Top business trends and issues affecting TMT companies in 2020
INSIGHT ARTICLE |
What are the top trends and issues affecting middle market technology, media and telecommunications companies (TMT) in 2020? RSM’s TMT senior analysts share insights on what to watch for in 2020.
Artificial intelligence and machine learning
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 at this point. We are clearly 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. McKinsey has noted that the high tech and telecommunications industry is leading in AI adoption and is expected to spend more in this area into 2020.
The mergers and acquisitions wave, the initial public offering window, and direct listings
The S&P 500 will continue to actively invest in technology through acquiring middle market technology companies in order to remain competitive. In 1964, the average tenure of an S&P 500 company was 33 years, which has since declined to 24 years in 2016 and is expected to further decline to 12 years by the late 2020s, Innosight estimates. We expect this trend to continue beyond 2019, especially for tech companies within the cloud, security and data analytics verticals.
Continued access to capital will be important for the TMT 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 20 years ago. Companies like Airbnb, one of the largest U.S. unicorns, have highly anticipated IPOs in 2020. Gitlab announced its Nov. 18, 2020, IPO date back in 2015; since that will occur just a couple weeks after the U.S. presidential election, it will be closely watched.
In 2018 and 2019, Spotify and Slack went public with a direct listing, rather than an IPO. In October 2019, the tech community gathered in San Francisco to discuss alternatives to the IPO process, like a direct listing. 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. Many top investment banks have stated that they support companies who want to pursue a direct listing.
5G will empower the next generation of technology innovation
4G wireless technology in its own way enabled a new world of user experiences and has paved the way for a connected future and digital experience that is only minimally imaginable at this time. The fifth generation of wireless technology, or 5G, will bring with it the ability to fundamentally change what is possible from technology companies as it relates to innovation. North American telecom operators have committed more than $350 billion of capital expenditures between 2018 and 2025, of which an estimated 87% will be dedicated to 5G deployments, to bring 5G connectivity to more than 80% of the population. 5G will enable what is sure to be the beginning of an innovation revolution that will see the adoption of autonomous vehicles, virtual and extended reality, remote health care, and industrial and massive internet of things and public safety-related innovations. Middle market technology entrepreneurs and business owners must consider a 5G strategy to empower their businesses, engage their customer base and employees, and provide insights and analytics not previously available on earlier generations of wireless technology. 5G is very much a “if you build it they will come” technology and is being built and deployed by the telecom operators without a full understanding of the innovations and technologies being developed to take advantage of its vast capabilities. Currently available in parts of 36 cities nationally, the United States finds itself in a race to deploy 5G at scale and to be seen as a leader in this space against the likes of China, South Korea and Japan for the benefit of their respective technology ecosystems.
Data protection, privacy and security
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 RSM’s 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 voluminous and valuable, cybercriminal activities continue to rise, creating more aggressive, preventative needs. Companies are even obtaining insurance policies to try to avoid making major headline news. According to the Digital Guardian, a data beach costs companies an average of $150 per record. Put another way, 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 and chief technology officers, but also chief financial officers, boards of directors and audit committees; these groups are all inspired to better understand how companies can protect themselves more effectively.
Long gone are the days when credit card information was the most valuable data. Now, personal and private information is the most highly valuable data within the dark web. Due to this, governments are starting to intervene to ensure companies are protecting your data and sensitive information with legislative acts, such as the European Union’s General Data Protection Regulation. Given recent privacy issues with Facebook, and now with the California Consumer Privacy Act legislation, effective Jan. 1, 2020, the U.S. government will most likely play a much larger role in creating federal mandates on how big tech is ensuring the privacy and confidentiality of our information, and allowing more transparency on how your data is being used.
Video gaming and e-sports
The gaming industry is projected to realize nearly $150 billion in revenues and is on pace to surpass $200 billion by 2022. Last year was an exciting year for the gaming industry as a whole, especially from a content perspective with releases such as Call of Duty: Modern Warfare, Diablo Immortal and Cyberpunk 2077. Last year was also exciting because of the way content was distributed and consumed via streaming. Google has found ways to completely disrupt 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 afterwards and is already giving Stadia a run for its money. Of course, streaming is only as good as your connection speed, but once gigabit and 5G connections continue to spread, latency will be a thing of the past. According to Bloomberg, market size of streaming could be roughly $500 million in 2020, and is projected to grow to nearly $10 billion in 2030 with as many as 45 million subscribers.
In addition, 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 with a market size of close to $1 billion in revenue for 2019, and forecasted to achieve $1.7 billion by 2021. E-sports is a form of sports competition using video games, and typically in an arena or venue to allow for numerous spectators to watch live or via streaming. There are more individuals watching e-sports than Netflix, HBO GO, ESPN mobile and Hulu combined. Much like professional sports, e-sports is also starting to monetize on league formats and franchising fees.
Changing consumption patterns for video/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 is anticipated to only accelerate as powerhouse companies such as Apple TV+ and Disney+ enter the streaming market. According to Nielsen, one of five pay-TV subscribers this year has officially “cut the cord,” setting a record pace of decline of pay-TV subscribers. In fact, pay-TV subscribers are 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 the anticipated powerhouse entrants, Apple TV+ and Disney+, have entered the streaming stage.
With more content comes more membership, and next year we expect to see significant increases to streaming media consumption as additional streaming options arise, such as NBC Universal’s Peacock, and HBO MAX, which plans to release all HBO content and welcomes the most watched streaming television series, Friends. But while Netflix, Hulu and Amazon dominate the streaming stage, Disney will be a significant new threat. Due to the Fox acquisition, Disney now controls Hulu. With live streaming, sports (i.e., ESPN) and a mega franchise library ranging from Star Wars, Marvel and Disney classics, they have a trifecta recipe to become the dominant player in less than four years.