All things will be smartphones
And other signals of change this week: The Software Invasion. The re-shaping of telecoms. Postcards from the Second Cold War. The "Techlash" gets momentum. What are investors looking at
Things are turning into smartphones
Computers are looking more like smartphones: Or at least that’s one interpretation we could give for this week’s news about Apple leaving Intel and shifting to Arm processors for its Mac computers. This will give the company control on the full technology stack, like in iOS devices, but also will enable new synergies between Macs and iPads & iPhones, like using the same apps across all the portfolio (Story)
One more step towards turning cars into “smartphones on wheels”: Nvidia has announced an agreement with Mercedes Benz this week, to build together what they describe as “software-defined cars”, including a high-performance processor from Nvidia, original software (that users will be able to update, from time to time) and apps to download, complementing the basic functionalities. Mercedes talks about “endless possibilities” for the customer, and about “perpetually upgradeable machines” (even if it is not clear how this benefits their business model…) (Story)
Factories have also start to be “softwarized”: Even factories are adopting something similar to the smartphone model, and companies will increasingly be able to manage them remotely, and optimize operations that way. This is one of the big promises that 5G advocates keep talking about, and an example was announced this week, with Ford signing a deal with Vodafone in the UK to install a private 5G network in a factory in Essex. The network will be provided by Ericsson, and the project is partly subsidized by the British government (Story)
More signs of the “Software invasion”
In Finance:
An “Amazon-like future” for banks? The CEO of Openbank in Spain says that the pandemic has made people digital beings “by decree”. The use of online banking in some European countries has actually grown up to 19% during the crisis. And this is expected to make banks of the future look increasingly like Amazon: digital front-ends offering a variety of financial products. Interestingly, this guy was hired by the bank from Amazon, and he’s now working to avoid that Banco Santander (Openbank’s owner) could be disrupted by firms like his ex-company (Story)
Maybe this could take time… The FT agrees that people’s habits are changing fast, but believes it is too soon to think of a fully digital financial system. For instance, claims from a Visa executive about the end of physical currency, that we discussed here last week, could be only partially true, as old fashioned cash still has many appeals, including the lack of traceability, which is obviously good for the bad guys, but also for legitimate privacy. The newspaper forecasts that cash won’t disappear, but turn into a more niche tool that will be harder to find (Story)
And the case of India shows that the digital payments market can be difficult: Somewhat paradoxically, the shift of Indian customers from bricks-and-mortar to digital commerce has had a negative impact on the country’s digital payments market (the fastest growing globally), as many physical transactions that are no longer happening were being paid digitally. This creates uncertainties in an overpopulated market, where many players (including Google, Amazon and the local Paytm, backed by SoftBank and Alibaba) were investing heavily to capture market share (Story)
In Media:
The crisis of the advertising market is accelerating change: This week we discovered that the crisis has created unexpected partners, with newspapers and Google (traditional enemies) being pushed into each other’s arms. Google has apparently agreed to pay to license news content from a selected number of publishers, and talks about this as a “step up” in its dealings with the news industry (Story)
Digital advertising will surpass traditional media this year: For first time in history, digital advertising will account for more than half the $530bn global advertising industry. This was already a structural trend, but it has recently been accelerated by the effects of the pandemic (Story)
But again, this doesn’t mean the end of traditional advertising: Or at least, that’s the opinion of the FT, which has been very explicit this week on its defense of some parts of the “old economy”. As budgets get less constrained in the coming years, CMOs could increase marketing spending (e.g. looking to increase brand awareness), which typically uses traditional media, like TV and newspapers (Story)
And the digital ad players are also suffering with the crisis: Even super-powerful Google is expected to have a decrease in ad revenues this year, that the market researcher eMarketer estimates in -4-5%. And that’s including the assumption that the company will capture share on a total advertising market that could decline up to -7% according to the same source (Story)
In Video Entertainment:
Streaming keeps making progress, and Disney+ is a clear example: The last positive message that we have received about Disney’s new streaming service is that they have just stopped offering one-week free trials in the US, which is seen as an obvious sign that things are going (very) well. Disney+ already has more than 54m customers (Story)
