This article originally appeared in the January 2016 issue of 425 Business.
Words by Jake Bullinger, Marjorie Clark, and Joanna Kresge
2015 was a wild year on the Eastside. T-Mobile passed Sprint in subscriber count. Augmented reality, cloud computing, and a new operating system made people excited about Microsoft again. Expedia announced it was bolting for Seattle. Home prices soared, China’s president visited, and construction projects were omnipresent.
All these signal that the area economy is dynamic and booming, so 2016 promises to be another busy year. Here’s what to expect in the next 12 months.
425 Business Predicts: Amazon will widen its lead in enterprise cloud computing
Late last year, Microsoft CEO Satya Nadella said that cloud infrastructure is a “Seattle contest,” implying that Microsoft and Amazon were the only major players in the field. He was correct in saying the two companies are leaders, but he might have been better off characterizing the race as Amazon vs. Everyone Else.
The latest figures from Synergy Research show that Amazon Web Services accounts for nearly 30 percent of the cloud infrastructure market. Microsoft’s Azure comes in second place, at 10 percent, followed by IBM at 7 percent. Cloud experts note that Microsoft is a level above Google and IBM, but don’t expect it to gain any ground on Amazon in 2016.
Microsoft, with its renewed cloud focus under Nadella, the former leader of Azure, is wheeling and dealing. In the last few months of 2015, it announced collaborations with CRM firm Salesforce, itself a major cloud player, and Red Hat, maker of the Linux operating system, that will boost Azure’s profile. But according to Larry Carvalho, cloud analyst with researcher International Data Corporation, those moves aren’t significant enough to signal a fast overtaking of Amazon Web Services, which is built for fast tweaks.
“(Amazon) started with infrastructure services, and they kept everything as components they could build on. They had a computing component, a storage component, and that’s what they started with,” Carvalho said. This makes it easy for Amazon to introduce new features using fewer employees, as most of the building blocks are already in place. Microsoft, Carvalho said, can’t match Amazon’s pace.
But there is one thing working in Microsoft’s favor: the combination of apps with Azure. By, for example, expanding its cloud-based Office 365 suite to device makers outside the Windows family (namely Apple), Microsoft is setting itself up for a larger, more interconnected cloud ecosystem. Microsoft also offers private cloud systems, but that’s something Carvalho expects Amazon to roll out in the coming year, too. – JB
425 Business predicts: T-Mobile finally will be purchased
AT&T, Sprint, Iliad. All three tried to buy T-Mobile US from its German parent company, Deutsche Telekom, in the past four years, and all three deals fell through. T-Mobile perpetually remains for sale, and 2016 is the year a deal will finally get done.
Who exactly will make that purchase? Likely contenders include Dish Network and Comcast, two television-subscription services who have reportedly been in talks with Deutsche Telekom. Dish has a history of waffling on deals — AT&T, Sprint, and DirecTV have all been targets — so expect to hear Comcast’s name come up this year.
While T-Mobile has been gobbling subscribers — 2.3 million in the latest quarter — and turning the occasional profitable quarter, it needs to focus on spectrum acquisition and making inroads in connected devices such as cars and wearables that could benefit from wireless networks.
“That’s where carriers believe the next wave of growth is going to come from, and as T-Mobile’s phone adds start to slow down, you would want to see them making strides in that area as well,” said Bill Menezes, a wireless analyst with Gartner.
It’s this trend that makes T-Mobile a likely target in 2016. A buyer like Dish or Comcast would help T-Mobile add spectrum capacity, while T-Mobile can help its new parent get TV on mobile devices.
T-Mobile’s increasingly profitable quarters are another reason a deal could get done in 2016. CEO John Legere’s “Un-carrier” moves have nabbed numerous subscribers, but it also has historically sacrificed profit. But more stable quarters show buyers that Legere’s plan has some legs. With the help of a cash-heavy parent, Legere’s work won’t get undercut by bigger rivals AT&T and Verizon, both of which have far more cash to spend on wireless spectrum than does T-Mobile. – JB
425 Business predicts: The Trans-Pacific Partnership will pass, and it’ll help Washington’s economy
The final year of Barack Obama’s presidency will likely see the fate of his signature trade deal, the Trans-Pacific Partnership, decided, and there’s plenty at stake for Washington companies.
