Technology Is Good Enough; Won't Be A Growth Engine
13-Aug-02 00:21 ET
[BRIEFING.COM - Robert V. Green] The technology sector drove the market, and perhaps the economy, for the past 15 years. The biggest problem facing the technology industry today is that the technology market is maturing. Most of what is out there is "good enough" and almost everyone who is a potential big buyer of technology has already bought in.
The Desktop
Face it: the desktop has gotten as good as it needs to be.
Microsoft and Intel won, of course, but now they have no one left to slay. Ask yourself, in the PC world, whose lunch can Intel and Microsoft eat? Only their own! And that won't be easy.
There isn't really any need to upgrade a PC any more. Excel, Word, Powerpoint, even email - these are all about as good as they need to be. Upgrades are even avoided. Windows XP is not being embraced in the way that prior upgrades were.
We have reached the point of diminishing returns on PC investments. The only place where technology isn't really fully useful yet are the software tools that are free! RealPlayer, WindowsMedia, Internet Explorer : all of these things are still being enhanced to the point of better usefulness, but they don't have the revenue model that software upgrades used to have.
PCs are good enough.
Enterprise Systems
The enterprise is the Cibola of the technology world. Replacing the existing systems of mainframes and some minicomputers with networked PCs running NT, Solaris, and/or Oracle databases is the great vision of the "new technology" warriors.
But in the current environment, there is no rush to upgrade or improve the existing systems. Businesses are focused more on generating new revenue, not make new investments in better infrastructure.
For a while, about a year ago, we felt that technology spending that was focused on cost-reduction, not new revenue generation, could still be sold. Not any more.
The real indication that IT spending has stopped was when the supply chain vendors led guidance downward and reported sequential declines in revenue. The supply chain vendors can often show less than 1 year payback on investment through better cash flow and lower inventories.
If the supply chain market, which is driven by expense reductions, is drying up, there is only one conclusion: companies are becoming more satisfied with their existing systems. They may not be the greatest or the best, but investing in a new system is not the top priority right now.
The corporate data system is good enough.
Cell Phones
What would make us all dump our current cell phones and buy something new? That was the promise of 3G, but that's fizzled, and has not been replaced.
Face it: 3G is not happening any time soon, if ever. Add that to flat to lower handset sales, and there is basically one conclusion: cell phones are good enough.
PDAs
Hardly worth mentioning. The Palm Pilot market died two years ago. The "cool" factor has long since worn off.
Blackberrys almost replaced Palm Pilots as the cool PDA, but Blackberrys are still the province of the executives only. In fact, Blackberries are "too good" to buy one for everyone in the company.
The Internet
We have a glut of internet fiber and internet hosting capacity. Nearly half of the glut is owned by companies in bankruptcy or hovering just above it. (See the Stock Brief of 29-Jul-02 Verizon/Genuity, the Internet Glut, and Regulatory Irony ).
This very fact alone says it all: if the internet capacity were not good enough, then customers would be financing new buildout. But the opposite happened. Companies financed new buildout with capital, and they built too much.
It is a stark contrast to the technology markets of the past, where the installed system was made obsolete, and was replaced, with financing done by customer revenues instead of capital.
The internet, in its current state, is good enough.
Broadband
Despite the fact that many people still complain about lack of access to broadband services at home, broadband is not going to be a driver of technology.
Why? It costs too much. Not to you, the end user, but to the provider of the broadband services. (We haven't done the survey yet, but it might be worthwhile. How many of the 10 million US households with broadband are being serviced by bankrupt companies?)
There is no rush at the RBOCs to roll out DSL lines - they have a "tread water" strategy. All the RBOCs have to do is wait until all their broadband competitors fold over the next couple of years.
The motivation to roll out broadband at cable companies is probably even lower than at the RBOCs. No one is going to steal their customer from them. What's the rush for rolling out broadband service that requires large capital investment?
Consumers might not think that broadband service is there, but the only companies that can provide it think the current state of affairs is good enough.
Everything Is Good Enough
Technology used to be driven by a compelling fact: companies had to invest to keep up.
This fundamental fact just isn't the case any more. Granted, this is a very subjective statement, and subject to debate. But with every major sector of the technology market in a slump, the conclusion is clear: technology is not selling like hotcakes anymore. And the over-riding reason is very simple: most of what everyone already has, is good enough the way it is.
This is a major fundamental shift. We first pointed it out in a Stock Brief when it first became apparent, in the Q1 reports of 2001: 26-Jun-01 Where Have All The Growth Markets Gone.
Sequential growth declines happened for the first time, across the board, in technology sectors. At first it seemed like a consequence of the bubble overbuilding. But now it seems clear that
After all, what company that hasn't bought SAP already is going to buy it now?
This doesn't mean that technology companies are going to shrivel up and die. As the market matures, the best companies may continue to grow, but at the expense of the weaker companies. But the heyday growth markets of the past are probably gone, until some new technology innovation comes along.
The information technology infrastructures that companies have built are good enough. It is time to reap the return on those investments.
The Shift
A major shift in the technology market is happening. Value will accure to the application of technology, and not to the technology vendors themselves. This major shift has only just started.
The Barron's article this week suggesting that technology might be returning missed this point.
The lone shining company that was highlighted as a solid company is not a technology company. First Data (FDC) is an "applied technology" company. It has a business model which successfully uses technology to develop a scalable business model. It does not sell technology. First Data sells a service, enabled by technology.
We first covered First Data in a Stock Brief about 18 months ago: 08-Jan-01 eProcessing: Technology Enablers for Finance when the price was about $27 (split adjusted). FDC is now $34.
The argument for an investment premise in "technology-enabled finance service companies" then was expressed as follows:
Technology enabled financial institutions will generate higher operating efficiencies in large existing markets. Companies which provide automated solutions for processing financial transactions will be in demand by financial institutions. Companies which attain scale have a lasting advantage, which could last for years.
The 26% return performance of First Data over the past 18 months underscores this major shift: the application of technology is where technology investments returns will be found, not in the vendors of technolgoy. Failure to realize this will cause technology investors to underperform the market, even at the drastically low prices of most technology stocks.
Why? Because existing technology is good enough.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
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