Chinese tech giants want a piece of the global video streaming market: Tencent, one of the two Chinese tech giants (with Alibaba), and a global leader in video game content, is investing to enter the South Eastern Asia video streaming market, through the acquisition of content, technology and resources of iFlix, a provider with 25m customers operating in a dozen markets in the region. They say this is in line with their strategy to expand their international streaming platform, WeTV (Story)
Live games are a new battleground, but Microsoft won’t be part of it: Microsoft has announced they’re shutting down their live-streaming service Mixer, a competitor to Amazon’s Twitch, and an (apparently) obvious bet to leverage their leading position in video games, with the Xbox. Interestingly, the site’s traffic will now be redirected to Facebook Gaming (the third player, after Twitch and YouTube Gaming) (Story)
5G could trigger a reshaping of telecoms
The change in technology is starting to change the industry: This week we’ve learned of a relatively small (and distant) move, but one that could be showing us how things could evolve in the next few years. Japanese incumbent operator NTT seems to be in advanced discussions to acquire a $500m (5% stake) of Tokyo-based NEC Corp, a network equipment supplier, and rumors are that the partnership will be focused on developing “open network” equipment for 5G and (future) 6G networks. According to the WSJ, they would be thinking big, and aspiring to sell this equipment to companies like AT&T, interested in finding alternatives to Nokia and Ericsson (Story)
Meanwhile, in the US 5G remains at the center of the “Second Cold War” with China: Like in Japan, a key problem is how to rebuild the supply chain, in an ex-Huawei part of the World. And the US government would be looking at three different alternatives: (1) subsidizing Ericsson and Nokia, to make them more sustainable, (2) convincing American tech companies (e.g. Cisco) to acquire the European suppliers, or invest in them, or (3) creating incentives to adopt “open network” equipment for 5G, which would create opportunities for innovative American vendors like Altiostar, Mavenir or Parallel Wireless (Story)
Cross-border M&A is fashionable again in European telecoms: This week both M Vestager (the EU’s competition’s chief) and the CEO of Telefonica have expressed sympathy for a potential wave of cross-border takeovers between European telecoms. The European Commission would see these as preemptive moves to protect regional operators from “predatory foreign buyers”. Vestager, who has blocked national consolidation deals in the past, is now saying that “it would be good to have more pan-European players”. At least in theory, the “software invasion” of telecoms (e.g. via open network equipment) could create enormous economies of scale and justify some of these deals (Story)
Postcards from the Second Cold War
The battlefront in South East Asia keeps active:
Singapore’s operators will not use Huawei for 5G: Singtel and StarHub, the biggest local operators, have chosen Ericsson and Nokia as their main 5G suppliers, leaving Huawei with less significant contracts. The Singapore government is saying that they’ve never explicitly excluded any vendor, but many see this as a victory for the “American side” (Story)
Google could exclude Hong Kong as a destination for the subsea cable they’re building in the region: Google and Facebook are building a 13,000Km high capacity cable between the US, Hong Kong, Taiwan and the Philippines, but the US government has been opposed to Hong Kong as an access point, as this “could expose global data to China”. Now Google is saying that they’re looking for alternatives (Story)
Huawei is making moves in the UK, to defend its position: The US has warned the UK over a Huawei plan to build a £1bn chip factory in the country, that has been well received by a local committee in the area where it would be built, that sees this as a potential stimulus for their economy. US officials would be concerned about the possibility that Huawei would test US chips in the UK (Story)
Russia is emerging as an (unexpected) ally for the Chinese supplier: Huawei would be making a lot of effort to lead the race to supply 5G network equipment for Russian operators. The Kremlin seems to sympathize with this, not only for economic reasons (Huawei’s equipment is often cheaper) but because of national security issues, to reduce dependence on the West and with the Chinese as a “lesser evil” (Story)
One more week, one more technical breakthrough in China: China keeps showing the world their technology strengths, with news of innovations almost every week. This time they’ve announced the completion of the “Beidou” project, an initiative to build their own GPS system and cut their reliance on American technology (Story)
“Tough” Chinese politics don’t help Chinese firms to expand internationally: A good example this week came from India, where a clash between local and Chinese troops at the Chinese border caused 20 casualties two weeks ago, triggering a wave of anti-Chinese feelings in the country. Last Wednesday, Indian officials said that they would bar the state-run telecom companies from buying equipment from Huawei or ZTE (Story)
The “Techlash” gains momentum
The negative political and social reaction against Big Tech companies is growing, driven by the turbulent times of this crisis
