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Apr 21, 2022

Extinction

By:Josh Fabian

Disruption. It’s one of the most overused words in describing change and for that reason alone, we hate using it. But that doesn’t make it wrong. Markets are living organisms, evolving over time. Unlike changes at the cellular level, like we see in other living things, changes in the marketplace take place at the company level. One company creates a new way of doing things or maybe even creates an entirely new space. Then in time, another company comes along that displaces the first company.

It wasn’t all that long ago you could find a Blockbuster in every neighborhood. Circuit City competed directly with Best Buy in the consumer electronics space. Barnes and Noble or Borders was where you went to buy books. Now, Netflix, Hulu, Amazon Prime and a host of others deliver movies on demand. There are no more Blockbusters. Circuit City and Borders no longer exist while Barnes and Noble is fighting to survive in the shadow of Amazon. Perhaps one of the more interesting phenomena of this evolution is our inability to recognize or accept the changes.

Imagine a world without the streaming services you currently have. It’s next to impossible for almost everyone. We say almost because the person or people who will eventually disrupt those streamers can imagine that world and it’s simply a matter of time until we’re all “(insert new product) and chilling.”

The same rules apply in finance. When we broke into the business, customers called their broker to make a transaction. Then they hung up the phone and waited for the broker to call them back with an execution price. You were lucky if bid/ask differentials were one-eight wide. Quarter point differentials were still pretty common. Commissions were often calculated as a percentage of the notional value of the trade. Think about that. 100 shares of Amazon is over $300K. Granted, not many people can afford that. But for those that can, the cost today is nothing. Twenty five years ago you would likely be looking at a commission of at least 1% (which is why brokers had yachts and customers didn’t).

E*Trade was really the first one to disrupt the model, offering online trading at a fraction of the cost. Unlike the Netflix disruption, movies continue to exist. But when was the last time you met a stockbroker?

There is a lifecycle to companies and their products or services. Their presence can become so great that we verb-ify their names, like Google. They storm into our lives with such dominance that once they’re there we can’t fathom a world without them. But the extinction graveyard is littered with names we once couldn’t imagine a world without and whose names we can now barely recall. Altavista. MySpace. Napster. Stockbroker.



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