It is Changes in Abundance and Scarcity That Drives Disruption

scarcity loop

A key question in business (and hence in investing) is: what drives change? Why do dominant businesses get disrupted so frequently by challengers? I posit in this post that most of this disruption is a consequence of a shift in economic scarcity, mainly caused by technological advances.

Most businesses can be conceptualized as offering a product or service bundle of value to their customers. The bundle is made up of various modules that combine together to provide the customer a valuable offering. I suggest that advances in technology cause changes in the relative scarcity or abundance in the underlying economics of these modules, and it is these changes in economics that create an opening for a challenger to topple a dominant business.

Consider an example given recently by Marc Andreessen:

“And so the newspaper bundle, the idea of this slug of news and sports scores and classifieds and stock quotes that arrives once a day was a consequence of the printing plant. Of the metro area printing plant, of the distribution network for newspapers using trucks and newsstands and newspaper vending machines and the famous newspaper delivery boy. That newspaper bundle was based on the distribution technology of a time and place.

When the distribution technology changed with the internet, there was going to be the great unwind, and then the great rebundle, in the form of Google and Facebook and Twitter and all these new bundles.

I think music is a great example of that. It made sense in the LP and CD era to [bundle] eight or 10 or 12 or 15 songs on a disc and press the disc and ship it out and have it sit in storage until somebody came along and bought it.

But, when you have the ability online to download or stream individual tracks, then all of a sudden that bundle just doesn’t make sense. So it [got unbundled] into individual MP3s.

And I think now it makes sense that it’s kind of re-bundling into streaming services like Pandora and Spotify.”

In general, once the deck of economic value has been shuffled by the shift in scarcity, it can create an opening to an entrepreneur to start from scratch by targeting a key module of the old bundle that is now relatively scarce — hence valuable — and leverage the newly created abundance. The Moore’s law driven plunge in the price of communications, for instance, is enabling a lot of startups to rethink existing business bundles by exploiting the “free” distribution available on the internet, just like iTunes did to unbundle CDs and Pandora is doing to iTunes in the example.

Once the challenger has won, it is fairly easy for the winner to bundle more and more features around the core module, to increase its value and to capture incremental marketshare. Of course, this process eventually sets up the bloated bundle to become a target for the next new challenger on the block, as technology changes the point of scarcity again!

The former CEO of Netscape, Jim Barksdale’s observation: ( “there’s only two ways I know of to make money: bundling and unbundling” captures this cycle of unbundling followed by bundling; but he does not really explain why should this be so? Andreessen, in a recent Tweetstorm, has provided a detailed example of this phenomenon of bundling and unbundling (

Thus the key driver of all the disruption and unbundling is technology driven changes in economic scarcity. A particularly powerful example of such a technology driver is the virtuous cycle of semiconductors and software advances feeding into each other, diagrammed below (I have previously written about this loop here:

I think it is vital for a disruptor to succeed that it be better aligned with this loop than the product it is challenging!

This is why I think the Christensen model of disruption, while insightful, is not complete. It comes in two flavors: low-end disruption and new-market disruption. Neither is fully satisfying as an adequate model of disruption – a counter-example to Christensen’s framework is the fact that the expensive, richly-featured iPhone manage to completely disrupt the cheaper, less functional feature-phone business (e.g., Nokia) — the exact opposite of what his model predicts! In my framework, by contrast, the key driver (driven by Moore’s law) was the relative abundance, and hence cheapness, of the internet. This allowed the iPhone to feature internet-enabled apps as the main attraction, rather than phone calls (in fact the initial iPhone was not all that great at making calls!). Thus the shift in scarcity/abundance created an opening for Apple to target internet connectivity as the core offering. This, I claim, is a better framework to explaining why they succeeded in disrupting the plain old cellphones despite being much more expensive; it was clearly not an attack from the bottom. (To be sure, smartphones also disrupted PCs, and that fact can be explained as an attack from the bottom as well as an unbundling of PCs due to a shift in scaricity/abundance; I chose the disruption of dumb-phones in this example since that cannot be adequately explained by one of the two frameworks).

To be sure, there can be other kinds of technology changes that are not related to semiconductors. But it is really hard to find other examples of something that can grow 40% per year for nearly 50 years! Moore’s law in likely unique in this aspect, which is why I think it has plays such a crucial part in the persistence of the disruption phenomenon, of the kind we have been experiencing in the last few decades.

The Moore-Andreessen Disruptive Creation Loop

Moore-Andreesen Loop

This post combines two famous but separate observations, made 46 years apart, about technology advances into a single integrated feedback loop that I think has been the major source of disruptive creation in the world over the last fifty years; it still continues, unabated, today.

  1. Moore’s Law: This is not really a law in the sense of scientific laws of nature; rather, it is a prescient observation made by in 1965 Intel’s co-founder Gordon Moore on the exponential pace of change in the semiconductor industry. He noticed that the transistor count in semiconductors seems to double every couple of years. Surprisingly, his observation continues to be valid more than 49 years after he first made it. This relentless advance has been like a giant clock that drives the entire technology industry forward every year.
  2. Venture capitalist Marc Andreessen’s observation (first made, I think, on the pages of WSJ in 2011) that “software is eating the world” trenchantly captures the fact that software replaces more and more functions that were formerly performed by humans or physical machines with every passing year. This is also a relentless advance that feels like a force of nature in its power to disrupt.

Moore’s Law is the result of human ingenuity and hard work fueled by ever rising capital expenditure and R&D on semiconductor fabrication processes. Each advance has required major breakthroughs at the level of material science, industrial processes, and applied quantum physics. Amazingly, such advances have indeed been made just in time to preserve the cadence of the “law” for over four decades. The following graphic captures the fact that the number of transistors found on a chip has been doubling every two years — i.e., growing at more than 40% per year!


