Technology, media and telecom industry outlook
INSIGHT ARTICLE |
Key takeaways from the winter 2020 technology industry outlook
- Middle market companies have slowed technology investments, but disruptive innovations are on the horizon.
- Tech giants are fully committed to 5G, bringing advancements in computing speed, reliability and availability.
- Technology companies are fighting the labor shortage with digital transformation initiatives.
- Artificial intelligence, machine learning and the cloud remain hot areas, with several potential opportunities for middle market companies.
- The initial public offering window may be closing, as companies choose to remain private for longer.
- With breaches and regulatory scrutiny on the rise, companies must focus on data security and privacy.
- The gaming and esports sectors continue to grow in popularity, with significant expansion and revenue increases projected in coming years.
- Cord cutting shows no signs of slowing down, and the increase in streaming platforms point to a competitive landscape and battle for subscribers.
The U.S. technology industry is reaching highs unparalleled since the turn of the century. According to the National Science Board, knowledge—and technology—intensive industries have a value-added output of $24 trillion, making up nearly one-third of world gross domestic product. As we move into a new decade, many companies are looking for new ways to gain an edge on their competitors.
In addition, the media landscape continues to change rapidly, as video gaming and esports expand and evolve and the growth in streaming platforms sets the stage for a highly competitive future. Companies in all sectors are developing strategies to attract and retain customers as disruptors enter the market. However, while focusing on growth, companies must also keep an eye toward data security and privacy regulations such as the General Data Protection Regulation and other emerging standards.
Middle market may reduce discretionary IT investments
The International Data Corporation estimates that $1.58 trillion was spent in 2019 on information technology. Large enterprises will likely continue to spend on cloud solutions, but small and midsize companies could reduce their spending on discretionary IT investments. History has shown us that the timing of discretionary IT hardware or software purchases often has a degree of flexibility and can be delayed in a weak economic environment. In fact, a recent survey by RSM US LLP and the U.S. Chamber of Commerce found that middle market leaders have been slow to increase capital expenditures, including those earmarked for technology during 2019.
As the United States prepares to enter a new decade, emerging technologies such as 5G, the internet of things, augmented reality and virtual reality will only amplify the ubiquity of technology in business. Change is certain and will continue to accelerate.
The biggest tech companies are fully committed to 5G
North American telecom carriers have committed to accelerate the deployment of 5G networks across the continent in 2020, and are actively aligning with technology companies and cloud computing providers to empower rapid 5G application development and deployment.
Verizon recently announced a partnership with Amazon’s cloud platform, AWS, while AT&T announced a long-term strategic alliance with Microsoft and its Azure cloud computing platform. In both cases, all of the companies involved commented that collaboration will provide enterprise customers and developers the ability to quickly, and with scale, bring integrated solutions to the market in the areas of public safety, cybersecurity, collaborative communications, virtual and extended reality, and many other services.
Other telecom hardware providers like Nokia, Ericsson and Samsung are working directly with the likes of Verizon, T-Mobile, Sprint and AT&T to bring this powerful network into reality in the next five years.
Key specifications of speed, latency, network density, reliability and service deployment will enable the combining of wireless technologies and cloud computing power to bring next-generation computing—referred to as edge computing—to the network. The speed and latency enabled by 5G technology allow connected devices to offload computing power to the cloud. In addition, the cloud will be located much closer to the end devices, bringing real-time insights and analysis to enterprise customers to create the real-time enterprise.
NORTH AMERICAN TELECOM CARRIERS HAVE COMMITTED TO ACCELERATE THE DEPLOYMENT OF 5G NETWORKS ACROSS THE CONTINENT IN 2020, AND ARE ACTIVELY ALIGNING WITH TECHNOLOGY COMPANIES AND CLOUD COMPUTING PROVIDERS.
So what does this all mean?
SPEED: Data transfer speeds, once the 5G networks are built out to maturity, will reach up to 20 Gbps (gigabits per second), which is up to 100 times faster than the fastest 4G speeds currently available.
LATENCY: The time it takes for a packet of data to leave a device, travel across the network to a central processor and back again will be less than 10 ms (milliseconds), up to 10 times faster than speeds currently available.
NETWORK DENSITY: Depending on the configuration of 5G wireless, the networks can have the capacity to handle up to 1 million simultaneous connections without any compromise to the speed and reliability of the network. This density is up to 1,000 times the current density available from most 4G wireless network configurations.
RELIABILITY: As 5G reaches maturity, the reliability of the network connectivity will reach 99.999%, providing enterprise customers and consumers with a wireless network option more reliable than even the strongest fiber and 4G networks currently available.
SERVICE DEPLOYMENT: Built primarily on a foundation of software and given its wireless nature, deploying a 5G network and performing security or feature updates can be completed in a fraction of the time that current networks allow for due to their hardware nature.
