Tuesday, April 26, 2005
Recession or Growth Market?
Mixed results from technology companies in recent weeks have people speculating that the tech market is still in or perhaps heading for another recession. A closer examination of the data does of course tell a different story. Indeed close examination can tell you almost any story you want it to. In recent weeks we saw Intel raise guidance on profits and Apple again exceed expectations. We then saw IBM miss its numbers due to weakness in some of its markets in Europe followed by Lexmark that missing its profit forecasts. These contradictory results have been attributed to economic cycles, business management and simple poor forecasting. What’s clear however, in almost all cases is that sales have actually been rising. Even IBM, which has sales that rival the GDP of some countries, saw an increase that would satisfy Alan Greenspan. Wall Street, however, doesn’t care about sales that much. Wall Street cares about margins and of course earnings - and most importantly future earnings. It’s this last point that still seems to be where the tech industry is struggling. The bumpy state of world markets is making it hard for most businesses to project with certainty. The good news is that almost all the trends in tech sales are up. Of course there are sectors that are struggling but the encouraging news is that in general sales are trending in the right direction. The real challenge for the tech industry would however appear to be how to break out of low GDP-like growth and get back to the high growth rates achieved in the late 90s. Companies like Oracle are saying that growth will only come by acquiring market share. That seems rather a defeatist approach but who am I to argue with Larry Ellison. Actually I will argue with him on this point. The tech industry has a great chance to break out of GDP level growth but only if it wants to. I think the drivers of potential change exist. For example the growth in wireless technologies that make infrastructure way simpler for businesses and individuals to deal with. This growth is fuelling the opportunity for millions of people to access technology and technologies previously available only to the likes of the Fortune 500. At the same time the success of On Demand software such as Salesforce.com is showing that if you make it easier for people to access the technology they’ll buy it. At this point both of these areas of technology are relatively small when compared to the large traditional enterprise software and hardware markets. But I’d argue that if the industry really does focus on reducing barriers to technology in the same ways these markets have then growth could once again be quite explosive. Look hard at all the small businesses you know and ask if they use all the technology they could. The answer is no in almost all cases. Of course most businesses now own a computer but an alarming percentage of companies still don’t have a meaningful online presence. Add to that the unsophisticated approaches to distribution and purchasing that most small companies use and you see how big the potential opportunity is for just a few areas of the small business market. Getting to this market is of course easier said than done. Barriers such as affordability, accessibility and reliability still need to be adequately addressed but again examples such as the OnDemand software solutions from Siebel and Salesforce show that when you tackle these issues markets open up. So in closing I guess the message I want to leave is one of optimism about the long term opportunities facing the tech industry. This optimism, however, rests on the tech industry’s ability to create new markets by tackling the barriers that exist rather than simply fighting over existing market share.