Technological Competition

Business is often compared to war, and in the tech industry the blitzkrieg is over, and the troops are digging in for the long haul. This shift holds some very important considerations for managers tasked with guiding their company technologically in the coming years.

So far, the industry only shows signs of slowing financially. Innovation and investment are still occurring at a rapid pace, but the companies that are financing most of this investment are starting to fall victim to the law of diminishing returns. In the early days of the tech industry, large gains could be had for comparatively little investment. Now, some companies are investing huge sums in building server infrastructure to support the gains found in cloud computing, while others, like google, pour even larger sums into trying to find new stable revenue sources (even while they reinvent their current revenue sources). These mammoth investments depress earnings and represent huge bets. Similar to the way a traditional brick and mortar store would need to tie up large sums of capital in rent or illiquid property, these tech firms find themselves with less profitable illiquid assets piling up on the balance sheets.

These huge investments differentiate companies who are focusing on business clients (servers, consulting services, etc), and those who choose to tie up capital in areas still experiencing lightning growth. Mobile is a good example. As developing countries skip large screens entirely, and developed ones move increasingly to their pocket sized devices, this section of the market is an all out brawl between Google, Yahoo, Apple, Microsoft, Facebook, Twitter and scores of other app developers and advertisers. Additionally, there are still some companies that seem to be growing incredibly quickly (Apple springs to mind) despite industry wide stagnation.

Overall, the huge capital expenditures and niche growth opportunities are causing the tech industry giants to become extremely specialized. IBM, for example, has sold off its personal computing business to China’s Lenovo, and recently paid a contract chipmaker to take its semiconductor business. These changes have positioned IBM to focus on software and consulting. Similarly, HP is splitting up. One side of the company will now focus on making and selling hardware, while the other (larger and better funded) side will focus on investing in new cloud computing software and solutions. Other companies, such as Google, Apple, and Microsoft have retained a broader focus, but are investing huge sums in buying up competing products.

What does this mean for the corporate consumer of technology? Business can expect more alliances like the one recently announced between Apple and IBM giving existing corporate devices more functionality. Additionally, businesses can expect to see some heavy selling on the part of companies that have just finished investing billions in specific areas of technology. Security and customer service should also improve as companies bank more and more on improving existing services rather than inventing new ones.

More broadly, business should be watching these new streamlined investment focused tech companies as they begin to put money in faster moving non-tech sectors. For example, SAP, an enterprise software firm, recently invested in a travel and expense management company which puts them in competition with travel agents. Tech companies will also begin trying to find more money in formerly low margin businesses. Netflix, for example, has started to produce and market its own original content in an attempt to drive down television viewership and increase subscription and retention rates.

It is impossible to predict how the tech industry will look in ten years, but it will undoubtedly look very different than it does now. Those in charge of corporate technology will need to keep a close eye on the divestments and mergers currently taking place in the industry to ensure their firms are buying the best possible tech services in an increasingly specialized market.