As the disaster in the Gulf of Mexico makes abundantly clear, every company operates with risks -- some bigger than others. Paying attention to those dangers can make us smarter investors. And in the tech world, there's no bigger risk than losing ground to your competitors.
Tech risk
The folks at BDO recently ranked the top 20 risks cited by the 100 largest U.S. technology companies, and compared those numbers with ones from the year before. The top three concerns were competition and consolidation within the industry, a failure to develop new products or services, and general U.S. economic conditions.
That last item, moving up to third place from sixth last year, suggests that tech companies believe we're not out of the recessionary woods just yet. But the top two risks stress the importance of effective competition. That idea's reinforced by the risk factor that jumped the most on this year's list. "Failure to properly execute corporate strategy" rose from 27th place last year to 11th place this time around.
Looking at the industry, it's easy to see how important these concerns are. Not long ago, Microsoft (Nasdaq: MSFT) was tech's seemingly impervious 800-pound gorilla. But Google's (Nasdaq: GOOG) search engine left Microsoft's online efforts in the dust, and now Google's attacking Microsoft's bread-and-butter Office software with its online Google Docs applications. A decade or so ago, Apple (Nasdaq: AAPL) seemed to be fading away; today, it has surpassed Microsoft in market capitalization, thanks to the success of products such as the iPhone and iPod. Even Apple's computers have been gaining market share. Clearly, competing effectively, and executing your planned strategy well, is critical.
Volatility woes
On the other hand, fewer companies in the tech industry now fret about "cyclical revenue (and resulting fluctuations in stock price)."
I'd expect many companies in cyclical industries to just accept their businesses' inevitable ups and downs -- but the recent downturn has been especially hard on some companies. With its stock down more than 70% over the past few years, Motorola (NYSE: MOT) clearly needs a successfully turnaround strategy. To that end, the company recently announced plans to spin off its ailing cell phone division, which has shed market share from 20% to 3%.
Alternative telecom carrier Vonage (NYSE: VG) has similarly struggled ever since its 2006 IPO. Lately, its international plan has been drawing interest, and it has reduced its customer churn. Still, the company needs to translate its successes into more inspiring revenue and earnings gains.
Even if the industry as a whole is less concerned about volatility, these companies are right to worry about severe fluctuations. Very low share prices make companies look weak and vulnerable, especially in tough economic times.
Regulation trepidation
One risk that rose in stature over the past year involves changes to federal, state, and local regulations and taxes. Cited by 88% of respondents, this concern came in fourth, up from ninth last year. At least some of the many possible regulatory reforms floating around these days could significantly affect tech-heavy companies.
Look at Amazon.com (Nasdaq: AMZN), which has long fought against having to charge its customers sales tax. There are big bucks at stake in this battle, so companies and states have a great interest in it. One estimate is that Florida alone could gain $1.2 billion annually by taxing online sales. No wonder Amazon has reportedly spent more than $1 million on lobbying efforts over the past six months.
Danger ahead
It's smart to pay attention to the risks facing our holdings and would-be holdings, and to appreciate how and why they're changing over time. Take a lesson from the tech industry: While it's hard to avoid risk entirely, you can't afford to let it blindside you.
