United States

Technology, media and telecom industry outlook

Volume 8, Summer 2021

The technology, media and telecom industry continues to evolve quickly, especially as interest from investors continues to increase. This sector has significant opportunities for growth, with capital flow continuing at a record pace. In addition, the future is bright for 5G, as expanding network infrastructure and adoption paves the way for transformative data processing and access. However, these industries must keep an eye on emerging risks, because cyberattacks are increasing—especially against media companies—and could cause significant harm.

Key takeaways from the summer 2021 TMT industry outlook

  • Following a record year, technology, media and telecom companies continue to attract large capital investments from a variety of sources.
  • Adoption of 5G networking and devices continues to build, with the potential of more efficient data processing, reduced network costs and increased network density on the horizon.
  • Technology, media and telecom companies are prime targets for cyberattacks that could result in considerable costs and loss of intellectual property.

Technology

Capital flow into technology sector shows no sign of slowing

On the heels of a record year, the technology sector continues to attract large amounts of capital from a growing pool of interested investors. Venture capital is making large bets at all stages, private equity (PE) is looking to software for outsized returns, special purpose acquisition companies (SPACs) are seeking to bring promising emerging technology companies to the public markets, and nontraditional investors are participating in a growing number of TMT fundings. Here, we take a look at the current trends for these key technology investment vehicles and provide an outlook for the coming months.

Venture capital: Following a year that saw U.S. venture capital activity exceed $150 billion for the first time, 2021 shows no signs of slowing down, and the trends we witnessed in 2020 have persisted through the first half of 2021. The technology, media and telecom industry attracted approximately 52% of all U.S. VC investment in 2020 and accounted for 57% of investment through the first six months of 2021.

We expect trends observed in 2020 that fueled the record amount of invested capital to continue through 2021. Late-stage venture deal-making already saw a strong resurgence in the first half of the year, growing 154% from the same period in 2020, with the median deal size growing from $10 million to $20 million. The growth of median deal size is driven by a growing number of mega-rounds observed, with 167 deals totaling nearly $42 billion in capital, more than half of which were focused on TMT companies.  

Technology companies that have raised $100 million rounds this year include Clubhouse, the voice-only social media platform that raised $100 million in January and another $200 million in April. In addition, Plaid, the fintech company that had a $5.3 billion acquisition by Visa called off in January, closed a $425 million dollar round that valued the company at nearly $13 billion. Gaming platform company Epic Games also closed a $1 billion funding round, valuing the developer at more than $27 billion. 

MIDDLE MARKET INSIGHT

We expect fintech, gaming and e-sports, health technology, and education technology to continue to see strong interest from venture capital investors over the remainder of 2021 as they look for high-growth areas in which to deploy the record amount of funds raised during the pandemic year of 2020.

North American TMT venture capital deal values

Private equity: Following a strong year of U.S. tech-focused investment, 2021 has seen momentum continue with a heavy focus on software as a service companies. According to deal statistics tracked by PitchBook, private equity firms have spent more than $49 billion acquiring U.S.-based software companies in the first half of 2021, an increase of 100% over the same two quarters last year. Across the entire TMT industry, deal-making is strong and on pace through the first half of the year to far surpass the deal value of 2020. 

U.S. private equity software deal activity

In fact, as the second quarter of 2021 has come to an end, PitchBook data reveals that overall PE investment experienced its highest-ever quarter for capital invested in North American-based companies, with over $181 billion of investment, a good portion of which was directed to TMT companies. Through the first half of 2021, these investments have totaled $125 billion, up 115% from the same two quarters last year and already more than double the annual totals from 2015 and 2016.

North American private equity TMT deal activity

As companies adapt to a hybrid work environment and continue to adopt innovative and necessary digital technologies to complement video calling and other communications tools widely implemented during the pandemic, private equity investment in rapidly growing B2B and enterprise software companies will be a trend that continues long after the health crisis subsides.

SPACs and public markets: Although newly listed SPAC activity has slowed, the reverse merger process known as de-SPACing continues to move into 2021 on a steady pace. While de-SPACing may lag behind IPO activity, appetite for this exit strategy looks promising. Since the start of 2020, 137 reverse mergers have been completed, with 95 happening in 2021. Fifty-three of these mergers have been completed with TMT operating companies.

As companies adapt to a hybrid work environment and continue to adopt innovative and necessary digital technologies to complement video calling and other communications tools widely implemented during the pandemic, private equity investment in rapidly growing B2B and enterprise software companies will be a trend that continues long after the health crisis subsides.

The focus of the SPAC investors has largely been on emerging technologies like autonomous and electric vehicles, fintech, and health technology companies with established brands. For instance, 23andMe, Hims & Hers Health, Clover Health, SoFi and Metromile have all chosen a SPAC merger since the start of the year.

The competition and likely valuations will continue to heat up as VC, PE and SPAC investors converge on the best of the best private technology companies with record amounts of deployable capital. Founders and current shareholders will have many exit and investment opportunities to explore and will see no shortage of available capital well into 2022. 

Data compiled from Bloomberg shows 96 TMT-related IPOs since the start of 2020, with 46 of those occurring in the first half of this year—nearly matching the total capital raised in all of 2020. Established tech leaders like UiPath, Marqeta, Monday.com and Poshmark have all taken advantage of investor interest in the public markets since the start of 2021.

Media

Cyber vulnerabilities of media and entertainment companies

Cyberattacks have shifted from rare misfortune to persistent reality of conducting business in the modern world. According to the 2020 Cyber Readiness Report published by the insurer Hiscox, technology, media and telecom companies were one of the three most targeted areas, “with 44% of firms in each sector reporting at least one incident or breach.” Further, according to Statista, almost a quarter of cyberattacks in 2020 were against entertainment companies.

