The AI productivity trap: how the 'Blockbuster Effect' may hurt your stock investments

Summary
While AI presents vast opportunities for enhancing global economic productivity, it is important to acknowledge that not all companies will thrive or even survive in the face of this revolution. However, it appears that investors are presently embracing an overly optimistic outlook, assuming that virtually every company will automatically reap the rewards of this emerging technology.
We currently live in the so called “knowledge economy”, a system that values intangible assets such as knowledge, intellectual property, and innovation as the primary sources of economic value. Knowledge acts as a potent business moat for established companies, making it challenging for competitors to replicate or access. Thus creating a strong barrier to entry in the market.
The emergence of AI could potentially lead to a "knowledge democratization" phenomenon, gradually dismantling the barriers that currently protect business moats, and thereby impacting the valuations of many popular stocks. This effect, which I refer to as the "Blockbuster effect," entails a scenario where a disruptive technology benefits everyone except those who were initially expected to be the primary beneficiaries of such innovations.

The actual post
Over the past decades, the concept of the "knowledge economy" has gained prominence, emphasizing the significance of knowledge generation, acquisition, and utilization in driving economic growth and development. In this transformed economic landscape, the primary source of value has shifted from traditional factors like raw materials and physical labor to intangible assets such as knowledge, intellectual property, and innovation.
Within this context, knowledge can be viewed as a valuable business moat. It represents a company's unique expertise, insights, or intellectual property that are not easily replicated or acquired by competitors, thereby creating a barrier to entry.
Smaller companies and startups often face challenges in competing with larger corporations due to limited financial resources. They may struggle to invest in research and development, hire highly skilled professionals, or acquire advanced technologies, which can hinder their ability to develop and leverage knowledge-based assets. In contrast, larger corporations benefit from well-established networks, partnerships with industry leaders, and research institutions, granting them access to valuable knowledge, market insights, and collaborative opportunities. These advantages strengthen their competitive position.
In my perspective, the modern corporate world is heavily influenced by the monopolization of knowledge. However, AI has the potential to bring about a paradigm shift by democratizing knowledge, which could prove detrimental to many well-established companies. If AI succeeds, it may enable smaller companies to compete with industry leaders in the medium term. In the long term, we might witness a guerrilla war where market leaders contend with numerous small or micro companies.
In this hypothetical scenario, the global economy becomes highly productive, which is undoubtedly beneficial. However, increased productivity does not automatically translate into higher stock valuations, and the opposite may be true for many stocks currently traded. I refer to this phenomenon as the "Blockbuster effect" or the "Blockbusterization" of the economy, in honor of the defunct video rental company that was essentially rendered obsolete by the internet.
During the late 1990s, computers and the internet were introduced as transformative technologies that would reshape the corporate landscape and enhance productivity, which indeed happened. The democratization of information brought about significant societal and economic changes. While many existing companies benefited greatly from this revolution, others became redundant or remained as struggling entities awaiting the next downturn.
Blockbuster serves as a notable example. The internet greatly enhanced the productivity of the entertainment industry, benefiting society at large. However, it also swiftly eradicated Blockbuster's core assets and competitive advantages. For instance, Blockbuster had an extensive network of exclusive movie rental deals with major producers such as Warner Bros., Disney, and Paramount, which ensured early access to popular titles and fostered customer loyalty. However, with the rise of streaming platforms, many of these partners established their own direct channels, rendering Blockbuster's exclusive deals irrelevant. Other once-relevant moats, such as well-located stores and an extensive movie catalog, also lost their significance.
Blockbuster stock performed quite well during the dot-com bubble and reached its all-time high in early 2002. Investors seemingly believed that Blockbuster could leverage its dominant market position and embrace the wonders of computers and the internet at the core of its business. However, it is unclear why they were so optimistic, considering that Blockbuster primarily served as an intermediary between studios and consumers, lacking distinctiveness beyond physical rentals. Investors seemingly failed to distinguish between the broader societal and economic impacts of technology and its specific implications for their investment.
While Blockbuster is a prominent example, countless lesser-known companies and entire industries faced similar fates. The internet revolutionized entire layers of intermediaries that existed before personal computers and the internet.
In my viewpoint, there seems to be a pervasive tendency to haphazardly incorporate the potential productivity gains driven by AI into the valuations of every company. This mirrors the past mistake made by Blockbuster's investors, who assumed that the mere greatness of a new technology for society and the overall economy would guarantee its benefits for their favored stocks or indices.
Furthermore, it is crucial to delve into related matters that surpass the scope of this discussion. For instance, it is worth examining why there is a widespread belief that the "Magnificent Seven Stocks" will inevitably derive substantial benefits from, or even survive, the AI revolution. Additionally, one should consider the possibility that the true victors of the AI revolution have yet to emerge, transcending existing players in the market.

My advice for the future
Right now we are getting bombarded with AI hype, FOMO and 90s like irrational exuberance, my advice can be summed up as follows.
1-Exercise prudence when factoring in prospective productivity improvements into the current market leaders. This task is intricate and carries a considerable risk of filling your portfolio with overvalued stocks.
2-Maintain an open-minded approach, acknowledging the possibility that many present-day market leaders could face redundancy or obsolescence in the medium or even near future, despite the overall stability of the economy and markets.
3-Don't let AI distract you from important macroeconomic trends happening in the present hoping the irruption of AI changes it all. Same happened in the dot com era, people talked about this “new era” where even basic stuff like P/E ratios or the yield curve inversion were no longer relevant, but it was. God knows it was.