The Gorilla Game
by Geoffrey Moore et al
reviewed by Marco den
Ouden
Originally published at About.com - 06/01/98
Also available at
Stocknowledge
"Knock! Knock!"
"Who's there?"
"Gorilla."
"Gorilla who?"
"Gorilla my dreams!"
Old joke. But here's a new twist. The Gorilla Game,
a new book from Geoffrey Moore (with Paul Johnson and Tom Kippola) tells you how
to stalk and capture a gorilla. And what's a gorilla? Why nothing less than the
stock of your dreams. And that's no joke!
Consider Cisco systems. A $10,000 stake in Cisco invested
in 1990 is worth over $1,285,000 today. $10,000 invested in Microsoft in 1986
would be worth over $1,800,000 today. Cisco and Microsoft are both gorillas in
the world of high tech investing.
Geoffrey Moore is chairman of The Chasm Group, a
marketing consultant to high tech companies like Microsoft, Cisco,
Hewlett-Packard and others. Recently named by Upside magazine as one of
the "Elite 100 leading the digital revolution" he is the author of two previous
books on the high technology industry, Crossing the Chasm and Inside
the Tornado.
His cohorts on this latest effort are also engaged in the
high tech market. Johnson is senior technology analyst with BancAmerica
Robertson Stephens, a high tech investment banker, and also an adjunct professor
of finance at Columbia University. Kippola is a partner in the Chasm Gorup and a
professional investor. He is on the advisory board of Internet Capital Group, a
venture capital company.
This new book builds on the theories about the high
technology marketplace Moore developed in his earlier books. And in case you
missed those, because they are so crucial to the game, he recaps them here.
The high tech market, argues Moore, is not the same as
the regular market. The old rules about investing don't apply here. Today many
people are amazed and alarmed at the high valuations placed on stocks in today's
stock market. In the high tech market such valuations are common. But Moore says
this is not an anomalie, but the nature of this particular beast.
The technology market is based on something Moore calls
discontinuous innovation. This isn't simply a question of tweaking
existing products to make them better. A car is improved by adding electronic
fuel injection, better suspension, airbags and so on. But a car is still a car.
The innovations are continuous.
A discontinuous innovation, by contrast, introduces a
whole new paradigm. It means "not compatible with the existing systems". Fuel
injection is an innovation. The Ballard Power Cell is a discontinuous innovation
as it would require a massive change in infrastructure. It cannot be fully
adopted until there is a willingness to change from gas stations to hydrogen
supply depots, until there are plants built to generate the hydrogen needed to
power millions of vehicles. The people investing in Ballard are betting on
Ballard becoming a "gorilla" in Moore's terminology. And if they're right,
$10,000 invested in Ballard may well be worth a million dollars in ten years,
even though now it is trading at over 1400 price to earnings.
So what's a gorilla? Moore et al explain that when a new
discontinuous innovation is introduced into the marketplace, there is a
recognizable pattern to the market's adoption of the change, what they call the
Technology Adoption Life Cycle. First there are several competing companies
promoting the technology, each of them offering a variation of the same idea.
The technology is first embraced by technology enthusiasts who are willing to
pay the higher initial prices. Then the visionaries jump in. These are usually
corporate executives looking for ways to give their company a competitive
advantage by adopting a new discontinuous innovation.
But the mass market has not yet been reached. The mass
market is the pragmatists. They don't want to experiment, but they don't want to
be left behind. They conform to the herd and when they sense or see the herd
adopting a technology, then they jump in too.
Between the adoption of new technology by the visionaries
and the pragmatists looms the chasm. The chasm is "the consequence of the polar
opposition between the visionary, who is deliberately going ahead of the herd,
and the pragmatist, who is just as intent on staying with the herd." The chasm
is the point at which the visionaries start losing interest but the pragmatists
aren't quite ready to jump in yet. You might call it the calm before the storm.
And that is because the next phase in the development in
a high tech market is the storm, or, as Moore calls it, the tornado. The
tornado is the hypergrowth stage of the new high tech market. The herd dynamics
that had all the pragmatists holding back at the chasm, now has them leap that
chasm and jump in with a vengeance. The tornado phase of the market can generate
growth of "300% per year in the very early going, 'slowing down' to 100% a year
over a longer period."
And it is here that gorillas develop. Moore et al argue
that the market naturally wants a standard. In the evolution of the new
paradigm, one company is fortunate enough to become the darling of the market,
the new standard, and becomes the gorilla.
