Technology Sector Chases High Margin Software & Services
As the post-digital era begins, the technology sector is experiencing a shift from low-margin hardware to high-margin software and services, specifically cloud platforms. Microsoft, Google, and Amazon have realized favorable returns on their cloud investments, and considering the utility of the cloud, many new players are investing in this emerging industry.
Microsoft’s cloud computing service, Azure, is second to Amazon in terms of cloud services market share; yet, since 2015, many other technology behemoths have recorded positive trends in cloud-based revenue. Last year, in the fourth quarter alone, Microsoft reported “intelligent cloud” revenue of $9.6 billion with Azure revenue growth of 89 percent. In the same time period, IBM acquired RedHat, the leading provider of open source cloud software, in the third largest technology merger in history. This acquisition was preceded by corporate disinvesting in their hardware supply side since 2004, when they sold their PC group Lenovo.
RedHat’s hybrid cloud engages AI capabilities to bolster business agility, security, and data extraction across multiple public and private clouds in ways that market competitors cannot. Although Amazon and Microsoft’s market capitalization is larger compared to IBM, Gartner predicts that by 2020, 90 percent of organizations will adopt these hybrid infrastructure management platforms. That being said, unexpected economic or technological changes could alter the demand for software and services; however, IBM is not the only company that has disinvested in their hardware supply side to focus on businesses with higher margins.
Written by James Mueller, Edited by Rachel Weissman & Alexander Fleiss