The following short post contains some medium-term (2 – 5 years) predictions that are completely contrary to what many well-known market analysts think.

As a result, I’m going to put some weasel-words here first:

• I have absolutely no idea what stock prices for any given company will be, in any time-frame.
• My comments below cover a fundamental issue, and barring specific catalysts, may not have any bearing on share prices anyhow.
• The companies concerned could very well adjust their strategies, making my comments irrelevant.
• If you trade based on anything I say, I bear no responsibility whatsoever!

I’m currently rather bearish on large cap technology companies, over the course of the next few years. The technology industry itself will probably do pretty much as it always does – various people will innovate, new products will come on the market, and there will be winners and losers – as always. This pertains primarily to the dozen or so very large, well known technology companies that are well covered by market analysts.

My thesis is as follows:

• The success of Apple has resulted in virtually all of these companies getting “hardware envy”. Examples include Google, Microsoft, Amazon and likely several others too.
• As a result, they’re all planning on building mobile devices, and it looks like many of them are betting the farm on their success.
• Hardware is a very different business to software and services, and it tends to have much larger capital requirements, and much lower margins. It is somewhat like the auto industry that way.
• Mobile devices in particular tend to be sold via telcos, who have significant power in setting prices. Even Apple is discovering that fact.
• Mobile devices are also heavily regulated. Anybody can assemble a PC and sell it, or build software or sell stuff online. The cellphone industry has to work with government regulators.
• The mobile market is currently divided into high end devices that make most of the margins (i.e. iPhone for now, previously folks like Nokia, and possibly Samsung in the future), and low end devices that have razor-thin margins, and require massive volume. There’s deflationary pressure on both markets as well, driving prices (and profits) downwards.
• Pretty much everybody who wants a cellphone now has one. The new device market is currently focused on the upgrade cycle (people tend to get a new phone every 2-3 years or so, unless they’re me), and on moving people with old-style handsets to smartphones. This has been a high growth industry, but I’m fairly sure that at some point it will grow at the same rate as GDP or population growth.
• There’s really only room for a few winners in this market. Ask RIM or Nokia.

Adding this all up: currently the big tech companies do compete with each other to some extent, but they also have niches of their own that have provided them with relatively high margins. The push into mobile is going to turn all of them into direct competitors, with all that this implies.

There are going to be some interesting side-effects.

Many of these companies have been purchasing wireless frequency bandwidth for years. Amazon has recently got into that game, probably in order to be able to deliver better service to their Kindle devices in a fragmented telco market.

I believe that the push into mobile will force many of these companies to also become cellular service providers, largely in order for them to regain control over their own pricing structures.

This is a bad thing.

There’s a name for a company that is a software publisher, a consumer electronics company and a telco: conglomerate.

That word has had unpleasant connotations since the 70’s. Its awfully hard to run a single successful business. Running several different businesses under the same roof, each with their own (very different) business cycles, margins, capital requirements etc is a mug’s game.

Add in the recent run-up in stock prices, partially due to bullish overflow from Apple, and partially due to the flight to perceived safety, plus the resulting lower profitability from this strategy, and I suspect that the result will be a sustained period of poor results for this sector.