Where Have All The Growth Markets Gone?
26-Jun-01 08:52 ET
[BRIEFING.COM - Robert V. Green] From a big picture perspective, the great growth markets for technology of the past five years seem to have disappeared. From Y2K to telecom to dot.com, everything seems to be shrinking. If you are a growth investor, it is time to change your focus from the technology markets of the past, to those of the future.
PCs Have Flattened
The PC revolution is over. They are now appliances. If investing in refrigerators bores you, PCs might not be much better.
Recently, IDC, the research firm revised their estimate downward to -6.6% growth for worldwide PC demand, from a prior +2.2% forecast.
The real problem of course, is that everyone who really needs a PC already has one. Where there used to be demand, every year, for upgraded PCs, with more power, there is now little reason to upgrade. Upgrades are a pain. Even the applications, particularly the Microsoft productivity applications, are about as good as they need to be. Do you need anything more in Excel?
The ripple effect of the dry-up in the PC market affects every company in the PC value chain. From disk drive makers to distributors, everyone suffers when growth dwindles.
The PC marketplace has finally matured. Value will now accrue to the most efficient companies, with the strongest financial positions, and the best lock on distribution. That still means Microsoft, Intel, and, possibly, but maybe not, Dell, but it doesn't mean growth, and it doesn't mean growth stock valuations.
The Bandwidth Glut
The world has enough bandwidth. At least, for the near term future.
Global Crossing (GX) just announced the completion of their global network. But it comes at a time when the literally dozens of other companies also built networks. Even utilities companies strung fiber next to their electric wires and built fiber networks.
And demand hasn't kept up.
Now, the fiber market has become a consolidation market. The money to be made is picking the companies which will be acquired in the consolidation phase.
It is no surprise that rumors started going around today that Metromedia Fiber Networks (MFNX) would soon be acquired. It is one of the few systems whose customers signed 10 year or more contracts. Metromedia's customers are obliged to pay. And with great customers like Verizon, the contracts have real value.
And now that all of the fiber providers have dropped in value, a consolidation stage is possible.
This situation affects everyone in the value chain of bandwidth. From JDS Uniphase (JDSU) that makes components, to Nortel Networks (NT) that makes equipment to Cisco (CSCO) that makes complete systems, the slowdown of the bandwidth market hurts. JDS Uniphase's revenue warning on June 14 was for revenue of only $600 million in Q4 (their current quarter), a sequential decline, and then just $450 million in Q1. This is a one-third decline from analyst projections of modest growth in Q1.
The tide has turned. And as one of the premier players in the component space, JDSU serves as a proxy for the industry.
Bandwidth isn't a growth market anymore.
The Internet Consumer Bust
Do we even need to discuss the bust of this growth market? We were never that fond of the parade of "dot-coms" as any long time Briefing.com reader knows.
There was some serious growth on the internet for consumer companies for a while. After all, AOL kept adding customers at an amazing pace. But that phase is over. AOL/Time Warner is now a giant of America. You might even see dividends pretty soon.
But AOL isn't a growth stock anymore.
The Last Mile Bottleneck
Raise your hand if you don't have any of the following of in your home:
DSL access
Two-way broadband satellite internet access
Cable-modem internet access
If only we could see everyone raising their hands!
But we can't, because the penetration of broadband access hasn't gotten far enough to allow easy video-conferencing between consumers. Nevertheless, it should be about 93% of you.
Broadband access at home is estimated at only 7% of US households by Arbitron/Edison Media Research in a report issued this month. That is less than 8 million homes.
What is worse, Arbitron also estimates that people spend less time on the internet than they did at this time last year. They also reported that the number of people who view streaming video over the internet has declined! The reason? They didn't like the quality.
Ironically, IDC, the market research firm, issued a report yesterday confirming the Arbitron data, giving a figure of 3.8 million homes for cable-modem broadband access. That report also predicts 57.5 million US homes, which is half of all US households, to have cable modem broadband by 2005.
But IDC also reported, in 1999, that 27 million US homes will have DSL access in three years. That prediction seems nearly impossible today. Is the cable modem prediction in the same category? I think so.
