Is the IT Revolution Over? An Asset Pricing View

I develop a method that structures financial market data to forecast economic outcomes. I use it to study the IT sector’s transition to its long-run share in the US economy. The method uses a model which links economy-wide growth with IT’s market valuation to match transition data on macroeconomic quantities, the sector’s life cycle patterns, and, importantly, market valuation ratios. My central estimates indicate that the revolution ends between 2028 and 2034 and that future average labor productivity growth will fall to 1.7 percent from the 2.7 recorded over 1974–2015. I show empirically the IT sector’s price-dividend ratio univariately explains over half of the variation in future productivity growth.

By Colin Ward.  Speculative, as they say!  Still, interesting to see someone go through the exercise.  Via the excellent Kevin Lewis.

Comments

Software is eating the world as they say in the Valley. Every company will transition into being a tech company and those whose cultures don't mesh well with this reality will find themselves creatively destroyed. The list of traditionally non-tech companies that call themselves tech companies keeps getting longer from Goldman Sachs, General Electric, and Walmart to Ford Motor company. Tech is no longer a cost center but a core competency in the 21st century. Innovate or be extinct.

'Every company will transition into being a tech company'

Yep, that will certainly describe road building, from bulldozering to pouring concrete.

Or possibly, the Romans were an example of how we simply did not realize they were a tech company society when building things like the Pantheon. Probably just missed the PR opportunity now being employed by American companies.

Neither taxi driving nor delivering books are particularly tech-like but there are ways to create tech giants out of these mundane tasks. The same could be done with road building or any infrastructure.

'but there are ways to create tech giants out of these mundane tasks'

Pretty much involving PR. Hard as it might be to imagine, people were calling taxis using their cell phone in 2004 too. What Uber did, mainly, was breaking the law as a business model - whether for the greater good is another question entirely.

Totally agree with "What Uber did, mainly, was breaking the law as a business model". They disrupted a brittle market that was overregulated by local governments who could not keep up with changes in reality.

Yep, that's at least half their value, but it also just works a hell of a lot better than the taxis.

> Yep, that will certainly describe road building, from bulldozering to pouring concrete.

I guess you're trying to be sarcastic, but pouring concrete certainly involves high tech.

Once you mix it, the clock starts ticking. Routing trucks through traffic to the right destinations at the right times can involve sophisticated logistics. For example, putting GPS trackers on all your trucks seems obvious now, but at one time it was an innovation that let some companies outcompete others.

Brian's point is spot-on.

As Brian says above...

Given the vast and obvious areas for introduction of, yes, more IT, this just seems way premature.

Basically all my tech devices could/should run better and there are so many areas in which tech would be useful but barely exists.

Why doesn't anyone talk about how "Big Data" is just hype? Oh... Because it turned out to be super powerful and useful to get vast amounts of data...

Almost every company from your boutique law firm to large Fortune 500 companies are contracting with IT companies to run most of their applications on third party servers or cloud that automate everything from HR and payroll to operations and onboarding. I contract with one of these IT companies, like ServiceNow, and they handle the rest. The old days of manually trying to find which software or platform to use to carry out a particular function or service in one of my departments is over. The IT provider you contract with takes care of all that.

But now you have to trust your IT provider. I suspect that more tech knowledge will have to built in-house and baked into the company's DNA because every company's most valuable property is its intellectual property containing at the very least customer data and product designs. This is not something you want stored in server in Shanghai or Bangalore. Here's a recent breach at one of the world's largest IT outsourcing company, who contracts with a third of the Fortune 500:

https://krebsonsecurity.com/2019/04/experts-breach-at-it-outsourcing-giant-wipro/

I read a boring article yesterday about 5G networks are going online around the world. A watershed event, the 5G deployment, was dealt with the same interest you put on a pencil factory.

5G solves the last mile problem for broadband internet connections: 1 ms latency, I Gbit second. 5G is pervasive cheap broadband internet. It's the same the satellite internet companies offer, but......for real and today. I have now 4G home internet, I look forward to when the provider in my town deploys the 5G one later this year.

A week ago it was considered that the expansion of Amazon to emerging markets was a sure thing, this week is "calm down boys". Amazon may get there by 5G, not satellite =)

In December, GE announced that it would spin off its software division, GE Digital. GE's stock immediately shot up 13%. Some may remember back in 2015 GE making a big deal about its foray into tech for industrial uses, even proclaiming that GE would be a tech company. It failed - much to my disappointment. Are tech (software) and industrial as a single company incompatible? Here's the story in the NYT from December with an explanation of why GE Digital failed at GE and what GE Digital hopes to become as a stand alone tech company: https://www.nytimes.com/2018/12/13/business/ge-digital-spinoff.html

I am not completely opposed to this. Every technology has a run where it is hot, and then a longer life as it becomes part of the world. The age of steam is over .. but nuclear power plants are steam engines.

IT itself is an archaic term, and something that brings to mind accounting on mainframes more than Netflix.

So sure, by 2030 it might be over, but also everywhere. And there will certainly still be a cutting edge.

Presumably "IT" also includes the $135 billion computer games industry?

Fun with categories.

I'm not sure I understand this. The valuations of tech companies, which presumably represent the value of it's output to the economy, are a predictor of productivity growth due to tech implementation.

In the last 6 months I'm seeing a change in the tech business. The prices of their services are increasing. That tells me that indirect funding via advertising, company valuation increases are not keeping up with the costs.

I came to a realization last year. In my endeavor, it takes 10 years of training and experience to be qualified to take on any project within the scope of your experience. I've talked to mechanical engineers who said the same thing. Before that you can be productive within a narrow range, but experience gives you a broad knowledge of what works and what doesn't, how to approach problems, and most importantly, get paid for your work.

I have been working on a development project, coming in contact with developers. Someone with 5 years experience is a veteran. I get that coding requires a certain flexibility of mind and a young mind is quicker. I see that akin to a young back enabling someone to move quicker. It explained to me why my experience with corporate IT systems and the software has been almost universally like root canals without anaesthetics.

It takes Google 6 months of bureaucratic effort to accept a new programming language into their systems. The life cycle of a programming paradigm is less than that unless it is extremely successful.

I can see IT growing to the point that it is incapable of moving. Extremely large and expensive systems requiring massive amounts of expensive people time to keep the damn things running. These systems are critical, inflexible and more and more intrusive and controlling of more and more of the business operations. The business works as designed, which is never a good idea.

"Excellent" is clearly Kevin Lewis's honorific. Dame Joan Sutherland, Excellent Kevin Lewis

The future growth area is robotics. In particular the interface between the chip and the physical world. That has hardly got started yet...

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