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What is it that investors don't understand about innovation?
Sometimes they believe that some technologies are just a fad, a temporary trend that will ultimately lead to a lot of hype and a lot of losses. Investors have been burned before on solar companies, alternative wind projects, 3D video, and water desalination. There's a lot of hype and not a lot of return.
But we've found a way to determine whether or not a potential innovation is here to stay, something that will become widely adopted, and best of all, profitable to our readers.
We asked six questions that can make you rich. And by answering "yes" to all six of them, you can increase the probability that your investments will provide long-term security and returns.
The final question is this: Are there significant barriers to entry for competition?
Barriers to entry in the technology space is absolutely vital, as we want to ensure that competitors and new innovators are unable to displace this technology, and effectively establish itself as the most reliable and profitable source of innovation.
And we can look at one company right now that is at the pinnacle of success, and could soon face a lot of problems as it begins to see new competition from its rivals.
Raise the Defenses, Raising New Barriers
Barriers to entry are the fortifications that companies rely on in order to protect market share and against new innovations. There are a number of categories that define the types of barriers a company might face, such as low margins, patents, licensing requirements, brand loyalty, predatory pricing, and of course regulations in Washington.
As we have seen in the recent past, companies are actually lobbying at the state and Federal level to make the regulatory environment even more complex, making it very difficult for new competitors to establish themselves in the market place. This is something we have called the Fifth Rail at Money Morning, and it's not only corrupting our marketplace, it's actually strengthening some companies as new regulations are unrolled by agencies like the Federal Communications Commission and the CFTC.
But the most important barrier to entry centers on the scalability and technology of the company itself. If a piece of technology answers our first five questions, that it strengthens trade and movement of physical goods, it improves the speed of information and capital, it provides better bang for your buck and is more efficient for consumers, it harnesses the power of other innovations, and it's practical to users regardless of customs and cultures, then it's very likely that it will have a high barrier of entry given the costs of the technology and the very broad scale the company maintains.
When Scale and Technology Intersect
I believe there is no greater company in the United States right now than Amazon when it comes to scale, technology, and deliverability. This company answers "Yes" to all six of our questions with its constant sources of innovation in new technologies. The company's digital enterprise, shipping services, and ability to enter new markets make it one of the most formidable opponents in the world today.
I wouldn't want to compete against them… But one company, at the height of its technology and innovation, is about to learn the hard way that the barriers to entry in online streaming video weren't quite as high as they hoped.
The reality is that Amazon Prime (which provides the same shows and program offerings) is going to begin eroding Netflix's market share in online streaming. Though the barriers to entry were high in terms of licensing and service agreements (which took years to register), a company like Amazon had the technical scale to move into this marketplace with relative ease and compete based on value.
Netflix will have to innovate, likely taking on its own television shows to compete with the likes of HBO, Showtime, and Amazon (which is also exploring its own television options.) This will not be cheap, and it could lead to the new "technology war" of the decade, as two rivals duke it out. The reality is that the one that offers the best product with the most value-added in addition to the best marginal returns will be the victor, and I think Amazon will be the king of online streaming in the end.
Still Netflix and Amazon will dominate the online streaming markets for some time. The ability to scale up a net-streaming service is high given the licensing requirements, technological developments, and sheer volume of offerings necessary to establish oneself as a formidable opponent in this space.
Nonetheless, I'd still take Amazon over Netflix any day of the week. Netflix has too many barriers to try to establish an online shopping portal, while Amazon is already chipping into Netflix's market share with unique value-added products like free Prime two-day shipping, which is one of the most undervalued services in the United States today.
That concludes our six questions that can make you rich. We'll be talking about a number of companies that are on the cutting edge and poised to make a lot of money for investors as they fulfill all six of our categories and become staples into the lives of millions, and ultimately billions or people around the world.