Re-designing the way we live
And also: building the infrastructures that our new lives will demand; the new regulatory challenges and the Second Cold War; the new investment opportunities
Re-designing how we live (and work)
The COVID crisis has accelerated change. The world was already becoming digital, but the virus has made more people cross the last barriers to live and work with digital technologies. The international business press this week discusses if this is an opportunity coming out of a catastrophe.
This week the news are full of examples of how digital is starting to be the default, and the traditional physical experiences, even without disappearing, could be shifted to a new kind of “premium”, only for special occasions or mostly for the affluent classes
According to the FT, COVID maybe an opportunity, as long as we are active in the “re-design” of everything. This article reminds us of Nietzsche’s aphorism, “what does not kill me makes me stronger”, and wonders if this will be the case with the virus. There are also optimization algorithms that voluntarily subject the system to stress, to avoid “local minima” and find the actual optimum solutions: could the virus work as one of this “stress triggers”? For now, we’ve mostly seen the negative side, but the author claims that there is a lot to be won if we focus on building the new tools and infrastructures to address the emerging demands that the crisis has created (FT)
Digital is emerging as “the new default”: Augmented Reality is hot (again)
Microsoft signs a $22bn contract with the US army, to supply augmented reality headsets: A new, ad-hoc version of HoloLens will bring “the next generation of computing to the battlefield” and will help soldiers train, home in on targets or identify threats, superimposing contextual data on top of the real world (FT)
Rumors that Apple could talk about AR at their next developers’ conference: This is probably not true, but the rumor reveals how excited is everyone about augmented reality headsets this days. As the pictures in the invites for the next Apple developers’ conference (WWDC 2021) include a Memoji of a person wearing glasses, PCMagazine is “wondering” if this could mean that Apple will announce something, e.g. a new headset prototype for developers to start creating apps… (PCMagazine)
Snap announces they will release a new version of their smart glasses: Apparently this version will not be for the consumer market, but only for developers. Makes sense, as the previous model didn’t get momentum, among other things because there were not attractive apps (TheInformation)
“Pokemon Go” creator, Niantic, could also be preparing its own AR glasses: The CEO of the company tweeted an image that looked like a close view of pair of AR glasses with the Niantic brand. Analysts are already envisioning a hands-free version of Pokemon Go… Something really exciting, by the way (Engadget)
Medicine is also getting digital
Virtual surgery is coming, with innovation moving from emerging to advance markets: Proximie, a telemedicine startup, is looking to digitize the operating theater and make it available to everyone. The COVID crisis has accelerated the expansion of these solutions, with the company’s users multiplying by 9x and the actual procedures on the platform growing by 5x, to reach 9,200 across 270 hospitals. The FT’s Gillian Tett sees this as an example of “reverse innovation”, expanding from emerging to advanced markets. The same is happening with digital payments too, and all this is making VCs look into less developed markets in search for innovations with high potential impact (FT)
Post-COVID banking is not expected to go “back to normal”
Traditional banks under threat after COVID, as people won’t stop using digital banking apps anytime soon: As in many other industries, what is happening is the combination of previously existing trends with a big acceleration effect coming from the pandemic. The result is that people are now happy managing their accounts through digital apps, and less inclined to visit physical branches, which provide a poorer user experience. So traditional banks are under more pressure than ever (Bloomberg)
Investors are excited with this, and money is flowing to startups seen as “enemies of Wall St”: The New York Times calls them that way, and gives some examples, like Sila, Blend, Brex, Dave, Zeller, Sivo. All these funny-named companies offer banking, lending or payment processing services. Some even have not formally introduced their products yet. But valuations and funding rounds are booming. The underlying vision is that “the current banks are extremely vulnerable” (NYTimes)
Bitcoin on its way to the mainstream: This week both Goldman Sachs and Morgan Stanley were mentioned as examples by Bloomberg, among traditional Wall St firms that have expressed their intentions to offer bitcoin trading to their customers. The article talks about the recently lower volatility of cyber currencies, as a driver for this “mainstream” adoption (Bloomberg)
Online education gets high valuations
Coursera is preparing its IPO, at a $4.3bn valuation: Digital education has also grown fast with the pandemic, and Coursera, a leading startup in this field, is preparing a multi-billion dollar IPO, after having seen its revenues grow more than +50% during 2020 (Bloomberg)
People are going to restaurants without “dining-out”
