She Doesn't Give You Time for Questions

Something Ventured

January 13th, 2006

Prediction Without Superstition

“She doesn't give you time for questions As she locks up your arm in hers And you follow 'til your sense of Which direction completely disappears.” – Al Stewart, Year Of The Cat

It’s a funny day to be doing an “outlook for 2006” summary, given the publish date of this column is Friday the 13th. When you add the 27 straight days of rain, the fact that I have to get a filling replaced, the Vancouver Centre choice(?) between Hedy and Svend, the lack of consistent goaltending for the Canucks and the unfortunate news that my current venture fund has done its last “new” investment, you’d think this would be a grumpy outlook. You’d think…

But I have been scouring the wires and the pundits to synthesize for you the collective spirit going into 2006 about information technologies and, well, despite my personal discomfort in having to chew only on the right side… things are looking pretty damn good! You can read on for more detail if you want, but that’s pretty much the gist of it.

At the very highest level, businesses look to be back buying technology at a 5-6% increase over last year. For instance, Goldman Sachs upped its targets on all big, public enterprise IT companies this week based on a rosier outlook for IT spending and its positive effect on earnings. The increase will be largely driven by many of the same forces of 2005, VoIP, security, storage and mobility. Interestingly, despite the launch of Microsoft Vista this year and Office 12 shortly thereafter, most pundits agree that the impact on 2006 spending will be minimal. Not because Vista, and all of the 3rd party applications built for it, won’t dominate the software spending, but simply because it won’t be released until near year end. Notebook sales continue to grow, with the unit volume passing that of desktops in 2005. The long awaited upgrade cycle for PCs in the enterprise is finally upon us, despite us all wishing for it in years past.

SMBs and consumers are the new nirvana for target markets. The big enterprise still seems a little sluggish to adopt and, more importantly, upgrade their core software and hardware. Sure, big financial services and technology companies themselves continue to drive innovation through earlier adoption of next generation hardware and software, but the bigger manufacturing, government and health care sectors are still not setting the world on fire. We have all seen the hype in the consumer technology area, with the digital home and the personal wireless/media devices dominating the news. SMBs are the area to concentrate on because they will spend money to save money in 2006. With the overall economy pretty good, unless you make cars or car parts for a living, the mood is rosy among the faster growing smaller and medium businesses out there. Without huge legacy investments in IT that need to be integrated into any decisions, they look for the new, low cost of entry and low cost of maintenance solutions. For example, new IP PBXs for VoIP and other call management features are hot. Also, on-demand (FKA software as a service, FKA ASP) software is huge with the SMB markets right now for the aforementioned reasons. As always, the challenge for a company is how to sell to the SMBs without killing yourself with cost of sales.

A lot of pundits have tried to pick the specific product categories that are moving (or have already moved) from hype to reality for 2006. Companies with products to address these areas may have an opportunity to reap large market share as these categories move from early adopter to widespread use:

 Service Oriented Architecture (SOA) implementations – The model for constructing and assembling network services and the common accessibility to data across the network will turn this hype to reality this year. Get ready for big re-engineering of IT processing and storage using XML and open standards. Effective implementation of SOA means that business processes become more extended and more efficient.

 Converged Network – IP PBXs went from nearly zero to a billion dollar market in 2005 as companies look to run their all of their communications over IP, not because of the neat features that you can add to simple voice and e-mail exchanges, but because the whole things costs less. Skype has led the charge for even cheaper peer-to-peer PBXs and the inexpensive reality of video conferencing over IP, video messaging and other new ways to interact.

 Broadband Wireless – New 3G (EvDO) and fixed broadband (WiMax) networks are turning on across North America and the world. Although the truly disruptive mobile version of WiMax (which will drive service providers nuts as it rivals their “pay” 3G networks with free spectrum use and municipal roll-outs) probably won’t be out in 2006, the broadband adoption will skyrocket this year. Starting with the new Treo 700w, people will enjoy new functionality and utility from handhelds. Mobile TV will be the next killer app in the consumer world (even though TV won’t use the data networks directly) and video messaging on a cell phone will be commonplace in 2006 thanks to the new networks.

 Ad-Supported On-Demand Software Applications – Selling software per seat is dying. It is still there for the big enterprise IT buyers, but, as mentioned, the SMBs are not buying it as much any more. New developments in Web software allow sophisticated applications with user-friendly (or “rich”) GUIs thanks to AJAX and other new tools. The SMB enterprise will love custom developed on-demand applications for business processes like CRM and knowledge management (sophisticated search). But the exciting development in 2006 is Microsoft (“Live”), Google and Yahoo as they all move to the new portal play… great software applications for the masses supported by ads. Social networking apps, communications apps (talk and video), productivity tools, blogging tools and of course, emerging search tools are all being built and paid for by ads.

The big trend that will continue in 2006 is mergers & acquisitions (M&A). From the mega deals like AT&T/SBC to the quick flips of new web 2.0 companies, the IT and telecom worlds will be busy consolidating again. The service provider market is intriguing because they will all start to suffer from identity crises. The wireless companies are making tons of money, while wireline is getting more and more squeezed. The cable companies are doing voice and the telephone companies are doing TV. At the end of 2006, will they all just be “communications” companies? How does that affect regulatory issues? How does that affect company culture? Does the consumer win?

Google is like some huge new black hole in the universe. Its extreme gravity is pulling everyone into the Internet craze again. Companies are getting funded at record paces (if not amounts) again and filling new “hot” categories with twenty competitors before anyone even has a beta release. It is unhealthy to be thinking that old “land grab”, “first-to-market” mantra again, like we did in 1999. But Google itself, THE story of 2005 (apologies to Apple and Skype), is facing a serious challenge in 2006: it will be hard pressed to follow its mantra of “do no evil” as it throws its significant weight around to stomp competition and continue its growth. How long before the Google Maps mash-ups start getting charged royalties? Will its search services become tiered as it competes with Yahoo and MSN? Will it try to win the desktop from Microsoft?

So, cheer up when you think about the days ahead in 2006. It can’t rain for the entire year… can it? The Canucks will get a goalie. The Liberals will not be in charge, at least for a little while. And once my tooth’s fixed, I will be able to smile again. According to the pundits and analysts out there, opportunity abounds in IT to make some serious hay. Now all you have to do is go and sell. Good luck.