A Telecom Revolution
And also: Other ways to build the infrastructures of the future; the boom of digital audio and other signals of a digital-first future; the search of a new world order, including Big Tech
I. A telecom revolution is starting (and other ways to build the infrastructures of the future)
Telecoms are changing. Maybe forever
Dish will have its core network hosted by AWS: a new type of infrastructure sharing is possible (in the cloud). Dish is deploying a next-generation 5G network in the US. As part of that, it is using Open RAN technology, that runs network functions as software on top of open hardware “white boxes”, and makes it possible to build networks on cloud infrastructure. For the access layer, where Open RAN sits, the physical infrastructure underlying this cloud needs to be at the edge, close to the traffic sources, so the network can work as required. But for the core network not even that is needed. So operators can already opt to host their “Open Core” network infrastructure on the (centralized) public cloud. This is what Dish is doing, and they have chosen Amazon’s AWS as their public cloud partner. Cloud architectures (in general) help operators reduce costs by sharing resources across different cell sites, and by leveraging modern, cloud-native software management technologies. This is possible even if the “network clouds” are private. But by using the public cloud the cost reduction opportunity is amplified, because the physical infrastructure (passive and active) is then shared with other services and companies. It may be seen as a first step towards a full “layerization” of telecoms, similar to what has already happened in IT, with (different) specialists providing (a) the physical infrastructure (data centers), (b) the computing platform (IaaS), and (c) the commercial value proposition (the connectivity service, in telecoms). The move of the leading public cloud players to the edge may be the next step, so in the future we might expect to see AWS hosting Open RAN functions too… (FT)(Bloomberg)
5G could accelerate F-M convergence in the US: AT&T had already embraced the convergence narrative, and it seems to be going OK. The same is happening with cable companies, which are progressively capturing mobile market share. Now the quintessential “Mobile-only” player, Verizon Wireless, could also accelerate convergent offers. Let’s see why:
Verizon may need to accelerate F-M convergence to support its 5G investments: Verizon’s 1Q21 results this week were a bit disappointing, with the company losing postpaid mobile phone subscribers, the most profitable, and a key source of cash flow for the company. This, together with the increase in leverage to acquire more spectrum, is creating pressure on 5G investments, and leading to uncertainty in the company’s future, very dependent on 5G. On the other hand, as a positive effect from the pandemic, Verizon’s Fiber to the Home service (Fios) is going well, with almost 100,000 net adds in 1Q21, so this article from the FT wonders if this could be used as a catalyst to improve the dynamics in mobile adds (certainly possible) and protect cash flow generation (not so clear, as convergence often leads to discounts). In any case, interesting dynamics in the American mobile market (FT)
AT&T had a much better quarter, and content could also help subsidize 5G: Unlike Verizon, AT&T had a rather good quarter in terms of postpaid adds, with almost +600K, and with what they described as “expenses in check by servicing more customers online and selling simpler plans”. The content division also performed well, with HBO Max consolidating as a competitor in the streaming market, and with WarnerMedia growing significantly. The traditional pay TV business was (as expected) quite a disaster with a loss of -620K customers. Regarding 5G, like for Verizon, spectrum costs have increased financial pressure, specially if the company wants to maintain the dividend. In this scenario, it is to be expected that AT&T will for us on all kinds of commercial bundles, including F-M (convergence) but also with their own video offers (WSJ)
Money is flowing to chip creation infrastructures
The chip shortage won’t go away anytime soon: This long WSJ analysis discusses (again) the question of why we’re now in the middle of an unprecedented chip shortage, affecting all kinds of industries. The pandemic accelerated the shift of manufacturing capacity towards advanced, higher-margin chips, as demand for computing devices increased with the lockdowns and the massive adoption of all things digital, and as demand for cars and other consumers of more basic semiconductors was expected to decrease. All this combined with some external triggers, including climate disruptions in Texas and geopolitical disputes, including restrictions in some countries to use chips designed or built out of their frontiers. So now we don’t seem to have enough capacity to address the boom in demand that is happening in anticipation of the end of the pandemic. Governments (including the Biden administration) are working to solve the problem. But it will take time, and money. Making the US self-sufficient would cost more than $1.4trn. Meanwhile TSMC, the global leader in chip manufacturing, has committed to spend $100bn in the next 10 years. Each of its new fabrication plants (including one in the US) is estimated to cost billions of dollars, and requires expensive machines that are also difficult to transport (WSJ)
