Hamish McRae: Hi-tech’s evolution points to a smaller Apple and more AI

That is a dangerous position for any enterprise to find itself. Its chief executive, Tim Cook, gave a profit warning earlier this month, citing the slowdown of sales in China as the main concern. But there is broader transformation taking place. Each new iPhone, or indeed each new Android smart-phone, is only an incremental advance on the previous model.

If the typical customer chooses to upgrade every three or four years instead of every two, then smart-phone sales move from explosive growth to a steady state — rather as the sales of PCs did a decade or more ago.

The real growth is in the applications, not the hardware — from services, not the kit on which we access those services. It is true that Apple is in the service business, with AppleCare, ApplePay and so on. But these services only account for 16% of its revenues.

That leads to the wider point. There has been a general downgrading of profit expectations for the hi-tech sector this year. A few months ago analysts were penciling in 10% increases in earnings this year. Now, according to Reuters, they expect barely any increase at all — a mere 1.7% on average. You can blame the trade war and the slowdown in China for some of this retrenchment, but not all.

What I think is happening is something bigger: a growing awareness that one period of the hi-tech revolution is coming to an end and that another period, with different drivers of growth, will take over from it.

So though most of the present hi-tech oligarchy will probably continue to prosper, as Microsoft has done, the exciting developments will be elsewhere. Companies of the size and clout of Google or Facebook do not disappear overnight, but it is worth noting that General Electric, the conglomerate which under the leadership of Jack Welch had a market capitalisation of $500 billion in 1999, is now worth just $80 billion. It may even be broken up.

So where will the next Apples and Googles come from? Of course we cannot know, but I think we can glimpse the areas to look. A good place to start is looking at applications of Artificial Intelligence.

AI has been around since the Sixties and has been rather disappointing — good at doing things you don’t really need doing. But recently it has found an area where it is invaluable: analysing big data. There is so much data out there (including that generated by services such as Google and Facebook) that the only way of sorting it out is to use AI. There is too much for humans to handle.

Applications already moving very fast include medical diagnostics, fraud detection in banking, and security. I expect other service industries, including education and the legal and accounting professions, will be transformed over the next few years.

But just as hardly anyone foresaw the iPhone revolution (except for Steve Jobs himself) it is very hard to envisage the new applications that will be developed. We did not know we needed a Facebook or a Twitter until they came along.

As for the (somewhat) battered giants, well, let’s see what they come up with in the next few days. But expect fewer fireworks in the years ahead.