The Gorilla Game: An Investor’s Guide to Picking Winners in High Technology – by Geoffrey Moore

I just finished the 2-3 hour abridged cassette tape book, The Gorilla Game.  The premise of the book is that there is an easily identifiable pattern that technology industries follow that can make you a lot of money if you invest following the rules outlined in the book.  The rules are remarkably simple and low maintenance.  But the amazing thing to me, is that it’s a book about technology, written 10 years ago, that still seems relevant.  It’s not a strategy I plan to follow, but it’s still interesting.  I don’t particularly recommend the book, but it’s short.  I can lend you my tapes.

Principles:

• The technology industry is characterized by discontinuous innovation – new business segments periodically appear that are not evolutions of a prior technology, and are often started by new companies.
• When a new business segment is forming, the stock market frequently underestimates both the growth rate of the industry, and the length of the growth period.
• He names phases a Bowling Alley, and a Tornado phase. In the first, the business segment is slowly getting integrated by customers that are typically most tech savvy.  In the Tornado phase, almost everyone realizes that the technology will be useful.
• There are 2 classes of business segments:
• Enabling Technologies:  Winner-take-all segments like pc processors.
• Software Applications: Since you can get vendor-lock-in, there may be several small players that have success in this area.
• There are 3 types of companies:
• Gorillas – dominant leader in a segment. (such as Intel)
• Chimp – challenger to the gorilla.  (typically doomed to fail)
• Monkey – follower of the standards set by the leader.  (AMD)

This is the process:

1. Scan publications and news for business segments that may enter a tornado phase.
2. For Software Applications, buy before a gorilla emerges, because even chimps may be profitable.  For enabling technologies, wait until the tornado phase starts.  Buy stocks in all companies that may become the gorilla.
3. Track market share quarterly and consolidate holdings in the gorilla.

I’m not sure how well this will apply in a more mature technology market, where it feels like hardware is built on more standards, and software is increasingly built on advertizing, making it unclear if they will profit.  It all sounds reasonable, but I wonder if I’ll ever identify a business segment that I think will enter a tornado phase, and if I do, will the companies be public (which seems rare recently).  Anyway, the book convinced me that I should hold on to my Apple stock for longer.  I think the market is still under appreciating the growth potential for Apple, even after rising 70% since my Apple analysis post from late last year.

Note, my book notes are probably more for my own benefit than yours.  A 1-page summary just can’t do any book justice.