Twelve Technical and Business Trends Shaping the Year Ahead

You’ve heard all the hype about technical and market changes that are reshaping business. Recently Peter Cohen looked into several important trends to provide us with a survey of the real facts behind some well-known market moving trends.

How is Voice over IP causing a convergence of the cable and telecom industries?

How are advertisers using digital messages in new places to overcome the decline in broadcast viewership?

How are market forces and demand from China changing the structure of the software industry and changing the nature of demand for IT products?

Did you know that fighting spam is a bigger market than sending it?

Do you know how many big players have already transitioned to Linux- based systems?

What is the near-term future for RFID type supply chain systems?

By: Peter Cohen

http://www.babsoninsight.com/contentmgr/showdetails.php/id/687

(Many thanks to Jeff Shay at UM for passing this excellent Babson College newsletter http://www.babsoninsight.com/babson/index.php along- Russ)

Since March 2000, a change in the way technology is financed has changed the way it’s bought and sold. Money for technology is not free anymore. With cash scarce, companies are looking to squeeze more performance out of lower IT budgets. Technology vendors which offer tools that cut costs – like VoIP, Linux, outsourcing, blade servers – are taking a growing share of these dwindling budgets.

In 2004, this dynamic will produce the following 12 technology trends:

1. Convergence of cable and telecom industry services.

After a decade traveling distant tracks, the paths of cable service providers and telecom carriers will finally intersect in 2004. Both will vie for a common set of offerings that include video, voice, and data. According to IDC, 49% of US households will choose the package that offers one bill, versus 32.4% households that will choose the package that offers only cost savings. To satisfy these consumer needs, most cable and telecom market participants will offer these services, shedding old roles as the once-distinct sectors converge.

Furthermore, Voice over IP (VoIP) will facilitate this convergence. After years of technical shortcomings, VoIP is finally ready for widespread commercial use. These systems allow voice and data to share the same network, lowering overall costs. While VoIP systems will not overtake traditional phone systems anytime soon, maturing standards and new systems will accelerate their adoption.

2. Targeting digital advertising to consumers who are skilled at avoiding it.

While digital technology continues to influence the music and film industries, major advertisers are adapting to changing customer behavior. Advertisers are targeting messages to specific audiences by embracing new technologies. They want to understand the role of commercial-skipping digital video recorders (DVRs) like TiVo, as well as the potential of placing advertisements on video games and throughout the Internet.

This is important because young men, a key demographic group, are watching less television. According to October/November figures from audience monitor Nielsen Media Research, 7% fewer men between the ages of 18 and 34 were watching TV than in the same period of 2002. This group of people was raised on computers, movie rentals, dozens of cable channels, and video games. Their tastes can be shaped when they are young – molding them for much of their remaining lives. Studies from sources, including Advertising Age and the International Advertising Association, indicate that consumer-buying habits of men under 35 are malleable and more receptive to advertising-inspired brand switching. (After 35, these studies say, brand loyalty is set in everything from deodorant to cars.)

Targeting video games and other media, not TV, will let advertisers follow the right channels to meet the new youth demographic group. As network TV ratings have fallen, annual video game sales have more than tripled from $6.5 billion in 2000 to a projected $20.8 billion in 2003, according to NPD Group and U.S. Bancorp Piper Jaffray. Agencies are following the money beyond TV, collaborating with video-game manufacturers to pay for product placements in the games. That will help video game makers, which are expected to earn $700 million in advertising fees annually by 2005, according to data from Forrester Research and Jupiter Media. That is seven times more than in 2002.

3. Shakeout among medium-sized software companies.

Two trends – a strong buyers’ market and the push to on-demand computing – threaten to drastically eliminate the software firms that are neither large enough to weather the storm, nor small enough to innovate a survival niche. The greatest threat to software company revenues is the competition from many application developers offering similar software to the same buyers. That gives software purchasers far more bargaining power than in the past. People are much smarter about buying software, and software revenues have declined 5% from 2002 to 2003. Software vendors believe that they need to make up the lost revenue and then grow their business.

