How the pandemic changed the weather in the tech industry

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THE TECH the industry recently seemed to be sitting on a new cloud. One record after another fell when quarterly results were released three months ago. Revenues were up 40% on average from the same period a year ago and profits by 90% for the five Western tech giants — Alphabet (parent company of Google), Amazon, Facebook, Apple and Microsoft. , collectively known as GAFAM. Technology equity indices, such as the S&P 500 information technology benchmark, climbed to stratospheric heights.

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If the latest round of quarterly results is any guide, three of the digital giants have already reported and Amazon and Apple’s results are expected to be released after The Economist is in press, the tech industry is coming back to earth. Assuming the pair meets analysts’ expectations, GAFAMboth revenues and profits will have increased, but by a more modest 30%. Stock prices are languishing. The slowdown – or the pause, if you prefer – provides further evidence of how the pandemic has changed the tech industry. The question now is whether the sector is on a new course or will return to normal in the coming years.

For starters, one of the first predictions when covid-19 hit in early 2020 was that it would make big tech even bigger. These companies, the theory says, would be best placed to benefit from increased demand for digital offerings, while smaller companies, with fewer resources to weather the pandemic, would suffer the most from its drawbacks. The first half of this prediction has come true: as shown by the growth in market capitalization of the five companies. In January 2020, their combined value represented 17.5% of the S&P 500. Today, their share hovers around 22%.

That said, many small businesses have also grown in size and value. The pandemic has given birth to a group that could be described as “tier-two tech”, whose weight, measured by market capitalization, has notably increased compared to the titans. In May, we defined this group to include 42 companies with a then market value of at least $ 20 billion that were incorporated in 2000 or later. As of February 2020, they had a common market capitalization of 22% of the GAFAM‘s. Today the figure stands at 31%

There are many reasons for this new strength. One is the large number of recent registrations, especially from tech startups: more than 100 since the start of the year, according to Renaissance Capital, a data provider. Despite a few high-value deals, a backlash against big tech acquisitions has slowed the pace of mergers and acquisitions this year. More importantly, the pandemic has shown that there are large digital markets that are not dominated by GAFAM. The tier two group of companies, for example, is led by PayPal, a payments provider, which claims a market capitalization of $ 276 billion.

Yet the most intriguing changes are qualitative. The first is that the tech industry has become much cloudier than before. “We have seen two years of digital transformation in two months,” Microsoft boss Satya Nadella said at the start of the pandemic, mostly referring to the growth of his cloud. Together, the revenues of the three largest clouds: the cloud business of Microsoft, that of Amazon AWS and Google Cloud Platform, which together provide more than 60% of online infrastructure services, jumped by more than a third, from $ 27 billion in Q4 2019 to nearly $ 37 billion in Q2 quarter of this year.

However, the biggest beneficiaries of the cloud coming together seem to be small businesses. If we consider today a panel of about fifty second-tier technology companies, about four-fifths are cloud service providers. Some are now unavoidable: Snowflake, a cloud-based data platform, is worth $ 104 billion; Twilio, which provides business communications services, some $ 61 billion; and Okta, which manages employee digital identities, some $ 39 billion.

Older tech companies are now also more firmly entrenched in the cloud. Salesforce, a software giant, was one of its pioneers. Adobe, another software titan, has successfully reinvented itself for this new form of computing. Even those lagging behind in the cloud, Oracle and SAP, the world’s largest providers of conventional business software, are finally using it. The largest hardware manufacturers: Cisco, Dell and IBM– are also increasingly selling their products “as a service”, accessible remotely via the cloud on a pay-as-you-go basis rather than installed on desktop computers.

The second industry change is that modest hardware has also made a comeback in some way during the pandemic, despite migrating to the computer sky. Most surprisingly, personal computers have seen a revival, with telecommuters needing better equipment. In 2020 computers experienced their strongest growth in a decade, with more than 300 million devices shipped, 13% more than in 2019, according to IDC, a market research company. Growth has since slowed, but mainly because shortages of chips and other components are holding back production. Dell, the world’s third-largest manufacturer of computers after Lenovo and HP, did the best, increasing third-quarter shipments by nearly 27% from a year ago, according to IDC—Almost guaranteed to perform well in Dell’s November 23 report.

Chipmakers are giving an even stronger signal that hardware is returning to the heart of the industry. Although Intel disappointed investors when releasing its quarterly results on October 21, pushing its share price down, sales rose 5% to $ 19.2 billion and profits rose 60% to 6 , 8 billion dollars. Samsung Electronics, the world’s largest memory chip maker, which will also release results on October 27, saw profits soar to the highest level in three years. And TSMC, the leading semiconductor contract maker, for its part said on Oct. 14 that sales continued to grow at a rapid pace, reaching $ 14.9 billion with net profit of $ 5.6 billion, ie an increase of 16.3% and 13.8% respectively.

The big question is whether the three companies can carry out their record investment plans. These are intended to meet the growing demand for chips not only from cloud providers, but also from companies manufacturing equipment for what is known as the “edge”: devices connecting to or extending to the cloud, smartphones with smart sensors. Intel, for example, has announced it will invest up to $ 28 billion in 2022. TSMC plans to spend $ 100 billion over the next three years to expand its chip manufacturing capacity.

Perhaps the third big change in the tech industry during the pandemic is the most significant: increased competition. Although the members of GAFAM have yet to attack each other’s major franchises, such as online search in the case of Google and e-commerce for Amazon, rivalries have intensified. So far, strongly competing clouds and changes in Apple’s privacy policies on the iPhone – which hurt Facebook’s ad revenue according to results released on October 25 – are prime examples. But on October 21, Google announced that it would reduce the fees charged to subscription providers in its app store to 15%, pressuring Apple to do the same. And with so many people now working remotely and likely continuing to do so, a platform battle has erupted between Google, Microsoft, Salesforce, and Zoom, a popular video conferencing service, dominated by the virtual desktop.

Other companies also choose more fights with GAFAM. Facebook’s social media fortress looks a lot less secure now that it has at least two serious rivals: American Snapchat, a social network owned by Snap, and TikTok, the short video app operated by ByteDance, a Chinese media giant. ‘Internet. According to data leaked in a recent wave of leaks, teenage Facebook users in America now spend two to three times as much time on TikTok as they do on Instagram, which is owned by the American social media conglomerate. Amazon is also facing increased competition, both in the form of incumbents who have finally embraced the digital world, including Walmart, and newcomers, such as Shopify, which helps merchants sell online and execute commands. PayPal’s attempt to buy Pinterest, another social network, now appears to have been scrapped, but it would have helped PayPal go deeper into e-commerce.

After nearly two years of covid-19, the tech industry is cloudier, more hardware-bound, and more turbulent. Of these trends, the first two are unlikely to last forever, at least in their current form. Digital meteorologists say the cloud has already reached the ‘peak of centralization’, meaning it will now expand not so much through football-pitch-sized data centers, but on the ‘edge’. ”, Where its digital services touch the physical world. And given the economics of the semiconductor industry (manufacturing plants often cost over $ 10 billion and take years to build), the chip shortage could eventually turn into a glut.

A more open question is how long the new phase of competition will last. Optimists argue that after a long period of ossification, the pandemic has helped push the industry into a more dynamic period, in which the giants compete with each other as well as with small businesses. Pessimists say this phase will not last long, and industry leaders will sooner or later consolidate their fortresses and buy out their competitors. And that is why, more than ever, trustbusters must not let their guard down.

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This article appeared in the Business section of the print edition under the headline “Cloudy with a shortage of crisps”


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