A version of this essay was originally published at Tech.pinions, a website dedicated to informed opinions, insight and perspective on the tech industry.
Growth cycles come in waves, some bigger than others. A wave swells and subsides. Companies that ride these waves risk being caught in calm waters if they do not or cannot catch the next wave. Interestingly, we are watching this play out in real time with many public tech companies. We can run with the “peak” narrative for many different companies. When someone implies that a company has peaked, they are saying that the first growth cycle — that first wave — may be subsiding. While no growth is easy, companies that catch these growth cycle waves benefit from the momentum.
That is what I allude to when I say “easy growth.” For many public companies, the easy growth and the momentum is subsiding. These companies will now enter the phase where growing gets much more difficult.
Look at a number of public companies that are reporting less than stellar profits: Twitter, LinkedIn, Yelp and Google, to name a few. I view what is happening with many companies as a saturation of user bases. The products of these companies simply are not attracting new users at the rate they once were. Perhaps they have reached the maximum number of people for their service? In any case, for many of these companies their user growth has slowed, and it’s showing in their quarterly earnings.
The other observation I make is how the most profitable customer segments are already on the Internet with a smartphone, PC and/or a tablet. Google’s revenue growth for some time had a direct correlation with net new users getting on the Internet each year. While that number is slowing, those coming online now have less disposable income than many present Internet users. With the most profitable Internet population already online, and humans having a limit on the amount of time they have and services they can consume, you can see why the market fundamentals are causing slowing growth for many companies. For these companies, there are a few strategies:
Milk their existing user base
The most common strategy is to focus more on monetizing their existing base than on growth. Since many of these companies offer free services which are supported by advertising, it likely means more ads. Twitter is exploring more ways to incorporate more targeted ads into its timeline. Facebook is pushing the limits of advertising already, but will continue to be aggressive in order to monetize its existing base of customers more efficiently. Google recently started putting ads in the Play Store as a means to increase advertising revenue from existing customers. These are a few examples where companies are trying to milk more value from their existing customer base.
For companies that offer a free service supported by ads, this is a bit tricky. If the adverting is not deeply contextual and relevant, they risk annoying users and driving them to use the service less, or in some cases not at all. I’ve written in depth about why I’m skeptical about the long-term viability of free with ads and, while I question just how far that business model can truly take a company, it is certainly not going away.
But as consumers mature and become more savvy, I do feel there are challenges to this business model, due to the incentives it assumes and the potential impact on customer’s experiences. Time and time again, as markets mature, we see strong evidence of value being placed on consumer experience in ways that did not exist when the market was first maturing.
Monetizing an existing base will be a complex balance for many companies with free-but-ad-supported models. More people use Facebook and Google on a regular basis than any other service, which puts them in a strong position in terms of gathering the most data. Ultimately, both these companies, and many others, will have to walk a fine line so as not to alienate customers due to extreme advertising initiatives.
Mergers and acquisitions
The other telltale sign of a growth cycle slowing is the increase of mergers and acquisitions, something we have clearly seen accelerate over the past few years. Smart companies acquire to get ahead of the slowing momentum, while others may just be waking up to the fact their growth wave is subsiding, and are now looking for complementary assets to add to their revenue lines. Some companies may wait too long, and end up as the ones that get acquired.
Given a number of market fundamentals that are becoming quite clear around this first initial Internet growth cycle, I believe we will see an even more dramatic increase in mergers and acquisitions over the next three to five years. We can speculate all day on who needs to acquire whom, but the general philosophy I like to use is to think through which companies will be stronger together than apart. The other is to look at which has the most cash, or valued/growth stock, to use.
My post last week articulated how difficult it will be for companies to go global. As companies like the ones I mentioned and the plethora of those in other markets like China and India hit their max customer base in their region, going global is a way to grow. However, I maintain that they will need to buy their way in. Take a look at which has the biggest cash hoards: Apple, Google and Microsoft fit the bill. But the ones to watch here, in my opinion, are Google and Microsoft. I believe some big acquisitions and industry consolidation are coming over the next five years.
All of this is driven by the slowing growth cycle for many public companies. There is still a great deal of growth and momentum happening in the private company sector, but these are the types of companies primed to be acquired by the larger public companies which are, or should be, seeking growth in order to catch the next wave, whatever it may be.
There is another wave out there somewhere. It may take a while to arrive, but there are certainly many “mini-waves” taking place within this industry as it continues to more deeply segment. We may not see another wave as big as the Internet and mobile, and while growth is slowing, there is no question there is still a vast sea of opportunity.
Ben Bajarin is a principal analyst at Creative Strategies Inc., an industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Reach him @BenBajarin.
This article originally appeared on Recode.net.