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Last week, we explored the three technical questions central to successfully investing in technological innovation.
This week, we focus on three practical questions that can make the average investor a lot of money in the early waves of innovation. All of these questions word together for one purpose.
By answering "yes" to all six questions, you can dramatically increase the probability of a successful technology investment and return on your shares. And best of all, you can identify the winning companies that are poised to profit in the few key sectors that we've identified.
Our fourth question for technology investing is very simple:
Can this technology harness the power of other innovations to maximize its performance and sales?
When exploring this question, it's important to understand how a new technology reaches its full potential. To maximize its potential, a technology must first have the capacity to fulfill what we identified in our first three questions. It must accelerate the speed and transfer of physical goods and trade. It must expedite the flow of information and capital, and provide more "bang for your buck."
But this fourth question requires that the new technology integrate with other technologies that already exist, and make it possible to harness emerging innovations in a high-tech world. This is how we take an existing success and identify just which company is going to lead to a major global breakthrough.
And there's one primary example that can provide the greatest lesson in the recent digital revolution.
The Difference Between the iPod and Everyone Else
If you want to understand how one technological innovation facilitated the digital information boom over the last decade, look no further than a single event that happened in April 2003.
The digital music industry underwent a remarkably radical change. Long gone are the once music retail giants, the Sam Goody's and Music Towers of the world, driven into the ground by their digital competitors.
Now, many could argue that Napster and other file sharing sites (which led to a number of major lawsuits and a few poorly written movies about their creators) were responsible for this digital revolution. But the reality is that the digital music revolution really hit its stride with the introduction of one specific product: Apple's iPod.
The iPod was naturally a revolutionary product for Apple. It was sleek, storing thousands of songs and made it possible to transfer music directly onto the chip. It became a cultural phenomenon.
But the technology wasn't radically different than its MP3 competitors at the time. It wasn't until
April 28, 2003 that Apple's iPod harnessed the power of another radical innovation that would lead to Apple's dominance over the digital market for the next decade: The Apple Store.
The Apple Store sold one million songs in its first week, and enabled consumers to download and purchase music legally for $0.99 per song, eliminating the need for full album purchases, all while expediting the speed of the music trade, capital flows between consumer and artist, and providing far more value to the music experience. In 2013, the Apple Store reached 25 billion in song sales.
Everyone was purchasing early MP3 players, but they required music lovers either to download illegal music or transfer music from compact discs. The so-called "iPod Killers" of the world like the
Microsoft Zune were never able to compete against Steve Jobs' musical vision because of their inability to integrate channels and technologies.
The iPod's harnessing of the Apple Store was a visionary integration of multiple innovations and channels, one that forever altered the course for the ongoing digital revolution of streaming and downloading music, movies, and other forms of content that once required us to visit brick and mortar stores for all of our software needs.
It's this sort of integration we are seeking from next-generation technologies and investment opportunities. The good news is that there are plenty on the horizon.