Cyber Domain and Advanced Computing

While the term ‘cyber’ is a shortened form of ‘cyberspace,’ cyber is often used as an adjective, verb, or noun. Cyber is most commonly understood as the complex combination of infrastructure, hardware, software, platforms, and general IT.

The U.S. is currently in a great power competition increasingly fueled by the information revolution within the ever-evolving cyber domain. Advanced computing transforms the global economy, e-business and every warfighting domain. The U.S.’ analysis, engagement and leadership in this revolutionary transformation is paramount to securing the future for our nation and for our allies.

To prepare future U.S. leaders and policy-makers and our international partners to prevail in this domain, the members of the Eisenhower School’s Cyber Domain / Advanced Computing Industry Study (IS) examined a range of cyber and advanced computing technologies and explored the current state of the market of many key information technologies such as AI, blockchain, commercial cloud, and quantum computing. Additionally, the IS examined the challenges that the United States faces with respect to cybercrime, data privacy, protecting intellectual property (IP),supply chain vulnerabilities, accelerating the delivery of warfighting capabilities through modern software development practices, and a changing workforce.

The methodology used during the semester-long IS employed a variety of pedagogical approaches geared to a variety of learning styles, including: reading current topic-specific articles and literature, examining relevant market structures, student-led learning via case studies and knowledge-sharing, and discussions with experts from components of the triple helix (i.e., U.S. and foreign governments, industry and academia), and the iron triangle (i.e., Congress, Industry and Executive Branch). Additionally, the IS met with private and government-backed venture capital firms to understand their approaches to investing in start-up companies, whether to help incubate or accelerate their ideas to the commercial market. The members of the IS also visited U.S. and foreign government organizations, such as the NATO Military Committee Working Group for Communication and Information Systems, the Estonian Information System Authority, U.S. Department of Homeland Security, U.S. Cyber Command, and the Defense Information Security Agency (DISA), to gain an appreciation and sense of the U.S., allies, and partner cyberspace operations and capabilities to secure and defend the cyber domain.

Industry Definition

The cyber domain and advanced computing industries are wide-ranging and evolving sectors that encompass many different subjects. As there is no single cyber industry,” for ease of discussion in this paper, we will use the term “cyber industry” to represent the main industries among the computer-driven and interconnected technologies. Commonly, the term cyber evokes a variety of definitions especially as it becomes more intertwined in the many different facets of daily life. At a macro level, cyber and advanced computing includes information technology services, hardware, and software that function in the cyberspace domain. Further dividing cyber and advanced computing industry into subsectors yields: products, services, computers, wireless, fixed line telecoms, software, application development, human capital management, training, cyber insurance, semiconductors, processors, and internet services. Key industry topics consist of the following primary and enabling technologies such as: 5G, internet of things (IoT), edge computing, AI, blockchain, cloud storage and computing services, quantum computing, autonomous vehicles, and cryptocurrencies. With the delivery of these technologies, it will empower people to use resources beyond today’s imagination which elevates the need to measure and understand the market.

To gain an appreciation for the vast size of the cyber and advanced computing industries, one need only view the multiple industry codes according to both the North American Industry classification System (NAICS) and the Standard Industrial Classification (SIC). Most firms fall into multiple NAICS and SICs due to the diversification of the market (See Appendix A for a subset of the NAICS codes that make up the cyber industry). Some examples include Electronic Stores, Data Processing, Software Publishers, Custom Computer Programming, and Computer Systems Design. Some examples of leading, publicly-traded U.S. information technology firms are Apple, Microsoft, Google/Alphabet, Intel, IBM, Facebook, and Oracle. All of these firms are in the Forbes Top 10 for global technology and are examples of the plurality of the market in which most firms generally provide both products and services along with hardware and software.

Current Condition of the Industry

As previously noted, there is no single “cyber industry.” For that reason, this section examines the current conditions of the main distinct industries among the computer-driven and interconnected technologies essential to the cyber domain, including IT and telecommunications.

Current Competitive Structure

Industry competitive structure varies widely in the cyber domain. For example, despite the presence of a number of large multi-national companies with high name recognition in the IT consulting sector, market concentration is low and competition is high due to the rapid pace of technological change and low barriers to entry. While the larger, more well-known cloud and enterprise solution providers typically target large corporate clients, there are “thousands of smaller firms specializing in a specific technological platform, skillset or geographic area.” In contrast, the U.S. wireless telecommunications industry is highly concentrated, with four large companies (Verizon, AT&T, T-Mobile and Sprint) controlling the vast majority of industry revenues, and high competition among the firms within the sector because the industry’s products and services are homogeneous. As of this writing, the U.S. Department of Justice is still considering whether a proposed merger between T-Mobile and Sprint would adversely impact competition. Wireless telecommunication companies also face increasing competition from rivals outside of the industry, such as cable companies.

Firm Health

Simply by virtue of its size and breadth, the U.S. IT consulting industry is generally resilient. During the five-year period up to 2018, the industry’s estimated annualized growth rate was 2.7% and average profit margins were estimated at 7.1% of industry revenue before interest and taxes. As is typical of high knowledge-based service industries, wages represent the largest cost incurred by firms in the industry. Due to continued strong demand for IT services, it is estimated that wages accounted for approximately 48.4% of annual industry revenue in 2018, which is up from 43.5% in 2013. This stands in stark contrast to the wireless telecommunications industry where wages make up just 6.4% of revenue. Driven by year over year increases in the number of mobile internet connections, the wireless telecommunications industry has performed well over the past five years. Revenue is projected to grow at an annualized rate of 1.1% to $289.4 billion through 2019, with revenue projected to increase by 3.4% in 2019 alone.

Role of Firms’ Business Units

Business units are important to large capitalization tech firms; for example, Facebook, Amazon and Google have steadily acquired smaller firms and start-ups to quickly access new technologies instead of developing those capabilities themselves. In 2018, Facebook acquired PillPack in order to gain a foothold in the healthcare space, and also acquired the connected doorbell company Ring “to further its ambition to become the master of the smart home.”

Effective Business Strategies

Over the last decade, the dominant business strategy in the wireless telecommunications industry has been consolidation. The industry is extremely capital-intensive because of the need to invest in wireless telecommunications networks and infrastructure and obtain licenses for radio spectrum. Wireless telecommunications operators have consolidated in order to eliminate redundant costs, expand coverage and improve their profitability. In less capital-intensive industries such as software development or IT consulting, companies tend to focus on niche areas of expertise. In the cybersecurity industry for example, there are many different security technologies covering data centers, endpoints, mobile, remote and cloud operations, to name a few. Customers tend to buy security tools from more than one vendor.

Threats from Substitutes, Suppliers, Customers, or Foreign Competition

The primary threats to companies in the cyber domain are consolidation, mergers and acquisitions, IP theft, and the rapid pace of development of the overall industry. On the foreign front, U.S. innovation in software and hardware development has been targeted extensively by Chinese competitors and State-Owned Enterprises (SOEs). In telecommunications, the threat from suppliers and China are one and the same. China produces most of the hardware for the industry. The U.S. has divested itself from manufacturing responsibilities and, as an industry, has become “neuro-facturers,” meaning producers of intellectual services rather than physical goods.”  This de-facto “divestification” was also a key finding in response to Executive Order 13806 Defense Industrial Base and Supply Chain Resiliency, in the impacts of “Decoupling of Design and Manufacturing.” 

Read the report →