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Big Tech Is Going Down

Short the big-cap tech basket!

Jenny Zhang/Shutterstock

Current big market cap technology companies are under siege. IBM just reported its seventh straight quarter of declining sales. And I believe that the value of big cap technology companies as a group will substantially decline in the coming years. The changes we are seeing in the enterprise technology space are too disruptive on many, many levels for these companies as a group to overcome.

Of course these “Big Tech” companies have industry leadership positions, broad and deep penetration of key corporate accounts, formidable selling motions and tons of cash. And with an improving IT buying climate, they may exceed expectations for a few quarters. But the pace and nature of change in the core underlying technologies, product development, selling models and buying models will undermine the historical Big Tech advantages just as it has in past cycles. It may not happen this year, but it will happen sooner than most expect.

The Big Tech incumbents

The history of largest technology companies ranked by market cap suggests volatility at the top. Only five of the 10 largest tech companies by market cap today were on the list in 2000. Just last year, HP and Cisco dropped off the list. In contrast, Amazon recently entered the list, and climbed to No. 5 — it now has a market cap greater than HP and Cisco combined.

Stock prices and underlying value are sometimes disconnected, but look at this Big Tech basket: IBM, HP, Cisco, EMC, Intel, Microsoft and Oracle have a combined market cap, in January 2014, of $1 trillion, up almost $100 billion in the past two years. But in that period, their combined revenues declined $818 million (-0.2 percent), and profits increased only $138 million (+0.2 percent).

On a positive note, the Big Tech basket has $218 billion of cash, hundreds of thousands of paying customers, and respected and established brands. In addition, according to a recent Morgan Stanley CIO survey, corporate IT spending grew 4.6 percent in 2013 and is expected to grow 4.5 percent in 2014.

One approach to obtaining new revenue and profit sources is through acquisition. In the venture community, we have seen Big Tech companies successfully buy our smaller companies and dramatically grow their revenue and profits. EMC and Oracle, in particular, have been successful with this model, and it is a source of competitive advantage for them. But post-merger integrations often fail. And between a robust IPO and M&A market, acquisition prices are significantly higher today, raising the risk of expensive failed deals.

Many Big Tech companies have allowed their innovation muscle to deteriorate. So they must acquire, not only for growth, but for bringing in talent and technologies to help them meet customer needs and expectations.

These factors lead to a series of daunting questions:

  • Have Big Tech companies lost touch with customer needs?
  • Can Big Tech companies translate customer needs into compelling products?
  • Can Big Tech overcome legacy (i.e., profitable) products, business models and buying strategies in time to embrace new technologies and methods and win new product/market fit battles?

The pace and nature of change

The nature of emerging technologies and pace of their adoption is foreboding. Mobile-first design, cloud and services infrastructure, and SAAS-oriented applications that are updated on monthly or less upgrade cycles, are becoming the norm. Younger companies have been listening to customers, embracing innovation and developing compelling solutions in these areas.

More importantly, customers are increasingly discovering and buying new solutions in a “bottoms-up” way. These solutions span from infrastructure via Amazon Web Services and others, SAAS applications like or Concur, to mobile-first productivity apps like Dropbox and Smartsheet. The bottoms-up buying model undermines the account control and selling motion advantages of traditional Big Tech companies.

New companies also sell and price their products differently. Most products, even infrastructure products, are now sold in some form of subscription. Those subscriptions can easily evolve from an initial free trial or freemium model based on customer usage or desire for key features. And the “salesforce” is often word of mouth, online marketing, and at most, an inside sales organization. The best new companies are highly analytical about how every aspect of customer cultivation and nurturing works, and deploy specific campaigns and programs at key trigger points to win or upsell a customer.

These changes in selling, pricing and customer management are hard for incumbents to embrace. Think about the changes in sales organizations required for even just sales compensation when you move to subscription pricing. A related challenge is how channels and business development relationships need to be adapted. And from a CEO or CFO perspective, revenue recognition and cash-flow patterns are materially impacted by shifting from the traditional “license plus maintenance” model to a “subscription and renewal” model.

Finally, the pace of change is truly quickening. I recently spoke with the CEO of a $10 billion market cap technology company, and he reported that he has never seen an era where change was happening more rapidly. The good news is that this CEO remains close enough to his customers and market so he sees the rapid change, and is mobilizing his organization to embrace it. It is just much harder to listen to the market and react nimbly when you are a $50-billion+ market-cap company with 25,000 or more employees.

I’m not prepared to suggest who among the Big Tech basket will be winners and losers in the coming years. I actually believe each one of the companies in this basket could emerge as a winner or a loser. Each one has many strengths and highly talented people on their teams. And, as mentioned earlier, the economic and IT buying trends are a tailwind for growth, and create the potential to exceed expectations in the near-term.

But as a basket of companies and investment opportunities, I am a doubter in aggregate future value creation for current Big Tech companies. In the face of dramatic technological and business model change, not to mention historical precedent, time is not likely to be kind to the basket. Perhaps there is an ETF already constructed that you could short if you agree!

Matt McIlwain is a managing director at Madrona Venture Group, where he invests in early-stage technology companies. Follow him @mattmcilwain.

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