Visiting Professor IESE Business School, Strategy Advisor to High-Tech Companies - Philip Lay
This post originally appeared on PhilipLay.com.
Like most years, 2014 has gone by in a flash, it seems. But like many years before it, it will leave its own mark on the development of new markets and tech businesses as well as the decline of others. Below is a list of my personal Top 20 trends and disruptions in terms of their significance this year, and for 2015 and beyond. It should come as no surprise that, to put it mildly, my Top 20 draws on some of the companies and topics I covered in posts during the year, because these represent themes and issues that I was able to explore in some detail
Note that I’m dividing my Top 20 into two lists of ten items each, in order to distinguish between the very different dynamics of business and consumer markets.
Enterprise market trends and disruptions
- Cloud computing becomes mainstream in the enterprise as Salesforce.com is joined by Netsuite, Workday, Successfactors, Concur, and others in becoming significant Saas alternatives to traditional on-prem vendors, and as Microsoft and Google up their games against AWS in cloud infrastructure and platform-as-a-service (Iaas and Paas). Many Saas vendors that began their existence by focusing on small business customers are moving upstream to serve enterprise customers, and all are having to learn how to beef up their product and service offerings to meet more rigorous enterprise-level requirements.
- The race to the bottom in cloud infrastructure pricing starts to bottom out as Amazon’s industry-leading low-price strategy is matched step by step by Google, with Microsoft close behind. Since the latter two companies have war chests that dwarf Amazon’s paltry $5bn or so in cash, AWS finally needs to start adding greater value in order to become profitable and begins to offer value-adding services on top of its commoditized infrastructure services.
- Security becomes a compelling investment theme due to the impact of 2013’s NSA surveillance leaks by Edward Snowden, and even more importantly due to the ballooning frequency and gravity of hacking incidents by rogue groups and states. Target, Home Depot, and just recently Sony Pictures lead an extensive list of household name and less well known victims. The vicious cycle of more sophisticated hackers exposing leaky computer systems in ever-more embarrassing and brand-damaging ways provides a huge opportunity to companies that specialize in ultra-secure cloud hosting (for example, Firehost), team collaboration (Huddle and others), and many other categories.
- Multiple commercial applications for drones sprout up, but the FAA steps in with heavy-handed regulations, apparently aimed at ensuring that the U.S. will cede the lead to the rest of the world in this highly attractive new category. The cost of ready-to-fly drones are now available for $1,000 or so, and a recent Economist article cites examples of land survey and development, agriculture, package deliveries, news gathering, rescue operations, and hundreds of mapping applications where there are compelling benefits by using drones instead of current methods and technologies. Other countries including neighboring Canada are permitting the use of drones with minimal regulation, but unfortunately the FAA is requiring human drone pilots to be certified with the same rigor as airline pilots, and have health checks with the same frequency.
- Big data storage, retrieval and analytics have not yet crossed the chasm in the enterprise, though there continues to be increasing customer interest in leveraging the massive amounts of data generated in their business operations on both the demand and supply side. Some companies, such as Splunk and GE are making headway in a number of big data applications, many linked to the industrial internet, GE’s specific sweetspot. IBM has made a major investment in the cognitive analytics use of big data with its Watson initiative, though most concrete use cases are still “pre-chasm” in nature.
- The recent and still-growing hype surrounding the Internet of Things is helping to point to compelling business problems and use cases for vendors to address. The early success of Nest (acquired in January by Google for $3.2bn), in addition to major investments by GE, Cisco, and others are likely to drive some industrial and consumer applications across the chasm during 2015.
- The decline of IBM becomes precipitous, and other major systems companies including HP, Cisco, Oracle, and EMC begin to look increasingly vulnerable, largely because they tried to stare down the approaching disruption of cloud computing and consumption-based business models until (almost) too late, and are now suffering the consequences as their traditional businesses mature and decline. No one should be too surprised if, sometime in the next twelve months, IBM becomes the largest tech company ever to be acquired by a syndicate of P/E firms. Stay tuned for some interesting action as soon as the stock declines further, toward $100 a share or less.
- Corporate splits suddenly become all the rage – HP announces its split into two separate companies, one focused on enterprise services, the other on its high-volume personal computer and printer businesses; Symantec is following a similar strategy to separate its enterprise and consumer/small business activities; EMC has been under activist pressure to cut VMware loose to unlock shareholder value, and eBay (a consumer-focused company) was under similar activist shareholder pressure to split up its Marketplace and Payments businesses, in pursuit of the same objective.
- Activist investors such as Elliott Management become very vocal and active with companies that they consider to be under-valued, leading to an increase in leveraged buyouts, in addition to defensive moves such as splits (reported above) to avoid or alleviate pressures to sell to P/E firms. In addition to the significant buyouts of Dell by Silverlake, and BMC by Bain Capital and Golden Gate Capital in late 2013, Tibco, Compuware and most recently Riverbed sell themselves for values in the low billions in late 2014, as the trend solidifies for aging tech companies to withdraw from the harsh spotlight of the public markets in order to re-engineer their business models.
