This was what was defined last week! The trigger for this: a plugin that Claude introduced into his AI platform to perform legal, sales, marketing, and data analytics tasks suddenly raised concerns about how AI could disrupt the software industry. Then, more information unraveled over the next few days, as many software coders, developers, and entrepreneurs gave their opinions on how AI was shaking up the software industry. What do you think? Let’s learn some lessons from history.
The iPhone saga
It’s January 9, 2007. Steve Jobs had just wowed the public and the mobile industry when he unveiled Apple’s new product: the iPhone. (You can see how he wowed the crowd in the first five minutes of this video link https://tinyurl.com/stevejobs07). It surprised the entire sector. Apparently no one expected a new product with the level of differentiation and sophistication that the iPhone offered.
In the book, Losing the Signal: The Untold Story Behind BlackBerry’s Extraordinary Rise and Spectacular Fallauthors Jacquie McNish and Sean Silcoff describe an interesting incident that occurred at Google headquarters shortly after launch. Until then, Google was working on two mobile phone operating system projects: one project that could be developed and brought to market quickly. This would have little sophistication, but would serve general usage purposes and could be used to access the Internet, including online searching; another, a more high-end project with touchscreen interface and a high level of sophistication and wider applicability of tasks on a handset. The first was thrown out immediately after the iPhone was unveiled and Google went all in on the second project. The result of this is the Android operating system, which currently has a market share of approximately 70 percent in the mobile operating system industry. Thus, in January 2007, the seeds for Android’s success were sown.
But this is only half the story. The other half is how the seeds of destruction of some of the global tech giants of that period, such as Nokia and BlackBerry, were sown on the same day. Between the iPhone’s unveiling and its launch on June 29, 2007, a variety of views from industry experts and analysts made headlines. That it would affect the incumbents was one thing; that it is good for incumbents because it will broaden the ecosystem was another. As you would have it, none of the top executives at any of the leading handset/smartphone/mobile operating system companies – Nokia, BlackBerry, Motorola, Windows Mobile Operating System – recognized how disruptive the iPhone launch was to their business. They all downplayed the threat.
In its quarterly earnings conference call in July 2007, immediately after the launch of the iPhone, in response to an analyst’s question about the threat of the iPhone, Nokia management noted that they welcome competition because it makes them better. Then-Microsoft CEO Steve Ballmer infamously mocked the iPhone. When asked what his reaction to the iPhone was, he replied with a laugh: $500…fully subsidized with a plan…that’s the most expensive phone in the world…and it’s not attractive to business customers because it doesn’t have a keyboard. He also added: Right now we’re selling millions and millions and millions of phones every year. Apple sells zero phones per year (You can watch this response from Steve Ballmer on iPhone in this video link https://tinyurl.com/msiphonereax).
Surprisingly, in the early stages, they seemed to be right when you looked at the performance of their company and stock (in 2007). Nokia exceeded a market capitalization of $150 billion by the end of 2007. A significant portion of this value came from the handset/smartphone business, while a smaller portion came from the telecom equipment business. BlackBerry (then called Research in Motion) exceeded a market cap of $100 billion in 2007. These market capitalization levels were among the highest in the world at the time.
The unveiling of the iPhone marked the starting point of a permanent tectonic shift in the way not just the mobile industry functioned, but how the entire world functioned. The competitors spectacularly failed to notice this.
In late 2009, after stocks recovered from the impact of the global financial crisis, the iPhone effect began to emerge; and that was reflected in the weaker performance and share prices of BlackBerry, Nokia and Windows Mobile OS sales. By 2012, Apple had apparently captured about 70 percent of the profits in the global mobile phone industry (up from zero until mid-2007), with a share of only about 10 percent per unit. The impact on competitors was more destructive than anyone could have imagined in 2007.
