Technology, media and telecom industry outlook
INSIGHT ARTICLE |
Key takeaways from the fall 2020 technology industry outlook
- Cloud spending is projected to increase, with IaaS, PaaS and SaaS solutions slated for increased growth in coming years
- Cloud security solutions are becoming more popular and are a potential area for accelerated growth in the coming year
- While unemployment has risen, the technology sector has been buoyed by work-from-home strategies
- 5G devices and remote high-speed access networks are coming quickly to North American markets
- Security has become a top priority for stakeholders as more key information is transmitted with mobile technology
- The future of streaming is bright, although we may see more consolidation and bundling to align with consumer demand
The technology, media and telecom sectors are undergoing a significant amount of change. While technology jobs have not been immune to COVID-19, the industry has been more resilient than others. With the cloud and cloud security moving to the forefront, 5G becoming more of a reality, and telecom and streaming services providing critical connectivity and distractions during the pandemic, several opportunities exist for companies that can match products and services with demand.
Spending on the cloud remains resilient
The technology, media and telecom sectors are playing a crucial role in keeping people connected as the coronavirus pandemic hobbles the global economy and dramatically changes daily life around the world. Spending on cloud solutions remains an area of strength for the technology sector despite the pandemic according to the International Data Corporation (IDC):
- The projected spending of $66 billion on infrastructure-as-a-service (IaaS) in 2020 is expected to reach $177 billion by 2024, representing a compound annual growth rate (CAGR) of 29%. Companies like Amazon, Microsoft and Google are well-positioned for continued growth and are noted as leaders within the Gartner IaaS Magic Quadrant.
- In 2020, IDC estimates that $41 billion will be spent within the platform-as-a-service (PaaS) market. The pandemic has slowed the PaaS estimated growth rate to 14% this year, compared to the 41% growth experienced in 2018 and 2017. Growth rate estimates increase in the outer years, with estimates that spending will reach $100 billion in 2024.
- Since 2014, the software-as-a-service (SaaS) industry has experienced a CAGR of 23%, as workloads migrate to the cloud. The SaaS market is approximately $164 billion in size today and spending on SaaS represents nearly two-thirds of all cloud spending. The IDC estimates that the industry will grow at a rate of 13% through 2024.
Security is a top growth segment for the SaaS industry
The SaaS market was largely born in 2014. Adobe was one of the first movers in the software industry to migrate from an on-premises offering to the cloud. The move ultimately paid off, as Adobe’s stock has appreciated more than seven-fold since January 2014, and was trading at over $500 a share in early September 2020. In the current environment, some SaaS companies have gone to market with a freemium model in hopes that free trials will drive adoption. As a result of this strategy, a sales recovery for many SaaS companies won’t begin until late in 2020 and into 2021. Despite the headwinds that the pandemic has created, many SaaS companies continue to chase the $164 billion market.
Security represents 8% of SaaS spending, according to the IDC. However, the pandemic has provided tailwinds for the security industry, and security is currently one of the hottest SaaS verticals. The increase in demand has been experienced as many employees and security administrators continue to work from home in the midst of the COVID-19 pandemic. As the remote workforce has increased the number of devices used to enter company networks this year, we expect there to be a nice tailwind for increased spending on cloud security solutions.
Bloomberg estimates that only 20% of the security market has been captured by SaaS providers, presenting an opportunity for security SaaS companies that can help companies safely migrate workloads to the cloud. Leaders in the cloud security space include companies such as endpoint security provider Crowdstrike, which had one of the best IPOs in 2019 and has continued to experience significant growth. We anticipate that SaaS security providers will experience continued accelerated growth through the rest of this year and into 2021.
Tech jobs have not been spared in the pandemic, but growth of remote work helps some
Before the pandemic, unemployment in the technology sector was at a five-decade low and was far below the overall U.S. unemployment rate. Though unemployment has risen for some parts of the technology sector as the pandemic has gripped the country, there have been some early signs that the industry employment levels have bottomed out. In fact, the August 2020 jobs report has motioned a W-shaped recovery for the information industry job market.
Though the worst of the information industry jobs data might be behind us, the recovery is expected take several years to reach pre-pandemic levels as companies seek to do more with less and leverage technology in new ways. Continued innovation is still critical for many technology companies, and their commitment to research and development will benefit job recovery in the coming quarters.
Additionally, the recovery will be enabled by the ability for many technology companies to work remotely. Even before COVID-19, large portions of the technology workforce were partially or fully remote. Many Silicon Valley companies such as Facebook and Twitter have announced plans to allow many of their employees to work remotely indefinitely.
MIDDLE MARKET INSIGHT
History has shown that technology industry trends that originate in Silicon Valley often foreshadow what is ahead for many middle market tech companies across North America. The early sentiment about the work-from-home trend during this pandemic is no different, as companies such as Canadian-domiciled Shopify have latched onto this idea of remote work. We anticipate that more middle market technology businesses will provide remote options for a larger portion of their workforce moving forward.
