In the first installment of this series, we did a quick review of the high-tech sector and of the challenges and quandaries it has presented to modern society. The editorial concluded with the assertion that this sector had reached an inflection point never before seen in its history – a plateau of very modest and even zero growth across all sectors, with revenues stagnating and innovation shifting its primary focus from generous feature enrichment to one of cost cutting coupled to optimizations and refinements of current designs.
This characterization is a bitter pill to swallow for most of us – after all, we've toiled diligently and fiercely over our careers to create truly wondrous and world-altering things. There has never been a comparable assemblage of talent and ingenuity with such a “never say die” attitude in the history of human endeavor as is seen in the ranks of high-tech workers. Some argue that by painting the entire high-tech industry with such broad brush strokes, the creative contributions of individual companies scattered across the many sectors of high-tech is unfairly minimized and underappreciated and that a detailed examination would be more illuminating.
Now, we'll extend the discussion from last month and examine a variety of systems, software, and silicon firms at a more granular level. By refining the analysis, perhaps we can further discern where the industry is heading for the short and medium term.
First, let's look at the systems portion of the high-tech market. Below is a chart which captures the quarterly revenues of Cisco, Apple, HP and IBM from calendar Q1 2008 to Q3 2014.
These four companies can be fairly described as capturing the infrastructure aspect of high tech. One could, in figurative terms, portray them as the leading providers of the bridges, pipes, wires, roads, railroad tracks, and machinery of the Second Industrial Revolution.
IBM dominates the datacenter with hardware, software, and services. HP competes both at the enterprise and consumer levels with servers, workstations, PCs and laptops, along with peripherals and services. Apple is a market and technology leader in mobile computing (smartphones and tablets.) Finally, Cisco offers 'big iron' primarily for wired networking up to and including wireless backhaul, but also participates in SAN and wireless front end with a combined offering of hardware, software, and services.
All four companies experienced a revenue hit during the 2008 financial crisis. Their performance from mid-2009 and beyond tells a tale very different from the one preceding the downturn.
IBM and HP display the most worrisome numbers. One can plainly observe that revenues are trending down and have so since Q4 2010 for IBM and Q4 2011 for HP. The rise of virtualization – driven by enterprise retrenchment on fixed investment and a consequent impetus to minimize additional IT expenditures in preference for getting the greatest 'bang for the buck' from the installed plant – is apparent from the financial history of these two companies.
Cisco showed tepid growth up until 2014, where it took another dip – likely correlated with the revelations of the NSA tampering with Cisco hardware and the resultant negative impact to the company's international business, particularly China.
Apple's curve is truly fascinating. Notice the repeated Q4 spikes coinciding with the holiday season. More significantly: notice also how the growth of the company has been steadily rolling over. The easiest way to see this is by tracing a line thru the quarterly numbers over the years – for instance, all the Q3's from 2010 to 2014, or all the Q2's and so forth. This gradual plateauing of the numbers reflects the increasing saturation of the tablet and smartphone markets. 2015 will be a stressful period for Apple, as the smartphone market appears poised to peak this year and the tablet market has flipped over and begun to decline.
The next chart is a selection of companies that 'feed' the systems houses described above. All four are technology powerhouses whose offerings have extracted significant value from system vendors and pulled it down the technology chain.
Broadcom has obviously been struggling for the last five years. Revenue stagnation reflects the divestiture of multiple product lines during this period, including cellular baseband, BluRay, and HDTV. The fact that a company so clearly blessed with talent and IP has not been able to grow over the last half decade is an incontestable indicator that all is not truly well in the high-tech marketplace.
Qualcomm is no less gifted with top tier employees and home grown intellectual property than Broadcom and is arguably even superior. The company's dominance in smartphones is evident in the healthy growth of financial results over the last five years. Nonetheless, the saturation and upcoming stagnation of the mobile computing market will send Qualcomm into a crisis from which it can only emerge once it innovates enough to open and develop new, untapped markets.
Intel's financial profile sends some mixed messages. The last three years have been sluggish, though the last two quarters are encouraging. Though it cannot be disputed that the company is still overwhelmingly dominated by its Pentium line and the PC and laptop business, Intel has made real inroads into the datacenter for both applications and storage servers. The company has made it abundantly clear as well that, despite mounting losses, it will continue aggressively pursuing both established and emerging mobile computing segments (such as the Internet of Things).
Intel's stubbornness in this regard should be praised, as it has precedent – amply illustrated by its longtime comrade up north in Redmond, Washington. Over the last several years, Microsoft has completely ignored scathing and even defamatory polemic from critics and has persisted in its pursuit of mobile computing, gaming and cloud services offerings. Showing equal parts courage and resolve, the company learned from its mistakes every step of the way and now boasts growth and critical acclaim with Windows Phone, Surface and Azure.
The company has also embraced Linux and changed its software product mix and subscription models. The benefit to the bottom line is starkly evident in its continual financial improvement from Q3 2009 thru 2013. Things are evidently getting harder, though, as further growth in saturating mobile computing markets will have to come thru cutthroat competition and stealing market share from rivals.
Because things are the way they are, things will not stay the way they are. – Bertolt Brecht
What we can conclude from all of this is that the high-technology sector is already in a period of struggle where the wild, exuberant and heady days of experimentation and innovation to support a seemingly inexhaustible impetus of growth has been replaced by prerogatives that maximize the chances of long term endurance and survival. This is a dramatic change indeed, and one very characteristic of Mother Nature and her denizens in winter.
Yet even in winter, not everything is dormant, hibernating or grimly struggling against the elements. Underneath the blanket of snow and ice, some creatures are scurrying about, preparing themselves for a spring which will arrive just as inevitably as the season of winter must eventually fade. Who in High Tech is also quietly preparing for that Spring, and what form will that new flowering potentially take? That will be the topic for the next post in this series.