How Big Tech survives recessions and always comes out stronger
As an analyst, I’ve been involved with the tech industry for 40 years now and have lived through at least five recessions during that time. I’ve noticed that many of the tech companies that survive them share some things in common.
The great recession caused by the housing bubble in 2007-2008 was devastating for some industries. Some, like the auto industry, needed bailout money to survive. Tech stocks took some hard hits, but the industry survived and eventually recovered. It was during the same period that I learned a valuable lesson about the resilience of tech companies in periods of economic downturn.
I was working with Intel’s CEO at the time, the late Paul Otellini, and his marketing team. The mood inside Intel was a bit dour, as it was inside most companies. During a meeting a few months into the recession, a few of us asked Otellini how the recession might impact the chip company he led.
His answer was brilliant. He said that recessions come and go, and some are worse than others. While some companies might hunker down and slow down their research and development, Intel had no intention of doing that. Intel, he said, would increase its R&D budget in preparation for a time in the near future when demand for the company’s products would rise again. When that time came, he said, he wanted Intel to be ready with innovative products to meet the needs of its customers.
“Invest more during recessionary times” seems to be a real mantra with many of the tech CEOs I have spoken to. They understand that they can’t stand still. They must be ready when people’s confidence and ability to buy new products rebound.
Given the potential impact on world markets caused by COVID-19 and the recent oil price war, most economists believe that we could be headed for another worldwide recession. While that has not yet been confirmed, the threat is real.
BIG PROBLEMS, BETTER TECHNOLOGY
Tech is already at the forefront of helping us deal with various disruptions from the COVID-19 threat, as people use video conferencing and online collaborative tools to work from home. Many of us stream music, video, and games to help us through our self-imposed quarantines. Colleges and schools are forced to deliver their classes online to keep their students safe and isolated.
Our research firm has observed that demand for laptops with better-quality cameras and audio is starting to pick up steam. As workers and students are forced to work and learn at home, older PCs with poor-quality cameras and audio won’t cut it if they have to interact with customers or teachers online.
Smartphones are our communication lifelines to friends and family when we can’t meet them in person. But this was true even before the coronavirus outbreak.
Although the tech industry is not immune to a recession, it is in a much better place to weather the crisis than the travel industry, for example. In some ways, tech is being used a substitute for travel that’s no longer possible during the public health emergency. We’ll see the need for more technology, not less, to help us get through this challenging time in our history.
BIG TECH COMPANIES ARE ALREADY INVESTING MILLIONS IN AR, VR, AND MIXED REALITY
Given that many tech companies increase their R&D in downtimes, the big question is what new technology current investments will eventually yield. The one consistent answer I get from tech leaders is that it will be transformational technology related to 5G. Many see 5G as the heart of the next decade’s tech boom, along with virtual reality, augmented reality, and mixed reality.
While 5G availability in the U.S. is still limited, most believe that we will see strong 5G networks in place by late 2021 or early 2022. With that in mind, almost all companies in tech are doing extensive research on how 5G might enable new and innovative products in the future. All smartphone makers are prepping new 5G phones and expect to see a very high demand for those devices later this year and especially in 2021.
5G will be critical for autonomous vehicles, smart buildings, and smart cities, and the internet of things. It’ll enable companies like Quibi, which will soon offer short-form videos, to deliver new types of content.
Apple is expected to bring its AR/mixed-reality glasses to market sometime in late 2022 or early 2023. Some tech leaders believe Apple could be the company that makes spatial computing a mass-market technology. Apple is increasing its R&D budgets in this area. It can’t afford not to, given the technology’s potential, even if a recession is in place.
Facebook is working hard on creating virtual meeting rooms in VR environments. If done right, this could represent the next big wave in video conferencing.
Not all tech companies come out stronger after a recession. Some may not even survive. But history shows us that recessions can also serve a purpose. The dot-com bust of 1999-2000, for example, was a tough one for tech, but in the end it weeded out the companies that got funded on business models that didn’t show a clear path to actually making money. From 2002-2008, we saw companies grow more disciplined and only got funded if they showed real promise as moneymakers. During this period, Facebook, Twitter, Uber, and many others took off and started the tech boom that continues even today.
As they watch their businesses and the economy threatened by the coronavirus, tech companies need to consider Paul Otellini’s advice: Invest more in R&D even during a recession, knowing that the market will eventually rebound and new and innovative technologies will drive future demand.