Healthy amount of capital available to tech firms
Technology firms and start-ups alike have been an attractive investment opportunity for venture capital (VC) firms for some time now, but a recent trend has shown a more diverse group of investors are finding an appetite for venture deal-making. Nontraditional investors, including corporate venture capital (CVC), private equity investors, government and sovereign wealth funds, and family offices have found the technology industry a land of opportunity for their growing amounts of capital, given the sector’s rise in popularity and ability to continue strong growth in the midst of a global pandemic.
CVC has garnered the most attention, as large tech firms amass stockpiles of cash and have used investments in tech start-ups as a supplement to their overall research and development programs. According to data gathered by PitchBook, 2018 was a banner year for CVC involvement in overall venture capital deals and overall deal values by participating in 25.3% of all deals and making up 55.3% of the overall deal values for the year. 2019 and 2020 continued to show a high level of participation and elevated deal values with CVC participation as depicted in the chart below.
MIDDLE MARKET INSIGHT
The software sector has been the leading area for deals involving CVC, experiencing a significant rise in overall percentage of VC deals going back to the mid-2000s. In our view, we expect this trend to continue as nontraditional investors continue to view venture-like investments in technology firms as a significant opportunity for market-leading returns.
5G CAPEX is increasing and the devices are coming fast
In March, Samsung released its S20 series of smartphones, its first 5G-enabled device. As expected, Apple is reportedly following Samsung’s lead with its flagship iPhone 12 5G device. As the build out of the 5G network continues to grow, we expect a number of additional 5G-enabled smartphones will come to the market soon and that wearable and smart home devices are not far behind.
Our expectations align with GSMA’s research as we expect operators will invest up to $1 trillion in 5G networks, but that most of the investment will be back-loaded. Global 5G investment is expected to happen in three broad waves as outlined below:
- Wave 1: Early deployments (2018–2020) – China, United States, South Korea and Japan
- Wave 2: Ramp-up (2021–2023) – European investment acceleration
- Wave 3: Wider spread (2024 and beyond) – Latin America, the Middle East and North Africa, the Commonwealth of Independent States and other parts of Africa
Remote high speed access is also coming
In December 2019, the FCC announced plans to launch a $9 billion 5G fund for rural America. In some areas, this will replace previously planned and federally supported 4G LTE rollouts. In addition to these investments in the 5G rollout, the FCC has supported the proposed buildout of high-speed low earth orbit satellite internet by granting approval for a nearly 12,000-satellite constellation to Space X’s Starlink network. In July, it also granted approval for an additional 3,236 satellite constellation from Amazon’s proposed Kuiper project that Amazon has said it will invest more than $10 billion into.
The rollout of these services is coming soon as Starlink has already launched over 700 satellites, making it the largest satellite constellation with plans to increase its rate of deployment at an accelerating rate. It has also increased its initial request for user terminals from 1 million to 5 million, after nearly 700,000 people in the U.S. registered interest in the service. The company has already begun private beta testing and has promised initial service will be available to some rural customers in the United States and Canada before the end of this year, with rapidly expanded near-global coverage available in 2021.
The company has indicated that once fully optimized through the final deployment, the system will be able to provide high bandwidth of up to 1Gbps per user. Although slower than 5G, 1Gpbs is still roughly 10 times faster than current 4G speeds and would be available in the most rural environments across the globe.
Securing a remote workforce essential in pandemic environment
Telecommunications technology continues to be the backbone for a remote workforce, remote and distanced learning, and digital social environments. As enterprises undergo analysis on a more permanent remote workplace, securing those work environments is a top priority for business leaders.
According to a study conducted by Risk Based Security, over 7,000 data breaches were reported in 2019, with the greatest number of breaches occurring within the information technology sector. And in a recent survey conducted by Verizon, on a scale of 1 to 10, corporate IT leaders were asked how important mobile was to their overall business strategy—83% of them responded 8 or higher.
The growth of mobile-enabled technology, telehealth and telemedicine, and e-commerce and collaboration tools is bringing valuable, private and protected information to more and more endpoints and creating greater levels of exposure to a security compromise. In the same Verizon survey, 39% of respondents reported a compromise, up from 33% in the prior year’s survey.
Continued successful growth of remote work, digital customer and consumer experiences, and overall enterprise growth will require companies to evaluate and properly deploy next-generation security solutions empowered by leading-edge telecommunications technology.
The future of streaming is changing post-COVID
Unless you’re one of the 78.1 million people who is still holding on to traditional cable TV, you’ve helped streaming continue to take off and become the new medium for content delivery and distribution.
When the pandemic started in the United States, it gave virtually all streaming platforms a boost as people sheltered in place and sought new ways to keep themselves entertained.
Overwhelmed consumers: Within the last year, discerning consumers have zeroed in on which platforms work and which don’t. Competition has become tougher in what was already a saturated market. The streaming ecosystem is more delineated now than ever, as just within the last year we had powerhouse entrants into the streaming market such as Disney+, AppleTV+, Peacock, HBO Max and Quibi.
