Technology, media and telecom industry outlook
INSIGHT ARTICLE |
Authored by RSM US LLP
Key takeaways from the summer 2020 technology industry outlook
- Collaboration technology is projected to continue its significant growth.
- Tech companies are embracing the work-from-home trend, leading to more geographic distribution of talent.
- The tech sector is moving forward with growth by acquisition, while also investing in innovation and research and development.
- Telecom companies have stepped up during the pandemic, providing the backbone for increased use of collaboration and communication tools.
- The further expansion of 5G networks is a critical element of telecom sector growth.
- Broadcasters are facing challenges due to declines in advertising and few live sporting events, but an increase in ad revenue may be on the horizon, and retransmission fees and digital streaming may present new opportunities.
- Video gaming and esports companies have seen dramatic growth during the pandemic and acquisition activity is expected to increase.
The technology, media and telecom (TMT) sectors are playing a crucial role in keeping people connected as the coronavirus pandemic hobbles the global economy and dramatically changes daily life around the world. Businesses and public entities are especially relying more and more on services provided by tech and telecom companies as large numbers of workers shift to remote work.
While some TMT sectors have been relatively insulated from COVID-19, many areas are continuing to see a ripple effect from the pandemic and the unknown business environment moving forward. For example, the popularity of collaboration technology has surged and telecom companies are buoyed by expanding 5G networks, but broadcasters are facing challenges amid decreased ad revenue.
Early estimates for the conferencing market—which had a pre-COVID-19 CAGR of 13.6%—now project nearly 30% growth per year through 2023.
Disruption from the pandemic will continue across all sectors, and companies are implementing multiple strategies to stay nimble, maintain profitability and identify growth opportunities.
Lightning strikes for the collaboration technology market
The COVID-19 pandemic has been a headwind for most technology companies, but the collaboration technology market has seen significant growth during the last quarter. Before the pandemic, the collaborative market was forecast to grow at a 12.4% compound annual growth rate through 2023, according to the International Data Corporation. As a result of COVID-19, a couple of verticals within the collaborative market are anticipated to grow twice as fast.
For example, early estimates for the conferencing market—which had a pre-COVID-19 CAGR of 13.6%—now project nearly 30% growth per year through 2023. Even the growth rates for the email market, which was previously one of the slowest growing verticals within the collaborative market, is expected to double over the next three years as rates have increased from 4.3% before COVID-19 to high single-digit CAGRs.
Tech goes more remote
Even before COVID-19, large portions of the technology workforce were partially or fully remote. Twitter made waves in May when CEO Jack Dorsey told employees that they would be allowed to work from home indefinitely. Also, during a livestreamed staff meeting in May, Facebook CEO Mark Zuckerberg said that many employees would be able to work from home permanently, The New York Times reported.
“It’s clear that (COVID-19) has changed a lot about our lives, and that certainly includes the way that most of us work,” Zuckerberg said. “Coming out of this period, I expect that remote work is going to be a growing trend as well.” He expects that by the end of this decade, half of Facebook employees will work from home, according to The Times.
MIDDLE MARKET INSIGHT
History has shown that technology industry trends that originated in Silicon Valley often foreshadow what is ahead for many middle market tech companies across North America. The early sentiment about the work-from-home trend during this pandemic is no different, and we anticipate that more middle market technology businesses will provide remote options for a larger portion of their workforce.
As more technology jobs go remote, employees who live across North America will not all be able to command the same pay as those living in Silicon Valley. This is likely a positive trend for middle market technology companies, because many tech workers in Silicon Valley still do not earn enough money to be able to buy a home there. If technology workers desire a lower cost of living and the ability to become a homeowner, they may be able to achieve that in one of the many emerging tech hubs across North America. This could lead to better geographic distribution of top technology talent.
Hardware and semiconductors continue the rebuilding of supply chains
The reach of COVID-19 has been felt across the technology sector. For some technology companies like those within the hardware or semiconductor space, the effect of the pandemic has not just been a demand shock. Like many middle market businesses, their supply chains have been dismantled in relatively short order. Though the supply shock was experienced very quickly for many businesses, it is expected that supply chains will take much longer to rebuild to pre-pandemic levels.
As the restoring of supply chains continues, middle market businesses will be reconsidering any geographic and supplier concentration risks. We anticipate that the ramping down of employees within certain geographies or lines of business in recent months will also allow an opportunity for middle market technology companies to consider how digital transformation can play a larger role in the future of their organization.
COVID-19 drops growth rates on software by 10%
For many software companies, the COVID-19 pandemic has not had a significant impact on how they operate their businesses, but many software companies have been negatively affected as a result of selling into affected segments of the global economy. For example, the IDC and Bloomberg expect the growth in spending on software as a service and on-premise software to drop in 2020 by approximately 10%, when compared to the 2019 growth rates.
Some software verticals, such as online travel, have seen some of the most severe COVID-19 headwinds in recent months and will experience contraction rather than growth this year. The extent of the drop is largely dependent on the length and severity of the economic downturn sparked by the outbreak. There is a COVID-19 silver lining for some software verticals like telehealth, which has seen significant tailwinds as a result of the pandemic.