- 3D printing, a much-hyped new category in 2013, makes its debut during 2014 to mixed results. This is still a very early technology that will take a while to mature, though companies such as HP and Autodesk are making strong moves to legitimize it.
Consumer market trends and disruptions
- The sharing – or collaborative – economy becomes mainstream, led by its poster child Airbnb. Despite the acknowledged importance of building trust among customers and service providers such as car owners, odd-job workers, and accommodation hosts, many young companies in this sector stumble as they seek to establish a profitable business model, or to obtain permission from regulators to operate in urban and suburban markets. Throughout, Airbnb seems to be the one major new player that has the vision, culture and execution strategy required to thrive in its rapidly growing space, despite understandable opposition from neighborhood associations and government authorities.
- Drones become a serious hobby for enthusiasts, who are permitted to operate them with minimal regulatory supervision. This seems somewhat ironic, in the context of the FAA’s clumsy handling of commercial drone applications.
- The 100% electric car finally crosses the chasm thanks to Tesla’s astounding and industry-disrupting Model S, its aggressive investments in a new battery and recharging infrastructure, and its visionary transformation of the automobile into a software-updated mobile device with sophisticated smartphone apps and other capabilities. Tesla’s success stems largely from its vision as a technology company that happens to make automobiles, rather than an auto manufacturer that has to integrate technology into its products.
- Valuations of consumer tech companies become extremely frothy, causing retail and corporate investors to get worried about a possible re-edition of the 1990s tech bubble. Facebook’s extravagant acquisition of revenue-free Whatsapp for a mind-boggling price of $22bn. sets the tone. Later in the year, Alibaba’s huge IPO establishes another bar for e-commerce company valuations (though in this case based on more solid economic performance), and Uber’s progressively higher valuation through two separate rounds of funding looms as the scariest of all due to its seemingly multiplying conflicts with authorities, drivers, passengers, and competitors. Perhaps the most surprising incidents to hurt Uber’s brand are multiple occurrences of Uber drivers raping and groping passengers in India and the U.S. The most recent of these was reported in today’s edition of TechCrunch, with an Uber driver arrested for raping his female passenger on December 6. For this reason the issue of enhanced background checks on contracted drivers gains considerable urgency.
- Privacy violations become routine by the more secretive companies – including usual suspect Facebook, and everyone’s new favorite bete noir, Uber. Facebook is already notorious for carrying out experiments with user data that it quickly has to cancel once the word gets out. The most alarming recent threat to privacy is related to how Uber’s technology operates, apparently exposing passenger and driver data in highly inappropriate ways. What many tech companies seem not to have learned is that users’ behavioral data does not actually belong to them, but to the individual consumer. A more enlightened approach to sharing data with users without necessarily always exploiting it for economic gain is required. That said, although the EU and most European countries are fairly vigilant about privacy on behalf of their citizens, smartphone and web users in the U.S. seem increasingly to shrug their shoulders unless privacy violations directly threaten their pocketbook.
- Chinese consumer internet companies begin to rival their U.S. counterparts, led by Alibaba’s blockbuster IPO, which gives it a larger valuation than Amazon and eBay combined. The fact that Alibaba’s valuation bears a reasonable relationship to its profitability is one factor that has put Amazon’s market valuation and extraordinary profit-free business model under pressure. Undoubtedly, 2014 is the year when the rest of the world has begun to understand the scale and growth of the major Chinese players like TenCent and Baidu, alongside the dominant Alibaba.
- eBay joins the upcoming “splitters”, announcing that it will spin out its faster-growing subsidiary, PayPal. Activist investors have their finger-prints all over this one. Most observers anticipate that the split will, among other advantages, free Paypal to strike up new alliances with eBay’s many competitors including Amazon and maybe even TenCent (though probably not Alibaba, because it has its own payment subsidiary).
- Cable giants and major wireless carriers make a laughing stock of the century-old Antitrust law with their proposed mergers – Comcast and TW Cable, AT&T and DirecTV, etc. It becomes increasingly challenging to conceal the vice in which this unholy cartel holds the U.S. market. Their attempts to make it look as if they genuinely face competition in their segmented markets would be laughable if they weren’t a real threat to inexpensive internet access.
- Net Neutrality looks increasingly vulnerable due to intense lobbying of the FCC by carriers and cable companies anxious to increase profits at the cost of inexpensive consumer and corporate access to internet broadband. Not helping matters is the fact that the current head of the FCC, Tom Wheeler, is a former lobbyist for the cable companies.
- It is becoming apparent that VC investors no longer hold sway over their star portfolio companies between funding events – or even during rounds of new funding. A series of egregious sins and general bad behavior by Uber’s CEO and management team, reported above and in my November post on Uber, exemplify this worrisome trend. During the past decade or so entrepreneurs such as Google’s Page and Brin, Facebook’s Zuckerberg, and others have implemented dual-class ownership structures in order to insulate themselves from pressures applied by shareholders or even their boards, freeing them from the censure of their venture-heavy boards along with the virtually non-existent risk of being held in check or fired for non-performance or unacceptable behavior.
That’s my list. Comments welcome.