MIDDLE MARKET INSIGHT
According to a recent Wall Street Journal-Harris poll, on average Americans have 3.6 streaming services. That number has continued to rise as the streaming market broadens into various streaming models such as subscription video on demand, advertising video on demand (AVOD), transactional video on demand, and now premium video on demand with Disney+ premium to access movies for limited time, such as Mulan.
This highly fragmented model has overwhelmed and confused consumers, but has opened opportunities and challenges for multivideo platform devices (MVPD) such as YouTube TV or over-the-top devices such as Apple TV, Roku or Amazon Fire. These companies now must figure out how to consolidate this market and monetize on a product to allow for simplicity and one-stop shopping.
Fighting for your free time: To make matters even more complicated, video gaming and esports have seen significant growth during the COVID-19 pandemic as live sports temporarily paused, and more users resorted to playing video games during their free time. According to data from Stream Hatchet, Twitch streaming hours nearly doubled in Q2 to 5 billion hours. Streaming platforms and services are not just competing among each other, but are fighting for your free time as well.
What’s ahead for streaming?: The future of streaming continues to be bright, and streaming continues to be a primary platform and means of delivering content to our devices and homes. With so many options, price becomes a more significant factor to consumers; it’s why we have seen a larger rise in AVODs to help subsidize the cost to consumers. We expect to see this model continue to grow in popularity, as AVODs such as RokuTV, PlutoTV and Crackle have proven with the growth of their subscribers.
In addition, there’s a large re-aggregation opportunity as the streaming market has become heavily saturated with too many options. Consumers are overwhelmed; the more consolidated and simplistic solutions are, the more likely consumers will gravitate toward them. Although MVPDs have had significant declines in subscriptions this year (e.g., AT&T Now), and some have even exited the market (e.g., Sony Playstation Vue), expect to see consolidation and bundling of services at a more affordable price.
Also, data and algorithmic models are going to be increasingly important in the future. They’re what make or break a social media model to entice you to click on that next recommendation to have you engaged in a platform longer. We’ve all been down that dark abyss, but it’s the recommendation algorithms that often determine a consumer’s next click. These recommendation engines will be front and center in the near term as a means to generate traffic.
Cloud gaming poised for explosive growth
With the recent groundbreaking announcement of Luna, Amazon’s cloud gaming service, cloud gaming is expected to take on a completely new vertical and could make gaming consoles and digital downloads a thing of the past.
According to Kagan, by 2024, the global cloud gaming user base is expected to reach 124.4 million users with an estimated global revenue of $14.93 billion, representing nearly tenfold growth in as little as five years.
Cloud gaming isn’t entirely new. We’ve seen Google launch Stadia in 2018, followed by Nvidia’s G-Force Now, Sony PlayStation NOW and Microsoft’s xCloud, with the latter effectively consolidating into Game Pass.
What is cloud gaming?: Cloud gaming essentially moves the content and execution off of a consumer’s device and onto the cloud, similar to how one would stream a Netflix movie. By opting to download the movie on a device, users avoid any broadband, download speed or latency issues.
Historically, video games needed to be purchased and executed directly on a device, such as a gaming console, PC, mobile device or over-the-top (OTT) set top box such as Apple TV, Amazon Fire or Roku. The content would take the form of a game cartridge, disc (e.g., CD, DVD or BluRay), or a downloadable file.
With cloud gaming, a user can play a game directly from any compatible device. This is game-changing (pun intended), as it eliminates the need of high-cost gaming consoles or gaming PCs which could cost upward of $2,000. By allowing the technology and infrastructure to reside in the cloud, users have the freedom and flexibility to play more advanced games anywhere there is an internet connection, and from a larger list of compatible devices that are not reliant on memory, processing or graphics chips.
A work in progress: While cloud gaming is still in its infancy, this segment does pose some challenges here in the United States. In a hypercompetitive gaming world where every millisecond matters, high bandwidth and low latency will determine much of the success of cloud gaming, particularly as many of the graphic-intensive games require sizeable download and upload transfer speeds. In other words, cloud gaming is very dependent on the household’s infrastructure of gigabit or 5G connections. Otherwise, gamers will experience lag, or even worse, the spinning “wheel of death.” Until broadband infrastructure catches up, hardcore gamers will still prefer a PC or console.
The success of cloud gaming is also contingent upon the library that supports it. Because the concept is so new, there is not a large volume of games or the quality that would attract some of the more hardcore gamers. Much of this is due to the fact that video games are graphically intense and complex, which results in larger storage and data that would need to be downloaded and uploaded. This limits the titles that are optimal for cloud gaming. Video gaming publishing studios are now considering re-compiling or programming their games more thinly to allow for the same experience which involves more time, resources and costs in a platform that has not proven itself.
The future of cloud gaming: Despite the cloud’s challenges, in the distant future, discs and downloadable content could be a thing of the past. Large gaming and tech companies such as Microsoft, Amazon, Google and Nvidia are putting their bets on cloud gaming and we expect to see more companies enter this space in the future.
For further insights, read a recent Gizmodo article featuring RSM’s industry eminent Victor Kao, who provides further insight on the unique cloud gaming sector.
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