And Intel seems to agree with this: Intel presented its 1Q21 results this week, and the new CEO said that the global chip-supply shortage could stretch two more years. The numbers were not so good, with revenues in line and net income below expectations. Surprisingly, this comes amid the current boom in demand, and is linked to Intel’s weakness in two key segments: (1) PCs, where demand is shifting to low-end models and to MacBooks, where Intel has been losing share; and (2) data centers, where AMD and Nvidia (which recently presented a new product specifically targeting this market) are increasing the competitive pressure, and where Big Tech’s in-house chips are also expected to hurt Intel. To respond to this, Intel has a plan to become a major contract chip maker, focused on the US market, a move that could also help them get some government funding. But execution won’t be easy (WSJ)
Investors are preparing to fund the design and construction of new chips: A fund manager at the FT explains why shares of semiconductor companies, that used to be cyclical, are now becoming structural growth stocks, as a result of the boom in data creation and consumption, which are linking all kinds of economic activities to the use of chips. And the trend is just beginning. So three areas of opportunities are emerging for investors: (1) tools for design (e.g. Cadence, Synopsys) and manufacturing (ASML, Lam Research, Applied Materials); (2) new chip designs (e.g. Nvidia); and (3) chip manufacturing (e.g. TSMC) (FT)
Europe’s ASML is one of the beneficiaries: ASML, a global leader in chip manufacturing tools, with Intel and TSMC among its key customers, presented its 1Q21 results and its FY2021 guidance this week. The overall tone was bullish, with revenue growth expectations for the year increased from a previous +12% to an impressive +30%. Shares went up, but they’re starting to look a bit risky, at 47x expected earnings, and with market cap beyond $250bn, turning them into one of the largest tech companies in Europe. For instance, some investors are starting to be concerned by how much the company depends on Chinese customers (15% sales in 1Q21) (WSJ)(Bloomberg)
The US government includes healthcare and education in its infrastructure funding plans
Healthcare and education emerge as priorities in Biden’s infrastructure building plan: The plan allocates $400bn to be spent on healthcare, with another $25bn to support childcare. On top of this, $100bn are being allocated for schools. All this may look inconsistent. What have healthcare and education in common with new bridges, new telecom networks or new semiconductors? However, a more long-term perspective can help. First, with an aging population, and as an activity that is still difficult to automate, healthcare is a safe bet as a source of future jobs. Second, better healthcare may help improve productivity in other activities, so there is an “amplified” effect on economic growth. And third, with respect to education, improving “human capital” looks like a good thing to do, with automation and digital technologies expected to reduce the importance of “physical capital” in the future (FT)
IBM might have finally found its role as a cloud infrastructure provider
IBM’s results: biggest revenue growth since 2018. IBM announced a positive revenue growth (+1% to $17.7bn/Q) in 1Q21, driven by demand for cloud services, and suggesting that the turnaround plan of the new CEO is starting to work. Total cloud revenue grew +21% to $6.5bn, so IBM’s “hybrid cloud” value proposition, which allows customers to store data in private servers and on multiple public clouds, seems to be successful. IBM is positioning as a “neutral” middle agent between customers and the three giant public cloud providers (AWS, Azure and Google Cloud). For that, they are using technology from Red Hat, a company that they acquired in 2019 for $34bn (Bloomberg)
Cities seen as an essential element of the future climate-friendly infrastructure
Cities now called “our best hope for surviving climate change”: This Bloomberg article mentions the “hysteria about urban density” that has come with the pandemic, and claims that it is now disappearing. So people will probably continue moving into cities. Yes, that may be risky if we think that another pandemic could be in the horizon. But from a climate change or sustainability perspective it may actually be a good thing. Cities consume 2/3 of the global energy supply and generate 3/4 of the world’s greenhouse emissions, but this centralization of the risk creates an opportunity to maximize the impact of specific initiatives to build more sustainable cities. There is already a debate across many big cities across the world, including the “15-minute city”, where people live within a short distance of everything they need, reducing the use of cars (and emissions) (Bloomberg)
