Whenever a new technology changes the way something is done, it tends to ruffle people’s feathers. It takes time and effort to build widespread acceptance of an innovation, and the learning curve is rarely smooth. Building acceptance requires patience. Unfortunately, such patience is too often in short supply among investors.
Investors can struggle to see past the initial criticisms that new technologies face as a matter of course. Those who do, however, can frequently reap the greatest rewards. There may be no better example of this phenomenon than Apple Inc. (AAPL, Financial) and its experiences with the iPhone and iPad.
Smartphones and tablets: from cutting-edge to commonplace
When Apple first introduced the iPhone to the world in 2007, it was met with near-universal skepticism from the marketplace. Bloomberg blasted the buttonless smartphone as “nothing more than a luxury bauble” with little prospect of securing more than a sliver of the cellphone market. MarketWatch’s assessment was even more scathing:
“Apple should pull the plug on the iPhone…What Apple risks here is its reputation as a hot company that can do no wrong. If it’s smart it will call the iPhone a ‘reference design’ and pass it to some suckers to build with someone else’s marketing budget. Then it can wash its hands of any marketplace failures…Otherwise I’d advise people to cover their eyes. You are not going to like what you’ll see.”
Apple was unfazed by the scorching criticism, pushing ahead with the iPhone. In the 15 years since then, Apple has been more than vindicated. Far from being a niche product, the company has sold more than 1.5 billion iPhones since inception. In the first quarter of this year alone, Apple raked in an astonishing $71.6 billion from iPhone sales. Even more importantly, the iPhone has been responsible for fundamentally changing consumers’ relationship with—and expectations of—their mobile devices. With the iPhone, Apple effectively created the modern smartphone market.
Having defied the doubters and proved the skeptics wrong with the iPhone, one might think that Apple would have been given the benefit of the doubt in 2010, when it introduced the iPad tablet. But that was not the case. Instead, Apple once again faced withering criticism, this time from analysts and commentators who openly doubted whether there would ever be a significant market for tablet computers. And once again, Apple’s confidence was eventually vindicated by the market. In the first quarter of 2022, Apple brought in revenue from iPad sales to the tune of $7.3 billion.
The lesson here is simple: Innovative technologies that genuinely make life better for consumers, or simply offer a better user experience, will find a market. That is also what distinguishes durable innovations from mere faddish novelties.
Internet of things: the next disruptive frontier?
The unexpected successes of the iPhone and iPad demonstrate the power of real innovation. With each, Apple effectively invented a new consumer technology segment. That sort of segment-defining technology is a veritable holy grail for growth investors on the hunt for the next big thing. At present, many such investors have turned their attention to the internet of things.
The term “internet of things” has come to describe a growing universe of tech-enabled, digitally connected and networked physical objects. Such devices integrate sensors, software, digital processing and other related technologies that make devices “smarter” and more connected, allowing companies to tap new streams of information that extend IT beyond the digital sphere and into the physical world. The sector is already expanding at a rapid pace with no sign of slowing down, as a recent report published by Mordor Intelligence highlighted:
“According to Zebra’s Manufacturing Vision Study, smart asset tracking solutions based on IoT and RFID are expected to overtake traditional, spreadsheet-based methods by 2022. A study by the Industrial IoT (IIoT) company Microsoft Corporation found that 85% of companies have at least one IIoT use case project. This number may increase, as 94% of respondents claimed that they would implement IIoT strategies in 2021.”
Cooler Screens, a Chicago-based company focused on bringing IoT to the retail shopping experience, presents a useful real-world example of the disruptive power of IoT. The company's technology replaces retail stores’ traditional refrigerator and freezer doors with sensor-enabled, high-resolution smart screens. Sensors inside and outside of each allow for real-time inventory tracking, in addition to a wealth of identity-blind, fully anonymized data derived from consumer interactions. Cooler Screens has won plenty of high-profile support, including a major retail partnership with the Walgreens Boots Alliance Inc. (WBA, Financial), as well as a strategic investment from Microsoft Inc. (MSFT, Financial).
Cooler Screens has, perhaps unsurprisingly, faced some criticism from consumers unfamiliar with—and skeptical of—such a disruption to a comfortable and familiar retail shopping experience that has barely changed in decades. While such critical stories have garnered some attention from the press, the data tells a different story. The company’s quantitative research, based on the experiences of tens of thousands of customers, shows that over 90% prefer the IoT-enabled shopping experience to the traditional glass refrigerator and freezer doors. In other words, this appears to be yet another case of a real innovation colliding with unjustifiable skepticism, one that could well end in much the same way it did for the iPhone and iPad.
In my assessment, the internet of things represents one of the most promising growth opportunities for technology investors over the next decade. While many of the innovators in the space creating scalable real-world IoT applications—such as Cooler Screens—have yet to go public, investors can gain exposure to the frontier of IoT through names like Microsoft and Alphabet Inc. (GOOG, Financial). These companies clearly appreciate the scale of the IoT opportunity. Their success may well depend on the strength of strategic partnerships forged with the young companies that are already defining the IoT space.