Who cares if it’s not a “tech company”

Tech == Innovation

The best definition of a technology company is given by Marc Andreessen. His idea of a tech company is a company whose core product is tech innovation. IBM is an epitome of a technology company. So is Microsoft. Their core products are not operating systems or pos machines. Their core product is innovation.

The above statement has two major implications:

  1. A tech company faces an existential threat whenever a technological paradigm shift happens.
  2. The business model of a company or a market reaction to some major event does not make it any less “tech”.

Microsoft’s biggest threat in the 90s was the internet. There’s a reason why they wanted to shut down Netscape. Google’s biggest threat is AI. That’s why they want to be considered an “AI-first” company. The survival of these tech companies depends on how quickly they manage to innovate.

New Distribution Channel

Whenever a technological paradigm shift happens, a good tech company quickly spots the opportunity and creates a new network or a distribution channel. That’s why tech companies do “strange” things such as:

  • Google buying Youtube
  • Microsoft creating IE and Bing
  • Facebook building Libra
  • Google developing SPYDY (Http/2)
  • IBM building IBM Watson
  • Apple creating iPhone
  • and so on.

Tech companies are factories that create networks and distribution channels.

Some of the best and lasting companies are actually not tech companies by definition. They’re companies that use the most effective distribution channels in order to sell great products and services at scale. The internet was never a threat to Nike or Disney.

Whenever a new distribution channel opens up because of a technological paradigm shift, it opens up new opportunities for businesses to grow at a rate that was previously considered impossible. The HTTP protocol allowed Amazon to surpass Sears’ revenue in a fraction of time. Mobile allowed Uber to disrupt a century-old industry in less than 5 years.

A business can grow at an incomprehensible rate by using the new distribution channel but that itself does not make it a “tech company”. Bezos never considered Amazon a tech company. At least not in the early days.

Who cares if it’s not really a “tech company”?

The great value investor Peter Lynch advises people not to invest in “tech companies”, but in companies that use technology. Back when IBM (a hot tech company) was in the spotlight, everybody was rushing to invest in the company. Peter Lynch, on the other hand, decided to invest in ADP (a boring company that uses tech) and got a much higher ROI.

IBM had to constantly fight the innovation battle while ADP just had to keep focusing on creating great software products. Whenever technology became cheaper, IBM suffered while ADP thrived. ADP is continuing to grow at an attractive growth rate despite the Internet, Mobile, AI, and Blockchain.

Many great “tech companies” aren’t actually tech companies by definition. That includes software companies. They may be using the latest technologies to build a great product, but innovation is not their killer product (at least not in the early days).

Great companies offer products and services that people want. They’re able to sell at scale by utilizing the new distribution channels - often created by tech companies.