This article was originally published by RFID Update.
June 21, 2005—Because we do research in emerging markets and technologies, we frequently speak with analysts for venture capital and investment banks trying to quantify the trajectory of RFID.
Our research shows RFID will have strong growth. But some expectations are unrealistic. Recently, we were asked if RFID could sustain a 400% compound annual growth rate (CAGR) for several years. If you make modest assumptions about the RFID market in 2004, then a decade of 400% compound annual growth would exceed the US GDP. So it seems unlikely, regardless of the definition of the RFID market.
We see several misunderstandings about RFID growth.
First, the market is not starting from scratch. RFID contributes millions, if not tens of millions, of dollars of profit to the bottom line of firms like Texas Instruments and Philips. Markets that large can grow quickly, but there are limits.
More importantly, RFID growth is related to large capital investments. Unlike Internet and software markets, where there was little hard infrastructure capital, RFID is tied to the investments in material handling, packaging, trucks, and other industrial items.
Compare two examples from the nineteenth century. The telegraph grew quickly because it only required stringing wires, and revenues came in quickly. Electrical power and lighting required larger capital investments, and consumers had to change their habits to consume power. They loved it. It was easier and safer than gas or oil lamps, but investors and consumers adapted over a period of time. Some customers insisted on using their gas plumbing for electrical conduits – it made them feel they were still using that old sunk cost.
Another example is mobile telephony; year-over-year revenue growth exceeded 20% most of the last two decades. Again we see a strong sustained growth, not a short spurt.
The point is that markets which are closely related to large fixed capital investments (as RFID is related to factories and warehouses) are more likely to have long sustained growth than quick intense growth.
So, what does this sustained growth pattern mean?
In theory, even if it did exist, 400% CAGR would be good for the large incumbents since they are the only ones with the resources to ramp up and adequately meet such accelerating demand. But of course, most lack the agility necessary to keep pace with fast-moving markets, leaving the door open for small- and medium-sized firms to become leaders.
Consolidated Edison in the 19th century and McCaw Cellular in the 20th were agile and became large companies, not the incumbent firms that had experience and already knew how to string wire, distribute power, or connect communications. Likewise, there is a real chance that 21st century leaders in RFID are not the large firms of today.