II. The battle for social audio (and other signals of a “digital-first” future)
Everyone wants to surf the social audio wave
“Social audio” is officially a new investment hype, with Clubhouse at the center: We may be living in a (new) Venture Capital bubble, with investment in US startups having reached a figure of $69bn, a new record and +41% higher vs. the previous one, in 4Q18. A new wave of social apps is capturing most of the attention these days, with Clubhouse as the star of the show. Many other new social apps, including Stationhead (where users can host their own radio shows) are putting audio at the center, to differentiate vs. incumbents like Facebook, Twitter or Snap. Audio is also seen as a less invasive alternative to video, and a potential antidote to “Zoom fatigue”. All these perceptions are clearly helping Clubhouse, which has just raised funding at a valuation of $4bn. The number is equivalent to more than $100m per employee, and is 4x vs. just 3 months ago. So all those who talk about “investment frenzy” may have a point (WSJ)
But Clubhouse may be starting to lose steam: The Financial Times reminds us that downloads of the app have fallen -72% in just one month, and this could be a worrying sign, as the company is still far away from the reach of giants like Facebook (weekly active users are approx. 0.5% of Facebook’s daily user count). There may be several different forces at work here. First, new users of the app are not using it so intensely as the initial cohorts. The original users came mostly from the Silicon Valley, and had (by definition) similar profiles. Meanwhile, newer users would be finding it difficult to connect with people with the same interests, and getting bored with the experience. Second, vaccinated consumers may be going out more frequently, so (even when they have interest) they would have less time to spend with the app. Finally, many people still don’t even know what Clubhouse is, and the process for the company to spread the message to these less sophisticated users could be costly and time consuming (FT)
So Facebook sees an opportunity: First of all, Facebook obviously has a massive global reach, and also has tools for users to find “friends” with similar interests, like Groups, now used by 64% of the total monthly users of the blue app. So they are doing a very natural thing, and just announced the launch of a Clubhouse competitor (Live Audio Rooms) which will work within FB Groups. So there are reasons for Clubhouse to be worried. With its ability to solve both the problem of reach and the challenge to get users aligned around common interests, Facebook seems to be well positioned to successfully bring the concept to “Main Street”
Unlike Clubhouse, Facebook is well prepared to monetize the app, which could reinforce the positive effect on personalized ads that Groups has already had for Facebook, by revealing more information about what each user likes. On top of that, and aligned with the current skepticism about the future of digital ads, Facebook is also planning to experiment with mechanisms for users to directly pay for content, including “stars” that can be bought to reward creators (WSJ)
However, the move also creates new content moderation challenges for Facebook: Live audio, at the center of the “Audio Rooms” experience, brings significant content moderation challenges, due to its real-time nature. And this comes at a time when Facebook is under hard pressure in the US and in other regions, to control the conversation among its users, and avoid the spread of “toxic” content that can often have a rather unpleasant impact on the real world (FT)
Apple is launching (paid) subscription podcasts: Audio is also very important for Apple, which is in a race with Spotify to become the “default” app for music and podcasts. Last Tuesday, in their first product event this year, the company announced a new version of its podcast app, which will incorporate a paid subscription option. This is also one more sign of “the end of free” for internet content. Apart from this, Apple confirmed the critical role of chips to enable innovative form factors, now often more important for the user experience than raw processing speeds, with a radical redesign of the iMac that leverages the company’s new M1 processor. There was also a (rather good looking) new iPad, and a set of wireless tags that can be used to track gadgets or luggage (very similar to a previous product from Tile, a startup) (WSJ)
A revolution in the TV supply chain, driven by video streaming
Content gets “glocal”: global streaming platforms compete to dominate local content. There is a revolution under way for the way Hollywood delivers content to markets beyond the US. In the previous world, people consumed a combination of American shows, sold by US giants to local TV stations, and translated or subtitled in the local language, and other shows that were produced locally, by local content creators. In the digital-first world, global companies based in the US, like Netflix, Disney and Amazon, are developing direct relationships with consumers. As these consumer bases expand, the economics for producing locally improve, and this is leading to a massive effort by these American giants to create local content too. About half of the new content Netflix is developing (with its massive $17bn / year budget) is based outside the US, and almost 40% is not originally in English. Disney and Amazon seem to be moving in the same direction (WSJ)
