The rules of the gorilla game
Money's Duff McDonald interviews Tom Kippola, co-author of a new
high-tech investing handbook
moneydaily.com
If you read the business section of any major newspaper, it seems like
the only news that matters these days is what is happening to Intel,
Microsoft or Dell Computer. It's no surprise: big money is on the line,
for the corporations and their investors.
MONEY writer Duff McDonald sat down with high-tech market strategist Tom
Kippola, co-author of The Gorilla Game: An Investor's Guide to Picking
Winners in High Technology, to find out what makes a "gorilla,"
Kippola's term for a winning technology company.
MONEY.COM: This was a team effort. Who wrote The Gorilla Game?
KIPPOLA: There are three authors. Geoff Moore and myself are partners of
the Chasm Group, which is a Silicon Valley based high-tech market
strategy firm that offers strategy consulting services to primarily
computing and communications companies. Our third author is Paul
Johnson, who is the network analyst at BankAmerica Robertson Stevens.
MONEY.COM: One of the interesting things about this book, obviously, is
the terminology you guys used -- including the title. What is the
Gorilla Game?
KIPPOLA: The Gorilla Game is a type of growth investing that's focused
very narrowly in the high-tech markets and on very specific kinds of
technology companies. We look for companies involved in spaces that have
not undergone hyper-growth but will undergo hyper-growth. And when they
do, they will play out so that there will be a dominant player in that
space, which we call the gorilla. And the gorilla, generally, gains its
dominance because it has a proprietary architecture with high switching
costs.
MONEY.COM: Now, in terms of the development of these markets, I guess
you've developed your model because we've seen this type of growth
before?
KIPPOLA: That's right. The model that we've been using is the technology
adoption life-cycle model, which says that when revolutionary new
technologies are thrown out to a marketplace, there's a set of early
adopters and then there's a lull or a chasm between the early adopters
and the mainstream market. And then there are various stages of adopters
in the mainstream market. There are a lot of technologies, of course,
that do very well in a early market but die off in a chasm and never
make it to the mainstream.
MONEY.COM: And, just for an example, is Intel (OTC:INTC) a gorilla?
KIPPOLA: Intel is a gorilla, Microsoft's (OTC:MSFT) a gorilla, Cisco's
(OTC:CSCO) a gorilla. I think those three companies are probably the
most dominant gorillas in the computing space today. But there are a lot
of other gorillas that are not in enabling technologies like those three
are, but are in software application areas. SAP (OTC: SAPE), which owns
about 35% of the back-office software market, is a gorilla.
MONEY.COM: Some of the other terms that you use in the book: companies
can be chimps, they can be kings, they can be monkeys. It strikes me
that chimps, monkeys and gorillas are pretty similar: What are the
subtle differences between them in terms of the companies?
KIPPOLA: Well, first of all, chimps are companies that play in the same
arena as gorillas but did not get picked to be a gorilla. Monkeys tend
to come in later in a market and they clone a gorilla's architecture.
So, for instance, AMD (NYSE: AMD) and Cyrix (NYSE: NSM) in
microprocessors have really cloned the Intel microprocessor and,
therefore, they are monkeys. Whereas Motorola (NYSE: MOT) has a
completely different architecture and we refer to them as a chimp.
What distinguishes gorilla/chimp/monkey markets, from what we call
king/prince/serf markets is in king/prince/serf markets, no one owns the
architecture. So, for instance, in the modem marketplace, nobody owns
the architecture for modem protocols; that's set by industry standards.
And, therefore, nobody can gain the strength that a gorilla gains in its
marketplace because they don't have proprietary architectures with high
switching costs. The PC marketplace is a marketplace that is panning out
to be a king/prince/serf marketplace, where we have market leaders, like
Compaq (NYSE: CPQ), which we would call kings, but they don't have near
the market share that a gorilla has in its marketplace.
MONEY.COM: Okay. And talking high switching costs, I guess that would be
a real key in establishing yourself as a gorilla. It costs too much for
people to switch from your products once they've already got them? Is
that the idea?
KIPPOLA: That's correct. So, for instance, we've a lot of Fortune Global
1000 companies installing SAP today and in the last few years.
Installing SAP is a long process, can take many years for some
companies. And not only does it take a long time, but it takes a lot of
money to implement it. To rip SAP out and put a competing vendor's
product in is just too prohibitive. So most companies won't even think
of doing it, even if they don't like the vendor's software that they've
installed.
MONEY.COM: And Intel, then, would be something like the high cost of
coming up with a product that's better than theirs?
KIPPOLA: Well, Intel fits the model, yes. But because they have monkeys
in their marketplace, those monkeys -- AMD and Cyrix -- can get your
business the next time you jump to a new PC. However, it's unlikely that
if you already have a Windows-based machine that you're going to jump to
a Motorola-based machine or some other microprocessor that's
incompatible with the one you already have, because you already have too
much sunk costs in the applications, in the data, and your current
machine.
Tomorrow: How to make the most of the gorilla game in your investing.
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