The Apple Store remains under scope:
Negative perceptions on how Apple treats developers were patent before the WWDC event this week: Third-party developers had been accusing the company of exploiting “monopoly power” by getting a cut on payments that users make within many apps, or for arbitrarily rejecting some apps for not abiding by in-app purchasing rules (Story)
Responding to the pressure, Apple has announced several pro-developer policies: Developers will now be able to appeal decisions about potential violations of the App Store rules, and there will also be a mechanism to challenge the rules themselves. In addition to that, urgent app updates, e.g. for fixing bugs, won’t be delayed because of legal issues (Story)
Big Tech management of user data at the center of the fight:
Apple insists in its “privacy champion” narrative: Apple has been trying to differentiate vs. other Tech Giants for its priority to protect users’ personal data, implicitly arguing that their business model does not depend on monetizing these data. This week at their WWDC, they announced that they will force iPhone apps to get permission from users before tracking them, a timely message in the context of the massive demand of location-tracking data from governments that want to use it to control the pandemic (Story)
Germany is pushing Facebook to comply to antitrust rules on personal data collection: Germany’s top court ruled last Tuesday that Facebook had abused its dominance in social media to illegally harvest users’ personal data. As a result from that, the company is now being pushed to alter the way it processes data about its users, including allowing people to block the company to combine their Facebook data with information from other apps (Story)
Google is proactively becoming more privacy-friendly: In what looks like a preemptive move to avoid potential pressure from courts, Google announced this week that they will set a limit on how long they will store users’ personal data (Story)
And more regulatory / public opinion challenges keep appearing:
Google could face an antitrust case in the US: The US Justice Dept. is discussing a potential antitrust case against Google’s parent (Alphabet) for using its dominant position to suppress competition, particularly in the online advertising business, where the company controls the supply chain between publishers and advertisers (Story)
Facebook is having a hard time under the “content management” storm: A number of large companies, including Verizon and Unilever, have started to boycott Facebook and removing their ads from the company’s platforms, on concerns about “hate speech” not being restricted. Something similar happened to YouTube not long ago. Investors got nervous with this and Facebook’s shares fell -8.3% last Friday, with M Zuckerberg himself losing more than $7bn. The company has responded by announcing that they will add labels to some (e.g. those discussing information about voting) (Story1)(Story2)(Story3)
Brazilian authorities have blocked the launch of WhatsApp payments: In what is seen as a blow for Facebook, Brazil has decided to block WhatsApp’s digital payments service, arguing that more regulatory analysis is required to ensure that an adequate competitive environment is preserved. Brazil’s central bank asked Visa and Mastercard to stop processing payments made through the app, and the Brazilian antitrust watchdog blocked WhatsApp’s partnership with Cielo, the local financial partner (Story)
What are investors looking at
What companies have done worse in the pandemic: Last week we presented the list of the companies that had done really well in these turbulent times, courtesy of the FT. The same newspaper published this week an analysis of what companies were hardest hit by the crisis, and they’re in four different categories: (1) businesses challenged by social distancing, like airlines and aircraft manufacturers, alcohol beverages, casinos and catering companies, (2) businesses that have also suffered a hit to supply, like heavy industrials, (3) energy companies, where excess supply (e.g. of oil) is the key problem, and (4) banks, life insurers and asset managers, with profits sensitive to interest rates, which had fallen during the crisis (Story)
Amazon (a big energy consumer) wants to invest in clean energy: The company has just created an internal $2bn VC fund focused on technology investments to reduce the impact of climate change. The objective is to help Amazon reach a goal of “net zero” carbon emissions by 2040 (Story)
The UK sees space technologies as a strategic asset: The British Prime Minister has announced his decision to invest £500m in UK-based satellite company OneWeb, as part of a wider bid. If successful, the bid will result in the British state owning 20% of the company, which has 74 satellites in orbit and plans for several hundreds more. The strategic interest would be linked to the interest in accessing a global navigation system, like the EU’s Galileo program, from which UK companies have been barred (Story)
Investors are paying a premium for tech-exposed real estate assets: In a negative context for real estate during the pandemic, shares in real estate investment trusts related to technology are outperforming. Tower companies and Data Centers have had very significant gains (Story)