EDGE COMPUTING: Edge computing will utilize the cloud’s infrastructure and computing power made possible with platforms like AWS and Azure to move the processing and computing power closer to the end devices by utilizing the cloud to integrate directly with the wireless technology right at the edge of the wireless carrier’s network. This proximity to the user of connected devices combined with speed, latency and other capabilities of the 5G network will change the paradigm for the development of innovative and transformative business technologies.
What do middle market businesses and entrepreneurs need to consider?
The maturity and capabilities of cloud computing combined with the advancements in artificial intelligence and machine learning should lead to a window of rapid development and adoption of 5G-enabled business solutions and should be a part of all middle market technology leaders’ digital strategies in the next year or two. The application and use cases to build technology solutions for all components of public and private enterprise will arise and fundamentally change what had been previously possible.
MIDDLE MARKET INSIGHT What we are about to witness with the wide-scale rollout and adoption of 5G and the related enabling technologies will illustrate what is possible when some of the biggest names in technology come together to collaborate with their respective powerful technologies. It is time for the entire technology ecosystem to take note and take action.
Tech companies mitigate tight job market with digital transformation initiatives
The technology industry job market is tight, especially in most metropolitan areas, and the competition for—and cost of—highly skilled technology talent has risen accordingly. As a result, many growing software companies are laser-focused on how they can leverage technology to move from quote-tocash most effectively and efficiently. Notably, a 2019 study by RSM found that investments in technology were made primarily for efficiency, and not labor replacement, as well as to appeal to younger candidates and employees.
Slow economic growth will not change the rate at which technology is disrupting industry. If a company suspends its technology investments, it could disrupt its own business model and fall behind competitors. Businesses are continually looking to enhance customer relationships, operational effectiveness and their culture. With labor and competitive challenges across the United States on the rise, there has never been a better time to invest in technology
Artificial intelligence and machine learning to remain hot areas
Several large tech giants have a wealth of user data that is being leveraged for targeted digital advertising. A recent Forbes report showed that over 90% of the world’s data has been created in the past three years, and Cisco estimates that the amount of data is anticipated to grow at a 25% rate over the next three years. Many are of the opinion that under 5% of available data is being leveraged effectively.
We are in the early stages of leveraging data-rich markets, and the ability to use artificial intelligence and machine learning algorithms to connect with interested parties promises to be incredibly disruptive. Consulting firm McKinsey & Company has noted that the high-tech and telecommunications industry is leading in AI adoption and is expected to be one of the industries with the greatest spend in 2020.
Cloud computing will continue to be high flying
Over the past decade, many software providers have changed their offerings to a software as a service (SaaS) model. In addition to the cost and security advantages of a SaaS offering, investors prefer revenue and earnings consistency from quarter to quarter. Adobe was one of the first companies to make this shift to a SaaS model in late 2013, and its stock has grown by over 400% since the shift.
SaaS offerings saw tremendous growth in 2015, but revenue growth has slowed for SaaS companies since then. Macroeconomic factors, like a cooling economy, could slow SaaS growth, but the anticipated growth is still expected to outpace many other sectors in the technology industry.
Could the IPO window close?
Continued access to capital will be important for the technology industry, especially as the economy enters later stages in the growth cycle. It’s very possible that a slowing economy, coupled with a significant amount of dry powder among private equity and venture capital firms and the regulation that comes with being a public company, could keep companies private longer. The average age of a company completing an IPO is now approximately 10 years, which is up from five to seven years two decades ago. When companies decide to go public, increased focus will be given to governance policies to ensure that the structure in place does not provide a roadblock for the IPO process.
Companies like Airbnb, one of the largest U.S. unicorns, have highly anticipated IPO plans in 2020. Gitlab also announced its Nov. 18, 2020, IPO date back in 2015, which should be interesting amid uncertainties that could exist in the weeks after the U.S. presidential election.
MIDDLE MARKET INSIGHT In 2018 and 2019, respectively, Spotify and Slack went public with direct listings rather than IPOs. It’s possible that there will be more direct listings by technology companies with solid cash positions on their balance sheets and good brand recognition. Several top investment banks have stated that they support companies that want to pursue a direct listing
Data protection, privacy and security move to the forefront
Data has become more valuable than oil, and companies are spending significantly more time and resources to protect their data from unwanted hands. According to the 2019 RSM US Middle Market Business Index Cybersecurity Special Report, 15% of middle market C-suite executives said their companies experienced a data breach in the last year, a significant jump from 5% just four years ago. As data becomes increasingly more valuable, cybercriminal activities continue to rise, creating more aggressive preventative and insurance policy needs to protect companies from making major headline news.
According to the Digital Guardian, a data beach costs companies an average of $150 per record. From another perspective, the recent 2019 Cost of a Data Breach Report released by IBM Security has calculated the average total cost of a data breach to be $3.92 million. These astonishing numbers have heightened the awareness of not only chief information officers and chief technology officers, but chief financial officers, the board of directors and audit committees to better understand how companies can better protect themselves.
