But not all blue chips are created equal. These days, the Nifty Fifty aren’t looking so swift. There can be painful consequences to the strategy of simply looking at companies’ 15- or 20-year histories and concluding that the future will resemble the past. Such companies as AT&T, Eastman Kodak and Xerox have let down their shareholders over the last five years. In a time when–even accounting for the recent drop–the market as a whole is up more than 60 percent, AT&T and Kodak are each down more than 30 percent. Xerox? Let’s just say this is not your father’s Xerox. The stock has been as buoyant as a bag of anvils, and is down nearly 90 percent from recent highs.
For blue-chip companies in the technology sector, the New Economy may not be such a great thing after all. Recent developments in an economy increasingly centered around bits and bytes have not been kind to technology leaders of the previous generation, even as consumer-oriented companies such as Wal-Mart, Tootsie Roll and Johnson & Johnson have continued to provide market-beating returns. Consider Kodak. While its earnings are at record levels, the stock has been a consistent loser. The market, which is essentially a forward-looking mechanism, sees the future of picture-taking moving away from silver halide film and becoming more and more digital.
While Kodak has spent heavily in research and development in digital camera technologies, it hasn’t been enough to convince investors that Kodak has any particular advantage in converting its strong conventional-film brand into a name associated with digital imaging technologies. Fuji has already made significant inroads into Kodak’s market share simply by selling conventional film at cheaper prices than Kodak. The transition to the digital world will only increase the competition for the once dominant Rochester, N.Y., company. Kodak’s future earnings outlook, in short, makes for a very fuzzy picture.
Similarly, Xerox’s brand name hasn’t been enough to serve the company in the face of stiff competition. It’s strong: we all use “Xerox machine” generically, even when talking about Canons and Ricohs. But it’s not so strong that Xerox can charge a lot more than Canon and Ricoh do. And it certainly won’t shelter the company against companies that develop new technologies.
Ultimately, that’s the problem for the largest technology companies. Because they are big and have been around long enough to be designated blue chips, they’re probably locked into legacy systems. They’re trapped: on the one hand, they’ve got to innovate, and in the right way for a rapidly changing marketplace. But on the other hand, they have equipment that must be amortized, and workers whose skills are with that equipment. AT&T, for example, is in such a bind. It has to come to terms with the fact that the way we communicate is dramatically different in a networked world than it was 20 years ago. A decade ago, 95 percent of all telecommunications demand was for voice transmission. Today’s networks must be optimized for data traffic. AT&T correctly moved to de-emphasize long-distance service as the core of its business. But its attempt to remodel and re-brand itself as a bundled communications company, offering wireless and cable as well as long distance, has failed so far. Early identification of the competitive threat was not enough; AT&T also needed to execute.
Buying a blue-chip consumer-goods company isn’t really different from the way it was in your grandfather’s time. It involves the same risks, and also the same rewards. Is some new candy company going to bring a generic Tootsie Roll to market? And if it did, would a Tootsie Roll lover switch? That’s unlikely. But technology-driven companies are in a different and more dangerous position. Not only can they be trumped by newer technologies, but also the power of brands doesn’t translate as well in the technology sector as it does in consumer goods. IBM’s powerful name didn’t protect its PC business from upstarts like Dell, offering essentially the same machines at more attractive prices. These days, even blue chips get the blues.
