"You've got to invest in Bluetooth. It's the wave of the future."
How many times have I heard something like this as I sipped a Sapphire martini at a swanky Beltway cocktail party? Well, never actually, but I'm sure I will, once I get invited. The Bluetooth buzz is out there, as strong as the biotechnology buzz, or the Internet buzz of yesteryear. Every one of the above technologies is important and emerging, so we, as Rule Breakers, should invest in them, right?
Nope. These are all interesting developments, but they are important, emerging technologies. When we talk about important, emerging industries (and you can hear us talk about it in audio on Fool On The Air), we're usually talking about industries that utilize some new technology, but it's important to distinguish the two.
Industries, not technologies
The difference is not just semantic. New technologies produce a whole brood of industries, only some of which are important or emerging. And, only a small portion of the industries spawned by a new technology will prove to be Rule Breaking.
The basic difference between technology and industry is similar to that between genus and species. The technology is the broad science, and the industry is the specific application. Imagine that we are looking at a chart of the world's living things, in search of a great individual. We would do well to look at the genus Homo, but that's not the end of the task. Invest in a basket of Homo sapiens neanderthalensis, and you can kiss your cash goodbye.
The danger of investing in a technology rather than an industry is not that your branch may die out, but that it may have no competitive advantage. Any world-changing technology is bound to involve a number of components that are mere commodities that any number of companies can produce with only minor variations, with the result that nobody makes any decent money.
For example, imagine we're back in the early days of radio. Marconi's device that transmits sound through waves has presented a number of opportunities for people to create industries. The technology requires hardware ranging from devices like towers and commercial sets to components like vacuum tubes and alternators. It also requires signal generators and content providers. That, in turn, creates the need for recording equipment and ad writers. No single company can handle all these components.
Not all of the industries in radio technology were created equal. Making boxes, for example, was a commodity business with low margins and no competitive advantage between the players. AT&T's (NYSE: T) patents on signal-amplification, however, gave it an edge in that industry. NBC thrived on its production of popular programming.
That's why we focus on industries rather than technologies. Radio changed the world, but not every industry involved in radio produced Rule Breakers.
Let's apply the same notion to Bluetooth. Bluetooth is a wireless technology that uses radio waves to connect electronic devices at speeds of 1.0 Mbps (megabits per second) within a range of 30 feet. Any two products, regardless of manufacturer, can communicate without wires -- digital cameras and computers, stereos and speakers, VCRs and televisions, you name it. Look at the wires around you right now and imagine the applications. Pretty cool, no?
That's the technology; what are the industries? There are devices, like Ericsson's (Nasdaq: ERICY) Bluetooth-enabled cell phones and headsets. There are components, like Bluetooth PC cards from Motorola (NYSE: MOT) and IBM (NYSE: IBM) or radio frequency integrated circuits from RF Micro Devices (Nasdaq: RFMD). Then there's embedded Bluetooth software from Wind River Systems (Nasdaq: WIND) and Extended Systems (Nasdaq: XTND).
I'm sure that my in-box will be inundated with messages from people telling me the industries I've overlooked and the real players in the industries I've named. This is not meant to be a comprehensive study of Bluetooth, but a cursory look at the various industries within a technology. When Rule Breaker investors look at Bluetooth, they have to subdivide it into a number of constituent industries. Some of those industries -- like PC cards and cell phones -- are not new, nor are the players within them significantly differentiated from one another. Others, like perhaps software for embedded systems, are new and different. It may offer unique opportunities to the top dog.
This is your line at the cocktail party: "Invest in Bluetooth? I'm certainly interested in the software applications and transceiver-module manufacturing, but most Bluetooth products will be commodities before you can say 'RCA Radiola V.'" Then throw your drink in his face for good measure.
Remember to eat the olive first.
Sources for information on industries
Here are some places you can go to find out about industries and companies within emerging technologies:
- Technology magazines. These usually cover a broad spectrum of industries, so if you can spot a sector where things are happening, you may be able to catch a budding industry therein. For networking/Internet/telecommunications, I like Red Herring. For biotechnology, there's Science.
- Business magazines. Publications like Forbes and Fortune will often cotton to up-and-coming industries before they are public knowledge.
- The Motley Fool. We've got a couple of good sources. One is our InDepth sector coverage, which includes biotechnology, computer hardware, consumer brands, pharmaceutical, retail, and telecom/networking. Another is our discussion boards. If you go to the top boards and look at stock or sector names, sometimes something shows up that you haven't heard of. Follow it up. I've first run across a number of companies this way -- Rambus (Nasdaq: RMBS), Metricom (Nasdaq: MCOM), Cree (Nasdaq: CREE), and others. After you read around for a while, too, people will lead you elsewhere into interesting, less-populated areas.
--Brian Lund, who plans to file a shelf offering for $10 billion in debt and securities under the name TMF Tardior. We'll see if it works a second time.