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Which tech vendors will survive the pandemic-triggered recession?
- 12 June, 2020 07:42
Covid-19 has become part of practically every news story. There’s hardly any precedent for this level of coverage. It has saturated every pore of people’s consciousness and impacted lives in a way that rivals war.
Building a predictive model to forecast how it will all shake out would be next to impossible. No one can say for sure when the pandemic emergency will begin to subside.
No one knows if economic activity will bounce back to pre-pandemic levels once the rate of infections and deaths begins to slow. And no one can say with any certainty whether our jobs, employers, and industries will survive the crunch.
Even if we try to narrow our scope to the technology industry, it’s incredibly hard to predict which vendors will survive this period intact. Which tech firms will bounce back best from the Covid-19 pandemic and its aftermath, and which won’t?
One useful forecasting framework is to look at the factors that contribute to some firms becoming “unemployed.” I’ll borrow concepts that are often applied to individual job seekers in the labor force, but I could just as easily describe factors that frustrate businesses in their constant search for customers, sales, and revenues.
Surviving Covid-19-inflicted structural unemployment
Structural unemployment comes when many people are out of work because their skills fail to match what employers demand.
Often, this happens when changing technologies used by key industries or major employers make many workers’ skills obsolete. The solution is some combination of workforce retraining or, if that’s not feasible, recruiting new personnel who have those skills.
A business can become structurally unemployed when its operating processes become obsolete in the face of technological changes that give a persistent advantage to rivals that have disrupted the competitive arena by embracing new technologies. That’s what “digital transformation” is all about.
When customers prefer the new technological ways of doing business—such as online, mobile, self-service, digital, streaming, AI-driven, etc.—firms that hold fast to older technologies are likely to find themselves structurally unemployed. In other words, they will lose customers, revenues, and market share until they embrace the new tech (if it’s not too late).
Now that brick and mortar and other in-person business models are under severe stress, it’s likely that some firms that have relied on these approaches will not live to see 2021.
In a recent article, Tim O’Reilly depicted a possible future in which some of the business winners would be providers of solutions for sensor-driven quarantining, work-from-home productivity, remote online learning, real-time disease monitoring, and virtual reality for vicariously participating in sporting events.
Considering how the new normal will likely shake out in the post-pandemic group office, my prediction is that vendors of the following items will do well:
- Sanitisation-intensive maintenance items for wiping down and disinfecting all surfaces daily
- Contactless amenities such as touch-free doors, garbage cans, and restroom fixtures
- Office interior design services to rethink meeting rooms, lunchrooms, coffee bars, exercise facilities, and other spaces that traditionally fostered social intimacy
- Prophylactic furnishings such as plexiglass dividers and plastic shields
In terms of the IT industry, the structure of business life will favour vendors of the following solutions:
- Proximity sensing: Embedded in smartphonesand wearables, proximity sensors will feed personal digital assistants with real-time ambient AI on crowd conditions
- Computer vision: Smart cameras will use AI to automate surveillance of crowds and power applications such as occupant counting and wait-time metering, and send alerts when people move too close to each other indoors or out in public
- Location correlation: Mobile apps will rely on AI to correlate map data showing how well people generally are following social distancing guidelines. Contact-tracing apps will identify the extent to which they’ve remained distant from other people who are infected with a virus or, potentially, have any other attribute of interest
- Comprehensive biosensing: The post-pandemic office layout will be studded with biosensors to detect viral pathogens in the air, floors, walls, ceilings, equipment, and every surface. Some organisations will require employees to don wearable biosensors and use mobile-based contact-tracing apps to determine their exposure to disease carriers in the workplace. Infrared thermal imaging and other AI-equipped sensors will enable active surveillance and screening for infected and carrier persons in every facility. AI-powered computer vision will monitor and enforce social distancing guidelines
- Robotic disinfection: We also expect to see the disinfection of group working environments by AI-driven automation. Robotics is key to this emerging practice. Packages of smart biosensors and robotic cleansing platforms will automate the sanitising of commercial spaces prior to allowing workers and customers to reoccupy them. These apps will be an integral component of facilities administrators’ toolkits for managing the sensitive process of rescinding work-from-home orders. They will detect when nonquarantined people might bring infections into otherwise clean spaces and will enable office managers to automatically trigger ingress restrictions, in-office warnings, automated cleansing tactics, and other infrastructure-based responses for preventing or containing an infection
- Autonomous delivery: Drones and other autonomous delivery systems will serve in the front lines in practically every real-world scenario, leveraging AI to navigate, manage and manipulate objects, and interact with humans
- Telepresence: AI-powered telepresence systems will become a standard feature in home and even remote offices requiring full-fidelity conferencing capabilities
- Site exposure surveys: When developing their work-from-home plans, enterprise HR and facilities administrators will use automated site surveys informed by facility-embedded biosensors, augmented reality visualisations, and AI-abetted location intelligence
More broadly, we have to question whether the following tech industry segments stand a chance in the new normal:
- Can event marketing firms survive for long now that their tech customers are learning to go to market through entirely digital approaches?
- Will tech analyst firms whose business models depend on engaging customers through in-person events be able to carry on?