The TPP was concocted in secret by representatives of the U.S., Canada, Australia, Japan, and eight other Pacific Rim nations. The agreement is meant to reduce international trade barriers while implementing modern labor, environmental, and commerce guidelines. It was made public in late 2015 and awaits Congressional approval. Critics say the plan will allow corporations to ship middle-income jobs overseas, a common refrain with many trade agreements.
Eric Schinfeld, president of the Washington Center for International Trade, said the deal isn’t ideal for any of the participating nations, but it is necessary for international commerce to take place in a unified fashion.
“We live in a global economy; we are going to be in a global economy. There’s no turning back from that,” Schinfeld said. “So the real question is, how do we write the rules of the global economy in a way that maximizes the benefits to people that live in this country?”
Should the agreement pass, Washington likely would benefit. The state’s aerospace, information technology, retail, and agriculture sectors would all see tariffs decrease, and there is enhanced intellectual property assurances on the IT front. As for factory jobs leaving the state, Schinfeld doesn’t see it happening. American companies already have been outsourcing work to more affordable nations; a deal that might require Vietnam to establish a minimum wage likely wouldn’t accelerate that.
How the agreement affects China might be the final measure of the TPP’s value. Its economic, labor, and environmental standards hinge on values as much as currency, and were designed to sway the world’s second-largest economy.
“When that becomes the standard for how trade is done in the Asia-Pacific region, countries like China will have to make the very important decision: Do they want to participate in Asia-Pacific trade, or do they want to stay with their current ways of doing business?” – JB
425 Business predicts: The $15 wage debate will storm the Eastside
In September 2014, the pro-labor group Working Washington organized a fast-food-workers march in Bellevue to promote a $15 minimum wage.
“When we were out on the street, people would drive by and wave and honk in support,” said Sejal Parikh, the organization’s executive director. “We didn’t get any negative reaction.”
Since then, the debate about a higher minimum wage largely has been absent from the Eastside. But Seattle businesses thus far have had a smooth transition to higher minimum wages, with some wasting no time and jumping to $15 per hour immediately, years before the 2021 deadline. Restaurants such as Ivar’s are doing away with tipping for wages that are more equitable; the Washington Restaurant Association, a traditional opponent of wage hikes, in November even called on the state to raise the minimum wage.
But will an Eastside city institute a higher minimum wage before the state does? The Eastside’s Democratic representatives voted for a $12 state minimum wage in the House of Representatives (the bill was stymied in the Senate), so there is political support for the idea. What remains to be seen is whether municipal voters see it as a local imperative. Parikh believes that will happen if low-wage workers start talking.
“We’ve seen in city after city that, once workers’ voices are heard and they talk about what’s needed to make ends meet … people are becoming more and more supportive,” she said.
Market forces also may come into play. If a Bellevue employer is competing for low-wage workers with Seattle firms, it will have to match the $15 wage. “A Seattle McDonald’s worker has told us her (franchise’s) owner has been mirroring Seattle wages in her Eastside stores,” Parikh said. “We’re anticipating that this will not only move on a statewide level, but companies are going to start seeing that to attract the workers they want and to boost the local economy, they have to pay workers more.” – JB
425 Business predicts: Clean tech investment will build slowly
In the world of tech capital, $40 million doesn’t sound like much — Madrona Venture Group, for example, manages a $1.3 billion fund. But in clean tech, $40 million still is an amount worth celebrating. So when the state Legislature last year authorized a fund of that size — the second such one from Olympia — to support clean tech projects, there was much celebration.
Cash is hard to come by for clean tech companies. While an app maker can reward an investor with a relatively quick exit, clean energy systems can take decades to develop and prove — far too long for your typical Seattle or Silicon Valley investor. Thus, companies have to get creative.
“People are finding ways to find money. There are grants, the state’s Clean Energy Fund … there are some venture capital deals, though they’re few and far between,” said Tom Ranken, president of the CleanTech Alliance, an advocacy group based in Seattle. “Things are different, but they’re not dead.”
There’s reason to believe investment will quicken for clean-energy companies on the Eastside and beyond. Last year, the EPA unveiled its Clean Power Plan, which will require each state to hit carbon emissions targets. And the COP21 conference in Paris showed there’s an international demand for cleaner energy and more efficient systems. As those states and their utilities look to clean up their power grid, they’ll reach out to smaller, more innovative companies to help kickstart the transition.
