Roosevelt Institute | Cornell University

The Boom and Bust of the Technology Sector: When and When not to mess with the big boys

By Marc GetzoffPublished November 3, 2013

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The massive expansion of the technology sector in the developed world has been nothing short of extraordinary. Large technology corporations such as Apple and Microsoft produce products that are commonplace worldwide and have revenues that can compete with the top businesses in the world. What is often most shocking about these technology firms is that they usually start from practically nothing and become so large they face charges of creating monopolies on their respective industries such as Microsoft with computer software.
By Marc Getzoff

The massive expansion of the technology sector in the developed world has been nothing short of extraordinary. Large technology corporations such as Apple and Microsoft produce products that are commonplace worldwide and have revenues that can compete with the top businesses in the world. What is often most shocking about these technology firms is that they usually start from practically nothing and become so large they face charges of creating monopolies on their respective industries such as Microsoft with computer software.

            Not only does technology prove to be a lucrative venture, but there is no shortage of investment in the field, as the technology sector of the stock market has a market capital valued at 144101.5 billion dollars. The sector is still flush with many companies with market capitals valued at only a couple million. Many of these even show strong profits which would suggest that a technology company does not have to become a giant to succeed. A key example is Pointier Telocation Ltd. (PNTR) which shows strong revenue growth and earnings despite a market cap of about 29 million.

But don't let this fool you as many of the companies which are valued in the millions are simply the ones who tried to play with the big boys and failed. Take for example Powerwave Technologies Inc. (PWAVQ) which, once valued at over $20 a share, is now a penny stock as its revenue falls drastically. It seems competing in wireless communication with Fujitsu Limited and Mitsubishi Electric Corporation was not as wise as they thought. The other companies simply overpowered them with larger research and development investment and silenced the competitor. This is not an uncommon story as many companies have found themselves ballooned up with a breakthrough and then falling without anything to hang on to.

            Blackberry is only the most recent example of the fall of these technology boomers as it roared onto the market and captured the entire "smartphone" market starting in the early 2000's. Its stock soared to a peak of over $200 dollars and the pace even beat Apple's from 2007 to 2009. But the boom was not to last as the company failed to meet with the very market they helped create, the smartphone market. While Blackberries may have been the best for their time they faded as the IPhone became more and more popular and as other smartphones, such as the Droid, took their portion of the market. Blackberry's stock is now valued at roughly $8 a share and their revenue has continually been falling.

            The sad truth for the boomers of the technology sector is that they can't keep the market they created. The research and development capital that the major players have is simply too large for companies like Blackberry to compete with. Another problem is the boomers' reliance on one market for their revenues. Blackberry did not seek to expand its reach outside the smartphone market and ended up paying dearly for it as they had a unimodal portfolio. In this age of major corporations who can outspend the new competitors, it may be sad but true to say that the new technology boomers will eventually fade in the wind.

            Now, on the surface seem like a microeconomic problem for each individual business. But looking at a grander picture it becomes much more frightening. Most start up technology firms want to end up being like Apple; instead they are crushed by Apple. And why? Because of patent law. Patent law no longer guarantees the protection for technological development that these start-ups and early boomers specialize in. Thus, they become less and less focused on trying to further new technology, thinking that whatever prosperity they will get won't last. In a sense, the companies that want to become Apple may be too afraid of becoming like Blackberry. The ramifications would be a tremendous disincentive to get in to the technology sector. To fix this, the government must fix the patent law.

Sources:
<http://www.usatoday.com/story/money/business/2013/09/24/blackberry-apple-android-windows-phone/2861691/>.
Krantz, Matt. "BlackBerry Shares Stomped by Smartphones." USA Today. Gannett, 24 Sept. 2013. Web. 20 Oct. 2013.