A Matter of Life and Death

By Wayne Mulligan, on Thursday, January 15, 2015

Over the past decade, the music industry has lost $7 billion in annual revenue.

The film industry has lost $6 billion.

And the newspaper industry has lost a staggering $48 billion.

The culprit behind this destruction?


Software has disrupted – destroyed – entire industries, from media to taxis to hotels.

Recently, our research unearthed software’s next victim...

And this time, almost $1 TRILLION in shareholder value could be wiped out.

But is there a way to profit from this destruction?

Creative Destruction

A fascinating concept exists called “creative disruption.”

It describes a scenario where something new destroys something old.

Much of the technology industry is predicated on this concept:

Amazon destroyed bookstores like Barnes & Noble...

Publishing platforms like Tumblr and Twitter destroyed the news industry.

Uber is destroying the taxi industry.

These new companies have created massive value (Uber was recently valued at over $40 billion), but they also destroy value.

As human beings, we’re sympathetic to those being destroyed...

But as early-stage investors, it’s important to invest in the companies inflicting the destruction and avoid the ones being destroyed.

Software’s Next Victim

So which industry will technology disrupt next?

Where will wealth get destroyed?

And where will it be created?

This is a question we often ask ourselves...

And the answers can give us some of our best investment ideas.

Over the winter holiday, while vacationing in the San Francisco Bay Area, I put this question to a number of entrepreneurs, investors and technology executives.

One night I was having dinner with a high-level executive from Cisco Systems.

He asked not to be named in this article – and in a minute, you’ll see why.

Towards the end of our dinner, he predicted the market that will be ”killed” next:

The Internet itself.

More specifically, he predicted that the physical equipment that powers everything you do online – i.e., the hardware – will become obsolete.

This hardware is highly specialized.

It costs a small fortune to build, buy, and service.

Companies that supply it – like his employer, Cisco Systems (CSCO) – generate billions in annual revenue.

This status quo is good news for Cisco...

But it’s terrible for companies like AT&T and Verizon that need the equipment.

And it’s even worse for end users like you who are forced to pay exorbitant fees for Internet and cable.

Internet 2.0

Companies like Cisco have enjoyed a virtual monopoly for almost 20 years.

But that’s all about to change...

If Internet 1.0 was all about the networking hardware, Internet 2.0 will be all about the networking software.

It’s a phenomenon known as “SDN,” or Software-defined Networking.

Simply put, SDN shifts the “work” that powers our online activity:

It shifts it away from the hardware...

And onto the software.

That means no more need for Cisco’s expensive, specialized hardware.

Instead, companies like AT&T can buy inexpensive no-name hardware –

And then load it with cost-efficient software.

Business At Risk

Companies like Cisco and Juniper are scared.

Last year, Cisco generated roughly 48% of its $47 billion in revenue from its hardware business.

Low-cost hardware + efficient software would put that business at risk.

But remember:

Creative destruction mandates that when value gets destroyed in one place, it gets created in another.

In this case, value will be created in companies capitalizing on SDN...

For example, small-cap and mid-cap companies like Extreme Networks (NASDAQ: EXTR) or F5 Networks (NASDAQ: FFIV).

Even large-cap companies like VMWare (NYSE: VMW) are getting in on the action: in late 2012, VMWare acquired SDN leader Nicira for $1.26 billion.

Positioned to Profit

As the SDN wave gathers steam, we believe more acquisitions will take place:

To gain an edge in this emerging space – and to protect their revenue lines – larger incumbents will acquire smaller upstarts.

We believe that the majority of these acquisitions – and the majority of the value creation – will occur in the private markets.

Private businesses like Nuage Networks and Cumulus Networks, for example, are prime acquisition targets.

Historically, most investors couldn’t have accessed these private opportunities.

But soon, thanks to the JOBS Act, all investors – regardless of income or net worth – will be able to invest in early-stage SDN companies...

And hopefully, these investors will profit handsomely as the technology unleashes its inevitable creative destruction.

As always, we’ll keep you abreast of all JOBS Act related news and developments through the Crowdability website and newsletter.

Happy investing.

Best Regards,
Wayne Mulligan
Wayne Mulligan


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