This is aligned with an increasing need for the platforms to grow out of the US
Netflix’s subscriber growth is slowing down. Remaining growth opportunities are overseas: Netflix presented its 1Q21 results this week, and the initial reaction of the stock was to fall -11% in after-hours trading. The perception was that the company is getting close to its limit in terms of subscribers, after reaching more than 200m paid customers globally, and with the tailwinds from the pandemic starting to disappear. The company also mentioned a decrease in content releases due to the difficulties to produce new shows during the Covid crisis. Markets overseas are now almost the only growth driver, together with potential new price increases, which seem specially difficult these days, as competition (Disney, Amazon, HBO Max) gets tougher. Local (and maybe cheaper) production away from the US could also increase profitability (WSJ)(WSJ2)
HBO Max consolidates as another Netflix competitor, and has ambitious plans to expand out of the US: AT&T has also presented 1Q21 results, including very positive numbers for HBO Max, the new streaming app that delivers WarnerMedia content direct to consumers, and which already would have close to 20m subscribers, almost as many as the traditional HBO cable channel. The app is a key growth driver for AT&T’s content production division, WarnerMedia, which is growing almost +10% per year. The next step, according to AT&T, is global expansion, starting in June (NYTimes)
E-sports on the way to be the new sports
E-sports will become an olympic sport: The International Olympic Committee has announced plans to hold a virtual video games event ahead of the Tokyo Olympiad. This will be the first licensed Olympic e-sports event, and will feature competitions of Konami’s Powerful Pro Baseball 2020 and Sony’s Gran Turismo racing simulator, among other games. This is seen as an anticipation of e-sports becoming one more olympic sport. The next Asian Games, to be held in China in 2022, have actually decided to include e-sports as a full medal event (Bloomberg)
Automation accelerates in markets with high salaries, in search for cost reductions
Norway becomes a best practice for e-groceries: SoftBank has spent $120m on a stake in Oda, an online grocer from Norway, which they see as a great opportunity because the company has been able to thrive and be profitable in the market with the highest hourly labor costs in Europe. As a consequence, Oda is an industry benchmark in automation capabilities and fulfillment efficiency. We’ve sometimes discussed here the opportunities for advanced countries to import innovation from emerging markets, where it sometimes can occur more easily thanks to the absence of legacy technologies and incumbents. But this is an interesting example of innovation flowing in the opposite direction, and happening in a very advanced market, as a consequence of negative selection pressure due to high labor costs (Bloomberg)
The future of e-groceries are autonomous vehicles: With a similar logic to the case of Oda in Norway, and pretty much aligned with things we’ve been saying in these weekly summaries, John Gapper from the FT forecasted this weekend that Deliveroo will eventually move to use autonomous robots to deliver the orders, under pressure from increasing wages and more expensive working conditions for drivers (forced by regulation), on one side, and the challenge to be profitable, amid huge competition, on the other. As a result, “the delivery rider will be an endangered species as soon as machines can perform the task” (FT)
Coinbase may be great, but it’s not the real (digital money) thing
“Bitcoin believers” may be not so happy with Coinbase: Everybody was seeing the recent listing Coinbase, at a stratospheric valuation, as an official confirmation of Bitcoin as a mass market currency, and as very good news for the historic Bitcoin advocates, which has been dreaming all these years about a fully decentralized economy. But the FT explains how, rather ironically, Coinbase is not exactly that, because it actually behaves as a “middle person” between the “wild” crypto markets and the public. So it basically works like a bank, that buys the “exotic” cyptocurrency on behalf of its customers, and then stores it and trades with it, getting brokerage fees. So, as this article says, those who thought Bitcoin would remove the public’s dependency on financial institutions should be lamenting the expansion of Coinbase (FT)
The digital advertising market heats up