Companies stuck in the middle, such as BMC Software (revenues of $1.37 billion) and Compuware (revenues of $1.28 billion), will have the toughest time competing. According to Reuters Fundamentals, there are 577 companies in the software and programming space. Of the 507 for which revenue and market capitalization data are available, 75 are valued between $500 million and $4 billion.

4. Pressure to squeeze higher performance from lower-cost IT infrastructure.

With increased pressure to raise profits by cutting costs, companies will invest in cheaper technologies like open-source software, blade servers, and Voice-over-IP (VoIP), in addition to outsourcing functions that others can do more efficiently. According to research company Gartner, IT spending shrank 7.1% in 2002 and was flat in 2003. New IT projects were canceled, forcing managers to use existing equipment and systems. IT departments were downsized, and operations were outsourced to India. In 2004, Gartner believes that IT spending will grow 5%, well below the double-digit growth of the late 1990s.

The problem is that many companies still have excess computing capacity. Gartner estimates that only 20% of server and disk capacity are used in a typical installation, while the remaining 80% is wasted.

Companies will also continue to invest in blade servers – small, low-cost servers efficiently connected together in clusters. In the third quarter of 2003, the market for servers costing less than $25,000 grew by 9.5 percent over the previous year, while the market for enterprise servers priced more than $500,000 declined by 14 percent, according to research firm IDC.

The trend toward squeezing more out of existing technology raises questions about whether IT spending increases a company’s profits. A 2002 survey of 291 U.S. companies by Forrester Research found that, indeed, the lowest spenders on IT as a percentage of revenues were in the lowest quartile of financial performance. However, the top-performing companies in the survey spent the next-lowest amount on IT, suggesting no clear link between IT spending and financial performance.

5. China will continue to emerge as an important market for IT, but it must be approached with knowledge of its unique requirements.

With its determination for technology leadership, China is becoming the second-largest high-technology market in the world. U.S. and European companies are eager to take a share of this market. However, China is not eager to share it.

For the past few years, multinational companies have lost initial leads in the Chinese market by failing to understand the rules that govern the country’s marketplace. Even Microsoft has quietly conceded losses in the first two rounds of the PC wars this year (along with the enormous costs).

China became the largest market in the world for cell phones in 2003. It is rapidly moving into second place for PCs, and is expected to become the second-largest chip manufacturer in the world even sooner. China’s entry into the World Trade Organization may help to open its large market for U.S. software companies. In doing so, it would also move to put an end to widespread software piracy.

With a booming IT industry, as well as a state-mandated aversion to non-essential imports, China is determined to chart its own technology course. That could mean that only the companies that accept the country’s strategic move toward a national open source model will be viable players. In 2004, companies like Dell, Hewlett-Packard, IBM, Intel, and Oracle will attempt to adjust to China’s rules in order to make inroads. Both HP’s and Intel’s moves to invest in Linux support and research will begin to pay off in 2004.

6. Spam avoidance as a major venture investment opportunity.

Spammers generated revenue of $130 million in 2002 (including $20 to $30 million in profit) – more money than the dozens of companies that have emerged to fight spam. The anti-spam industry, which is operating at near-breakeven, is expected to bring in about $120 million in revenues in 2003. (Anti-spam revenues should double to $360 million in 2004, while spam will grow at a slower pace.) In an effort to capitalize on this trend, venture capitalists have invested $100 million in startups specializing in anti-spam software, hardware, and service technologies. Examples include:

* Hardware maker IronPort Systems of San Bruno, CA, which closed a $29 million C-Round in October led by corporate General Motors Asset Management and Chevron Texaco Technology Ventures,

* $16 million for ProofPoint,

* $10 million for Postini,

* $8 million for FrontBridge, and

* $5.5 million for MX Logic.

Other major anti-spam firms include market-dominant BrightMail and its competitors CipherTrust, Clearswift, MessageLabs, Sophos, and SurfControl, which are either fully funded or operating profitably.

