Wednesday, January 04, 2006

A New Year for Tech or another year of ups and downs?

If like me you keep an eye on NASDAQ's symbol for its computer sector stocks (NASDAQ:IXCO) you will have noticed that in the last year this index has moved around a great deal. Currently it's sitting at 1050 (ish). Back in April of last year it was sitting around 850. That may look like a good trajectory until you realize that at the start of '05 it was at almost 1000. The reality is that in the last couple of years this index has risen and fallen with the peak always being at the end of the year. Only back in 2003 did the index show a steady rise from the then low of around 500. Put another way the index (and one assumes the industry) is looking to break out of the cycle. In my humble opinion this will only happen once the sector gets firmly on a new course.

If you look back to the 80s the tech industry grew at an alarming pace as the PC took off and the revolution started. In the 90s the Internet gave the sector an even bigger horizon which of course the market has since dialed back. However, since the Internet backed boom we've not seen a solid new 'big opportunity' for tech. We've seen several firms try and create the next wave but in general the market is rightly skeptical. What the market wants is something solid to latch on to. This means a new technology, not a new marketing slogan. We appear to be some way from a radical shift in technology such as would be created by say a move to nano technology. Yet there are two important trends that I'd point to. First is Google. It may seem obvious but Google is the new Microsoft in the eyes of the street. In the same way that Microsoft cornered the PC market, Google is deemed to have cornered the Internet. The difference between their model and Microsoft's is simply that you don't have to use Google, you just tend to. This makes them far less prone to the legal problems Microsoft has faced in the last ten years.

The other equally obvious, but no less important, trend is wireless. Every single device on the planet is going wireless. Right now people are making things that are wired wireless, phones, PDAs etc. In the next generation we'll have a raft of devices that are going to be born wireless. The interesting part to me about this market is that nobody has cornered it...Yet. RIM aka Blackberry, has made a good attempt but Palm has fought back thanks to the ever so unreliable but quite functional Treo. At the same time, rumors abound that Apple will enter the space. If they do we can expect them to do well, given the success of the iPod. To my mind there is a technical barrier that needs to be overcome which is bandwidth. The really hot wireless technology will emerge once the pipe is big enough for interesting applications. In Europe 3G has already been launched with mixed success it seems. I'll confess to feeling that this is because people are applying the bandwidth to the wrong application - namely the phone. If we all wanted a video phone why don't we have one on all our land lines?

My summary is therefore that Google will undoubtedly have another blow out year. I saw one stock analyst has already said there shares could hit $2000 (that's each btw). Such a valuation may seem crazy but think back to what happened to Microsoft's stock. Therefore I think the smart brands in '06 will be the ones that can figure out how to ride the Google wave. My other prediction centers around the gaping wireless opportunity - right now I believe RIM has a great chance of owning this space, assuming it can come up with a) an exciting vision b) some slightly more innovative devices (i heard from one source that RIMs CEO refuses to incorporate an MP3 player in the Blackberry - to that I say to him go sit on an airplane and look at what people have with them) and c) a settlement on its troubling lawsuit. If they can't execute well here someone like Apple may well step in and eat their lunch and grasp one of the most interesting markets for the next five years.

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