2009 Predictions

Every year I say “I’m not going to write one of those damned prediction posts” but I end up doing just that. For this year I was thinking over the Christmas break that I don’t have just a list of predictions but also a list of aspirations (but because search engines send a lot of traffic to posts titled “predictions” around this time of year, that’s what I’m calling it.)

2008 was a tumultuous year and it revealed fractures in many of the assumptions that we have built our economy on. We have also seen a generational shift in politics and that has many consequences, some good and some bad, but clearly the big story for 2008 was the economy because that, unlike politics, really does affect everyone in a very direct manner so it’s fitting that we begin there.

1) Consumers re-evaluate the notion of value.

There are 2 major events taking place right now that will impact how consumers value products and services next year, the first being confidence for one’s job security and the second being an inevitable contraction of consumer credit as a result of the financial turmoil but also because important new rules that affect credit card issuers were put into effect a few weeks ago. One third of credit card holders pay only the minimum payments on their balances and fewer than half pay off the balance monthly, so simply put, revolving unsecured credit is a profitable business to be in but the new rules enacted will make it less profitable and as a result financial companies will move away from these businesses.

If people don’t have access to credit we will drift toward being a cash economy and when people have to save in order to buy things they tend to value those goods and services differently. While it may be tempting to suggest this is a flight to quality, I don’t think it’s that alone but rather a flight to utility. This is important for hardware and software companies because their products will have to have a less speculative and hard ROI story as a result.

2) Word of mouth marketing increases in importance.

I would not suggest that WoM marketing has not been important but the fact remains that very few companies do this well and despite all the “conversation marketing” that is going on, it’s hard to point to a repeatable success story as a result. Indeed companies that are downright hostile to critics, e.g. Apple, continue to prosper, which only proves a negative that WoM marketing is useful but not essential.

This could change in 2009 and companies like Zuberance are well positioned to take advantage of the trend, but only if it is evident that their solution works broadly and has demonstrable benefits. It’s early for them but with startup cycles on overdrive in a race to prove their merit, it will be essential for Zuberance to come out swinging in 2009 with clear and compelling case studies.

3) A major American city will be without a daily newspaper.

There are over 30 newspapers for sale in the U.S. right now and few buyers. It is not inconceivable that a major American city will be without a daily newspaper in 2009 and a raft of shutdowns will occur across the newspaper industry. If 2008 was bad for newspapers, 2009 will be devastating.

I take no pleasure in predicting this because the news is essential for a functioning government democracy and we all suffer as a result. Online news and blogs simply can’t fill the void left by a newspaper closure, if for no other reason that most current event bloggers preoccupy themselves with writing about what newspapers are writing and have little investigative or original content creation capabilities themselves.

In Federalist Papers #9 and #10 by Hamilton and Madison respectively, they cite extensively the danger to a republic from factions and partisanship, however it is Madison who identifies a serious source of faction to be the diversity of opinion in political life which leads to dispute over fundamental issues, but rather than advocating narrowing or controlling of diversity Madison warns about homogeneity of opinion and interest being more destructive. A lack of competition in any market leads to a weaker product for consumers and it’s no different in information businesses.

For all of their faults and weaknesses, newspapers perform a valuable function in our society. Having said that, it’s clear that their business models are outdated and ill functioning so with the crumbling of newspapers there will be an opportunity for something to rise in their place. If I were to make one wish for this subject in 2009 it would be that consumers of news more stridently differentiate between news reporting and opinion, placing once again greater value on the former.

4) Advertising as a primary business model for consumer web services will be abandoned.

In 2002 we witnessed a wholesale collapse in the online advertising industry because it was so overvalued through the dot com bubble. Today online advertising is less speculative and certainly not dramatically overvalued, therefore pain in this current economic downturn has been limited. Ask any network and they will tell you that rate cards are probably 20% adjusted, which is still a lot but not at all what we saw in 2002.