Cyberattacks by industry

Cyberattacks, like many other crimes, are perpetrated for many different reasons, but most of the time it’s for money, and they almost always represent a significant cost to the victim. Cyberattacks against large national or global companies such as Colonial Pipeline, SolarWinds, Microsoft, Sony and Deloitte are the ones that receive the most media coverage. However, cyber risk is not limited to large public entities. According to data in the RSM US Middle Market Business Index 2021 Cybersecurity Special Report, “larger middle market organizations were most at risk, as 42% of executives at such companies reported a breach.”

Cyberattacks against large national or global companies such as Colonial Pipeline, SolarWinds, Microsoft, Sony and Deloitte are the ones that receive the most media coverage. However, cyber risk is not limited to large public entities.

In the media and entertainment space, June was a trying month, especially for Cox Media Group, which owns several television and radio stations, and Electronic Arts, one of the world’s leading video game publishers. Cox was the victim of a ransomware attack on June 3, and Electronic Arts suffered a data breach on June 6, during which “hackers claimed to have obtained 780 gigabytes of data from EA, including the Frostbite source code, which is the game engine that powers the FIFA, Madden, and battlefield series of video games, among others,” reported CNN.

Whether companies are developing products, broadcasting, reporting, publishing, or producing films, TV or music, protecting IP and ensuring total control of launch and release are paramount. While all media and entertainment companies represent a potential ransomware target, product developers are also likely targets for data theft.

To a product developer, a breach can be much more significant than a few days or weeks of lost profits; it can jeopardize years of work and millions of dollars of investment. Similar to the attack suffered by Electronic Arts, the Sony hack in 2014 was one of the more significant in recent memory. According to Time, hackers “made off with a vast amount of data (reports suggest up to 100 terabytes), wiped company hard drives and began dumping sensitive documents on the Internet.” Time added that this same breach compromised the release of The Interview, a film starring Seth Rogan and James Franco, when theaters, including “AMC and Regal…chains that control about half of the country’s movie screens,” played it safe and “decided against” playing the film.  

Ransomware, the likes of which Cox Media Group was targeted with, can pose a devastating threat to middle market companies. A recent Forbes article found that the average ransom in 2020 was more than $300,000 and the typical cost of downtime was more than $270,000. For a massive studio such as Sony or a large national media group such as Cox, a breach largely means a hit to the bottom line, but for a middle market company a similar breach can mean closing its doors.

How hackers are getting in and how to stop them: According to CSO Online, “94% of malware is delivered by email,” primarily through phishing and spear-phishing attempts. So companies that use email are potentially vulnerable to an attack—meaning just about every company in operation today. The best way for middle market companies to fortify themselves against a potential attack is to first acknowledge an attack is possible, and then adequately recognize this possibility in the budget.

MIDDLE MARKET INSIGHT

Companies can set aside capital to invest in cybersecurity talent, systems and products. In addition, time and resources should be properly allocated to ensure teams are adequately trained on cyber risks and methods of identifying potential breach attempts. (Parenting 101: Don’t open the door for strangers.) Insurance solutions that specifically cover cyberattacks should also be explored.

Former Cisco CEO John Chambers once said, “There are two types of companies: those who have been hacked, and those who don’t yet know they have been hacked.” Cyberattacks continue to pose a real threat to the middle market in today’s business environment, and cybersecurity is a fundamental cornerstone to running a successful business.

Telecom

Widespread 5G adoption moves closer to reality

This year, sales of 5G devices will surpass 4G sales as consumer demand for increased data speeds continues to grow. This shift indicates that network technology and bandwidth are nearing the point at which many of the transformative 5G enterprise changes may be possible. However, the move to 5G is already in progress as wireless carriers, equipment manufacturers and software developers race to develop, test and deploy key use cases.

U.S. wireless unit sales

One of the most highly anticipated changes is multi-access edge computing. According to the FCC, edge computing refers to locating applications—and the general-purpose computing, storage and associated switching and control functions needed to run them—relatively close to end users and/or Internet of Things (IoT) endpoints. By locating the applications and computing assets closer to the end users, organizations will be able to access and process critical data more quickly. For many industries, including retail and health care, this will present significant new opportunities.

In addition, software-defined wide area networks (SD-WANs) are not new, but are gaining in popularity in enterprise applications. Telecom market research firm TeleGeography surveyed 125 WAN managers and found that the number of respondents who have installed the service in the past two years grew from 18% to 43%. SD-WANs may allow organizations to reduce network costs, increase network capacity and performance, and improve security. 

Network density will be dramatically improved on 5G networks. Theoretically, 5G technology will be able to support 10 to 100 times as many connected devices as 4G—up to 1 million devices per square kilometer. Increased network density capabilities are crucial for continued expansion of IoT. Transforma Insights, a digital transformation research firm, estimates that there will be 24.1 billion IoT devices by 2030. Those devices may allow organizations to immediately monitor field and front-line operations, including supply chain performance and quality, customer insights, and critical health care data.

MIDDLE MARKET INSIGHT

The convergence of SD-WAN networks; the high-speed, low-latency, high-capacity capabilities of 5G networks; and the emerging use of edge computing capabilities is creating a favorable landscape for increased enterprise adoption of 5G.


The Real Economy: Industry Outlook

The Real Economy: Industry Outlook

Get data-driven economic insights and outlooks quarterly on a variety of middle market industries provided by RSM US LLP senior analysts.

Subscribe to TMT Insights Newsletter

RSM CONTRIBUTORS


Subscribe to TMT Insights Newsletter