Long gone are the days in which credit card information was the most valuable data source, nearly a decade ago. Personal and private information continue to be one of the most highly valuable records within the dark web. Due to this, government entities are now starting to intervene to ensure companies are protecting information with legislative acts, such as the GDPR.
MIDDLE MARKET INSIGHT Given recent privacy issues with Facebook, and now with the upcoming California Consumer Privacy Act legislation, which took effect Jan. 1, 2020, government entities may play a much larger role in creating mandates on how big tech is ensuring the privacy and confidentiality of information, and allowing for more transparency on how data is being used.
Video gaming and esports poised for expansion and growth
The gaming industry is projected to close nearly $150 billion in revenues in 2019 and is on pace to surpass $200 billion by 2022. 2019 was an exciting year for the gaming industry as a whole, and not just merely from a content perspective with releases such as Call of Duty: Modern Warfare, Diablo Immortal and Cyberpunk 2077, but also because of consumption and the way content is being distributed.
Those growing up playing Pong on an Atari 2600 or Lode Runner on a Commodore 64 would never have imagined gaming content being delivered over a phone line, let alone not having to own a console at all. However, Google Stadia has found ways to completely disrupt the industry and introduce a new way of consuming 4K graphic-intensive video games such as Assassin’s Creed Odyssey simply over a T1 connection with no gaming console required.
Not to be outdone, Microsoft released its streaming service, Project xCloud, shortly afterward and is already giving Stadia a run for its money. Of course, streaming is only as good as the connection speed, but once gigabit and 5G connections continue to spread, latency will be a thing of the past. According to Bloomberg, the market size of video game streaming could be roughly $500 million in 2020, but projected to grow to nearly $10 billion in 2030 with as many as 45 million subscribers.
While the video game streaming vertical sorts itself out, many gamers are looking forward to a refresh in gaming consoles for 2020. Both Sony PlayStation and Microsoft Xbox are anticipated to release their latest consoles in November 2020, which could give further lift to console content and revenue. The console sector continues to stay strong as the second-largest gaming category, with nearly a third of the overall market share.
Mobile gaming is the dominant leader with nearly 50% of overall gaming market share, and is only expected to grow in 2020. The way consumers purchase mobile games is also starting to change. In October, Apple released Arcade, a Netflix-like subscriptionbased platform that allows a user to play as many games on their iOS device for less than $5 a month. This could potentially cannibalize iTunes sales in the pay-as-youplay model, but arguably the average user most likely consumes less than $60 a year in iTunes mobile games.
While the platforms continue to compete amongst each other, the one that stands to benefit the most is esports. Competitive video gaming is providing another lucrative source of revenue for game makers, capitalizing on the millions of viewers and the advertising and entry fees that come along with it, generating a market size of close to $1 billion in revenue for 2019, but forecast to achieve $1.7 billion by 2021.
MIDDLE MARKET INSIGHT More individuals are watching esports than Netflix, HBO GO, ESPN mobile and Hulu combined. Much like professional sports, esports is also starting to monetize league formats and franchising fees such as Riot Games’ League of Legends and Activision’s Overwatch League, and more are to follow suit from Take-Two and Ubisoft.
Changing consumption patterns for video and streaming
2019 was a pivotal year for streaming, and it’s safe to say that the traditional methods of consuming television and video via cable and satellite have officially been disrupted. Cord cutting has shown no signs of slowing down, and it is anticipated to only accelerate as powerhouse services such as Apple TV+ and Disney+ enter the streaming market.
According to Nielsen, one in five pay-TV subscribers officially cut the cord in 2019, setting a record pace of decline year-over-year in subscribers, down 7% to just 85 million. In comparison, digital subscriptions are on track to total 180 million by year-end and will further accelerate now that Apple TV+ and Disney+, have entered the streaming stage.
More content produces more membership, and in 2020 we expect to see significant increases in streaming media consumption as additional options arise, such as NBC Universal’s Peacock and HBO MAX—the latter planning to release all HBO content and welcoming the most watched streaming television series, "Friends." However, while Netflix, Hulu and Amazon dominate the streaming stage, Disney will be a significant threat.
Due to the Fox acquisition, Disney now controls Hulu. With livestreaming, sports (i.e., ESPN) and a mega franchise library ranging from Star Wars and Marvel to Disney classics, it has a trifecta recipe to become the dominant player in less than four years.
According to a Wall Street Journal-Harris Poll, consumers will have an average of four streaming services in 2020. It’s difficult to fathom how the average consumer will filter through all the content, and while streaming has fragmented the way we watch TV, history may come back with a solution to consolidate the multiple services again (back to cable again?). Until then, consumers can enjoy deeply discounted subscription fees as the competitive landscape will continue to increase to fight for your membership
NETFLIX, HULU AND AMAZON DOMINATE THE STREAMING STAGE; HOWEVER, DISNEY WILL BE A SIGNIFICANT THREAT.
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