Leaders within the tech sector continue to pursue a buy and build strategy
Leaders within various technology sectors have been highly acquisitive in the past decade. Google has been the most active in the M&A market over the last 10 years, completing 146 deals. Before COVID-19, there were some signs of cooling with M&A and private company valuations beginning with the WeWork failed initial public offering in 2019. The COVID-19 pandemic has continued this trend into 2020, but big tech companies have not stopped buying companies within hot verticals such as cloud, cybersecurity, data analytics and collaboration software.
According to Pitchbook data, about 30% less M&A deals occurred in the technology industry since March 1, 2020, compared to the same time period in 2019. Some sizable deals still closed after March 1, 2020, but many of those deals had been started well before the COVID-19 pandemic struck. We anticipate that the volume of M&A deals could heat up in the back half of 2020, as big tech companies with access to liquidity go on a shopping spree.
Big technology companies are not just expected to acquire middle market technology companies. They also continue to invest in their own R&D activities. Former Google CEO Eric Schmidt was quoted as saying, “The strongest brands and the strongest companies will recover more quickly,” during a video call with reporters recently. He added that, “the industry leader, if it’s well-managed, tends to emerge stronger a year later.”
Many large technology companies have been doubling down and continuing to invest in innovation. Overall R&D spending at the five biggest U.S. tech companies continued to rise, even in the first months of the pandemic. These companies spent over $28 billion on R&D last quarter, which represented an increase of over 15% from the same quarter last year. While we expect Schmidt’s comment to be true for big tech companies, each technology vertical also has a leader, and we anticipate the same will be true for many of those middle market industry leaders as well.
Telecom provides the backbone and infrastructure to keep America working, educated and entertained during COVID-19 pandemic
As COVID-19 made its way across the United States, shelter-in-place orders sent America’s workforce and student population home, forced to work, collaborate and learn online. American wireless and fixed broadband networks were quickly tested and stepped up, providing the connection backbone to withstand increases in video streaming, virtual private network connections, online gaming, phone calls and collaboration meetings.
In recent investor presentations, Verizon and AT&T reported an increase of nearly 1000% and 400%, respectively, in the use of collaboration tools over their networks. With students, churches, gyms and corporate America all turning on their video cameras on their laptops and mobile devices to stay connected and productive, these wireless networks proved to be up for the challenge of keeping everyone online and connected.
Even Mom was no match for network capacity, with Verizon reporting a peak of more than 800 million calls on Mother’s Day, its annual high traffic day—more than twice the amount as usual.
5G deployment is key to telecom sector growth
The uncertainty surrounding consumer behavior and enterprise vitality has not slowed the deployment and commitment to 5G from any of the leading U.S. wireless providers. All three (AT&T, Verizon and CenturyLink) have confirmed in recent earnings calls that their capital commitments and deployment schedules are on or ahead of schedule for 2020 goals.
The 5G opportunity for each of these carriers is too great to risk falling behind in the race to bring this technology to market and remains a key strategy for this calendar year. According to a Bloomberg analysis of company filings, a projected capital expenditure of $48 billion will be spent on 5G network buildouts this year, a small reduction to 2019 spending for these companies.
AT&T and Verizon, the two largest U.S. carriers, continued laying the groundwork for a broad 5G rollout to come later in 2020 by installing 84,000 (54,000 and 30,000, respectively) route miles of fiber during 2019, according to research from S&P Global. The network of fiber combined with the build-out of additional and upgraded cell sites will bring the full set of capabilities promised by 5G to consumers and enterprises before year-end.
These two companies together hold 63% of the combined 3.6 million miles of fiber in the United States and are positioned very well to deliver this transformative new technology across the country before year-end.
As an example of Verizon’s dedication to bringing 5G-focused solutions to market, it acquired BlueJeans in the midst of the COVID-19 pandemic. BlueJeans is a videoconferencing platform committed to the security and privacy requirements of the financial services, education and health care sectors.
Verizon CEO Hans Vestberg commented, “We’ve added BlueJeans as a recent investment into our Verizon Business Group, where we see a great opportunity, where we now add their capabilities both to our existing distribution, but also for the future of 5G, where we think that our video capability will be extremely important.”
Telecom remains relatively insulated, for the time being, from COVID-19 impacts
In the near term, telecom service providers remain mostly insulated from COVID-19 losses. Service revenue from wired and wireless providers to both consumers and enterprises should experience an increase from the need to remain connected to friends, family and the workplace, as a return to full office capacity will be slow and extend into the remainder of the year across the country.
However, headwinds may be around the corner with the stress of rising unemployment and loss of business revenue, and the expiration of government support. These factors may lead to a number of consumers who can no longer afford expensive unlimited plans, and small and medium-sized businesses that do not survive the extended lockdowns and the resulting loss of revenue.
On the bright side, despite the global pandemic and increasing geopolitical risks, research from Ovum Intelligence points to strong consumer demand for the next generation of wireless devices with 5G capabilities. Expectations for 5G device sales in the United States are expected to grow from nearly 15 million in 2020 to just shy of 100 million in 2023. 5G devices will demand a premium sales price and a premium monthly subscription service which we expect will provide a solid revenue growth opportunity for telecom service providers across the country.
