haves and have-mores

The consulting firm McKinsey and Company published a study on the digital economy last month, titled “Digital America:  A tale of the haves and the have-mores.”

It makes two main points:

–the price of information and communication technology goods and services has dropped by about 2/3 over the past two decades.  So conventional measures of GDP are probably underestimating the positive impact of ICT on overall economic growth in the US.

More important for us as investors,

–the pace of digitization varies very widely by company and by industry.  The leaders have increased their digital capabilities over fourfold over the past 15 years.  The rest have 14% of the leaders’ digital presence.  That’s up from 8% in the late 1990s.  But the great mass of firms have barely closed any of the gap.

Laggards have only a fifth of the digital assets of the leaders and have only 7% as many workers performing digital tasks.

most/least digitized

most

Interestingly, McKinsey lists as the most digitized sectors:

ICT itself

Media (?)

Professional services

Finance and insurance (insurance?).

I guess I have to remember it’s a relative list.

least

The least digitized are:

Government

Healthcare

Hospitality

Construction

Agriculture and hunting.

competitive advantage

McKinsey also points out that the most digitized–think Google, Facebook, Amazon, Netflix–have an immense competitive advantage over their rivals.  That expresses itself in increased market share and higher profit growth–although personally I think we have to take the second on faith with firms like AMZN, which are plowing their cash flow back into expanding their reach.

significance?

In a year that will probably be flattish–even though the first couple of trading days make one think of flattish as an aspirational goal–looking to firms who are establishing digital leadership is a reasonable investment strategy.  Growth investors will likely try to find fast-growing leaders, both large and small.  Value investors will probably try to find laggards who now understand their potential predicament and are acting aggressively to remedy their shortcomings.

All we have to do is find names.