Briefing: Platforms, Tools, Applications - Part 2 - Examples
27-Aug-01 02:00 ET
[BRIEFING.COM - Robert V. Green] In part one on this topic, we defined a way to view the technology marketplace: as a pyramid of investments involving platforms, tools, and applications. In part two, we provide some examples.
Brief Explanation
Last week we explored the concept of the a technology pyramid, which three components:
- Platform: essential components of any solution
- Tools (and components): Technology companies whose customers are other technology companies that are building an application
- Applications: the technology that actually solves a problem - the customers of applications companies use the product as is, to solve a particular problem.
These definitions are for the purposes of investment, and differ from how they may be used to break down a technology solution, by technology layer.
The most important distinction involves the term platform. With reference to technology layers, "platform" refers to a hardware vertical environment (the Sun "platform" or the RISC "platform.") We are using the term from an investment perspective: a platform is the essential piece that everyone must have in their application.
From this perspective, the PC itself is not a platform, but Microsoft and Intel both are. For the PC revolution, the platform investments were MSFT and INTC. Dell was a successful investment, but AST Research was not. Yet both were PC manufacturers. Dell's success was not due to the fact that it was a platform, but that it executed better and more efficiently than everyone else.
Note: I have earlier argued that both Microsoft and Intel are no longer platform investments, because the PC is no longer an essential element of information systems. However, databases are. (See the Stock Brief of 16-Jan-01 The Platform Shift: Databases for details.)
Applications companies are companies that sell a technology product or service. These are not companies (in this view) that use technology to reach an end user, like Amazon.com or eBay.
For a full explanation of the pyramid view of technology, refer to last week's Stock Brief of 21-Aug-01 Platforms, Tools, and Applications
Note: On some sites where Briefing.com is republished, these links may not be operational. For a free temporary account to access the archives on our subscription service, please send an email to me, Robert V. Green, at rvgreen@briefing.com
Examples
To further explain this view of technology investments, I have included examples from various technology sectors, below. Each company is identified by its stock symbol. In many cases, a stock is in more than one level (Microsoft at its peak was prominent in all three), but I have generally chosen the most prominent aspect of a company, the aspect which will drive its financial performance. Some companies require acknowledgment on more than one level. Adobe is a good example. It is a platform company with respect to Postscript processing in printers, and an application company with respect to its graphics and Acrobat software.
These lists are not meant to be inclusive, but are meant to illustrate the concepts. If your stock is not listed here, these stocks will serve as comparison points.
Platform Examples
The following tables illustrates the concept of platform companies.
Platform - Companies
Enterprise
Information - ORCL EMC
Technology
Software - VRSN ADBE
Networking - CSCO
Telecom - TXN AETH BCGI QCOM
Services - BSYS FDC EDS DST
Note that the concept of "platform investments" requires some element of a barrier to entry. This barrier can be either distribution or patents or sheer size in terms of market share. It is not enough that the service or technology be essential. (Everyone requires electricity, but it is not a technology investment play.) For example, every internet company requires a web hosting service of some kind. But there are simply too many companies to choose from, none of which have any real barrier to competition. Therefore, none of them are platform companies, currently. Note that EMC is a platform company while DSS and WDC are tools companies. The dominant market share and distribution directly to end customers is the difference. EMC will be the primary beneficiary from an increase in demand for enterprise level information technology.
Platform companies make good value investments in downturns. Accumulation while the price is low is usually rewarded when the upturn finally comes. This is because the platform position makes it a beneficiary of increased spending by every level of the technology industry.
Tools Examples
The following table illustrates the concept of tools and component companies.
Tool and Components Companies
Enterprise
Information - BEAS PRLS PRSW CWLD CTXS MERQ
Technology
Software - BVSN ARBA CMRC OMKT BORL INKT
Networking and Hardware - AKAM BITS ADPT RMBS TMTA APH JBL DSS WDC CMTO BRCD
Telecom - LU JDSU AFCI ERICY NOK BRKT NT CIEN GLW SCMR
Semiconductors - ATYT NMGC ASYS XLNX AWRE PMCS VTSS
Vertical
Industry - EPAY FNDT SONE
Services
Tools and component companies have other technology providers as customers. They suffer the most in technology downturns, because their customers are seeing downturns in revenue.
Applications Examples
The following table illustrates the concept of applications companies.
Technology Application Companies
Enterprise IT - TALX AAPL CRDS LXK RSAS NOVL CCRD VRTS
Software - ADBE ADVS PSFT SAP MANU MANH INTU
Networking and Hardware - CSCO LBRT PLCM
Telecom - PCS FON NOK ERICY DOX PRSF VZ SBC Q BRW
Vertical
Industry - JKHY EXLT PRBZ SONE DRIV SIRI XMSR
Services
Horizontal
Services - INFS IDX AOL RCOM GMH DISH
Applications companies deliver a technical solution. In downturns, applications need to be very carefully selected. Those that have "no-brainer" cost reductions for enterprises or small business can do well. Those that require massive investment and a sea-change of cultural adoption, like SAP, tend to suffer, as corporate buyers postpone the investment. In addition, applications that depend on upgrade fees for recurring revenues tend to suffer. Pick carefully in a downturn.
What Good Is This Paradigm?
This paradigm is useful for sifting the technology landscape. The investment premises behind the definitions of platforms, tools, and applications allow you to have a starting point for analyzing the stock. Each stock must be individually researched, however, as there are always exceptions to every rule.
In addition, you have to ensure that your technology company really is a company that has a technology advantage driving it to new growth levels.
For example, note that PC manufacturers are absent. The PC era is over. The PC technology advantage is gone. It is now a competition of efficient manufacturing, distribution, and marketing. It isn't competition on technology. You can almost argue that PCs are already appliances. After all, a refrigerator has technology in it too, but refrigerator manufacturers are not technology companies.
And where is Microsoft? Microsoft is present in all three of these levels, however, because the revenue stream is still so closely tied to the PC, I have left it out of these examples.
Summary of How To Use This Paradigm
The pyramid view of technology is useful when examining turns in the technology industry. For a full description, refer to Part 1 of this Stock Brief. For a quick summary, here is the table from Part 1.
Applications
Opportunities in Downturn
Selective. Companies dependent on the the "upgrade" business model are hardest hit. Applications which reduce an existing expense can succeed.
Trends in Upturns
Companies with the largest customer base usually win. A new application must be radically different.
Tools and Components
Opportunities in Downturn
Few. Until the upturn starts, it is usually unclear what tools are essential.
Trends in Upturns
The tool de-jour can be a big winner, but it is difficult to stay on top.
Platform
Opportunities in Downturn
Buying opportunity. Downturns offer cheaper prices, but patience is required.
Trends in Upturns
Rapid expansion as all levels of the technology infrastructure begin buying.
When Is The UpTurn?
When is the turnaround in technology spending coming? Cisco's statements last week provided some encouragement to the markets that we may be seeing the end of the downturn.
Cisco's statement had the positive effect it did, because Cisco is a platform company. If Cisco is doing well, it implies everyone else will likely get pulled along. The essential nature of platform companies allow them to serve as proxies for the industry.
However, one day does not make a summer. Something to remember as we head into Labor Day.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
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