Nokia’s handset/smartphone division was acquired for just $7.2 billion. This was also completely written off in 2016 and the acquisition was considered a failed experiment at Microsoft. Blackberry’s market capitalization is currently around $2 billion, down more than 98 percent from its 2007 peak. Motorola’s handset business would also have suffered a similar fate had Google not bought it for $12.5 billion in 2011. It’s important to note that Google didn’t buy the company because it saw great value in Motorola’s handset business, but because the company, as a pioneer in handset technology, had thousands of patents.
In 2011, established mobile phone industry players such as Nokia, BlackBerry, Sony Ericsson and Apple formed a unit called The Rockstar Consortium, loaded with mobile phone patents, and used it to file patent infringement lawsuits against Google to slow Android’s progress. Therefore, Google’s acquisition of Motorola was done primarily to build up its own stock of patents to counter the Rockstar Consortium. And it worked!
By 2013-2014, the industry had changed to a situation unlike 2007. New names led the industry, while incumbents were wiped out.
In the 21st century, there are quite a few examples of how technological innovation and disruption have redefined the path of certain industries and the future. The launch of the iPhone and the denials and unpreparedness of other mobile phone industry CXOs to acknowledge and adapt to this serves as a very good example to learn from. Sometimes even the best can become uprooted, despite their intense efforts to evolve and adapt. That could be the impact of the change. Investors should be alert to this.
Note to investors
In times like the disruption we were warned about last week, investing should be based on prudence and consideration of multiple outcomes, not a ‘buy the dip’ mentality. The views of established CXOs should be taken with a grain of salt, as Warren Buffett once said: Don’t ask a hairdresser if you need a haircut. If you look at the comments from IT services industry CEOs over the past two to three years, there has generally been a trend to reiterate how they are well positioned to benefit from AI, even though the underlying performance hardly reflects that.
Compared to this, the SaaS companies have actually performed well in recent years. Yet their supplies have been routed. Following concerns about AI disruption, their shares have significantly underperformed business growth. Investors’ recency bias (about how companies have grown in recent years) is now being replaced by fear of what AI disruption could do to future business prospects. Adobe, for example, after growing 11 percent in revenue and 15 percent in net income over the past year and with a solid net profit margin of 30 percent, today trades at a forward price-to-earnings ratio of 15.5 times! On a forward PE basis, Adobe trades at 11.4 times (see the chart above).
In such times, it can be an endless debate about whether stocks are cheap or not. Therefore, investors should consider multiple outcomes. For example, one outcome could be that companies adapt, evolve, survive and grow, but at a lower growth rate than estimated a year or two ago. In such a case, buying at low PEs or single-digit multiples can pay off. But there could also be an outcome where some companies are affected, like the cell phone companies of the previous decade. In such a case, no level of purchase will be cheap. For example, when BlackBerry’s valuation fell from more than thirty times to a PE multiple in the low teens between 2007 and 2011, one Wall Street analyst called its valuation “theatre of the absurd.” Yes, the stock was theoretically very cheap, but still not priced for the disruption and continued to move lower and lower.
A word of warning
So investors looking to buy the dip should assess whether the stock is priced for disruption or extinction, and then place their bets cautiously. Currently, no one can clearly predict what the outcome will be in a few years.
In this context, it is worth noting that Indian IT services providers are not paying a price for disruption, whichever way you look at it. With lower revenue and profit growth and lower net profit margins compared to some SaaS companies (see the chart above), they continue to trade at high price-to-earnings ratios on both an absolute and relative basis.
During the previous phase of disruption in the IT services sector, which took place between 2015 and 2017, when the cloud/digital transition upended the old business model of the IT services companies, TCS, Infosys, Wipro and HCL Tech all bottomed out at 16.3, 13.9, 12.5 and 13.1 times respectively. Today, where the disruption and threat are significantly greater and their businesses have been more severely affected, as reflected in the financials of recent years, they trade at a higher price-to-earnings ratio (see the chart above).
There is a dichotomy here and therefore they do not provide value given the disruption risks, even after the underperformance of recent years. Bee bl.portfolioWe have consistently maintained a cautious stance on Indian IT stocks, and we reiterate that stance.
Published on February 7, 2026
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