- Will enterprise tech companies who decided to “co-locate” employees in physical proximity rather than remotely from their homes experience an acute drop in worker productivity from having to make a sudden, perhaps permanent, shift back to virtual collaboration?
- Will the vast office parks of some tech vendors sit empty, looming large on the balance sheet as costly overhead, as employees are encouraged to do more of their work from home?
- Will consumer tech companies that achieved broad adoption in part through a brick-and-mortar retail network be able to keep those outlets going as profitable operations if online sales and service have become most customers’ preferred engagement channel?
What’s unclear right now is whether any tech vendors’ in-person business models have been fatally damaged—or are likely to be—by the Covid-19 lockdowns.
Once the current emergency is over, events probably will be rescheduled with biohazard safeguards, workers will return to their companies’ thoroughly sanitised offices, and retail outlets will reopen with new “germ-free” operating practices.
Structurally, we live in a virtual world now. So it’s expected that the vendors that provided the virtual lifelines for us during the pandemic will bounce back earliest and strongest. The FAANG companies (Facebook, Amazon, Apple, Netflix, and Google) will be paramount.
Likewise, any SaaS vendor, such as Oracle, SAP, and Salesforce, will be sitting pretty and poised for runaway growth. Microsoft would also be in anyone’s inner circle of beneficiaries of the trend toward all things virtual, self-service, and cloud.
Our lives are now completely in the cradle they’ve stitched together: online, on-demand, self-service, mobile, social, streaming, virtual, and cloud-centric. Many of these vendors have also made major investments in AI, automation, robotics, edge computing, and the Internet of Things.
These are all key enablers for a world where we won’t need to see, touch, or otherwise interact closely with other human beings. The FAANGs and similar vendors will emerge into a tech marketplace in which vendors that weren’t prepared for this structural dislocation will have succumbed to Covid-19.
On the other hand, customers may have become so worn out by social distancing that in-person social intimacy (brick-and-mortar retail, big splashy physical events, travel for business and pleasure) will come back in vogue, thereby neutralising the structural advantage enjoyed by the FAANGs.
Weathering Covid-19-induced frictional unemployment
Frictional unemployment comes when many out-of-work people spend inordinate amounts of time searching for new jobs. Often, this happens when bottlenecks or inefficiencies in the job marketplace make it difficult for people to find jobs suited to their skills and compensation requirements, even though those positions may be abundant.
As regards businesses, frictional issues pop up when companies have to take more time than normal to secure the necessary cash to stay above water in tough economic conditions.
As the present crisis begins to wane, the tech firms that had healthy cash positions going in, or that currently have ready access to credit and other funding to keep going will bounce back fastest. They can hire, invest in new operating capital, and otherwise grow to meet what’s sure to be a lot of pent-up demand from frustrated customers.
Fortunately for us all, the Covid-19 crisis comes at the end of the longest bull market in history. More to the point, it comes at the end of a long period of full employment. That means many households are sitting on a lot of cash.
Hence, the investment community will not need to search too hard to find enough capital to fund whatever firms have survived the crisis and are ready to get back to work. Once again, the FAANGs and kindred should be in a great position, considering how incredibly cash-rich they already are.
There is a clear warning sign on the horizon for those that depend heavily on revenues from selling digital ads. In a recent Wall Street Journal article, Facebook reported significantly higher usage of its products and services during the Covid-19 crisis.
However, it is also seeing significant declines in digital advertising across the globe. Furthermore, it isn’t monetising many of the services that experienced increased engagement, which boosts their overhead expenses without corresponding top-line growth.
For its part, Google parent Alphabet reports that many of its biggest advertising customers have significantly scaled back their outlays for online ads. This is a foreboding signal for the firm, which relies almost entirely on online advertising and is acutely vulnerable to any structural industry shift away from ad-supported business models.
Hunkering down during Covid-19-triggered cyclical unemployment
Cyclical unemployment comes when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work.
Often, this happens in a recession when credit becomes tight, the stock market has crashed, the money supply contracts suddenly, and other macroeconomic factors gang up to suppress aggregate demand severely over a long period.
Whether a tech company can offset any Covid-19-triggered cyclical downturn depends on how well it weathers the structural and frictional challenges noted above. It also depends on whether it maintains a healthy enough balance sheet (such as by avoiding excessive debt financing) during this emergency and in the immediate aftermath.
Another cyclical recovery factor is whether it can retain enough valuable assets on its balance sheet during the worst of the crisis. If the going gets tough and it drains its cash reserves, it can bounce back effectively if it can sell or leverage key assets in order to raise the cash necessary to stay above water till the cyclical tide buoys it up again.
Once again, the FAANGs and similar firms have clear strengths here as well. The period we’re going through amply demonstrates the value of cloud, digital, streaming, edge, artificial intelligence, and other digital transformation technologies.
Even if ad and subscription revenues dry up during the Covid-19 crisis (a highly unlikely, worst-case scenario), all of these firms have a treasure trove of valuable products and services that they could conceivably liquidate in a pinch. Cash is king, especially in a time when the stock market is severely depressed and consumers are holding their breath, waiting for the all-clear.
You could do worse than bet on the FAANGs to emerge from this nastiness stronger and better positioned to dominate global business for years to come.