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Book Review

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!

 

Contents copyright Marco den Ouden       All Rights reserved
Typewriter graphic courtesy Stockfreeimages.com