But the “ante” in terms of capex and R&D dollars needed for such complex advanced rises every year. Intel, Samsung, Taiwan Semiconductor, et al are nowadays spending ten-plus billion dollars every year to keep the semiconductor manufacturing process advances coming. So where are the returns needed to fund these investments coming from?

This is where the crucial role played by software comes in. As it becomes more and more capable, it can do more and more (a tautology!) thus expanding the market for semiconductors. And the expanding semiconductor market, in turn, justifies an increase in the investments needed for the capex and R&D required for driving Moore’s law forward.

There are two parallel channels that allow software to become more and more capable as a result of better semiconductors: better and cheaper computing and better and cheaper communications. Think of the speed and cost of today’s internet and speed and cost of today’s smartphones as compared to the slow modem lines and slow and clunky computers of even a decade ago. Both these advances are synergistic and are critical enablers of the advances in programming techniques and tools needed for software to eat more of the world.

As software captures more functions it expands the market for computers and communications. Nearly 2 billion people already have the powerful supercomputers in their pockets known as smartphones, and serious projections are suggesting the possibility of 4 to 5 billion people having smartphones communicating with each other and running powerful apps in the next few years.

Every part of the loop sketched at the top of this post is important, and mutually supportive, to all the other parts:

  • Software, by itself, cannot advance at 40% per year type rates without improved hardware to run on and improved networking speeds. The major advances in software tools — from assembly coding to higher level languages to object-oriented languages, from waterfall to Agile programming techniques — are all fundamentally enabled by faster computing speeds provided by the underlying hardware.
  • Computers by themselves will completely starve of data-to-compute if the speed and reach of communication pipes linking them together did not advance along with them. Imagine connecting your super-powerful, instant-on, tablet to any of the slow dial-up modems of the old days!
  • The massive capex in semiconductors needed for improving both computers and communications cannot be justified without the expanded market provided by software eating more of the world.
  • And so on; all components of this positive feedback loop have to advance together, mutually re-enforcing each other, to keep it going.

Scaling the Power of the Loop

The scale of this phenomenon is not that easy to grasp. In personal conversations, people nod knowingly, thinking that all I am saying is that technology progresses every year, and of course it does. However, that is not my point at all. There is probably no other phenomenon, natural or artificial, that has shown this kind of exponentially fast growth such an extended period of time. I can safely claim this because of the unusual power of compounding: if anything has been compounding at this high a rate for so many decades, we would see it nearly everywhere already today!

To appreciate the stupefying scale of the phenomenon, let me contrast it to another technological revolution.

During the Industrial Revolution, that supernova of all changes in the human condition, growth in Western Europe accelerated by a puny 1% per year! Even this tiny amount though, when steadily compounded for a hundred years (most historians date the Industrial Revolution roughly between 1750 to 1850), resulted in a massive improvement in living standards from the complete lack of growth for the thousands of years before it (see the zero net growth in income per person for thousands of years on the left of the Industrial Revolution, during the so-called “Mathusian Trap” period, in the graphic below; source: figure 1.1 from a recent book on this subject by economic historian Gregory Clark).

great-divergence-graph Clark

So if the Industrial Revolution changed the world so dramatically with a mere 1% growth compounded for a hundred years, consider the relative impact on the world affected by Moore’s Law, which has compounded at over 40% per year for nearly 50!

Anything growing at this blistering pace should become millions of times better (faster/cheaper) in only a few decades, and indeed our computers do show exactly such improvement – that smartphone in our pocket really is more than a million times more powerful than the most powerful computer on the planet from fifty years ago. It is hard to think of many other examples that show such an astounding growth pattern; and the examples that do come to mind seem to be, in one way or another, intersected and transformed by the power of the Moore-Andreessen loop. Try thinking of a counter-example!

Shift in Scarcity

This sort of massive change can cause a fundamental shift in what is scarce and what is abundant every few years. In my opinion, it is this frequent shift in the point of scarcity that has been the real driver of the constant disruption that characterizes our information age. As if an avatar of the ancient god Shiva of Hindu mythology, who is said to destroy in order to create anew, this loop is a powerful force of disruptive-creation: companies that are better aligned with this loop can — and often do — replace incumbent companies that are slower in adapting to its consequences.

A corollary: SoCs are eating the surrounding chips

A phenomenon that is strikingly similar to “software eating the world” seems to be happening right within the motherboard of all the smartphones and tablets and laptops. A “System on a Chip” (abbreviated SOC or SoC), as the name implies, contains a whole system of modules on one silicon chip by absorbing more and more functions that were formerly performed by independent chips. Functions such as graphics, modems, DSP, and various kinds of memory have already been absorbed.

I think the abandonment of the baseband chip market by Texas Instrument and Broadcom is the latest example of this corollary phenomenon. The baseband function now forms just a piece of a larger SoC chip produced by companies like Qualcomm, Mediatek, and Intel. The economics of producing them as part of an integrated SoC became increasingly tilted in their favor compared to the baseband function chips made by TI and Broadcom until the latter finally got eaten up.

I see this as a trend powered by essentially the same kind of loop as diagrammed above, with Moore’s law shrinking the size of semiconductors and interconnection technologies with every new generation when combined with the ever-growing power of chip design software. The expanded market (e.g., billions of smartphones and perhaps tens of billions of “internet of things” devices) enabled by the resulting SoCs fuels the necessary investments in capex and R&D, completing the loop.

Disclosure: I am long Qualcomm and Intel in various portfolios at the time this post was written.