Five Key Technology Trends for 2008

Declining U.S. home values, nervousness surrounding the credit market, a dollar that has lost 25 percent against the euro since 2000, and ever-increasing oil prices are likely to dampen the overall U.S. economy. In turn, most companies will adopt a more cautious approach to major technology investments and will need to find new ways to maximize value in this more challenging environment, says a new report by Booz Allen Hamilton. Here are the five major trends the report outlines:

Trend one: A weak economy and dollar will put a focus on cost-containment, non-U.S. markets, and customers.

Not good for U.S. technology: The economy is softening and the dollar is weakening. In response companies will be forced to create new strategies to manage costs and run cash-positive businesses. The weakened dollar will be especially negative for companies that import products into the United States. On the other hand, U.S. companies that export products can use top-notch inventory and balance sheet strategies to reap the benefits of attractive export opportunities. Tech companies that have built a stronger reliance on non-U.S. markets have proven more profitable, as demonstrated by Hewlett-Packard’s success courtesy of 65 percent of sales from non-U.S. markets, compared with 40 percent overseas sales of the average tech firm.

Maximizing returns on R&D spend will continue to be a challenge. A Booz Allen survey found that there is no significant relationship between higher R&D spending levels and superior market performance. Using customer needs to guide innovation will become particularly critical for high-tech companies. Companies that focus on integrating customer needs here and abroad into the R&D process perform significantly better.

Trend two: Software industry consolidation will ramp up.

Augmenting this year’s M&A frenzy in the business intelligence space, larger software companies such as IBM, SAP, Oracle and Microsoft will continue to snap up smaller companies with high growth potential as a way to combat lagging growth. Also fueling acquisition will be the margin pressure that low-cost competitors are exerting on hardware and software companies. In addition, the ongoing commoditization of both electronic components and software are forcing vendors to find selling points beyond product characteristics. M&A activity will also be ramped up to meet customers’ demands for end-to-end solutions.

Trend three: Common industry standards, openness and collaboration with outside companies are becoming crucial to innovation.

A few decades ago, VHS defeated Betamax. Why? Because VHS’s widely available standard was more important to consumers and product manufacturers than was Betamax’s superior picture quality. The VHS standard fostered the growth of a broad ecosystem of products and services and faster innovation and customer adoption. Blu-ray Disc’s and HD DVD’s war echoes that battle of yesteryear, and that struggle is thus far stalling innovation in this sector; customers and product manufacturers are holding off until there is a clear winner. But if history is any predictor, an explosion of innovation will follow once one side dominates.

Apple, Microsoft and Sun Microsystems have already benefitted from openness and collaboration, reports Booz Allen. Apple understands that creating a standard benefits the creator as well as an expanding network of partners. Apple opened up its iPhone technology: Companies such as Salesforce.com were allowed to modify the iPhone for use with their own software. Microsoft has always understood the importance of such openness; it allows software developers access to its code and thus ensures that a multitude of software options will exist for each new operating system it releases. In a similar vein, Sun Microsystems has opened Sun’s Solaris operating system to the Linux developer environment.

Trend four: Manufacturers will rush to fill customer’s demands for all-in-one solutions.

Customers want easy, simple products that do it all, a trend powerfully illustrated by the success of the iPhone. Thanks to iPhone sales and its halo effect on Apple computers (themselves built on the all-in-one principle), Apple has beaten IBM and Hewlett-Packard for market share, despite the two companies’ greater revenue and profit. Booz Allen says this is a watershed moment and reflects consumers’ reluctance to manage multiple devices. In response, PC manufacturers are rushing to market with all-in-one desktop models, such as the Gateway One, the Dell XPS One, and Sony’s Vaio LT PC/TV. Hewlett-Packard’s TouchSmart PC now has a touch-activated screen similar to the iPhone, and Sansui, Toshiba, and Westinghouse have released flat-panel TVs with built-in DVD players. The all-in-one revolution will likely will gain greater force and extend to most electronics, including handheld computers and mobile communication devices.

Trend five: Mounting pressure will force technology to quit ignoring that “green” thing.

Green issues will increasingly come to the forefront of businesses’ consciousness in 2008 as local, state, and federal governments make the full spectrum of green issues a priority. In 2005, Americans threw away 2.6 million tons of electronic goods containing toxic substances. Numbers like that are drawing greater public scrutiny and some companies are responding before scrutiny—and consequences—become worse. IBM, for example, has developed a greener way to recycle scrap silicon and other waste from its microprocessor wafer manufacturing process.

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However, the hottest environmental issue is decidedly energy efficiency. Legislation to ban the common incandescent bulb and replace it with the new, energy-saving model has already been introduced in Australia, California and the U.S. Congress. Booz Allen predicts it won’t be long before similar scrutiny will fall on power-devouring appliances like computers and televisions, since many drain power 24/7, even while “sleeping.” Regulators will likely push for new TVs and computers that actually turn off when not in use. Computers’ energy-hungry cooling mechanisms will also likely get the stink-eye, and may revive more efficient liquid cooling systems to replace air cooling. It is also possible that Google’s intention to generate its own electricity for its new data centers using wind and solar power may inspire followers.