And a kickstart is needed. Ranken compared clean tech investing to buying a car — you don’t just buy a cool vehicle; you buy one that is guaranteed to start every time you turn the key. In the same manner, utilities won’t invest in a new technology unless it’s proven to provide enough power to the grid to turn the lights on. – JB
425 Business predicts: Traffic … it’s gonna continue to suck
We’d love to tell you that there is an end in sight for our region’s horrendous, soul-breaking traffic, but we’d be lying if we did.
Mark Hallenbeck, director of the Washington State Transportation Center, said there is change on the horizon, but we won’t be benefiting from much of it in the next 365 days.
“In 2016, you won’t see much,” he said. “Metro might add some minor service improvements as their budgets rebound with the economy, but nothing huge.”
One main reason for the delay is that road projects take time. The State Route 520 bridge won’t be finished until 2017. The East Link light-rail extension into Bellevue can take thousands of commuters off the roads, but it isn’t scheduled to run until 2023.
Until then, Hallenbeck suggests holding tight and taking advantage of the new Interstate 405 toll lane, the bus, or carpools, and use Waze or Google Maps to navigate around the bulk of the traffic.
While the new toll lanes on the north end of I-405 are causing new congestion, and a petition is garnering signatures to end tolling, A WSDOT spokesperson has stated that the program will run for at least two years.
“For those willing to take transit, their commutes will get much better and more reliable, because they won’t be stuck in congestion since the HOV lanes will work better on both northern 405 and 520,” Hallenbeck said. “But the southern half of the 405 corridor will continue to have major problems.”
While no new transit routes will be online in 2016, major planning steps could take place. Sound Transit is preparing a ballot measure for the November elections. The transit agency is soliciting comments on route proposals, which include a few Eastside possibilities: an East Link extension to downtown Redmond, light rail from Issaquah to Kirkland, bus rapid transit from Lynnwood to SeaTac, and bus rapid transit from Bellevue to Kirkland. – JK
425 Business predicts: Boeing will make the most of bomber dispute, win or lose
Business is good for Boeing’s commercial division: A record 199 planes were delivered in the third quarter of 2015, and the company’s backlog sits around 5,700 jobs worth $426 billion. But 2015 was another tense one between the company and its Machinsts. Boeing’s ramp-up in 737 production won’t directly result in extra jobs (robots will handle much of the new work); union organizers in South Carolina were thwarted by company executives and politicians; and Boeing announced a 737 completion center in China. Labor relations aside, the company has another worry to fret about in 2016: the outcome of a contested $80 billion Department of Defense contract to build a new bomber for the U.S. Air Force.
Boeing and competitor Lockheed Martin teamed up to present a bid, but Northrop Grumman won. Now, Boeing and Lockheed are contesting the decision. The upside to contesting the contract, even if Boeing loses the appeal: figuring out why Northrop got the contract in the first place.
“You learn about customer wants and expectations, and what might have gone wrong. It is a learning experience. You learn a little bit about what the other guy did right,” said Richard Aboulafia, vice president of analysis at Teal Group. “It doesn’t cost that much to contest, and it might be worth it.”
Aboulafia said Boeing could lobby Northrop for some structural work, but it’s difficult to know whether Northrop has its supply chain lined up already as details on DOD projects remain secret. But the precedent is there: Boeing built a portion of the wings for the B-2 Spirit stealth bomber that was awarded to Northrop Grumman in the 1990s.
Aboulafia’s advice for Boeing in 2016? “Try to reset relations with labor because frankly, the numbers just aren’t appealing,” he said. “The company loses $20 million on each 777 airplane produced. That doesn’t resemble any learning curve we’ve ever seen.” – MC
425 Business predicts: No IPO from Apptio … or anyone else
Apptio, one of the region’s most valuable privately held tech firms, has been the subject of speculation for the past 16 months. The question: Will the company present an initial public offering?
The Bellevue-based company appears to be laying the groundwork for such. Last year, the company hired Susanna Morgan away from Concur to lead finance and investor relations, and it reportedly hired Wall Street banks in July to explore an IPO.
But does the company need money from the public market? Apptio doesn’t appear to be hurting for financing — its latest financing round netted $45 million. According to PitchBook Data analyst Nizar Tarhuni, Apptio presenting an IPO depends not on its own finances, but on the stock market.