Growth in deliveries of restaurant food is creating a business for “ghost kitchens”: A new, more “radical” business model is expanding for food delivery apps, with “delivery-only” restaurants , where people cannot go physically, starting to proliferate. Deliveroo has been very favorable to this approach, and is the global leader in this business, with close to 250 “ghost kitchens” across 8 markets. Also, Uber’s founder Travis Kalanick has created a startup (CloudKitchens) focused on providing this service, which already reached a $5bn valuation by the end of 2019. And an ex-DoorDash executive has created Local Kitchens (a similar business) in the Bay Area. So the potential seems huge, and we may see this model replace some “fast food” venues in the near future, leaving the physical restaurant experience as a premium option (WSJ)
Meanwhile, some investors may have started to question the ambitions of the food delivery companies: Deliveroo finally launched its IPO this week, and it was quite a disaster, with shares dropping more than -25% on the first day of trading. Why? Apparently, investors are worried by (1) a slowdown in demand for deliveries with the end of the pandemic, (2) risks in the business models of these companies, especially after a UK court recently ruled that Uber should provide standard benefits to its workers, something that could be extended to other markets, and affect the cost base of firms in the “gig-economy”, (3) a badly priced IPO, given the “dual-class” share structure, and a badly prepared roadshow (someone may be suffering at Goldman in these post-IPO days), (4) a decreased appetite in the market for “growth stocks”, as bond yields are rising. The FT talks about the “worst IPO in London’s history” (WSJ)(FT)
A Spanish rival of Deliveroo seems to be in quite good health: Glovo, the Spanish local rival to Deliveroo, but more focused on groceries, just raised €450m in its last funding round. They will use the cash to expand across Europe. This comes after the Spanish government has proposed changes to the country’s labor laws, aligned with the recent UK courts’ decision. The company has not disclosed the implied valuation, but they already claimed they were a “unicorn” in a previous round, back in December 2019 (Bloomberg)
Can “everything” be turned into digital? Maybe it’s too soon…
Improbable Worlds’ dream is fading: Improbable Worlds was a company with a vision. In the past they declared their ambition to build “something like The Matrix”, through their SpatialOS, a platform initially targeting game developers (to use it to generate “virtual worlds” where characters would live. Improbable wanted to expand the tool as an enabler for simulations of practically anything. The objective is revealing difficult to deliver. SpatialOS was powerful, but too difficult to use, so game developers did not embraced it as expected. As a result, Improbable has simplified the platform, but this has been at the expense of its functionalities. So the original mission seems to have given way to a more anodyne one, like “providing better ways to build multi-player games” (FT)
As digital expands vs. physical, cities will have to change
Governments see this as an opportunity to solve the urban-rural divide: Ireland has just announced a plan to capture the “unparalleled opportunity” that the pandemic offers, after having triggered a radical shift in the way we work, that has allowed many people to move from major city centers to the rest of the country. The government aims to have 20% of the country’s 300,000 civil servants working from home by the end of 2021 (FT)(Plan)
The phenomenon is happening everywhere: Three trends are clear, according to this Financial Times analysis: (1) Smaller cities are attracting people previously based in large urban areas; (2) however, big cities are still attractive, and large homes close to their centers are having price increases; (3) “working near home” could become the new “work from home”, with many people interested in going out to work everyday, but also rejecting the previously usual long daily commutes. The conclusion is that “we just don’t know yet” which of these partially contradictory trends will finally dominate (FT)
Big Tech companies could start returning to the office: Google expects to reopen US offices in May, but doesn’t expect anything close to the previous normal until September. Amazon has said that most of its US employees will return to work in the Fall (WSJ)(Bloomberg)
Building the infrastructure that our new lives will demand
Networks
Governments move to build broadband networks: Everyone agrees that emerging needs of the post-pandemic world require better connectivity. However, in many countries (including advanced ones), broadband networks don’t deliver, or they leave large parts of the population with poor internet access. Governments globally see this as a key priority
This week we learned that the US is allocating $100bn to cover the connectivity gap: Within Biden’s $2trn infrastructure plan, broadband access has a relevant position. The total budget includes $100m to build broadband access infrastructure reaching every American home. This is pleasing advocates of “universal broadband”. However, other political sectors are not so happy, and they see it as a state intervention on the economy. The plan relies on private companies to build the networks, but there is the concern that companies may be reluctant to deploy an infrastructure that they may see as potentially unprofitable (this already happened with electricity in the 1920s). Within the local industry, telecom operators seem to have received the program better than cable players (which could lose their quasi-monopolistic position in some areas of the country) (NYTimes)(WSJ)
