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Virtuous Cycle in Tech

Digital transformation has sparked a virtuous cycle within technology, whereby several key markets appear to be increasingly interlinked. Ecommerce, digital advertising, payments, and enterprise software represent more than $9 trillion in annual spend and are growing at a 10%+ CAGR. Ecommerce has grown at ~20%+ over the last decade to nearly $5.8 trillion globally, representing more than 20% of total retail sales, and led the way as Amazon showed the world how physical goods could be delivered profitably at scale. Merchants have since learned this convenience comes at a cost, as Amazon’s platform provides little, if any, means to differentiate one’s product. This has prompted many brands to take back control of their digital presence, sparking a cascading cycle of reinvestment into each of the other segments mentioned here. Within ecommerce, Shopify is the primary company to keep an eye on, as it provides key elements of the ecommerce stack allowing merchants to diversify away from Amazon. Digital advertising has grown at an ~18%+ CAGR over the last decade to nearly $550 billion and is close to 65% of total advertising spend. While Google and Facebook have emerged as the dominant pure plays, Apple, Amazon, and Microsoft are angling for a greater share of the market. The volume of the major card networks has grown at +10% over the last decade to more than $20 trillion of spending volume. With digital now approaching close to one-third of payment volumes and growing 3-4x non-digital, the market could be nearing a key inflection point. While Visa and Mastercard remain the clear platform plays, it remains a key area of technological innovation. Enterprise software has grown at an 8% CAGR over the last decade to $785 billion in annual spend. Despite being an already attractive market, it has actually lagged the others as enterprise customers have resisted upgrading decades-old, back-office systems. The growing disparity between modern front-end systems (driven largely by ecommerce) and antiquated back-end systems, coupled with much more affordable cloud-based solutions, is pushing the enterprise software market to a key inflection point. Artificial intelligence (AI) will only add fuel to the digital transformation fire. AI holds the promise to optimize huge areas within an enterprise, but it’s pretty clear the more digital, the better.