Is The Tech Market Hitting Middle Age?

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.[pullquote]I 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.”[/pullquote]

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.

The tech industry’s transition to a more mature market does bring with it the opportunity for some potentially boring baggage when it comes to things like stagnant unit growth rates. However, instead of viewing this as a mid-life crisis, smart, innovative companies will figure out ways to see these developments as a mid-life celebration that can open up new opportunities.

Published by

Bob O'Donnell

Bob O’Donnell is the president and chief analyst of TECHnalysis Research, LLC a technology consulting and market research firm that provides strategic consulting and market research services to the technology industry and professional financial community. You can follow him on Twitter @bobodtech.

5 thoughts on “Is The Tech Market Hitting Middle Age?”

  1. Instead of comparing the emerging “mature” tech industry to the automobile industry, try comparing it to the aircraft industry. I don’t think there’s ever really been a period of disruptive, exponential growth in the abilities of automobiles (Ford instigated disruptions in manufacturing and marketing, but in terms of what the cars could *do*, he wasn’t really selling anything different than the companies displaced by his mass production). But there have been periods of exponential growth in the abilities of aircraft.

    Background: before the Great War, the aircraft industry was crippled by IP wrangling, with different manufacturers holding different patents and hoarding various trade secrets. No one had all the IP needed to build a state of the art aircraft — for instance, the Wrights held a patent on ailerons, but they didn’t have a patent on the joystick, and their planes had to use a far more clumsy multi-lever control system. The war caused governments in the US and Europe to step in and force the various stakeholders to form patent sharing agreements.

    So, around 1914 (Europe)-1917 (US) you have the birth of a mature airplane industry. From there until the mid 30’s, every year saw notable improvements in airplane speed, range, ceiling, and performance. And then improvement slowed dramatically. The DC-3 was designed in 1935 to provide transcontinental passenger service, and about 600 of them were built for civilian airlines. Another 10,000 were built for the US military during the war. After the war, all those thousands of surplus DC-3s entered civilian service around the world. And the market for planes of that size and range collapsed for the next 30 years. There was no compelling upgrade from that 1935 design until the 70’s (and even today, there are still a few thousand DC-3s in active service in remote areas around the world – a better, more reliable medium sized airplane that can take off and land on very small, unpaved runways has never been built).

    Jet aircraft had a similar evolution. Starting in the late 40’s there was a period of rapid innovation and development of ever-better engines and designs. Then, stagnation, with passenger and cargo jets designed in the 1960’s still being manufactured today.

    Maybe if the computer hardware industry matures, with no longer a compelling reason to upgrade hardware before it breaks, then the software industry will be forced to grow up — no more ADHD-like flitting from one new programming tech to another, no more “we’re too busy working on this new! improved! thing to bother fixing the bugs in that old obsolete thing, jeez, why are you still using that anyway.” And that would be a very good development.

    1. I think measuring technical improvement on the basis of physical performance (speed, range, ceiling, etc.) doesn’t capture the whole picture. By that measure, yes, there doesn’t seem to have been much improvement in automobiles relative to aircraft. But I think that’s because automobiles quickly reached the performance ceiling imposed by the characteristics of its use: It has to be able to stop and start safely at short notice and distance (but not so abruptly as to cause discomfort to its passengers), it has to get underway safely in close proximity with other automobiles, and it has to do so without generating an ungodly racket. Add to that the normal reaction times of a typical human being and we get a ceiling for how quick and fast a car should go and how big and heavy it should be. These ceilings were more or less reached as early as the 1930s. That doesn’t mean there haven’t been astounding improvements in other measures such as fuel consumption, weight reduction, emissions and manufacturing productivity, all of which revolve around a general notion of efficiency (as opposed to performance).

      Aircraft, on the other hand have a much higher ceiling on practical performance and the original power plant (piston engines) did not come close to breaching them so there was an incentive to develop another engine type that could go beyond the piston engine’s limits, namely turbines.

      Lately, automobiles appear to be on the verge of undergoing a power plant transition that is just as significant as the piston-jet transition but unlike in aircraft it’s not about pushing the physical performance envelope, it’s more about the efficiency envelope.

  2. “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.”
    I don’t know but seems to me MacBook Pro pricing has been on an upward trend these last few years. Admittedly, it’s hard to compare because of the concurrent tech improvements but I’ve always bought just above mid-range spec 13″ machines and the prices I have been paying have been rising.

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