Andri Haran: New form of Estonian IT sector even more valuable

The Estonian IT sector is not dead in the water following the end of the startup boom but is instead evolving into a part of Estonia's advanced industry, increasingly driven by engineering, writes Andri Haran.
There have been claims that Estonia's renowned IT tiger has run out of steam. Where are the new eye-catching technological solutions like the X-Road? Where are the new startups that grow into giants overnight, like Bolt? Furthermore, there is news that software development students are no longer being hired straight out of their studies. Instead, they now have to go through internships and apply for jobs like regular young professionals.
At first glance, it might indeed seem that Estonia's IT sector has lost its momentum or passed its "best before" date. However, I dare to argue that this impression is misleading. What we are witnessing is not a dead-end or contraction in Estonia's IT sector but, on the contrary, a transition to a new and even more valuable level. Considering the evolution of Estonia's IT industry thus far, this could be described as stage 3.0, and in this new form, the IT sector is set to become even more valuable to Estonia than ever before.
Estonian IT sector 1.0 — smart and hardworking programmers
The modern IT sector emerged alongside the mass adoption of computers in the 1990s. The public internet is as old as the restored Republic of Estonia itself, dating back to 1991. This meant that young programmers and their startups had roughly the same starting point as competitors from countries where entrepreneurship had not been stifled for 50 years under occupation. On this new field in a new market, all players were newcomers.
During this first stage, in the 1990s and 2000s, many of Estonia's now well-known and successful software development companies were founded and grew. The leaders in Estonia's public sector at the time also had the foresight to recognize the potential of new technologies in government administration. This led to the creation of Estonia's renowned e-state, a digital government system we can still be unreservedly proud of, as no other country has yet achieved such a complete digitization of public services.
Stage 1.0 primarily revolved around selling work hours and developing custom solutions piece by piece. Even then, new IT solutions were being created and successfully marketed. While this was an excellent start, this approach had a clear limitation in terms of bringing substantial wealth into Estonia.
Stage two — apps and billion-euro companies
A new breakthrough, one that effectively changed the game and created yet another new market where no one had an advantage from "old momentum," was the smartphone. The first iPhone was released in 2007. A smartphone could, and still can, be used for a multitude of purposes, but each use — such as ordering a taxi or verifying one's identity — requires software that enables the device to function in the desired way and allows the user to manage the process effortlessly.
This marked the beginning of the app boom, which gave rise to successive billion-dollar companies within Estonia's IT sector. The sector became an undeniable source of national pride and a dream industry for many. The number of IT specialists multiplied and the influx of investor money into Estonia became visible in real estate, streetscapes and retail.
In other words, an IT industry emerged in Estonia that created virtual products and services alongside traditional physical production. In hindsight, we can now say that this also laid the groundwork for future collaboration and mutual development across various industries.
However, no growth period lasts forever. While Estonia's startup ecosystem remains sustainable and will undoubtedly continue to produce unicorns, the cluster of crises beginning in 2020 — the pandemic, supply chain disruptions, energy crisis and the associated rise in Euribor — delivered a significant correction. Since then, it might seem as though Estonia's IT sector has stalled. But this is not the case.
Estonian IT 3.0 — becoming a core part of the economy
For several years now, Estonia's two major export sectors — IT and machinery — have been gradually interwoven and merged. This trend has become more widely visible with the rise of Estonia's defense industry, which essentially represents the integration of multiple industries, such as machinery and IT, to meet the needs of the defense sector.
Looking at these trends, I dare say that the combination of IT and industry, both in defense and other fields, is the new breakthrough and development stage for Estonia's IT sector. The low-hanging fruit created by phenomena like the internet and the smartphone were inevitably finite. At the same time, the comfortable lifestyle of the developed world increasingly relies on complex devices that need to be continually optimized and made smarter to save both money and the environment. This is where the strengths of the machinery and IT sectors converge.
The demand and market for growth are virtually limitless. The technology sector is receiving more attention and resources from the government to replicate past success stories.
I believe that we will soon see traces of Estonia's IT 3.0 in many areas of life. For instance, in education, fields that teach how to design, build and operate smart machines are likely to become increasingly popular due to high salaries and the availability of jobs. In terms of perception, the smart device engineer is the new software developer.
Fruits of IT success story will reach all of Estonia
The ongoing and rapidly accelerating arrival of Estonia's IT 3.0 is particularly significant because its benefits have the potential to reach nearly every household in Estonia. High-tech industries require a wide variety of workers, from research scientists to general laborers, offering all of them fair and decent wages. While the rapid growth of app-developing startups tended to concentrate benefits in specific regions and social groups, IT 3.0 is likely to improve the living standards of hundreds of thousands of people across Estonia.
Thus, rumors and perceptions of the Estonian IT sector's stagnation are unfounded. What we are witnessing is yet another transformation, much like the one that occurred roughly 15 years ago. Estonian-owned companies are now simultaneously appearing at the top of rankings for both IT firms and industrial enterprises. This is the new normal. Estonia's IT industry is increasingly taking on the shape not of an app icon but of radars, rockets and robots.
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Editor: Marcus Turovski