Major advertising revenue headwinds ahead for TV and radio broadcasting
The TV and radio industries grappled with challenges in the first part of this year as the coronavirus pandemic led to the cancellation of live sports and swift declines in advertisers’ marketing budgets. Looking ahead, broadcasters should brace for further declines in ad revenue, even when accounting for possible boosts from auto dealership and political campaign advertisements.
Year-over-year advertising revenue for broadcasters is falling in the second quarter due to tighter marketing budgets and very few live sports events. However, there was a large uptick in local news viewership as COVID-19 gripped the country and Americans sought out crucial information about the pandemic. Daytime television viewership rose 31.3% year-over-year, according to Comscore, and viewership for local and financial news nearly doubled. Record political advertising revenue in the first quarter of 2020 also helped soften the blow from overall declines.
Still, those upticks can only help so much in the face of major companies such as Pepsi and General Motors pulling TV ad commitments and the loss of major sporting events. According to Kagan Media Research, ad agencies expect Q2 revenues to drop below 2009 levels and estimated roughly $1 billion to $1.5 billion of ad commitments to have been canceled for the third quarter.
The postponed 2020 Olympics would have brought in more than $10 billion in advertising revenue with sponsorship deals and promotional events, according to sports market intelligence services, Sportcal. In addition, the cancellation of the NCAA’s March Madness college basketball tournament resulted in $1 billion in lost ad revenue.
A lack of new television content is expected to further affect ad revenue in the near term as new TV production is still on hold because of the pandemic. Sinclair Broadcast Group, for example, has projected a 15% decline in advertising revenue for the year.
There could be some lift in local advertising revenue in the second half of 2020, particularly from car dealerships. U.S. auto sales came to a near halt amid COVID-19, and dealerships will need to be aggressive in advertising in order to turn over lingering inventory. Retransmission agreements—which allow stations to receive fees when their programming is rebroadcast—may also continue to help broadcasters in 2020, as retransmission revenue continues to grow.
Digital ad revenue continues to be a bright spot, as more Americans have cut the cord during the pandemic, and traffic has increased on streaming platforms such as Apple TV, Roku and Chromecast. TV broadcasters should continue to focus on digital streaming agreements with such platforms, and consider developing their own streaming platforms to drive more viewership to their websites.
“People want entertainment; they want to be able to escape and connect, whether times are difficult or joyous.” – Reed Hastings, Netflix CEO, April 21, 2020, First Quarter Earnings Release
Video gaming and esports, already growing in the United States, see major lift during pandemic
A rise in video gaming since pandemic shelter-in-place orders went into effect could be the wave the esports industry has been looking for to become a more widespread trend in the United States.
Until more recently, the growing popularity of esports had been most dramatic in Asian countries. The trend is now spreading more in Europe and North America. Even before COVID-19, video gaming and esports were on the rise; consumer spending in the industry as a percentage of total entertainment spending in the United States increased steadily between 2012 and 2019, according to Bloomberg.
Verizon’s daily video game traffic has more than doubled since Americans began sheltering in place, according to Verizon data from early April, and that video game traffic increased more than video and web browsing. Week over week, Verizon’s gaming traffic continued to grow, according to data from the company later in April.
The esports industry was already growing before the pandemic, exceeding $1 billion in revenue in 2019 with year-over-year growth of 15.7%, according to market data from gaming and esports analytics company Newzoo. Just Fortnite and Dota alone, two popular online games, accumulated more than $35 million in competition prize pools last year. Such lucrative payouts have attracted more gamers to enter the world of competitive video gaming, and the audience eager to watch through streaming platforms is getting bigger as well. As audiences grow, ad revenue and sponsorships follow.
And money is far from the only driver increasing gaming. Live sports have largely been halted because of the pandemic, so gamers and even professional athletes have turned to video game sports such as NBA2K20, Madden NFL 20 and MLB The Show 20 in the meantime. In April, professional NBA players participated in a video game tournament, which aired on ESPN.
More acquisitions expected
With the popularity and increase in valuation of video gaming and esports, analysts expect the industry to attract more private equity, venture capital funding and targeted acquisitions in the near term. Social and mobile gaming company Zynga—which owns FarmVille and Words with Friends, among others—made waves in early June with the news that it will acquire Istanbulbased Peak Games for $1.8 billion. The deal represents the first billion-dollarplus exit for a startup out of Turkey, according to news site TechCrunch.
Within the gaming industry, mobile gaming is expected to be the fastestgrowing segment overall through 2023, according to Newzoo. Mobile game revenue in 2020 is expected to account for nearly half of the $160 billion in global gaming industry revenue.
Also, large video game companies such as Tencent, Activision Blizzard, Sony, Nintendo and Electronic Arts are in a prime position to capitalize on the growing popularity of esports. Hardware sales from Sony and Nintendo are expected to rise significantly during this economic crisis, much like they did during the Great Recession.
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This article was written by Victor Kao, Kurt Shenk, Davis Nordell and originally appeared on 2020-07-20.
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