At the same time as it reinforces iPhone’s privacy controls, Apple expands its ad business: Apple was already selling ads for app developers that wanted to appear prominently in search results within the App Store. Now they’re expanding the business and will start selling also positions in the “Suggested” section of the Store. The original business seems to be quite lucrative for Apple (makes sense, given the huge iOS installed base), with revenues around $2bn per year and 80% margins (not bad at all). Of course, the risk of this is that antitrust pressure could increase on the company for exploiting a monopolistic position in iOS app distribution. But of course, Amazon is doing something similar, at a much larger scale, so Apple shouldn’t probably miss the opportunity (FT)
Snap is going well, and not too worried about Apple’s privacy rules: Snap’s 1Q21 results topped analysts’ expectations in both revenues and daily active users. People start to believe that the bullish guidance of a +50% yearly revenue growth in the coming years is possible, and shares reacted positively (+5% after hours). Obviously the pandemic has worked in Snap’s favor, but the company doesn’t think this will fade as the Covid crisis ends. Evan Spiegel, the CEO, argued that augmented reality will be key to increase engagement in the coming years, and also to create monetization opportunities, e.g. for advertising of beauty products that the users will be able to test virtually. The company also referred to Apple’s new privacy rules, and said that their impact is uncertain, but that a shift in the user mix to Android (already more than 50%) should help with that (Bloomberg)
III. In search of a new world order, where countries and Big Tech coexist
The world needs a way to make nations and global tech giants coexist: Big Tech companies have accumulated a huge amount of power in the recent years, and they are expected to play an increasingly important role across all economic activities. So new political challenges are appearing, as decision making about many things affecting people’s lives is now in the hands of a few global companies, and beyond the power of national governments. These challenges are the root cause of a global “Techlash” that we are seeing these days, with governments in countries as far apart (in any possible sense) as China and the US now acting to limit the power of digital platforms. The end game, or at least part of it, should probably be an international control mechanism, not unlike the ones represented by the United Nations in the last 70 years, where Big Tech companies can be represented and reach cooperation agreements with national governments, with a balance between free (global) trade and (national) security. But let’s see, because these are uncertain times, and often things have to get worse before getting better (NYTimes)(FT)
US: Apple and Google under pressure for their App Stores. Last Wednesday there was a US Senate hearing in the context of an antitrust investigation under way against Google and Apple for anticompetitive behavior in their App Stores. Discussions were apparently more focused on Apple, and on the commissions they charge for in-app payments. The next step could be the drafting a new legislation to define what App Stores can or cannot do. Apple, who is positioning as a “privacy champion” but is at the same time perceived as an arrogant company when dealing with some of these accusations, should probably take note (WSJ)
US: Amazon’s labor relations under the radar. We’ve already discussed that the election in which Amazon’s Bessemer workers rejected to unionize is not seen almost by anyone as a final win for the company. The process has started difficult debates about the labor conditions, which even Jeff Bezos’ has discussed in his letter to shareholders this year. And unions keep moving, leveraging the growing consensus on the need to do something, and the favorable political climate under Biden. The latest news are that the Teamsters union, specialized in transport and logistics workers, is launching a new effort to organize Amazon’s drivers. Also, alternative ways to organize workers, different from traditional unions, are being discussed, e.g. with proposals to copy the “Alphabet Workers Union” that is active in Google, and helps employees participate on the company’s decision making (FT)
EU: a new regulation on AI systems, as a “third way” between the US and China. This week the EU presented a plan to become the first global bloc with a regulation of how AI can be used. The proposal is perceived as a “third way” between the approaches of the US, where private companies lead the use of AI, focused on commercial applications, and China, where the governments plays a more active role, and is effectively building a “surveillance” society that monitors what citizens do. Europe wants to preserve the positive stimulus to private-sector innovation, while also including mechanisms for governments to act when commercial applications create threatens for the citizens. Of course this sounds good, but it is (much) easier said than done. E.g. it is not easy to build “ethical AI” systems that are guaranteed to treat people fairly, and it is specially difficult to draw the line between systems requiring regulation and those that don’t. So many uncertainties remain. And concrete laws are expected in 2023 at the earliest (FT)(FT2)
