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Growing technology sector bubble and the demise of a mobile phone icon

May 29th, 2015
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Was yesterday’s announcement that Avago Technologies Ltd had purchased tech company Broadcom for a record $37 billion another signal that the marketplace is thriving or is it another step towards a market bubble ready to burst?

Shareholders at Avago and Broadcom are likely to be happy, as are their lawyers and investment bankers, at least in the short-term.

Cheers for Tech Market Growth But Also Concerns
However, the market may not be as sanguine about this development. In a May 28, 2015 Bloomberg Business News report, Alex Gauna, an analyst at JMP Securities in San Francisco said about the largest ever acquisition of a technology company: “I’ve got my misgivings, this feels very frothy for me….This seems like a stretch”.

While the tech industry crash of the early 1990s is still a vivid memory for many, the fear of being left behind as new technologies develop and consumer demands change is propelling a race to get ahead of the competition.

Is this fear blinding us to signals telling us that the tech industry’s trajectory is leading to a sector collapse and possible spillover into the larger economy? In the pre-2009 Great Recession days, many big banks and investment firms rushed lemming like over the financial cliff to cash in on high-risk mortgage securities. This blind rush for profits took them down along with the world economy.

We are collectively still processing the lessons learned from the Great Recession of 2009. One of them was that we are all subject to delusional group think. Warning bells were ringing loudly that a major financial collapse was imminent, but they were ignored. Many in the financial sector knew the collateralized debt obligations (CDOs) and credit-default swaps (CDSs) were extremely unstable, but they were making lots of money and investors wanted in on the action. Bankers and investors deluded themselves in the belief that the big banks couldn’t fail and the markets would self correct before collapsing. We know how that story ended.

As the Great Recession of 2009 has changed the world, so has rapidly changing technology and consumer expectations. Probably the most dramatic example has been the mobile smart phone market. In the mid-2000s, the dominant players were Nokia, Motorola and Blackberry. Today, the list includes Apple, Samsung, LG, HTC, Sony and Nexus (Google & Motorola) and several fast-growing Chinese companies.

The Agonizing Decent of a Global Icon
Why did those established mobile telephone giants lose to the market upstarts? The story of how one of those bright stars quickly lost its luster is told in a recently released book, Losing The Signal: The Untold Story Behind the Extraordinary Rise and Spectacular Fall of Blackberry by Jacquie McNish and Sean Silcoff of the Globe and Mail newspaper in Toronto, Canada.

I highly recommend this book to anyone wanting to gain a better understanding of how the leadership of a good company became complacent and failed to understand changing consumer needs and technologies in the digital age and now runs the risk of being ruthlessly set aside like the iconic Kodak company. As a former but happy owner of a Blackberry smart phone, I write this comment with a feeling of sadness over the turn of events leading to the demise of a good company.

What Went Wrong
The leadership of Research In Motion (RIM), the makers of the Blackberry, was caught completely flatfooted by the release of Apple’s IPhone in 2007. They not only did not understand how the IPhone was able to download music, videos and maps, they did not know that ATT, one of their major customers, would sign a multi-year contract with Apple to sell IPhones.

Even sitting at the top of the mobile phone marketplace, RIM seemed to be wearing blinders. They missed the business implications of the tectonic shift underway in consumer needs and expectations, and had no R&D efforts to make products that would attract both their core business customers and other audiences experiencing this wave of change. RIM’s response to the IPhone, the Storm, was rushed and ultimately failed, further eroding the brand in the eyes of the consumer. RIM’s competitive intelligence gathering appears to have focused only on existing competitors, and not on potential competitors.

The story of the RIM’s collapse is also a story about Apple’s success. Apple listened to the signals coming from consumers and technology developments. They innovated to create products that fit their brand image of high quality and aesthetic beauty. They unified the wildly popular ITunes, video content and apps into the IPhone raising the bar to new levels for existing and potential mobile phone producers.

The Blackberry saga is a useful case study for anyone trying to understand the dynamics and challenges of doing business in the early 21st Century. I look forward to following developments at Blackberry and the mobile phone sector, as well as the impact of the Avago-Broadcom deal on the technology sector. At the moment, the signals are mixed.

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