to convey the message that we Magyers were living the American dream – educated, successful, sophisticated. Today the books are parked in boxes in my parents’ attic, next to their wedding china and my Transformers collection.
The Britannica’s rise and fall in the Magyer household mirrors its global fate. First published in 1768, the Britannica sold a record 117,000 volumes in 1990. In 2010 that number dropped to a paltry 8,000, and in 2012, Britannica announced it would no longer print paper editions. It took the brand 222 years to peak but only 22 to disappear, a fact I found on Wikipedia – for free.
Disruption is a python. It’s weapon of choice is not fangs, but a slow squeeze. Most think the end is when the python finally swallows its prey whole, but the truth is that the prey’s fate is sealed as soon as the python first wraps its tail – it’s just that most (including markets) don’t recognise the finality until the lights have long gone out.
Disruption can take a long time to unfold. Take Encyclopedia Britannica, which took 22 years to die. Had the business been publicly traded, no doubt there would have been a long parade of deep-value-types who said something to the effect of “Yes, the business has headwinds, but there will always be demand for books and knowledge, plus the shares are cheap!” And they would have looked cheap…all the way to $0.
Value guys like me are also prone to stumbling into such situations before the business has yet – yet – to go ex-growth. I’ve been that guy –Sky Network TV (ASX:SKT), anyone? – and it happens to the greats too. None other than billionaire Carl Icahn invested in Blockbuster in late 2004, arguing that, yeah, the company had headwinds, but everyone had been saying that was a risk for a while and it had grown despite those. Unfortunately for Icahn, 2004 was the company’s pinnacle. Sales fell for the first time in 2005 and the business was put out of its misery by liquidators in 2011.
Assessing disruption can trip a lot investors up because there is so much noise to cut through to find the signal. I find a simple 3-step framework helps.
In summary, there are always early signs of decline of a business or, in fact, an industry. However, many choose to ignore the signs in the hope that things will get better – in many cases, they don’t!