In the early stages, it is not always clear who will be
the gorilla, but it is possible to pick the best contenders. And so we have the
basic strategy of the gorilla game as encapsulated early in the book (pages
12-13 to be exact):
-
find markets transitioning into hypergrowth
-
buy a basket of stocks that represent all the
companies that have a clear shot at being the gorilla
-
as the gorilla emerges, sell off the rest of the
basket and consolidate your holdings in the gorilla
-
sell the gorilla only when a new category based on an
alternative technology threatens to eradicate its power
Moore and partners go on to explain the basis for gorilla
power - proprietary open architectures with high switching costs. They
discuss the layers of technology in the computer industry, distinguishing
between enabling technologies and application technologies. The most powerful
gorillas develop in enabling technologies.
They then proceed to explain how the market values the
gorilla using a model developed by Johnson and a colleague in 1993. Called the
Competitive Advantage Period or CAP for short, it is the duration for
which the market expects the gorilla to maintain a competitive advantage. This
period is much longer for gorillas than for ordinary companies, and this long
period in conjunction with other factors determines the gorilla's market
capitalization. This is quite a fascinating study in itself and differs markedly
from the principles used by value investors. If Warren Buffett reads this book,
he may yet invest in Microsoft!
These principles, which make up the first half of the
book, form the foundation for the second half - implementation. There they cover
how to detect emerging tornado markets, how to pick the potential gorillas, when
to buy them and when to sell them. These are encapsulated in their Ten Rules for
Playing the Gorilla Game.
To more clearly understand these rules, the authors give
three case studies, using the gorilla game principles to explain them. The first
case study is Oracle and the relational database tornado. The second is Cisco
and the network hardware tornado. And the last is "a game in progress".,
client-server software.
Because the high tech business is, well, it's highly
technical, many investors may have a hard time playing the game. But
fortunately, Moore et al include a chapter on resources listing magazines,
newsletters and other sources of information (including the Internet) to keep
abreast of the changing landscape. The Net resources will be listed with the
links at the end of this review and added to a new Net link Library category
called Gorilla Game Resources.
The last chapter is called "Investing in the Internet -
the Mother of All Tornadoes?" There they categorize a number of opportunities
available at the time they finished writing the book (September 1997). They wrap
up with a Gorilla Game Test Portfolio listed in the table below. They take
$10,000 and divide it among four categories as shown. Because of the way the
shares are priced, there is some cash left uninvested as well.
The authors make the disclaimer that they have ongoing
business relationships with some of the companies bought through their
consulting company. Nevertheless they think the choices are sound. They track
the portfolio at their Website and will, as they put it, either "crow or eat
crow".
Company |
Shares |
Price |
Invested |
Supply Chain
Management - $2500 |
I2 |
30 |
41 |
$1230 |
Manugistics |
34 |
36.125 |
$1228 |
Browser & Web
Server - $2500 |
Microsoft |
9 |
136.375 |
$1227 |
Netscape |
30 |
41.625 |
$1249 |
Security - $2500
|
Checkpoint |
23 |
26.0625 |
$599 |
Cylink |
41 |
15 |
$615 |
McAfee |
10 |
58.5 |
$585 |
Security Dynamics |
17 |
35.75 |
$608 |
Grandfather
Gorillas - $2500 |
Cisco |
11 |
74.5 |
$820 |
Intel |
8 |
95.81 |
$766 |
Microsoft |
6 |
136.375 |
$818 |
It should be noted that Moore et al consider their
approach to be a safe, conservative one. They limit investments to potential
gorillas only. All others are discounted. In a tornado market, all the potential
gorillas usually gain until a clear winner is established.
At this point Moore et al find themselves at odds with
contemporary thinking which says safety consists in diversifying. For Moore,
safety consists in consolidating. As a clear gorilla winner emerges, the other
holdings are sold and everything consolidated behind the gorilla..
The downside to playing the Gorilla game is that it takes
discipline and it requires following the high-tech industry. It's not for active
traders, hunch players or gamblers. Following the industry can be very time
consuming.
Moore and his colleagues write about a very
technical subject in a clear, cogent and entertaining way. The book is never
dry, never dull. It can be difficult reading at times, but well within the grasp
of the intelligent layman. I highly recommend it. I know that I'll be taking a
stab at playing the game myself! |