Top Ten Tech Surprises in 2009: Low Probability, High Consequence Edition

In the tradition of Byron Wien’s Top Ten Surprises, here is the MGI Research Top Ten Tech Surprises for 2009. To make our list, the surprise must have a probability of 10% or less of occurring – a “low probability, high consequence” event. If conventional wisdom is thinking about it, then by definition we strike it from consideration. We look for seismic events that would rock the entire IT industry, forcing most, if not all participants to re-think their strategic planning assumptions.

Huge Recovery in Tech

Buoyed by a massive injection of government spending in healthcare, infrastructure, and energy, and a surprise second half rebound in the financial services sector, the IT industry exits 2009 in remarkably good shape. Despite dire analyst projections after miserable Q4 2008 earnings, tech sector results exceeds expectations and ’09 earnings grow at double-digit rates after significant cost reduction efforts taken in Q1 followed by strong second half sales. Companies delivering upside surprises include Oracle (ORCL) (which derives additional growth from its midyear acquisition of Cerner (CERN)), IBM (IBM), Autodesk (ADSK), Intel (INTC), and Applied Materials (AMAT), among others.

Intel Goes Private

CEO Paul Otellini organizes a management-led buyout of the chip giant after the shares of INTC briefly dip below $10. Unable to invigorate public market interest in the stock, Otellini joins forces with private equity firms Silver Lake Partners, Francisco Partners, and a club of super high net worth individuals in Silicon Valley and takes the company private. Two months after the deal closes, Intel announces the Clean Energy and HealthCare divisions – and commits to material amounts of investment in both sectors.

Steve Ballmer is Ousted as CEO of Microsoft

Faced with a corporate bureaucracy that looks more like IBM circa 1990 than Google (GOOG) 2005, Steve Ballmer proves unable to motivate the troops in 2009. CTO Ray Ozzie proves to be long on vision, but woefully incapable of producing a shipped product in either shrink-wrap or cloud-ready format. The blame falls on CEO Ballmer who is also held accountable for the missteps surrounding Microsoft Vista (MSFT). Corporate IT budgets shrink dramatically, and 15% of Microsoft customers elect to not renew their enterprise license agreements – the first sign of a slow, long-term decline in corporate use of Microsoft products. Frustrated by board chairman Bill Gates’ meddling in the business, Steve Ballmer accedes to institutional pressure to increase the dividend and transitions out of Microsoft by the end of the year.

Google Experiences Severe Setbacks

Amidst great expectations relative to its competition heading into 2009, Google faces a series of surprising setbacks throughout the year. CEO Eric Schmidt, considered a shoo-in for national “technology czar” barely gets the job, and then is confronted with an administration consumed with domestic economic issues. Privacy concerns are splashed across the front pages, and Google, with more than 75% market share in search, bears the brunt of the criticism. Internally, Google faces employee unrest – original Googlers are rested and vested, and largely calling it in. Google employees from the past four years are under water on their options, and increasingly disgruntled with the cutbacks in company perks. Billionaire founders Brin and Page find the scope and size of the management effort to be challenging, particularly without the full-time involvement of CEO Schmidt to shield them from the day-to-day minutiae of operations.

Amazon’s Kindle Book Reader Becomes Platform Device – Enters the Enterprise

Amazon (AMZN) CEO Jeff Bezos announces an array of new capabilities and services associated with the Amazon Kindle. Leveraging the existing strengths of Amazon’s one-click payment system, its user friendly web site, and the open APIs of the Kindle device, Amazon transforms the Kindle into a multi-use platform for music, content, and books. An industrial “hardened” version of the Kindle is launched mid-year, and developers flock to the open source platform. Combined with the surge in usage of Amazon’s Elastic Compute Cloud (EC2), Wall Street re-evaluates Amazon in light of its growing technology driven products and services.

Sun Fails to Find a Buyer

Stymied by its private equity owners KKR, Sun Microsystems (JAVA) fails to find a buyer in 2009. A sale to IBM falls through at the last minute, and then Google fails in an attempt to buy Java and select open-source assets (MySQL among others) and place them into a trust associated with the Mozilla Foundation in an effort to keep them out of the hands of Microsoft. Revenues fall below $12 billion, the company endures three rounds of layoffs, and CEO Schwartz is forced to cut the R&D budget by thirty percent. Another reverse split of the stock is contemplated.

