The Power of Exponential Technological Change

Every once in a while, my wife sends me an email with the latest on-sale bargains from a membership warehouse club we belong to. One time I noticed a Westinghouse 42” LED LCD flat-screen TV that was on sale for less than $600. Quite a bargain! Our 3-year-old has taken a keen interest to banging away on Rock Band virtual drums (the Beatles version is his favorite). A separate television set seemed advisable to encourage his musical aspirations, so we decided to snatch it up.

That $600 TV got me to thinking… We recently disposed of an old Sony TV that we had received secondhand. That unit was one of the early flat-panel plasma models, and was less than a decade old. The original price was a whopping $8,000. It suffered from the burn-in that is infamous in older plasma display technology. It also weighed a metric ton, consumed gobs of power and would get quite hot.

However, here in 2011, I am presented with a far better unit. It has better display quality and less power consumption than a 100-watt light bulb. The coup de grace: All of this goodness is available for only 7.5% of the price of the old Sony. Adjusting for inflation, it is even cheaper than that.

A large, high-resolution flat-panel television was within the reach of only a relatively wealthy person in 2001. That is not the case today. This state of affairs, of course, is a result of the innovative aspects of an open economy. A manufacturer producing televisions using 2001 technology and pricing would be out of business today.

Austrian economist Joseph Schumpeter summed it up well in his book Capitalism, Socialism and Democracy: “The capitalist engine is first and last an engine of mass production, which unavoidably means also production for the masses… The capitalist achievement does not typically consist in providing more silk stockings for queens, but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort.”

To Schumpeter’s words, I would like to add that this process is not slowing down. Technological change is accelerating…exponentially.

The types of companies I recommend to the subscribers of my investment letter, Technology Profits Confidential, are precisely those that lower costs through superior technology. These are the “better mousetrap builders” – the innovators who have the world beating paths to their doors.

For example, one of the investments I have identified for my readers is a company that stands to benefit from the booming growth of wireless Internet products and technologies. This company has played a key role in lowering costs for the “common man.”

I can’t reveal the name of the company, but I can, and will, highlight some of the reasons for investing in the rapidly growing wireless Internet sector.

Last month, Cisco published a fascinating report entitled, Global Mobile Data Traffic Forecast Update. This report contained some very detailed and persuasive predictions about the growth of mobile technologies. I’d like to highlight some of the projections made by Cisco’s analysts. They are, to say the least, astonishing.

Consider that total global mobile data growth is expected to grow at a 92% compound annual growth rate over the next five years. All that traffic growth won’t be coming from existing devices, of course. It will be coming from brand-new ones.

Anticipated Growth of Wireless Data Traffic

Although the bulk of data traffic will still be on laptops and netbooks in 2015, as you can see, the mix of devices will look quite different. While per user growth for laptops and netbooks will grow at a very healthy 42% annual clip, smartphones will do well too, at 24%. Finally, tablets will be growing at a breakneck compound annual growth rate of 105%.

The phrase “the power of compounding interest” is a valid and often-repeated mantra for long-term investors. In this context, think about what the power of steep rates of compound growth in smartphones will do for the profitability of the world’s mobile market.

In addition, tablets are the fastest-growing mobile segment. 2011 has been called the “year of the tablet,” but we are just witnessing the tip of a future iceberg.

Another big change under way is in the operating system of choice for mobile platforms. The biggest gainer here is Google’s Android, which grew at a monthly average of 56.7% for the first nine months of 2010. The second strongest operating system, Nokia’s Symbian, managed only 37.9% by comparison. However, following Nokia’s recent announcement that it will switch to Microsoft’s mobile OS, Symbian will now be relegated to the dustbin.

Patrick Cox, editor of Breakthrough Technology Alert, says:

There is, in fact, going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android OS has basically won the technological battle of the bands. It will become the standard…

Microsoft has been beaten in the mobile space and their proprietary OS is fading fast. Nokia has made a series of blunders as well and is now losing the mobile OS space it once seemed destined to own forever…

In Q4 2010, the Android OS was the world’s best-selling smartphone platform, ending the 10-year reign of Nokia’s Symbian. Recent events have solidified this trend. Open source advocates may have lost the personal computer battles, but they’re set to win the mobile war. This opens the doors for third-party developers like they’ve never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops.

The next generation of Android pad computers is simply going to rock.

Since Android is essentially free, we can’t invest in it directly as a pure play. However, there will be profitable opportunities to ride on its coattails. One avenue is to invest in mobile applications developers.

In a recent Forbes interview, George Gilder, senior fellow of the Discovery Institute, explained how crucial “deep packet inspection” (DPI) technology will be to grow the wireless Internet. He said:

Deep packet inspection is absolutely critical to our technology and the advance of digital technology, because you can’t really have cloud computing, you can’t really have video teleconferencing, you can’t do any of the new promise of broadband without having ways to differentiate among different packets.

I do hope that the FCC will sanely manage the exploding wireless Internet. However, whether or not the US’s mobile Internet gets swamped in a regulatory nightmare, the strongest growth will be in the rest of the world. This is a market I will be watching closely and recommend you do the same.

Ad lucrum per scientia (toward wealth through science),

Ray Blanco
for The Daily Reckoning

The Daily Reckoning