The problem is twofold, online advertising is dominated by remnant inventory which is, on a per unit basis, a pretty weak revenue driver and publishers don’t want more remnant inventory because they can’t sell everything they already have.

There is a basic mismatch between what advertisers want and what publishers can deliver, and not to digress but social network advertising is an unmitigated disaster when looked at through the lens of what was promised just a few years ago.

The bottom line is that most web sites and application services don’t generate the level of volume that is required for a sustainable advertising driven business, and similarly they don’t have the capacity to go out and drive their own ad sales which relegates them to what 3rd parties can rep.

Online media sites will be able to take advantage of existing networks, new and emerging, and while their revenue will likely come under pressure they will be able to survive nonetheless. Application services, on the other hand, simply cannot put forward a reasonable strategy that relies on advertising because of volume, user experience issues, and what advertisers want for their brands.

5) Enterprise software nuclear winter

I’ve spent most of my career in enterprise software and if there was ever a time that resembled a nuclear winter it is now. Microsoft, IBM, SAP, and Oracle (referred to as MISO) control these markets and the dollars that are spent in them. For startups the odds are daunting, very few businesses can get to $15m in annual revenue and then the hurdle to get to $30m is 4x as difficult and so on.

Software as a service has not had the dramatic impact in enterprise that has been predicted over the years even with Salesforce.com putting up some great numbers for the year the total software-as-a-service spend as a percentage of overall enterprise software is small. SaaS is probably around $3b a year in total size while the broader enterprise market is easily $180b annually.

I guess it would be incomplete to talk about enterprise and not include a comment about Google. Simply put, they are a non-issue in the enterprise and as the company retrenches into core markets and competencies, it’s inevitable that next year we will hear less about Google in the enterprise.

6) What SMB gives, SMB takes away

Companies large and small have devoted inordinate resources to moving downmarket into SMB and very small businesses. In any economic downturn the hardest hit segments are small business oriented and because these businesses are less technology dependent than large business it is one of the first areas to get cut back in lean times.

The weak holiday sales season exposed most dramatically the weakness in retail, where it is expected that retailers will shut down as many 12,000 stores in 2009, a fraction of overall projected small business closures. An economy is a woven fabric with interdependencies across wide swaths of sectors, which means that small business contraction is a certainty in 2009.

7) Role of government in business

This is not a one time thing but current events are forcing us to consider what role government has in markets and businesses. I really don’t know what the outcome will be here but I would hope that Congress and the President Elect would make it a priority to examine how regulation imposes costs on businesses without the promised benefits as a result.

Sarbanes-Oxley is the poster child for government regulation run amok. Not only did SOX impose significant costs on public companies without any of the promised benefits, but the downstream consequences for businesses aspiring to go public have been enormous. We have seen fewer companies go public post SOX despite generally favorable economic conditions than almost any other period in history and it’s make U.S. based exchanges weaker as a result.

Accounting regulations are similarly damaging American businesses without providing the clarity that is necessary to understand the financial conditions of the companies in question. T.J. Rodgers recently published a scathing critique of GAAP rules, summing up his sentiment with a single statement, “my financial statements are a mystery, even to me.”

It will be very difficult for the new Congress and the new administration to avoid simply throwing more money at the problems but given the magnitude of the crisis we have just experienced I would hope that more of the same and outdated Keynesian reflexes about building roads and bridges would be put aside to deal with the more substantive issues.

8) Generational shifts

Lastly, I’ve been thinking about how generational shifts impact the workplace and now believe that this is not the significant factor that it once was considered. To be sure, the workplace does evolve and adapt to new technology but not because younger employees espouse it but rather because the benefit is self-evident.

Younger workers entering the workforce don’t change the workplace, they adapt to it. Companies like Google and Netflix, which are consistently rated as good workplaces, serve as role models but they continue to be the exception and not the standard bearers.

In 2009 I think it is a safe assumption that younger employees will simply be thankful to have a job, less discriminating about the perks and benefits.