Deep Recession Drives Open Source, Linux

A severe decline in the US and European economy places extreme pressure on IT budgets. IT spending for the year declines 5% compared to 2008, which was re-adjusted lower after disappointing Q4 results of the tech sector. Open Source software is a surprise benefactor of the recession, as companies and government organizations shift to open source solutions in droves. After several small, strategic acquisitions, Long-suffering Novell (NVL) stages an epic comeback as the open source provider of choice across the entire technology stack. Novell emerges as one of the hottest growth companies in tech.

HP and SAP Announce Merger

In a hastily convened conference call, HP CEO Mark Hurd (HPQ) and SAP CEO Henning Kagermann (SAP) announce the merger of HP and SAP. The new company unites two giants and HP hands SAP free reign to push forward its middleware (Netweaver) and SaaS midmarket (BusinessByDesign - BBD) initiatives. SAP gives HP an enterprise applications and services business that finally crowns HP’s enterprise capabilities. Mark Hurd remains CEO as SAP’s CEO Kagermann joins the HP board and co-CEO Leo Apotheker is named COO of HP. The combined SAP-HP entity puts considerable margin pressure on IBM.

AMD Declares Bankruptcy

After a string of bad to worse quarters and unable to find a buyer, AMD (AMD) seeks Chapter 11 bankruptcy. Global chip demand slumps beyond expectations, and Intel gains market share in a fierce price war/race to the bottom with AMD. AMD is left in dire financial straits – Abu Dhabi-based Mubadala Investment Corp’s injection of $622 million fails to strengthen the rapidly weakening balance sheet of AMD. The company loses more than two billion dollars in 2009. Once-rival Motorola (MOT) posts an equally dismal year, and both AMD and Motorola petition the Obama administration for anti-monopoly relief.

Apple Buys Research in Motion

In a move completely out of character, the board of directors of Apple (AAPL) announce the acquisition of Research in Motion (RIMM) for just over $30 billion. After tumbling below $35 per share, RIMM shares had stabilized while revenues remained flat for the first half of the year. With the deal, Apple gets immediate entrée into the enterprise, while Research in Motion gains access to Apple’s innovative design team and network of retail stores. An ailing Steve Jobs announces Apple’s intentions of aggressively pursuing corporate buyers. Dell (DELL) shares fall 10% on the announcement.

Comments

[Treehouse:]

Gutsy story. Some comments:

1. Google might lose ground based on privacy issues. Unless Cuil and the other search engines totally refine their user interface and site ranking methods, Google will remain king.

2. I agree with the open source movement growing, but Linux's share in this is not as strong.

3. Intel going private ? I thought there was going to be a huge resurgence in tech. One or the other, but not both.

Jan 10 03:08 PM

[Treehouse:]

4. Ballmer ousted ? Long overdue. However if Windows 7 can ship by July, then he's safe till summer 2010.

5. Apple buys RIM ? I believe there are cheaper ways to get into RIM's market.

6. Sun fails to find a buyer ? If foreign buyers are excluded, then I agree.

Jan 10 03:11 PM

[Jorell:]

How is AMD going to go out of business? Abui Dhabai is investing in them, new manufacturing plant, patents, new products, if anything they can be bought out, but not out of business.

Jan 10 08:27 PM

[User 188158:]

How about RIM is merged with Dell. Think outside of the box.

Jan 10 11:50 PM

[Dan Jacome:]

what is the bull case for CERN? any "out of character" calls on healthcare in general?

Jan 11 12:01 AM

[donzelion:]

Some more intriguing possibilities:

Yahoo merges with Ebay
Amazon buys New York Times
Taiwan Semiconductor Buys AMD

Jan 11 08:56 AM

[mollytjm:]

um...RIM merging with DELL isn't thinking outside the box... more like inside the casket. Blackberry isn't a low end product and probably doesn't want to be linked with it. you never know, but i doubt it.

Jan 11 10:46 AM

[greenskyrocket:]

How about Apple buys Sony (already huge in CE) good prospects to take Apple S/W tech and graft onto Sony products, and they would have change left over.

Jan 11 11:40 AM

[BeachRider:]

Isn't Cisco trying to enhance their Intel-blade offerings? Doesn't Sun have a substantial knowledge of doing that from their Intel/AMD blade products? I don't know how the Sun/STK disk stuff would sell at Cisco, they don't have any offering in that area (could be good, though). The freeware might be useful to Cisco to augment existing Cisco products for Network monitoring that presume the use of Sun/Solaris. Purchasing Sun can't really be that expensive, anyway.

I would like to see these two get together.

Jan 12 01:55 PM

[Mr tech:]

Amd is safe. In fact, at these price levels, it constitutes a buy.

Jan 12 06:04 PM