Some critical network infrastructures are no longer provided by telecom operators:
Submarine cables are now being built by Big Tech platforms: The telecom industry is changing (or has already changed). A key infrastructure to support a country’s citizens’ access to internet are the submarine cables connecting different regions with the US, where the big data centers of the Big Tech platforms are based. In the past, these cables were built by operators, or by consortia in which they participated. This is no longer that case. Now it is directly the platforms that are building the cables. The Financial Times discussed this week the case of Facebook and Google in Indonesia (FT)
Physical infrastructure is increasingly in the hands of neutral providers, like Cellnex: The company has grown massively through large acquisitions of operators’ towers in Europe. Now investors (as this article describes) also want profitability (FT)
5G is bringing more changes to the telecom industry
Verizon just showed that local infrastructure is not critical to sell 5G private networks: Verizon beat local UK operators to get a contract with the Port of Southampton to build a 5G private network. This reveals that control of the local infrastructure is not critical for these deals, as Verizon doesn’t own any, and that didn’t prevent them from beating BT, Vodafone or O2UK. Another way of interpreting this is that if Verizon has done it, maybe companies like AWS, Microsoft and Google could also do it, and sell these networks as a value added service on top of the IaaS portfolio that they’re already offering to companies globally (Bloomberg)
In the US, T-Mobile will attack the Fixed Broadband market with 5G: As discussed in this Bloomberg article, this is something that has been tried many times before, with several different technologies. Most recently, Verizon has tried to capture some cable operators’ customers, using 5G wireless connections on mm-wave spectrum, but they’ve struggled to execute, due to problems like the need of a direct line of sight for these connections to work properly. T-Mobile claims to be planning a tactical approach, targeting the areas where connectivity is most lacking and where the company has the greatest capacity. The plan aspires to have 15m homes passed with this 5G technology by the end of 2021. On the other side of the debate, AT&T remains skeptical about 5G as a feasible competitor in Fixed BB (e.g. fiber or cable) (Bloomberg)
Semiconductors
We need more and different chips: The needs from new ways of living and working are driving demand for semiconductors. This time it is not only processing capacity what matters, and energy performance emerges as a key requirement, to enable new device form factors and comply with sustainability regulations. The “big acceleration” of digital adoption in the pandemic has created a massive shortage in chip supply, now affecting production of all kinds of things, from smartphones to cars. This Bloomberg article explains how it has happened (Bloomberg)
Arm emerges as a big winner, making it possible for Big Tech platforms to design their own chips: Arm sells processor architectures and licenses an instruction set to control the semiconductors. These are useful not only to traditional “neutral” chip designers, like Qualcomm or Samsung, but also increasingly to Big Tech companies like Google or Amazon, that look to differentiate their cloud infrastructure and their devices (two key areas of growth) with proprietary chip designs. The trend is already positioning Arm as a replacement for Intel in many segments. The company announced new capabilities in an event this week, including better security and higher performance for Machine Learning systems, looking to beat Intel in both areas. Arm presented itself as an enabler of “ubiquitous computing” (Bloomberg)
To build all these designs, everyone looks at TSMC, the most advanced “foundry” in the world: This week TSMC has announced a mind-boggling investment of $100bn in just 3 years, to build new chip manufacturing plants. Obviously something difficult to replicate by their competitors, that are already struggling to keep the pace. The largest ones, Intel ($20bn in two factories) and Samsung ($100bn in the next ten years) have already announced large investments too. All this shows how big is the need of new production capacity. TSMC also said that their current facilities have been running at 100% utilization over the last 12 months (Bloomberg)
Governments globally don’t want to depend on TSMC (and Taiwan) so much. E.g. China: Governments across the world are worried by this enormous dependence on a Taiwanese company, at least for the most advanced semiconductors (that today are almost impossible to build anywhere else). This includes China, where the tech-centric government is pushing for the country to become self-sufficient, pouring billions into the sector and setting up national chip funds. The leading Chinese foundry, SMIC, has just announced a $2.4bn investment in a new factory in Shenzhen. Local capacity is much needed to address the increasing demand of Chinese Big Tech players like Huawei, Alibaba and ByteDance, which, like Apple, Google and Amazon, are designing their own chips (WSJ)
The Second Cold War and other policy challenges
The Second Cold War