“If (markets) remain the same way they are, with the softening that we kind of expect to see, then no,” he said
It’s a reminder that a company moving from the private sector to the public market is more than simply an exit strategy for investors; it’s to get more money. If Apptio is generating revenue and continuing to grow without needing more funding than it can get in the private markets, then there’s no need to go public.
“It’s a lot easier to operate as a private company than under the scrutiny of the public eye,” Tarhuni said. “If they don’t need that additional funding, and if the VCs are willing to go different routes and aren’t pushing for (an IPO), then we might not see it for a while.”
Word is other Seattle-area startups won’t move into the public market in 2016 either, unless the market changes. “Nationally we might see some companies come to market,” Tarhuni said. ”But it’s tough to get there right now.”
In late 2015, companies such as Neiman Marcus, LoanDepot, and Albertson’s postponed their IPOs in favor of waiting for a less risk-averse market.
If Apptio does decide to go public, one indication could be a bridge round of VC funding, one that would help offset the cost of presenting a public offering. – MC
425 Business predicts: Relations with China won’t get better
Before Chinese President Xi Jinping visited the U.S. in September, a Seattle Times headline observed that he was beginning his trip in the “friendly” Washington. After visiting tech firms and high schools in the Puget Sound area, Xi went off to “unfriendly” Washington, D.C., where he was greeted by what the Washington Post called a “rough landing.”
In Washington state, Xi and his associates were largely being courted by companies that wanted better access to China’s enormous consumer base. China’s middle class, at 700 million, is more than double the size of the population of the entire U.S. But in D.C., Xi and President Barack Obama more strongly dealt with the national differences, some of which sparked the Trans-Pacific Partnership.
Xi’s visit, in hindsight, was marked by contradictions. He and Obama agreed to curtail cybertheft; days after his visit, 100 million U.S. records were stolen, allegedly by Chinese hackers. Boeing committed to opening a factory in China, then China’s state-owned aviation firm unveiled its first jetliner. Facebook CEO Mark Zuckerberg greeted Xi in Mandarin; Xi’s government doesn’t let Chinese people visit Facebook.
It’s these instances, plus globally tense situations like territorial disputes in the South China Sea, that make it difficult for one to expect thawed relations between China and the U.S. in 2016. Take Obama’s and Xi’s agreement to curtail cyberspying for example — national security experts were roundly skeptical of the agreement, and the U.S. has yet to counter on the policy front.
“Whether sanctions will be placed on Chinese entities for hacking or cyberespionage remains to be seen,” said David Bachman, a University of Washington professor who specializes in China relations. “If we do, it wouldn’t be surprising to me if China retaliated, and tech firms would be the ones most vulnerable to retaliation.” – JB
425 Business predicts: 2016’s top data source:
Most know that 2015 was a big year for wearables. The release of the Apple Watch was seen as a step toward the mainstream for a sector largely dominated by fitness-focused products. But runners aren’t the only ones who wear watches.
Fitness still dominates the category among major players (Fitbit, Microsoft Band) and more minor players (Redmond-based Sensoria’s socks) alike. But in 2016, expect to see more garments offering a wider array of wearable connectivity. Consumers have lots of information to provide, and many industries would like a piece of that information.
Consider health care. Lynne Dunbrack, research vice president of IDC Health Insights, says 20 percent of health care providers and a third of payers will invest in health and fitness activity trackers in 2016.
“Health care organizations want data that they can analyze to identify vitals that are outside the consumer’s normal range,” she said. Just as Sensoria weaves sensors into its fabric, Dunbrack said fitness clothing providers like Under Armour or Nike could do the same.
There’s also consumer demand for these products, particularly as capabilities increase. “Consumers want wearable devices that are easy to use … and that provides information that is useful and timely,” Dunbrack said. Just as wired workout clothes can be synced with fitness apps, casual clothes with sensors could be synced with social media.
One of the best ways to visualize the possibilities of connected clothing is through the military. Dunbrack said the U.S. military is designing combat uniforms that can submit GPS signals, track wound depth and location, and test bodily fluids for chemical or biological agents.
Those capabilities are highly specialized, but the tech can be applicable in the consumer realm. So while watches and headsets generate early headlines, keep an eye out for a T-shirt that can locate a lost hiker with GPS, a backpack that monitors your devices’ battery levels, or pajamas that monitor a baby’s temperature and movement. – JK