Like most people, I’ve heard the term "half-life" for years.  It always seemed to be used in reference to a prescription drug’s time of effectiveness.  So I was surprised when I heard it used by record executive Clive Davis about his business.  He had used the term to describe a song writer’s life span of creativity.  That reference got my attention.  I had always found it fascinating that creative people can excel at a particular craft and then suddenly they lose the gift.  Their journey is over.  They can’t write, sing, paint or act as well as before.  Ricky Nelson wrote about the experience in a song called “Garden Party” in 1985. He opened at a concert singing new material.  It was instantly booed.  The audience didn’t want to hear it; it wasn’t as good as the old.  Ironically, “Garden Party” would become his last “new” hit.

Creativity is also the driving force behind technology innovation.  Because of this reality, the ensuing half-life of a technology company can occur very quickly.  The term half-life refers to the amount of time it takes for a quantity to reduce itself to half of its initial value.  It’s a term used in nuclear physics.  Who knew?  I didn’t.  I learned the concept of half-life - and how quickly it can come to pass – from owning technology stocks.  My first experience was in 1966.  That year, I bought shares of Digital Equipment for clients in the aftermath of its IPO.  At the time, the company was profitable.

What I did not realize was that the company had been profitable since in 1958 on sales of just $94,000.  That was a small number even then.  The buy idea was not mine (I was just 22) but “Pete” Lawson’s.  Pete had been the portfolio manager of Fidelity’s Magellan Fund.  DEC, as it became known, turned into a colossus in the technology world.  At its half-life, it was second in size to IBM and would last 41 years.   That memory came back to me when I saw the recent press coverage of two high profile – and sizable – initial public offerings of technology companies Spotify and Dropbox.

Dropbox has $1.5 billion in revenue, Spotify over $3 billion.  Neither has made money in the past ten years.  The news story that got my attention read, “Spotify Makes Plays for Growth, Not Profit.”  Huh? Making money is the reason one starts a business.  There are two ways of doing that.  One is to make money from the financial structure (Amazon); the other is to make money from customers.

Spotify is the global leader in music streaming.  According to the company, it has 157 million users in 61 countries.  But just 71 million paid.  What about the other 86 million?  Dropbox has a similar mass market business model.   The company will store all of your digital stuff in the cloud for free.  It has 500 million users but only 11 million (2%) pay to get “premium” storage.  The rest – 98% - is free.

Investors have been enthralled by the appearance of these two Amazon-esk business models.  They should listen to 85 year-old Clive Davis.  I’m sure he would tell them about the half-life in creativity and remind them the name of classical rocker Amy Lee’s band is called Evanescence.  That name comes from the word evanescent; it means the appearance of success that is rapidly fading from view.

-Francis Patrick Boland