We’re in a new “Cold War”, with AI and 5G replacing nuclear weapons and the space race: This article compares the two. China is now playing the role that Russia used to play, against the US. Also, the race to lead in 5G and AI resembles the ones that happened in the 50s and 60s for nuclear weapons and “rocket science”. The main difference now is that there is a much more interconnected world, after years of globalization, and the economies are so interconnected that some of the most aggressive potential moves by both bands are more difficult to execute than in the past, because they could backfire (FT)
The problem is that China looks increasingly willing to accept economic risks in the service of nationalism: This is creating global concerns, because some potential actions, like an invasion of Taiwan, could massively de-stabilize the world economy, probably even more than the coronavirus, given the extreme dependency that the digital industries have on TSMC and its advanced chips. So some are advocating for fully new mechanisms (resembling nuclear arsenal treaties in the past) to take the temperature down and protect the global supply chains (WSJ)
Digital advertising is now also under suspicion: In the US Senate, a bipartisan group of lawmakers has sent a letter to some of the largest companies running digital advertising auctions, to find out if an external agent could use them to get access to personal data linked to US citizens, including location browsing history and demographic details. This doesn’t come in with the best possible timing, given the stress to which digital advertising is currently subject as a monetization engine for internet services, due to privacy concerns (WSJ)
Huawei is suffering a serious revenue erosion, due to this “War”: Huawei’s revenues in 4Q20 fell -11.2% year-on-year, to a total of about $34bn. This looks how serious the effect of the new “Cold War” (and the American sanctions) is becoming on the company’s P&L. The full 2020 results were saved by the first months of the year, so revenues still grew, but the net result was almost flat, with one of the slowest revenue growth rates for the company, ever. Interestingly, the company’s local growth within China is accelerating (WSJ)
Ericsson is a clear example of how these things can backfire: Many people were surprised when they saw the Ericsson CEO involved in a lobbying campaign to protest against the Swedish government’s ban of Huawei’s equipment in Sweden’s telecom networks. This just shows how integrated our economies are, because it is probably the result of the fact that Ericsson gets 8% of its sales out of China, where they run a major factory, vs. only 1% from Sweden (WSJ)
Cross-border investments are at risk too: Another example of “backfire” are the potential implications for corporate finance. American investors have been a key source of funding for Chinese tech companies until very recently. Many Chinese startups have done IPOs in the US, or in US-friendly markets like Hong Kong. But now there is pressure to list shares locally. 1Q21 is expected to be a record first quarter for global IPOs, with funds raised more than tripling last year’s total, and cross-border floats represent 38% of new US listings this year. Now, with a potential shift to local, there will be negative incentives for US investors to participate, and this could hurt Asian companies (FT)(FT2)
India sees all this as an opportunity (to become a global tech leader): The current trend to “decouple” the American and Chinese tech supply chains could create opportunities for India, where some companies like Apple, Amazon and Samsung are already shifting production and logistic centers from China, after Biden’s call for “China-free” supply chains in a number of sectors. India’s friendship with the US, Australia and Japan could help make this possible. A report published this week asks if India could become “a 21st Century Technology Hub” (Bloomberg)(Report)
Privacy
Snap is testing technologies to bypass Apple’s new privacy controls: This week the FT revealed that Snap has been using a technology called “probabilistic matching” to identify and track individuals, through data gathered by companies that analyze how people respond to digital ad campaigns, that they then match against the information they have about their own users. Again, the “digital advertising” engine is shown as a very powerful tool to find out everything about users’ online activities (potentially including foreign governments too, as we discuss also this week). The tool won’t be compliant with Apple’s new rules, and Snap has said that the program will be discontinued when these rules are effective, but they have also mentioned that gathering data on “cohorts” of users would not break the rules (several experts disagreed) (FT)
A new world of labor
Labor tensions, and pressure to apply “old economy” rules, could accelerate the “robotization” of tech companies: Regulatory pressure is increasing on tech companies which often have grown at the expense of sacrificing the working conditions of their employees. This is specifically affecting all industries linked to e-commerce and logistics, because the people operating the warehouses and doing the deliveries are typically affected by this “gray area”: they have a job, yes, but the conditions are not similar to the ones that an ordinary worker would get elsewhere. If this goes one, maybe the pressure will grow for these companies (Amazon, Uber, Deliveroo, …) to accelerate full automation and try to substitute people for robots, as much as possible