China: creating a national data platform for Fintech. The latest action by the Chinese government against Jack Ma’ massive Fintech platform, Ant Group, is a proposal to create a national entity to control the country’s financial transactions data. Ant Group would be forced to contribute its own database, a key differential asset, to this national platform, that all of Ant’s competitors, including state-owned banks, would also be able to use. This is relevant for competition in the Chinese financial services sector, as Ant has been using the data to develop superior credit scoring profiles of Chinese citizens, and this has allowed them to offer more attractive loans (and get fees from other financial institutions). The new vehicle would be run by former executives from China’s Central Bank, and this is creating skepticism on its viability, as previous attempts by the Central Bank to manage similar databases have mostly failed. Another issue is a possible lack of incentives for citizens to allow their data to be collected. Ant Group’s platform was exploiting its position as the natural payment vehicle for Alibaba’s e-commerce sites, but this won’t be so easy if it’s the Central Bank who gets and stores the data (FT)
Is this the beginning of the end for the Chinese version of capitalism? Obviously this new initiative from the Chinese government is seriously hurting Ant Group’s valuation, which is now estimated to be approx. half of what was expected at the time of the (failed) IPO: $160bn now, using a 15x earnings multiple, aligned with a traditional regulated lender, vs. $316bn before the listing was suspended. The first reactions in the International business press are showing concerns on this representing a “terrible signal” showing that the Chinese government would be willing to further reduce the autonomy of the country’s private sector (FT)
Snapshots from the Second Cold War
Nvidia’s acquisition of Arm is under scrutiny in the UK: This week the British government announced a national-security review of the acquisition of Arm, the “neutral” company behind the architectures powering most chips (with the exception of Intel and a few other “integrated” companies), by Nvidia, one of Arm’s customers. Yes, this may be linked to competitive issues: will Arm be able to maintain its neutrality when it’s owned by Nvidia? Will Nvidia get advantages vs. its competitors? There are reasons to suspect and implement restrictions to what the new company can do, if required. But behind the investigation there are other components, more related to geo-strategy, because this effectively means moving one of the tech “crown jewels” away from the UK, and into the US. So the government could be trying to protect an asset that, in the current international context, can be perceived as critical for the UK future. Nvidia’s shares fell slightly after the news (WSJ)(Bloomberg)
The US looks to build its own network equipment supply chain: The Koch group, an oil-based multi-billionaire American conglomerate with plenty of interests in (Republican Party) politics has decided to invest $500m on a stake in Mavenir, a provider of Open RAN software. Of course, this looks like a positive sign for Mavenir’s sustainability. However, given that it is Koch who’s bringing the money, it also looks like part of a political push for the US to develop its own network equipment supply chain, an area where the country has been weak since Lucent was acquired by Alcatel, back in 2006. The US government has already expressed its interest in developing a local ecosystem of smaller players that can compete with giants like Huawei, Ericsson and Nokia (FT)
India emerging as a geo-strategic battleground:
“Digital authoritarianism” grows in India, and foreign apps are forced to partner with local players: The case of China’s TikTok, which has been banned even after having accepted all requests from the government, illustrate a degree of arbitrariness that could affect any foreign app trying to enter the market. The climate is becoming even worse, with new laws being passed to give more control to the national institutions. As additional examples, messaging apps like WhatsApp or Signal are forced to break encryption in India, and social platforms are required to take down content upon request within 36 hours. Some digital giants like Facebook (Reliance Jio) or Flipkart (Adani Group) have decided to hedge their bets by partnering with local tycoons, with influence on the government (FT)
Europe sees an opportunity in Indian 5G, post-Huawei: EU leaders will meet with Indian representatives next month, in the context of the Indian ban against Huawei. This is obviously a commercial opportunity for Ericsson and Nokia, that is at the same time being dressed as a “renewed focus on ensuring security across the 5G value chain”, and a way for Europe to work with “democratic partners, including India” to establish transparent network security standards (Bloomberg)