Financial technology, cloud, mobile data and social networking will drive deals and valuation multiples in technology sector

As a new blogger, site statistics are a source of endless fascination.  They are however useful – my post on TMT valuation multiples seems to have been wildly popular, so I thought it worthwhile to trawl through some other reports to see what commentators were predicting.

PwC‘s technology insight presentation caught my eye.  It is a perceptive commentary on M&A trends in the technology sector, not only identifying hot areas, but also the drivers behind those hot-spots.

The first area identified is financial technology, with ongoing regulatory scrutiny and change within the banking vertical driving demand for integrated software and outsourced platforms. They highlight the Misys acquisition of Sophis as an example of this type of deal.

The second area is cloud services and the various activities within that space such as hosting, virtualisation and security. Reinforcing the theme of my last post, PwC sees relatively high valuation multiples for deals in this segment.

The third area is mobile data, which again is something of a recurring theme for this blog. The sub-segments highlighted include applications, gaming and advertising – all of which I agree with based on the recent deals we have seen.

I am less convinced with their last identified area – that of the public sector. As a result of the cuts in the UK, overall revenues are likely to fall so I would see deal activity being primarily defensive and with somewhat depressed valuations as compared to other segments.

Finishing with a personal view on another hot-spots for the year,  one segment that I think will be very hot is social media, with both IPOs for the large players possible, and also mid-market deal activity as the larger players acquire smaller players for capabilities to integrate into their platforms.

And the killer application for 2011 is …

I’m very excited to have had my first re-tweet, so today’s post develops the thought further.

The retweet was of an economist article which, in contrast to the emerging consensus that traditional telephone calls are dead quotes a recent Ofcom international research report as evidence that whilst fixed line volumes are declining across the world, their decline is more than offset by the volume of mobile calls. The Economist suggests, quoting Nielson and CTIA, that the US is the exception that proves the rule, and that voice is here to stay.

However, the Ofcom research covers a lot more than voice traffic volumes, and to really understand what is going on you need to look at a few more statistics:

  1. First, fixed voice minute volumes are declining in all markets (driven by substitution to mobile and VoIP), and with continued per minute price decline, fixed revenues continue to slide.
  2. In contrast, mobile voice minutes continue to grow, and whilst it isn’t possible to unpick exactly what is going on in every market, it would appear that inbound substitution (from fixed) and usage increases are  currently still more than offsetting outbound substitution to e.g. mobile VoIP.  However, price pressure means that voice revenues are falling, albeit not as precipitously as in fixed voice.
  3. Whilst data connections and usage (both fixed and mobile) are rapidly increasing, the general failure to move from ‘all you can eat’ to usage based tariffs mean that this trend is not yet offsetting voice revenue falls.  However, mobile carriers in particular have woken up to this and are using device introduction (cf the iPad in the UK) to move towards usage based pricing.

This is neatly summarised in this table extracted from the Ofcom report: Global Telecoms Revenue Trends.

So far, nothing earth-shaking.  However, its time to answer the question posed in the title of this post: what is 2011’s killer app?  Of course, it all depends on how you measure ‘killer-ness’ – economic utility, user numbers, revenue growth or something else.  If (for the sake of argument) we use 2010 revenues, then it is very instructive to compare estimated total revenues for Facebook and Twitter with service revenue for traditional voice minutes.

Now, as Facebook and Twitter are not yet public (on that, see http://bit.ly/dPjK4w), sources are somewhat unreliable.  My best crowd-sourced estimates are $1-2 bn for Facebook, and perhaps $50m for Twitter in 2010.  Compare those revenues to the Ofcom global figures for voice revenue in 2009 of c $680 bn  (= dollar equivalent of £511bn (fixed voice + mobile services) – £73bn (mobile data)). Even if you include $25bn for Google, you still end up with the revenues for Google, Facebook and Twitter combined being around 4% of traditional voice revenues.

This leads me to the rather contrarian conclusion that the killer app for 2011 (at least in terms of extracting cash from customers) is old-fashioned voice calling.

Now the problem with statistics is that you can use them to prove anything, so I shared this post in draft with my wife for a common-sense check.  She glazed over in the middle, but then brightened towards the end.  ‘You mean you have spent all this time writing a post that comes to the startling conclusion that people still like talking to one another?’