The technology industry will emerge from the global recession with some major stars, a lot of minor stars, a few constellations - and little in between in the vastness of cyberspace. Consolidation, industry analysts agree, will be the name of the game as heavyweights use their strong positions and free cash to swallow mid-market players. Meanwhile, cost-cutting and job losses will lead to less corporate experimentation and risk taking, creating big opportunities for entrepreneurs and innovators.
The example set by Apple in the period of caution following the 2000 dotcom crash is telling. While industry leaders were firing workers and slashing budgets, the company made big investments, incubating products that would capitalise on what Steve Jobs, the company chairman, believed would be central to the digital lifestye of the future. The result? While executives at companies 10 times its size were cowered in their boardrooms, hiding from the sun, Apple developed the iPod, which reshaped the music industry, and laid the foundations of the iPhone, which has the entire mobile industry looking over their shoulders.
Pyra Labs, the company that brought the weblog into the mainstream with its Blogger.com service, developed most of its product in the aftermath of the bubble. As its dotcom-era seed capital dried up, the company was reduced to a single employee. Evan Williams, Pyra's co-founder, was the last man standing at the company after the rest of its employees could no longer be paid. What he wrote on his own blog makes a solid rallying call to today's entrepreneurs.
"I'm not walking away," he said. "The good thing is, I have relatively low costs - though, I still need to bring in more cash than we have been - adequate server power for a while (thank you!), and the ability to focus on what I'm good at: creating things. I don't pretend I can do all this by myself. Nor that this path is going to make my life easier any time soon. But I can't give up. And I have to [re]start somewhere. So here I go."
Three years later, at the emerging of the second internet boom, he sold Pyra to Google for an undisclosed amount of Google stock. The transaction made him rich enough that when Facebook recently offered US$500 million (Dh1.83 billion) in stock for his new start-up, Twitter, he turned it down. Nobody knows who will be the Evan Williams of this recession, but we can rest assured that they are out there, quietly working cheaply to develop the technology that big companies will be paying big dollars to acquire in 2010-2011.
And while entrepreneurs lick their hungry lips, the corporations who will one day acquire these new companies are strengthening their hold on key markets. Google, which lords it over the online search and advertising market, almost reached an agreement with the number-two player, Yahoo, that would have extended Google's dominance. It took US federal regulators shaking their heads and mouthing the word "monopoly" to scupper the deal.
Throughout the technology industry, medium-weight companies are being circled by their larger competitors. Although the sector is expected to be more resilient to a spending lull than most, it is still predicted that consolidation will sweep the market as investors and creditors flee everything but the strongest and most stable companies. The world's biggest technology companies have posted strong quarterly results in recent weeks. Google announced third-quarter revenues that were up by 31 per cent year-on-year. Microsoft's quarterly profit was up by 42 per cent on the previous year, while HP, the world's largest computer maker, said laptop sales rose by 21 per cent in the past three months.
The same kind of growth was not in play at the second-tier companies in each industry. Google's main rival, Yahoo, reported a 1 per cent quarterly rise in revenue and a 53 per cent decrease in profit. Sales of electronic devices at Toshiba, a bit player in the laptop market, were down by 11 per cent and the division made a loss for the fist half of the 2008-2009 fiscal year. While no one company is a direct competitor to Microsoft across all of its business units, Sun Microsystems, which fancies itself as an all-purpose provider of corporate information technology, had a difficult quarter. Its revenues dropped by 7 per cent, and the company made a loss of almost $1.7bn. It has announced a restructuring plan that involves up to 6,000 job losses.
The telecommunications industry has been battered by the stock market woes as hard as most sectors. But telecom companies continue to post healthy profit and growth numbers, and spending on communications services such as mobile phones and internet access is expected to be among the last areas where consumers cut back. The downturn will be felt most clearly by mobile handset makers. While use of mobile phones is expected to continue largely unabated, demand for new devices will slow as customers hold on to their ageing handsets. Nokia, the dominant player, has warned shareholders of a decline in its market share and slower total industry sales.
For mobile network operators, financing costs will rise as the network equipment makers that build their networks reduce the amount of financing offered as part of a deal. In the past, network builders such as Ericsson and Nokia Siemens Networks would offer their services on generous credit terms, letting the operators quickly increase their capacity while slowly paying the price for the infrastructure. While the network equipment makers are reluctant to discuss confidential financing arrangements, industry analysts believe their credit terms have already become considerably tighter. This means the cost of adding new customers will rise, bringing to an end the land-grab business model that allowed networks to add hundreds of millions of low-value emerging market subscribers.
Regardless, the central importance of cash during a liquidity crisis will favour well-managed network operators, many of whom are sitting on billions of dollars of reserves. In the Middle East, this will put state-owned companies such as Etisalat and Saudi Telecom in a strong position. Opportunities abound for entrepreneurs in the mobile sector. The booming popularity of smart phones, which let users install new applications, download entertainment and games and browse the internet, has opened a broad new market for application developers and service providers.
At the same time, bringing new services to the two billion owners of basic handsets is likely to become the biggest business of all. One mobile technology start-up provided a rare bright spot on the markets last week when its stock price rose by 90 per cent after announcing a major deal. Synchronica, a UK-listed company which builds technology that can turn almost any mobile phone into a BlackBerry-style mobile e-mail device, signed an agreement last week with one of the world's largest mobile network operators.
The company's potential for rapid growth was outlined by The National in October after an interview with Carsten Brinkschulte, its chief executive, who was visiting the UAE. Synchronica did not disclose the name of the operator it has signed with, saying only that it is among the 10 largest in the world, reaching more than 100 million customers in Europe and Asia. As part of the agreement, Synchronica will be paid a ?1 (Dh4.67) activation fee for every mobile customer that uses the service, plus yearly subscription and support fees of up to ?3.60 per user. It will also sell professional services to the network operator, aiding the company in the integration and customisation of the technology.
The capability to bring an upmarket service to basic devices would be most lucrative in emerging markets, Mr Brinkschulte said. Middle Eastern operators such as Etisalat, Kuwait's Zain and Saudi Telecom, which are all expanding their networks into Africa and Asia, are prime targets for Synchronica's products. One of Synchronica's largest investors is Saudi Arabia's Prince Hussam bin Saud bin Abdulaziz Al Saud, who acquired a 10 per cent stake in February. A son of the late King Saud, Prince Hussam is the chairman of the Saudi Arabian affiliate of Zain.
The company is valued at £14 million (Dh75.5m), a figure that could increase substantially if it signs further contracts with network operators and handset markets. Nokia and Motorola each paid more than $400m to acquire specialist mobile e-mail companies in recent years. tgara@thenational.ae
