November 30, 2020
The lifecycle of modern computing consists of multiple periods of innovation over a relatively short time frame. As its advancements continue to accelerate, another seismic shift is on the horizon. Companies will adapt or be left behind as the quantity of data, the urgency at which it’s transmitted and the devices that produce it change before our eyes, according to Matthew Gerlach, investment manager at Walter Scott.
The first era of major innovation occurred in the 1960s and 1970s, during the shift from mainframes to minicomputers. The second, which took place in the 1980s and 1990s, was the transition to personal computers. And the most recent—only a short time ago—was the adoption of mobile and cloud computing. However, Gerlach says we’ve already begun the next chapter: edge computing.
The Internet of Things (IoT) represents a network of modern-day technology that relies on sensors and software to communicate via the internet.1 Increased adoption of these devices has led to the birth of edge computing, an architecture that enables mass connectivity at new heights, according to Gerlach.
Edge computing essentially aims to accommodate the increased data needs of the latest technological devices (IoT devices). This includes smart phones and self-driving cars—all the way to sensors and robotics used for factory automation. Because these devices produce data of larger quantity and complexity, edge computing, or decentralization of data storage, increases storage computing capabilities by keeping it closer to the end user.2
It does this with local servers, which act as the conduit between the cloud (large centralized data centers) and the end user, according to Gerlach, who says 5G technology is invaluable to this shift.
When it comes to the changing landscape of computing, companies fall into two categories, according to Gerlach.
“The first are those that adapt successfully and continue to thrive in the next computing era, while the second are those that fail to do so and pave the way for new solution providers to gain market share,” he says. “These innovation cycles typically express themselves as S curves. They are slow to adopt, in fact slower than people originally anticipate. But, once they get traction, they are almost impossible to stop.”
For those companies that do choose to adapt, Gerlach says their management teams are “having two parallel conversations of innovation at once.” The first concerns how to successfully adapt platforms they’ve already developed, while the other attempts to identify what types of products and strategies will be important for the era to come. That next era will revolve around the increasing complexity and urgency of data, according to Gerlach.
For now, traditional “edge” devices, like smartphones, security cameras and laptops account for most of the growth in data storage and transmission. However, a new wave of devices calls for further innovation in how data is handled, says Gerlach. Some of these devices include self-driving cars, collaborative robots and smart elevators. Newly created IoT devices operate from sensors, software and hardware that utilize real world data points, therefore producing data of a much higher complexity (e.g. temperature, pressure, velocity, acceleration and location).
“In the early days of data creation, it was about long strings of text and numbers. In today’s world of social media, that includes billions, if not trillions, of unique images, audio and even video,” he says.
Not only is complexity increasing, but data urgency is also: “If you consider the decision-making requirements of a connected vehicle, a connected factory, or remote patient monitoring system, the risk and cost of failure is that much greater,” he says.
Because failure can literally mean life or death, cyber security has been another beneficiary of data advancement. Companies that play a role in the facilitation, protection, and transmission of data will be at the forefront of the transition. But the cloud is not enough to fulfil the vision of mass connectivity between a wide range of industries, hence the need for edge computing, according to Gerlach.
“In practice, this means a dense network of cell towers, base stations, and microdata centers—all underpinned by 5G—which pushes storage computing and analytics functions away from the cloud and closer to the edge,” he says. “We believe the cloud, in turn, becomes a warehouse only for the most valuable types of data and a place where we will see artificial intelligence (AI) being deployed at scale.”
This may sound futuristic, but the transition is very real and will determine the fate of many technology companies, according to Gerlach.
Spaces to watch
- Gerlach believes four types of companies are particularly well positioned to benefit:
- Innovators of machine vision and sensing hardware
- Semiconductor/analog chip manufacturers
- Cyber security
Regarding the first, he says, the Walter Scott research team is watching two manufacturing companies in the space: one Japanese and one American. Both are heavily involved in factory automation but have also found other sales channels for their products, including logistics automation, retail automation and life science automation, according to Gerlach.
“About 70% of the Japanese company’s products are the first of their kind, while the American company spends about 15-16% of sales on research and development each year. So, we think both companies are well positioned to benefit from these ongoing trends,” he says.
The second area of interest, analog chip manufacturing, is dominated by one key American player, according to Gerlach. The company has twice the market share of its next closest competitor.3 Analog chips are essential for the next era of computing because they convert real world signals of the analog world to digital signals, which can be understood by edge devices, he says.
Lately, the top player has seen wide adoption of its chips: “This includes everything from aerospace and defense, to automotive—where it benefits particularly from electric vehicles—and other markets such as retail appliances, factory automation and much more,” he says. “The company has invested meaningfully in several direct-to-customer initiatives as it seeks to leverage its unparalleled scale to gain market share while improving profitability and return on invested capital.”
AI, the third space to watch, has forced many of the Big Tech companies to design their own chips as they realize the strategic importance of this technology long term. The competition in this space has also bred a number of exceptionally well-capitalized new entrants.
“At such an early stage of AI development and with such intense competition, it’s really hard to tell who is going to be a winner. But we believe there are a few likely contenders.”
“We think the future is as exciting as ever,” Gerlach says. “This next era of cloud computing not only has meaningful implications for business—but potentially for other areas, including geopolitics, as well as policy and regulation formation, and even the environment,” he concludes.
1 Wired: What is the Internet of Things? Wired explains. February 16, 2018.
2 Network world: What is edge computing and why it matters. November 13, 2019.
3 Top ten ranking of analog IC vendors by 2019 revenue ($millions). IC Insights. June 1, 2020.
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