The Wireless World
As if all this weren't enough, the 3G revolution can't seem to get off the ground either. The 3G standard was supposed to be bring high speed data to handsets, for all kinds of applications. But it just doesn't seem any closer than it did 2 years ago.
On top of that, handset sales continue to get weaker. Nokia tells the whole story. At the beginning of the year, they set growth forecasts at 35%. Then in April, they cut forecasts for the year to 20%. Then, two weeks ago, they cut forecasts to 10%. At this rate, you can almost project them to forecast negative growth for the year in August!
The wireless handset industry, since its inception, has been one of those great growth markets that set incredible forecasts, almost unbelievable forecasts, and then beat them every year for nearly ten years. That remarkable growth has come to an end. Even if handset sales pick up, the "hot" aspect of the market is probably gone.
Telecom Competition
With Teligent's filing for Chapter 11 bankruptcy, you can mark the end of the competitive telecom carriers. We won't list them all, but there was plenty of capital, plenty of investor interest, but no real market for the competitive services. Blame the Telecommunications Act of 1996 if you want, or blame devious behavior by the RBOCs, who were forced to share their infrastructure with the upstarts, but the real problem was that the market never really happened.
What Happened?
To paraphrase Peter, Paul, and Mary: Where have all the great growth markets gone?
Gone to surplus, every one.
It is hard to believe, admittedly. But if you view yourself as a technology growth market, it is time to face the music:
PCs have fully matured.
Networking, telecom, and internet markets are entering maturity.
Wireless services have slowed dramatically, and may now be entering the maturity stage.
This leaves only two questions:
What could revive the great technology markets of today?
If they can't be revived, where are the next great technology growth markets?
The Killer Application
What could bring back strong growth to these core technology markets?
They need a great new killer application.
Every technology revolution has a killer application. PCs had the spreadsheet and word processing, then email. The browser drove the buildout of the internet infrastructure. And cell phones, well, talk-anywhere was the killer application.
What the excess bandwidth, overpowered PCs, and ordinary cell phones need is the next killer app.
Two years ago, we, along with everyone else, thought it was going to be on-demand video over an IP network. Maybe even visual phones. But that has never materialized and seems further off now then ever. Without the last mile finalized, there is no market for on-demand pay-for-view video.
So what is it?
The killer application that might revive these growth markets is one which would:
require us all to get new PCs,
flood the existing fiber networks with so much data that more throughput is needed,
add some new feature to a cell-phone that would make us all toss the one we have now in the trash.
Your guess is as good as mine. Send me, Robert V. Green an email, at rvgreen@briefing.com, if you think you know what it is.
Paving the Last Mile
Another savior, one that might burst open the dam, is solving the last mile bottleneck. But what catalyst will do that?
What's Left?
If these great growth markets are over, where is the next one?
I suggest looking at the largest possible secular trends. These are trends that are in process and continuing regardless of economic ups and downs, or market movements.
And there are two big trends on the horizon that merit attention.
The next five years will have growth investment opportunities, as a result of technology, in the following areas:
Healthcare
Finance
The coming healthcare boom is almost inevitable. The baby boomers are aging. They have money. They will spend it on healthcare as they get older. It is a simple premise, but the demographic argument is a strong one.
The financial world is still remarkably undeveloped, from a technology perspective. Checks are processed manually. Insurance companies still employ huge offices filled with claims processing clerks, who enter data from handwritten claims forms. Every time you make a contribution to your 401(k) plan, a clerk at the payroll company and a clerk at investment record keeping company upload the same data that could easily have been transferred electronically. These institutions are ripe for re-engineering through technology.
And the internet is likely to be a key component in both areas.
What companies are going to reap the benefits of applying technology to these industries? I'm not sure yet. It might accrue at the highest level of applications, and not at the infrastructure level, where everything is being driven to a commodity. But growth investors should start thinking about looking in these areas, and not rely solely on waiting for the old growth markets to revive.
There will probably be lots of short term activity in the traditional tech stocks over the next six months, with lots of short term trading opportunities both ways. But as major growth forces, the markets listed above have stalled.
Just like Huck Finn, if you've had enough of these "markets," it might be time to be "lighting out for the territories."
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
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