TECHnalysis Research Blog

August 25, 2015
Is The Tech Market Hitting Middle Age?

By Bob O'Donnell

First it was PCs. Now it’s tablets. And very soon, it will be smartphones.

Each of these markets has, or will hit its peak in both revenues and unit shipments in short order. Each has moved (or will soon move) from the soaring grandeur of youth and young adulthood, to the dowdiness of mature, middle age.

As these inevitable market developments occur, important shifts are starting to happen. Not only will device manufacturers, and their key component suppliers, have to evolve their businesses—as many have started to do—but very soon, so will companies offering software and services used by those devices.

While some argue that these software and services companies are taking over the world, it’s naïve to think that their growth can be maintained completely independent of the devices. At a fundamental level, the two are linked, and when the device numbers peak, so too, do the potential users of any software or service. Admittedly, there’s more of a growth opportunity over the short term for these software and service companies, but that won’t last forever either.

As a result, I believe it’s time to look at where the tech market is headed from a different perspective, and to realize that these markets do not have evergreen growth opportunities. Instead, it’s clear that the main tech device markets are quickly settling into more of an automobile-like industry model. Some years you go up, and some years you go down—not every forecast chart is going to offer a hockey stick headed in a north-easterly direction. Additionally, swings in these markets end up being more tied to the economy and other external factors than any technological breakthrough—a classic sign of industry maturation.

One added challenge for the tech markets moving forward: pricing. While automobile average selling prices (ASPs) generally increase—and those increases are widely accepted and expected by consumers—the tech market has created the exact opposite set of expectations. Tech products are always supposed to get cheaper ever year. As a result, as the tech market continues to mature, the rapid decline in average selling prices—particularly for smartphones—is going to make it a real challenge to maintain any kind of revenue growth in tech hardware—even for some of the biggest players.

Software and services companies aren’t immune to revenue challenges either—they just come in a different form. We’ve already seen the almost complete disappearance of the packaged software market, and we continue to see experiments and evolutions in software business models with questionable degrees of success.

For a while, it seemed the app store model was going to be the saving grace for software. Instead of paying hundreds of dollars for general-purpose apps from a tiny number of major providers, you could spend a dollar or two and choose from literally millions of options. But it turns out too much choice can actually be a bad thing, and the app store model is showing signs of imploding. A tiny, tiny percentage of companies actually make money in app stores, and based on very low usage and high abandonment rates, it seems many users aren’t really satisfied either.

Ad-supported models for software aren’t proving to be a cure-all either. Interactions with ads, particularly on mobile devices, are extremely modest. This, in turn, has led to low ad prices and serious challenges to any kind of revenue growth, especially on a global basis, either for application developers or content publishers. Sure, there are exceptions, but they are just that—exceptions.

The red-hot—for now, at least—services market seems to offer the brightest opportunity for future growth, because many of its offerings simply leverage the widespread usage of tech devices. As long as people keep using their devices—regardless of the form those devices take—the opportunity should remain. The problem here is that many of these services aren’t really doing anything new—they’re just offering different ways of doing things we already do—find a ride, a place to stay, etc. As a result, they appear to be much more susceptible to business model disruption, whether it comes from local market adaption trials, an abundance of competitors, or even legislative constraints. We’re still in the early days of tech services, but I can’t help thinking that the scenarios (and players) are going to be very different even just a few years from now.

Given all these challenges, one could easily presume that I’m seriously concerned about the future of the tech business. In fact, nothing could be further from the truth. I’m convinced that the tech industry will continue to serve as a critical growth engine for the entire world economy.

Having said that, I do believe we are starting to enter a very new phase in the tech business—a phase that’s going to be driven by many different developments than the ones that have led us to where we are today. As with any major industry transformation, this means that some of the biggest industry players may not survive in their current form (or at all), while others are likely to go through some dramatic transformations. This also means that there will be tremendous opportunities for today’s smaller or even yet-to-be started companies.

Here's a link to the original column: https://techpinions.com/is-the-tech-market-hitting-middle-age/41585