Amazon’s workers in a “David & Goliath story” to open a union. As we’ve already discussed here, workers in an Amazon plant in Bessemer (Alabama) are trying to unionize, against the company’s will. The fight is led by the American “Retail, Wholesale and Department Store Union” (RWDSU), which represents more than 100,000 workers at companies like Macy’s, H&M and Zara. This would be the first unionized Amazon facility in the US, and behind all this there are a large number of question marks about Amazon’s warehouses’ working conditions (FT)
Working practices are also under scrutiny at god-economy companies, creating regulatory uncertainties: The latest, most evident case has been the disastrous Deliveroo IPO this week, where current working practices, regulatory risks linked to them, and how all that could affect the company’s business model have been questions under discussion for investors (FT)
Emerging investment opportunities: enablers of the future
Investment activity in innovation is stronger than ever: The Financial Times mentioned this week that the SPAC boom has driven a record volume of global M&A deals ($1.3trn) in 1Q21, the largest one since 1980 (!). As a result, investment banks have collected more than $37bn in total fees (FT)
Hot topics: new semiconductors
Groq: a chip start-up building processors for machine learning applications, is a new unicorn: They’re now in talks with investors to raise $300m on a $1bn valuation. They’re focused on designing specialized chips for AI inference tasks, which will be deployed closer to the edge, where the algorithms need to respond to inputs. This segment requires different performance metrics vs. the more powerful, but more centralized AI training applications. Groq could emerge as a strong competitor for Nvidia (FT)
Hot topics: new batteries
Interest growing in lithium ferrophosphate batteries, which are cheaper but provide less autonomy for electric cars. Tesla is already using them in China. They have lower risk of catching fire and is less costly because it uses (abundant) iron, rather than (scarce) cobalt and nickel. The trade off is that ir offers much less miles on a single charge vs. the current alternatives (WSJ)
Japan (home of Panasonic) wants to become a global “battery hub”: Panasonic is currently a leader in lithium-ion batteries. But the Japanese government wants to reinforce its position, under current geo-strategic pressures on global supply chains, and with structural changes ahead in the market: (1) changes in battery designs that could lead to faster charging times and longer duration (and ranges for vehicles), (2) demand for lithium-ion batteries potentially exploding soon, as a consequence of electric vehicle proliferation, and (3) batteries becoming a strategic component, and governments interested to control their supply (FT)
Hot topics: electric (and self-driving) cars
Xiaomi just announced a $10bn commitment to build electric vehicles: China’s electric vehicle market is booming, and Xiaomi is the latest tech company announcing its participation, with a large investment. Domestic rivals include specialists like NIO, Li Auto or Xpeng, but also other tech giants like Baidu. Xiaomi is conscious that this may turn to be a costly adventure, and the CEO said that his company’s large cash cushion gives them confidence to move forward. A new subsidiary will be created for this (WSJ)
Foxconn accelerating the pivot into electric cars, under financial pressures: This week the company that manufactures a large share of the iPhones sold globally reported a quarterly profit that disappointed investors. And they tried to offset the negativity with an announcement that they are accelerating a shift away from the core business, into electric vehicles. They already have partnerships with several carmakers, including Geely, Byton and Fisker. But what many people expect is an eventual announcement with Apple (Bloomberg)
The first commercially feasible autonomous vehicles could be trucks: This week Aurora, a startup including Amazon and Sequoia among its reference investors, announced a multi-year partnership with Volvo Trucks. This comes after a similar deal with other giant truck manufacturer (Paccar) and is perceived as a signal that heavy-duty trucks, and not robotaxis, could be the “killer app” of autonomous vehicle technologies. This makes sense for a number of reasons, including the possibility to focus on long distance trips, and use hubs in city suburbs, to simplify the routes and make them easier for the algorithms. On top of that, there are significant efficiency opportunities in the transport industry, that automation could deliver (FT)
Hot topics: space-based connectivity
OneWeb emerges as a rival of Elon Musk’s Starlink, to provide satellite-based internet access: The company has announced that it’s closing several wholesale deals that will help them fund the expensive launch of their satellite constellation. They already have 146 satellites in orbit, but this is much less than an initially planned number of 648. OneWeb could now have partners in Canada, UK, the Nordic region, Australia and Africa. The CEO has said that they’re on track to go live in northern latitudes by the end of 2021 (Bloomberg)
Starlink (and the rest of the industry) faces sustainability issues: Concerns are growing about the effects that a massive deployment of satellites in low Earth orbits could have on our planet. For instance, Starlink is planning to relocate 2,800 satellites from orbits around 1,200km above earth to 550km. These lower orbits are starting to get crowded, and there is an increasing feeling that we need new international rules to regulate how they should be managed (e.g. how to deal with the debris, when the satellites are no longer active) (FT)