Technology Industry Trends in 2010
Despite being widely affected by the economic downturn, the technology sector experienced various bright spots in 2009 which point to the direction the sector will take throughout the year.
The effects of the economic downturn that began in autumn 2008 were felt throughout the technology sector—a universe that includes semiconductors, consumer electronics, software, computing, and network infrastructure. Spending by consumers and corporations was down significantly during 2009, but despite cost cutting by enterprise technology companies, last year brought with it some bright spots: second-quarter sales of netbooks increased by 40 per cent over the previous quarter; shares of VMware, a maker of virtualisation software, more than doubled since hitting a low in December 2008 suggesting a continued interest in virtualisation; Apple’s revenues and earnings remained strong as customers continued to find the Apple ‘ecosystem’ appealing; and the digitisation of everyday tasks continued apace, with the rapid growth of electronic reading on Amazon’s Kindle and Sony’s Reader, according to a new report by Booz & Company.
“These bright spots confirm the relevance of the five key trends we expect to redefine the technology sector throughout 2010—including further consolidation, the growth of cloud computing, the further consumerisation of technology, the acceleration of open innovation, and the growing power of emerging markets,” commented Ramez Shehadi, a partner at Booz & Company.
Despite the recession, M&A activity in the technology sector in 2009 didn’t slow: the high-tech sector worldwide made 365 deals, worth US$27.2 billion in September 2009—the highest total since December 2007. Driving the consolidation trend in the short term is the downturn itself, as it lowers the valuations of many target companies.
In the long term, two major structural forces will continue to drive tech M&A. “The first is the determination of many larger players to quickly increase the scale and scope of their business,” explained Shehadi. The second is the rapid shift toward services as a mainstay offering, thanks to the increasing commoditisation of hardware and the annuity stability provided by services. “Similar deals are expected in the near future, but prices are likely to escalate as the economy improves and buyers chase a declining number of desirable assets,” he added.
Consumers are already familiar with a wide variety of cloud-based services, such as Google’s many Internet-based applications for personal productivity. Now, cloud computing is also becoming a more common choice among corporate IT users. So far, it is mostly smaller companies that are turning to “public” clouds to gain flexibility and cost variability in their purchase of computing power. Larger companies have so far preferred to build internal, “private” clouds, which offer the benefit of flexibility without the ongoing security concerns.
“The real hurdle for cloud computing among large companies has really been a corporate IT culture that is wary of housing strategic data outside their firewalls, and their control. That will likely change as the cost and agility benefits of cloud computing become a strategic differentiator,” explained Shehadi. Indeed, the rise of cloud computing will bring with it major changes: in terms of how workers work and in the nature of the devices they use. The popularity of smartphones and netbooks suggests that the glory days of client-server computing are slipping away, and that the end-use form factors will fragment into a wider range of options dictated by consumers.
As the power and mobility of all kinds of devices and consumer-oriented services grow in popularity, consumers are becoming the new kings of the tech world—a world traditionally led by enterprises. Customisation—the ability to personalise virtually every kind of device and service—has become key to success in consumer electronics, and no product, it seems, can succeed now without its own online store stocked with thousands of apps.
Equally important is the degree to which the consumerisation trend is affecting corporate computing. Workers that have grown up with the internet have come to expect the same degree of device choice, flexibility personalisation, and collaboration in the office that they have at home. “The rise of cloud computing is both a cause and a symptom of this trend—corporations are changing their IT strategies and investment patterns to support users’ demands for anytime, anywhere availability,” said Shehadi.
Today, as the centre of power in the technology sector shifts toward consumers, so too will the heart of innovation. In less than two years after the birth of the IPhone, Apple’s app store went from zero to more than 100,000 apps and now generates over $200 million per month in sales. Within weeks of its release in October, the Google/Motorola Droid phone already had upwards of 15,000 apps. This pattern of innovation is likely to intensify. The long-term trend is toward openness—open source, open standards, open operating systems and open interoperability. Consumers and business users alike are increasingly demanding it, and companies are responding. Furthermore, open innovation can be much cheaper to conduct.
This trend, however, brings with it potential disruptions. Three years ago, dedicated GPS navigation devices were hugely popular and shares of companies such as Garmin and TomTom were flying high. But the introduction of GPS apps on smartphones has changed the market dramatically, and shares in Garmin, for instance, have tumbled 75 percent. Other segments are likely to go down this same path.
As tech sector growth remains sluggish in developed markets, much of the sector’s action is likely to move east and south to developing markets, especially the BRIC countries (Brazil, Russia, India, and China). Most of the future growth in the PC market will occur in these markets—and the number of PC users is expected to increase more than 30 percent annually, to more than 500 million by 2012. Local vendors, which already control as much as 30 percent of these markets, will likely take the lead. “Meanwhile, more and more sourcing activities are moving to the developing world and developing markets will become increasingly sophisticated. Local companies will move up the value chain, from manufacturing to design to innovation, at very low cost—a process that will mean significant disruptions to traditional supply chains,” commented Shehadi. Ultimately, these firms will begin to create their own brands at highly competitive price points.
The success of the Chinese Shan Zhai companies, which derive their growth from rapid innovation, is a symptom of this trend. The best of them have succeeded in transforming the dynamics of a number of markets in China and, increasingly, overseas. Other companies, such as makers of mobile handsets, could follow the same path. It remains to be seen whether companies in the developed world will be able to compete, given the downward pressure these new players will place on already thin margins.
“We believe we are seeing the rapid maturing of the technology sector,” noted Shehadi. The sector is benefiting from the sheer ubiquity of technology—as part of everyday life for consumers and business users. There is still growth to be found in select sectors of an overall mature or maturing market, if companies and even governments are smart enough to understand how to benefit from this rapidly changing marketplace.