Once upon a K-wave, Oracle, Apple face economic transition
- Summary:
- Oracle and Apple's announcements last week appear to be strong signals that we are entering the end of a K-wave. Here's why.
Two important yet apparently unconnected events happened in the tech world. In years to come they might be viewed as a turning point in the tech revolution that’s been ongoing without a break since the 1970’s. I think it’s an important signal of the decline of technology as the primary economic driver of our era, and with that we can begin calling a top to the era as well. The events include Oracle’s earnings call with analysts and the other was Apple’s Fall preview of its new products with the focus on iPhone.
Calling a top to tech as the primary economic driver is not the same as saying tech is no longer important. Prior eras were driven by manufacturing, steel-making, cars and much more. But when a driver, which is based on disruptive innovation, gets really big it eventually runs out of gas as the primary driver—trees don’t grow to the moon after all—and it settles back to be just another important part of the economy.
In finance, we see this all the time as growth stocks eventually become value stocks, things you buy and hold because there’s relatively little downside risk aside from the vicissitudes of the business cycle. Oracle was a growth stock and became a value stock. Last week it again showed it can be a growth-ish company posting monster numbers based on the breakout of its cloud products.
But an honest evaluation says that this is a rise that could last 5 to 10 years before Oracle gets its 400,000+ customers situated in the cloud, which is great. But despite the accompanying Oracle driven hoopla, it’s not the same as being Tesla where eye popping innovation seems to sprout like weeds. You can say the same about Apple and I’ll have more to say on both in a moment but first a brief detour into economic cycles.
K-waves and economic cycles
As you might recall from earlier posts, the capitalist economy of the West moves in long cycles (K-waves) of 50 to 60 years duration and there have been 5 beginning with the Industrial Revolution. The cycle is named after Nicolai Kondratiev, an early 20th century Russian economist whose self-appointed job was explaining capitalism to the Soviets.Vladimir Lenin liked Kondratiev and kept him in academia doing research and writing books in which he tried to reconcile the two economic systems. As long as Lenin lived Kondratiev was fine but when Josef Stalin took over after Lenin’s death, he began purging (i.e. killing) people who disagreed with him. Between 600,000 and 1.2 million people including high level military officers and academics lost their lives in the purge. Kondratiev’s crime was suggesting that the West was not in danger of imminent collapse, contrary to Communist dogma. What looked like imminent collapse was a cycle completing.
At any rate, if a K-wave lasts 50 to 60 years, the first half is broadly expansionary and inflationary. It usually involves building massive infrastructures to support a disruptive innovation like cable, telephone, electricity, other energy systems, water systems, interstate highways, and putting a car in every garage. In our lifetimes, the big infrastructure play was building corporate IT and then unbuilding it to build an even more massive Internet and cloud-based information utility. The first half of the cycle generates new industries and new jobs.
The second part of the cycle is about process efficiencies and automation. If the first half is inflationary and job creating, the second half is consolidating and it’s about capital efficiency. With the infrastructure fully built capital can catch its breath and begin leveraging the new capacity to make money. Automation and other efficiencies from fully leveraging the innovation reduce headcount and make the remaining personnel much more productive but the benefits of that productivity go to capital not labor, which we see today. In the second half of the wave, capital recoups its investment and then some. It’s a good thing too, because that investment is about to be needed again to roll out the next disruption as the cycle renews.
Oracle and Apple at the top
On the 14th Oracle reported a monster first quarter of its fiscal year. The numbers included a year over year 7 percent increase in revenues which were $9.2 billion and lots of other good news. At the same time CTO, founder and former CEO, Larry Ellison, said that he’d be introducing a fully automated database at Oracle OpenWorld; a database that runs on AI and machine learning and can set up and tune itself.
Almost at the same time on another front, Apple introduced the iPhone 8 and iPhone X. These devices have a great deal of new technology and it’s impressive to view them in relation to the original iPhone introduced ten years ago.
The new iPhones are gorgeous and they do many great things but fundamentally they are still phones with Internet access, cameras for stills and video, and a universe of apps that can customize the user experience. What part of that last sentence could we not say 5 years ago?
What all of these products have in common is that they are product line extensions and not net new products, and certainly not disruptive innovations, though they are certainly advanced. Product line extensions are what established companies do after the initial disruption they caused has run its course. They are also commoditizing.
The original wave of cloud computing at the turn of the century was the first commoditization of the IT wave that began in the 1970s and it satisfied the conditions to fulfill the first half of the K-wave. Since that time, further advances and acceptance of cloud computing have only accelerated the second part of the wave. Today, cloud computing is not controversial as it was 18 years ago. 'How will my data remain secure?' remains a question but it isn't the first question any longer. Rather, it’s an established fact that cloud computing is more secure than that undertaken in on-premises designs. Cloud computing is also commoditizing the hardware investments that were needed in the past because cost can and is shared across multiple customers. Amazon is your example here. Alongside, cloud computing has led to automation of provisioning and maintaining machines. Algorithms take care of IT infrastructure overhead functions. The result is that there are fewer tech jobs for DBAs and others who kept the lights on. The automated database Ellison proposes offers to add more fuel to this automation trend. In this sense, Oracle's accompanying announcement of an automated database - albeit larded with appropriate amounts of AI jargon, is broadly in keeping with the second half of a K-wave.
It would be inappropriate to call this automation bad or to say it is robbing jobs or anything else. It would be like saying a shower ruined your picnic. Showers happen and picnickers have to adjust.
My take
Tech is still hugely important. But it has been commoditizing for 20 years and it is already not the engine of economic growth it was when we had dumb terminals on our desks or even PCs. The new iPhone X has a starting price of $999 but it represents the power of millions of dollars’ worth of gear from two decades ago. Back then the gear commanded an army of acolytes to service it. The iPhone is a personal device.
The new Oracle database version extends the commoditization started by the Internet and cloud computing and now that Oracle is doing so well with its own cloud products, there’s really no established resistance to the cloud. It’s the way things are and will be.
Let me stress again, this does not signal the end of IT. Just as we still make cars and airplanes, we still forge steel and mold plastics, IT has a bright though different future. We still do all of the things that were invented in earlier K-waves but they are now the background of the economy, not the forefront, and we do all of them for fractions of the prices they once commanded.
This leaves us with a tantalizing question: What’s next? What’s the next K-wave and can we see its outlines on the horizon? How will we make money? Good questions and generally we can see the next wave forming but that’s a subject for another time.