Who’s afraid of disruption?

The business world is obsessed with digital disruption but it has had little impact on profits

Few weeks back Schumpeter met two tech tycoons who control businesses in total worth $600bn. In both cases the mayhem around them was what you would expect if Beyoncé hit town, minus the musical talent and looks. Hotel floors were locked down by the official secret service; the corridors were crammed with lines of petitioners and in one case a Wall Street boss gatecrashed the room in order to hug his idol.

The message from both titans—you ain’t seen nothing yet—was imperious. Over the next decade, they say, conventional industries will face an onslaught from tech competitors wielding vast financial resources, new technologies and massive reserves of data. It is a view that has swept through traditional firms’ boardrooms, too, where enthusing about virtual reality and singing the praises of Jeff Bezos, Amazon’s boss, is almost obligatory. The notion of disruption, with its promise to destroy the status quo and then renew it, is the most fashionable idea in global business since the craze for emerging markets over a decade ago.

Yet there is a puzzle at the heart of the orthodoxy. Few bosses, in public or in private, expect their own firms to decline, and hardly any American companies are valued by investors as if their profits will fall. The tech revolution, it seems, will be momentous, but harmless, with no corporate victims. Something does not add up.

If disruption is defined as conventional firms being clobbered by digital ones, there is certainly some of it about. This month Toys “R” Us went bankrupt, joining many clothing and hardware retailers felled by e-commerce. On August 23rd shares in WPP, an advertising firm, slumped after it said clients were cutting spending partly because of technological change. A few days later Amazon closed its acquisition of Whole Foods, a food retailer, and cut its high prices, spreading fear in the supermarket industry’s aisles.

At least six conventional industries have been eviscerated by digital innovation in the past two decades—music, video-renting, books, taxis, newspapers and clothes retailing. In financial terms the survivors are shadows of their former selves. The New York Times Company’s profits are 67% below their peak. It is a similar story at Barnes & Noble (76%) and Universal Music (about 40%).

But these firms and their peers were never large. In 1997, when Mark Zuckerberg was 13 years old and the six industries were in their prime, they accounted for 2% of the profits of the S&P 500 index of big American firms. The toll that digital disruption has taken so far on overall earnings is thus tiny. Across America’s economy profits are high and stable relative to GDP.

If technological disruption was about to inflict a new and more devastating blow on traditional firms, you would expect to see lots of them with miserly valuations, as investors discounted a slump in their profits. Yet such firms are uncommon. Only about 40 companies in the S&P 500 have a price-earnings ratio of less than 12, which is a sign of imminent decline. That is similar to the share two decades ago and half the number of ten years ago.

Only two industries are priced for devastation. General Motors and Ford are valued at just seven times profits. Investors expect Tesla, a manufacturer of electric cars, to steal market share, and ride-sharing firms to cut demand for cars. Airlines are dirt cheap but that is because the market frets about a price war and the chance of tighter antitrust regulation, not about disruption.

Many industries that you might imagine to be directly in the crosshairs of Silicon Valley are expected to plod along happily. Consider television, where Amazon, Netflix, YouTube and Apple are pouring money into buying and making new shows. There are certainly worries about consumers cutting the cable-TV cord, but the incumbent cable firms and content producers are in aggregate valued on 20 times profits, implying cash flows will continue to rise. Likewise, hotel companies, rather than being wiped out by Airbnb and throttled by online travel agents, enjoy similar perky valuations to those they had ten years ago.

The list goes on. The credit-card giants, Visa and MasterCard, are on a roll, and are together worth almost as much as Amazon: there is little sign of disruption by digital-payments firms. From stodgy banks (facing a putative threat from fintech) to electric utilities (which might be disrupted by batteries and smart grids) it is a similar story: valuations imply that investors are relaxed. Even food retail’s giant sitting duck, Walmart, is forecast to see pre-tax profits increase by a cumulative 6% over the next three years.

A different kind of digital accommodation

Investors appear to be assuming an accommodation between big tech and the rest of big business, not a bloody showdown. The five largest tech firms (Apple, Amazon, Alphabet, Facebook and Microsoft) have valuations that suggest their combined share of total corporate profits will rise from 7% now to 13% in a decade. They are expected to keep near-monopolies for decades in products that attract huge public interest, such as search and social media. But they are not expected to lay waste to America Inc.

That is reasonable. Many incumbent industries have high barriers to entry. Two of the largest, banking and health care, are surrounded by a mesh of regulation. And existing big firms have raised their game. Most giants, from Walmart to General Electric, have digital or e-commerce divisions. America’s incumbents spend five times more on research and development than the five big technology companies do.

But it is possible that the present balancing act may topple over. Either tech breakthroughs or deregulation could make it easier for tech firms to compete against conventional ones. If the tech boom becomes a bubble, there will be pressure on tech bosses to lower the hurdle rates they use for new projects and invest much more heavily in old industries. If they are rational, they will resist the temptation, but when you are holed up in a hotel room surrounded by admirers it can be easy to lose perspective.