Wharton Study: Securities Analysts Discourage Innovation
Ever wonder why established companies are often slow to adopt new technology? Why Kodak (EK) would hold be too slow in digital photography, or why Verizon (VZ), Qwest (Q), SBC Communications, or Bell South would let Vonage (VG) establish itself in voice over Internet Protocol (VoIP)? According to a Wharton School researcher, one reason is securities analysts, who can drive existing businesses away from innovation.
A study by Wharton Assistant Professor of Management Mary J. Benner in the January-February 2010 issue of Organization Science examines how incumbent firms fare when "radical technological change" challenges existing industry technology. Data from the digital photography and Internet telephony suggest that security analysts ignored established companies' innovations and new products intended to address disruptive new technologies. In addition, the analysts favored strategies that continued to build on old technology:
[T]he nature and direction of securities analyst reactions as incumbents take steps to respond to new technologies -- encouraged a continued focus on strategies to preserve and extend the old technology, and did not encourage incumbents' response to the new technologies.To put it differently, the established companies wanted to encourage higher stock prices, which meant pleasing analysts. As a result, the companies focused on existing technologies to please Wall Street and court investors -- and, in the process, also courted competitive disaster.
The lag of analyst attention to the state of technology, potential market disruption, and established vendors' reactions is amazing when viewed in retrospect:
There is also evidence in the coverage of wireline firms that the analysts are increasingly aware of the threat of technological substitution. Although VoIP technology is not mentioned in the analysts' reports until April 2003, a year after Vonage's entry into the market, analysts increasingly note the possibility of technological change. For example, the Deutsche Bank analyst begins to incorporate the following general text in every report starting in 2004: "We believe that technology substitution, crossplatform [sic] competition, and changes in the regulatory environment are key investment risks for the stock."A similar pattern occurred in digital photography, when analysts seemed to look at short-term stock performance as a counter to potentially disruptive technology. As I thought about the business model of the brokerages for a moment, this didn't seem surprising. The brokers make money when clients buy and sell stocks, not when clients buy and hold. The more activity, the more fees the brokers see.
Although study Benner doesn't directly draw the following as a conclusion, she notes one possible implication: Security analysts' reactions may "encourage [established technology vendor] exploitation over exploration or favor incremental innovation over more radical innovation."
Established vendors can still eventually dominate new technology because of other business advantages. But the study does suggest that views and interests of securities firms may put significant brakes on the pace of change.
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