Monday, January 23, 2006

January 2006 Early Indications II: Eight Predictions

I've had some very thoughtful responses to the Macro Issues newsletter, and I'll bring those into an upcoming edition. Because January has already rolled around, however, it's time for some polishing of the crystal ball. I'll repeat the fact, true since the newsletter started in 1997, that I hold no direct financial positions in any of the companies mentioned.

1) The second half of the year will be stronger than the first half in the PC sector

Dell has been running uncharacteristically behind projections and targets, as has Intel. My guess (and it's nothing more than a guess) is that enterprise IT shops are holding off buying PCs until Microsoft ships Vista: why would you want to deploy thousands of boxes in February only to have to upgrade them less than a year later? Microsoft, meanwhile, is ramping up the machine for its most highly publicized and marketed product launch ever.

2) "Services" will become the corporate IT buzzword outside IT

Services-oriented architectures, or SOAs, have soared in recognition in the past 18 months, and vendors are responding: you can see the term on Oracle's and BEA's front web pages, and extensive marketing support is showing up at HP, IBM, and SAP. Two questions should be kept in mind: 1) As one senior architect at a Fortune 50 company told me, "If SOA is the answer, what was the question?" 2) I defy anyone who's touting SOA to name the architecture it's replacing.

3)Google will launch a breakthrough business outside web advertising

The stock price contains lots of speculation that the company will reinvent another market, and downward pressure on that price along with increasing competition will perhaps accelerate the entry into the data center, Internet telephony, network computer, or other adjoining space. To hedge my prediction, the breakthrough new application may still be in public beta as of December 31.

4) HDTV will have collateral effects

After at least two decades of being a commodity item eclipsed in allure and economic power by the PC, the television is returning to primacy as a driving economic force. (To be fair, HDTV is in some ways a hybrid of computing and video display if you consider how much processing power is required for smoothing algorithms, for example, or how important computer memory is for the base technology.) Cable TV coax, for example, can't support as many HD streams into a residence as fiber can. Demand for those streams will somehow benefit fiber-focused companies, like Verizon and SBC/AT&T. Similarly, demand for HD-caliber content will force the Blu-Ray and HD DVD camps to reconcile. Finally, demand for flat-panel HD displays is driving a rapid increase in price-performance relationships, favoring efficient companies like Samsung over rivals with less disciplined supply chains and slower new product development.

5) The relentless reinvention of business markets by the Internet and digitization will continue

Here's a top-of-mind list of businesses that have had their economics radically altered thus far:
-travel agents, hotels, and airlines
-record labels and music distribution
-computer programming
-dating and matchmaking
-computer and network hardware
-video rentals
-government services such as motor vehicle registration, unemployment compensation, or the mails
-electoral politics
-secondary markets like garage sales, auctions, antique dealers, classified ads, and flea markets

That's a lot of change in a decade.

Who might be next? Television is my best guess, given the presence of Apple (iPod video purchases), Microsoft, Google, Yahoo, Cisco (with its newly-purchased set-top box business), and AOL/Time Warner along with the RBOCs: that's a lot of intellectual and financial capital being focused on a mature industry that is becoming more digital every day. Automobile manufacturers and dealerships, health care, and education are further down the list of potential breakthroughs.

6) The quiet march of robot progress will continue

iRobot now has two consumer offerings, a vacuum cleaner and floor-mopper, to go with their four publicly announced military and commercial products; the company sold almost $100 million worth of products last year. Stanford and Carnegie Mellon both enjoyed spectacular success at the 2005 DARPA Grand Challenge: a year after every vehicle in the field failed, some literally crashing and burning, five driverless entries completed a 132-mile off-road path. Countless industrial tasks are accomplished robotically with products from companies including ABB, Epson, Fanuc, and Panasonic. The fact that much of this innovation happens away from public relations firms and tradeshows like CES means that it's hard to get an intuitive feel for what's happening below the radar.

7) Sensors and other location-awareness technologies will make the news for an unexpected consequence

In 12 years, the EZ Pass electronic toll collection system expanded beyond New York, New Jersey, and Pennsylvania to reach from Maine to Virginia and as far west as Illinois. Such systems can facilitate other objectives as well as increasing traffic flow: variable road pricing (as is the case in London and elsewhere), crime-solving, and payment tokens. RFID tags are used by horse breeders (and have been for roughly the past 25 years), wildlife biologists, and supply chain managers. Cell phones can be both bar code readers (in Japan and probably elsewhere) as well as beacons. Sensor communications are becoming standardized, as with the ZigBee protocol for building automation and other tasks. The bottom line is that a system designed to do one thing will be manipulated to do something markedly different, and the side effect will be newsworthy.

Cell phone providers, for example, know how fast traffic is moving because of how fast their subscribers change cells. Will they sell that information to newsradio stations whose helicopters can only cover one road at a time? RFID tags in passports can be read from a far enough distance that the design criteria were recently changed by the US immigration authorities to include a metallic shield. If sensors are embedded in humans for authentication and payment, as has been suggested, will muggers kidnap people rather than demand their wallets? Who has the authority to download OBD II sensor data from automobiles, which can record how fast a vehicle was moving along with other parameters? Can such data be subpoenaed in civil litigation? If drivers don't want governments tracking their movement, it's often harder to pay tolls with coins than use transponders - and even then, the toll booths frequently record license plate numbers to catch evaders. What are the actual costs and benefits of anonymity versus facilitating tracking?

8) The developing world will once again make headlines for innovation and not just cheaper production costs

Brazil is leading the world in some facets of cloning and alternative energy development. China is developing a state-backed Linux distribution. Korea leads the world in broadband deployment. The Microsoft Developers Network has 6.5 million people in India, which is second only to the U.S. What has been called the BRICK cluster - Brazil, Russia, India, China, and Korea - is evolving extremely rapidly, although the political instability of Russia is impeding its progress as investors back away. Look for a major announcement from one of the four remaining countries, potentially in biotech, optics and displays, or networking.