Wednesday, July 18, 2012

Canada's Shrinking Tech Sector - Is Mitel #1 Now?

Some stories have a shelf life beyond 30 seconds, and this is one of them.

Those who follow me closely know that I don't chase news stories, and I'm rarely first out of the gate with happenings in this space. I'll never become beholden to the reflex-like urge to tweet about life as-it-happens - am way too old for that, and nobody cares two seconds later. Journalists and bloggers thrive on being the first know and first to show, but analysts are a different lot. There's very little value in that for my line of work. Our role is to be objective and reflective, and our value comes from describing and explaining. Enough about that - here's an example of what I mean.

I'm one of those old school types who still reads the paper every day, but some stories don't get read right away. Our leading national paper, the Globe and Mail had a nice piece from earlier this month about the demise of Canada's tech sector, largely hinging around RIM's struggles, which are in the news every day up here. For a while now, RIM has owned the mantle inherited from Nortel as Canada's pride and joy in tech, and while there are many flavors of tech, this run has been great for telecom analysts, as we've been spoiled with visionary leaders for about 15 years now.

I know I'm dating myself, but this is a bit like watching Jean Beliveau hand the reins over to Guy Lafleur in 1971 - he left the Habs in good hands and fans could rest assured Les Glorieux would continue their legacy (which of course they did, but being a Bruins fan, let's move on). Yeah, I'm a huge hockey fan, and sorry Leafs fans, but I can't think of anything remotely close to that, and frankly, I can't think of too many really solid comparisons in hockey since that time. Anyhow, we're talking about Canadian success stories here, and I'm sure you get the point!

Well, by all accounts our telecom run in Canada looks to be ending, and we see evidence of that every day. Until the iPad and Android came along, RIM owned this market, and there was no credible alternative for business users. We all know what's happened since, and it astounds me how every vendor has the same roadmap for mobile integration with UC and VoIP. They all have the same plan - support Apple first and then Android.

End of discussion -- but oh, did someone at the back mention RIM? Well, we're not sure yet and might support it next fiscal year, but it's not in the immediate plan - no one is asking for it and we can't find many developers. By the way, someone left their BlackBerry out at the registration desk - here it is. Oh - nobody's coming up to get it - hmm. Well, I'll just leave it here and you can claim it later after everyone has left.

You think I'm making this stuff up? Sad but true.

Let's move on to the bigger picture. Iain Marlow and Sean Silcoff have done a nice job in this article examining why Canada can't grow our tech companies beyond being mid-size as well as having sustainable success in the global market. Being American but  having lived in Canada most of my life, I have a pretty good handle on why that is, and I couldn't agree more with what Iain and Sean are getting at. Culture has a lot to do with it, not just within Canada, but also the way others view us - and both are problems. Like a lot of other industries (banking and resources aside), Canada does a great job of creating tons of small, successful businesses, but scale isn't our strong suit.

Both RIM and Nortel sure broke the mold, but they got too close to sun and now we have to wonder what's left and what does the future hold? The biggest surprise for me was how the article cited Canada's strongest current success story in tech - SXC Health Solutions. Huh? Well, the numbers are there, but I'm sure you've never heard of them either. We're conditioned to think of tech leaders up here as being in telecom, since that's the been norm since Nortel got hot, but clearly tech encompasses many things. Of much greater interest is the fact that this company was initially based near Toronto, but as the article explains, their path to big time growth came from essentially moving the core business to Chicago. In this case, the grass is definitely greener on the other side.

Anyhow, just read the article please. You'll get a better understanding as to why it's so hard to raise capital here, get attention from outside of Canada, and how the loss of big players like RIM takes away the anchor needed to nurture the supply chain and developer ecosystem so important to long term growth.

On the financial side, the article clearly shows how our startups sell out too soon, and hardly ever build up to the billion dollar paydays that Yammer is so typical of. As a result, the article also points out that tech companies now only make up 1.6% of the TSX's valuation (and this doesn't include SXC, since it is rightly categorized as a healthcare stock) - a far cry from 2000, when the metric was 41%. Wow.

This brings me to the final item - the one that should matter most if you believe RIM's best days are in the past - who is #1 now in telecom? I doubt anybody was thinking about this a year ago, but if you care about Canada's tech space, it's a valid question. Pretty much all the companies cited in the article are pure software companies or component makers, and they provide a nice update on once-hot players like JDS Uniphase, ATI, Cognos, Descartes and Corel. They also mention Mitel, and this is really the only one of the bunch I would consider telecom-related; and in my books, they would be the successor to RIM. I've been of this mindset for some time now, and here's my take on what this means from a post back in March.

Is that a good thing, and what does this say about Canadian telecom? It's great for Mitel, presuming they can keep up the good work, and based on what I saw at their Business Partner Conference last month, they seem to be on the right track. They recently listed on the TSX (MNW - also MITL on Nasdaq), so if they can boost that 1.6% share of index valuation, it's a very good thing. What do you think?

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