By Sam McClendon
What do banks, automobile manufacturers, taxi and hotel companies, and cable and satellite TV providers all have in common? Like the music business before them, they suddenly face competition from technology companies.
Take the car business. A US$2.7 billion August 2015 deal in which three German automakers jointly acquired GPS mapping technology drew worldwide attention to the industry’s competition with tech, which began several years ago when a handful of tech companies started exploring market entry through autonomous vehicles. These examples are merely the tip of the iceberg.
Technology innovation continues to push boundaries that have traditionally shaped businesses, industries and world markets. In today’s global digital economy, the boundaries between the technology industry and other industries are blurring rapidly – perhaps even disappearing.
“In this environment, tax risk is at an all-time high.“
Channing Flynn, EY Global Technology Industry Tax Services Leader
“It’s going to continue to become more and more challenging to define what is a tech company and what is an industrial manufacturer, or a retailer or any other type of enterprise,” says EY Global Technology Industry Leader Pat Hyek.
Companies across all sectors are digitally reimagining virtually every aspect of their business, from customer relationships and revenue models to supply chains and corporate strategies. “Increasingly, companies with data and information are considering themselves to be technology companies,” Hyek adds.
“Any one of the new decisions made – arguably every one – will also have a tax implication,” says Channing Flynn, EY Global Technology Industry Tax Services Leader.
Spotting the trends
This era of continuous innovation is triggering unrelenting waves of change, first producing such disruptive digital technologies as smart mobility and cloud computing and now accelerating their evolution, driving convergence and amplifying the potential for even more profound impact on the way business is done and money is made worldwide.
Amid the rapid digital transformation, our Global Technology Sector has identified three defining trends:
- Digitization on a global scale: Cloud computing, smart mobility, social networking and big data analytics have so far had the greatest impact of the multiple disruptive technologies now in play. Look for these technologies to continue to drive digital transformation across all industries at an ever-increasing pace, blurring the lines between the technology sector and all others.
- Reimagining business: Not long ago, a company that spent time and money to reimagine its business was thought of as forward-thinking. Now, C-suites and stakeholders see reimagining as a strategic necessity – from the way they interact with customers to their approaches to developing, marketing, pricing and distributing their products and services. Those that are slow to move forward are more likely to find themselves in the crosshairs of disruptive start-ups or shareholder activists who will force the issue.
- The blurring of industries: This blur has the potential to make competitors of technology companies and incumbent players in every industry. A few sectors are clearly leading in this digital transformation, such as the media companies and others mentioned at the beginning of this article. But look for more of the traditional lines of definition to blur – across the board – and for new competition to proliferate. For example, health care companies are becoming technology companies and vice versa, while smart apparel could blur fitness and sports apparel companies together – and blur both with tech. Companies once contained in a distinct technology sector are breaking out into other industries as well. Tech companies recognize the need to market and deliver true solutions to customers’ issues – solutions that go beyond tech-centric building blocks and even entire technology stacks to address discrete issues and requirements industry by industry.
Asking three big questions
As dramatic and fundamental change claims an immutable spot on the corporate agenda, three core questions can focus executives on considerations for their own digital transformation:
- Have you challenged the inefficiencies in your company? “Inefficient distribution and idle capacity can exist anywhere in a company and very often do,” Hyek says. Technology can help identify these gaps and show how to fill them. Disruptive start-ups and sharing-economy business models are using technology to connect more directly to customers – what they want, when they want it and what they’re willing to pay. The 21st-century iteration of ride-sharing and home-sharing are prime examples of how new models can change customer behaviors, expectations and relationships while also enabling more efficient use of assets and capital.
- How well do you know your nontraditional competitors? As the connection between company and customer becomes more direct, it isn’t enough for a company to understand its traditional industry-specific competitor. Says Hyek, “Companies need to look outside their same-sector roster – and especially to start-ups in this era of rising entrepreneurship – for insights that can help them reimagine their competitive environment.”
- Are you agile enough to adapt to rapid change? This question applies to the culture of a company as well as to its operating model. Digital technology opens up new opportunities such as crowd-sourcing, for example, and even calls into question how a company’s own R&D department might stack up against crowd-sourcing and big data. “You might ask, ‘How much of a marketing department or an R&D department do I need?’ That kind of thinking can be transformative, if a company is willing to change and can respond quickly,” Hyek says.
Period of historical change for the technology stack
Click here to open image.
What it means for mergers and acquisitions
“Technology and nontech companies alike are turning to tech mergers and acquisitions to keep up with the accelerating pace of change,” says Jeff Liu, EY Global Technology Industry Transaction Advisory Services Leader.
Disruptive technology has given rise to a blockbuster era in deal-making, including an increase in the number of megadeals, according to our Global Technology M&A Update, April–June 2015.
These deals position tech buyers with end-to-end solutions to address the explosive growth in connected devices enabled by the “Internet of Things,” continued expansion of smart mobility and the growing need for high-performance cloud data centers to manage the computing load required by today’s digital business reality.
And nontech buyers announced some of the highest-value technology deals of the second quarter in 2015 – further evidence of the blur occurring across traditional lines of business. Among their primary targets was security amid the rising tide of cybercrime that is challenging companies in every industry.
The same disruptive cloud and mobile technologies that are enabling digital transformation have increased corporate networks’ cyber vulnerability. According to our May 2015 Technology Capital Confidence Barometer, this issue is so prominent in tech executives’ minds that 54% of them said they are shoring up their M&A process as well to guard against security breaches, recognizing that such transactions are a prime target for cyber-attacks.
Connecting the dots to tax
“Today’s tax and C-suite executives not only have to do business while reinventing the way they do business, they also have to manage new risks and heightened levels of uncertainty across a global tax landscape that is itself dramatically evolving – to digital economy taxation,” says Flynn.
Technology companies have been in the vanguard of globalizing new digital business models that challenge sovereign borders, consequently drawing scrutiny from both policymakers and the media as digital tax issues rise to new prominence. Some have begun redefining their tax profiles for a new global tax environment.
But digital economy taxation will cut across all industries, with more and more transactions taking place in the cloud, more workforces becoming mobile and virtual and intellectual property becoming ever more pivotal to the profitability of multinational enterprises, as well as to the economic health of the countries in which they do business.
The changes afoot are material, including an expanding pattern of new value-added taxation on cross-border digital services and e-commerce, changing rules on what constitutes a taxable presence in a given country and other fundamental shifts.
What it takes to keep up
Though the lines between tech and nontech companies are blurring, the focus on corresponding issues must be laser-sharp. This rapidly arriving future, with its enabling technologies, will drive myriad opportunities even as it generates a plethora of new challenges – not least of which are tax uncertainty and risk.
In this disrupt-or-be-disrupted world, it takes continuous innovation and unprecedented agility – underpinned by effective business and tax management – to bolster confidence in action. “To remain viable in the digital economy, companies must be capable of transforming at the speed of innovation,” Hyek says.
Flynn adds, “In this environment, tax risk is at an all-time high. And your tax planner becomes your best defense – so make sure that tax has a seat at the decision table.”
This article is included in Tax Insights issue 14