7. Industry-wide focus on security.

About 200 attendees surveyed at a November technology business conference in Silicon Valley identified their priorities for security and trusted computing initiatives. The survey showed that:

* 43% identified viruses, worms, and malicious software as the most serious security-related problem faced by both individuals and business organizations;

* Another 22% identified hacker-driven identity theft as the most serious security-related problem;

* 20% identified malicious damage or theft caused by internal employees; and

* 13% identified e-commerce and transaction security as their top priority.

8. Linux as an emerging standard.

About 73% of attendees identified Linux or "some other" operating system as the dominant emerging standard operating system in the consumer electronics segment, while by 19% of participants identified Windows XP as the emerging dominant operating system in the consumer segment. In 2004, companies will continue to shift from costly Unix servers to clusters of low-cost Linux servers – a trend that has been emerging for several years. In 2001, Amazon.com cut its quarterly technology expenses by 25 percent, by moving its systems to Linux (as well as benefiting from price reductions for its data and telecommunication services). Today, a cluster of more than 10,000 Linux servers handles Google’s more than 200 million searches per day. Of 360 large European enterprises recently surveyed by Gartner, more than half either used or planned to use Linux for their Web servers.

9. Outsourcing IT will continue.

Offshore IT services will continue to grow as service providers aggressively build their offshore capacity into their own delivery models and cost structure. Offshore outsourcing represents a structural shift that is just as significant to the services industry as commodity computing is to hardware and software makers. By the end of 2004, 10% of jobs with U.S.-based IT vendors and service producers will move to emerging markets, according to Gartner.

The US Enterprise IT Outsourcing Market will grow 20%, from $46.3 billion to $55.5 billion in the next two years, according to the Interunity Group. These companies’ strategies for outsourcing offshore are distributed as follows:

* 40% do not plan to outsource offshore;

* 7% are watching the market; and

* 11% have offshore trials under way.

66% of companies doing offshore outsourcing are seeking to save costs and 34% are going offshore for other strategic reasons. Vendors that can demonstrate significant cost savings to their prospects will win 66% of the growth. The remainder will go to vendors that can satisfy customer needs for specific skill and industry expertise.

10. IT suppliers will learn to sell products that solve real business problems and generate tangible investment returns.

IT suppliers will struggle to put on a business face as they reorient their product offerings to more clearly address high-priority business problems. IT spending will be increasingly driven by CEO-level business priorities, such as improved product development and management, new regulatory reporting requirements, the continued pursuit of a single customer view, and the expansion of business services.

11. Radio Frequency Identification (RFID) is likely to fall short of the hype.

An RFID bubble will form — and burst — as the costs and difficulties of rolling out practical product tracking and supply chain systems become clear. Supermarkets such as WalMart and Tesco have already committed huge sums to the development of an RFID tagged product supply chain. Software suppliers should avoid potential pitfalls by focusing investments less on generating media attention for their involvement with RFID and more on developing RFID support in their applications — order management, inventory management, warehouse management, transportation management, and distribution center and replenishment systems.

12. Wi-Fi will continue to grow.

Public Wi-Fi hotspots will continue to proliferate, nearly doubling worldwide to almost 85,000, while WLAN adoption in the enterprise will remain limited due, in part, to security concerns.

Research shows that of the 945 million internet users expected by 2004, 41.5% will be wireless internet users and by 2007, when the number of Internet users will reach 1.46 billion, 56.8% will be wireless Internet users. The highest number of wireless Internet users will be in Asia-Pacific by 2007 at 612 million followed by Western Europe at 290 million and 236 million in US.

The sectors most willing to invest in Wi-Fi are manufacturing, information technology, healthcare, and education and research. The banking and financial services sector and telecommunications follow them closely.

Earliest adopters of Wi-Fi are likely to be banking and financial services, telecommunications, and information technology. Faster-moving consumer goods companies could soon follow.

Manufacturing, healthcare and education and research will also jump on Wi-Fi if applications are built for this segment but travel, transport and media industry would need innovative business models for concept acceptance.

© Copyright Babson College 2004