The Big (Tech) Clash
And also: Lukewarm 3Q20 results for Big Tech. The big content moderation battle. The semiconductor (cold) wars. Competition increasing in B2B apps. Netflix getting old
Big Tech companies in a collision course with each other
Apple rumored to be developing its own search engine: This week we learned that Apple could be preparing an alternative search engine to Google’s. This Financial Times article even points to the alternative, home-made search app being already used for some search queries made by iPhone users from the home screen (something I haven’t been able to reproduce in my own iOS 14 devices…) Maybe this validates the idea that pure competition in digital markets will eventually fix the very same issues that regulators are trying to address (as happened with Microsoft in the past). Or maybe this is being used as a way to convince regulators of the futility of acting against the current search deal between Apple and Google… (FT)
Indeed, Apple could be seriously affected by the antitrust process just started against Google. A decision to act against the current deal to position Google as the default search engine could hurt Apple as much as the Mountain View company, because the payments under question are estimated to account for 20% of the iPhone’s profit (WSJ)
What seems clear is that search is a significant part of Apple’s R&D efforts these days, even if we could discuss the end objectives. Two years ago the company hired John Giannandrea, then Google’s head of search. And this year the company has announced the acquisition of Vilynx, a Spanish startup with an AI technology that analyzes video, audio and text content, and turns all these into searchable data (Bloomberg)
In this context, the Financial Times wonders if Big Tech companies are in collision course with each other. In the particular case of Google vs Apple in search, the author has a good point here, when they argue that the regulatory action could be an incentive for Apple to accelerate its efforts in this space, as a hedge against a potential decision against the current deal. Apple could be aspiring to directly capture part of the search revenues, instead of receiving them indirectly from Google (FT)
Meanwhile, Facebook enters cloud-gaming, where they will eventually meet Microsoft and Google: Facebook just announced a new cloud-gaming service, aligned with an old tradition at the company, which at some point in the past had the games within the platform (from companies like Zynga) as a key catalyst for growth. Now they seem to be targeting the same kind of market as Google Stadia or Microsoft xCloud, but with a “disruptive” approach, with lower-quality games that are offered for free in Android platforms (FT)
As a byproduct, more Apple-Facebook tensions: The announcement includes one more sign of the current disputes between Facebook and Apple, as the new service won’t be available in iOS devices due to “restrictions at the App Store”. This comes after some tensions between the two companies, triggered by Apple’s “privacy protection” features, that will make it more difficult for Facebook or others to collect data from users’ smartphones and exploit them for ad personalization. It is not only Facebook that could suffer with this: in France, ad companies and publishers have filed a complaint against Apple for using its market dominance to introduce privacy-centric changes in iOS, e.g. requiring advertisers to ask for users’ permission before personal data is collected. Apple is emerging as the “data privacy champion” that some telecom operators (somewhat naively) aspired to be (WSJ)
Big Tech 3Q20 results: the lights and the shadows
A results “super Thursday” this week: 4 of the 5 Big Tech (Apple, Amazon, Google and Facebook) presented results on Thursday, almost at the same time. And in general they were better than expected, with all companies beating investor consensus. However, most of the discussions about the next quarter left investors disappointed, so the stock market didn’t react too positively. The single exception was Google, but they also had more room for growth, as their shares had only risen +16% year to date, compared with an average +56% gain for Apple, Amazon and Facebook (WSJ)
Apple had a better than expected 3Q20 revenue, despite the delay in the iPhone 12, but they didn’t give a revenue forecast for 4Q20, when analysts were expecting a bullish comment, driven by the new 5G iPhones, which could potentially be very big, e.g. in China, where the 3Q20 were actually quite poor, as the company didn’t have a 5G product to compete (WSJ) (Bloomberg)
Amazon’s 3Q20 results have been called “stellar” by some analysts, with the company enjoying the massive tailwinds for e-commerce amid the pandemic. Sales grew +37% yoy to $96.1bn, well ahead of guidance, and the earnings were also clearly beyond consensus. However, investors were disappointed with the operating income guidance for 4Q20, partially penalized by the extra costs driven by the pandemic (Barron’s)
Alphabet, under pressure from the recent antitrust initiative in the US, gave the most positive surprise to investors, beating expectations (as the other Big Tech) but also confirming a turnaround in digital advertising demand, with e.g. YouTube ad sales almost returning to pre-pandemic levels, and hinting that the company’s cloud infrastructure business (Google Cloud) could be profitable, through the announcement that they will be presenting its results as a separate segment from now on (Barron’s)
Facebook faced negative expectations because many analysts had linked the good results of both Snap and Pinterest with a potential shift of advertising money from their platform to these two alternatives,. This was supposed to be due to the boycott from some advertisers, earlier in the quarter, linked to the “toxic content” issues. However, this has not affected Facebook much. Revenues have grown +22% yoy to $21.47bn, and they expect even faster growth in 4Q20. The problem in this case were the comments about “significant amount of uncertainty” regarding the potential evolution of the business in 2021, including both the pandemic and regulation (WSJ)
Other digital companies with a good 3Q20
Clouds and gaming propel Microsoft: The company’s 3Q20 results presentation, that the trends accelerated by the pandemic have been beneficial for its numbers. In particular, growth in cloud computing (with the company at leading positions both in SaaS and PaaS/IaaS) and in video gaming seem to have contributed to the +12% yoy revenue growth reported. Indeed, gaming content sales grew +30% vs. last year, while “commercial cloud” services grew +31% to $15.2bn. Meanwhile, the devices division, which includes both the Xbox and the Surface PCs, grew +6% to $11.8bn (WSJ)
Samsung presented its biggest operating third quarter in 2 years, making it clear that the bans against Huawei have been beneficial to them, e.g. by allowing them to recover the #1 position in the global smartphone market. Net profit jumped +49% to $8.2bn, and revenue growth reached +8% yoy, to reach $58.4bn. The bad side of all this were the concerns that the company expressed about the coming months, saying that they expected a slow down in momentum during 4Q20. This made shares fall slightly after the results (FT)
Pinterest shines: In what eventually was going to be a prelude of the narrative in the next day, with the results of Google, Facebook and others, on Wednesday Pinterest presented an excellent set of results, also consistent with Snap last week. Revenue growth jumped to +58%, driving total sales to $443m in 3Q20, much higher than what investors expected. Interestingly, this was a consequence of strong advertising demand from small and medium businesses, probably a signal that the shift to digital is offsetting any decrease that the pandemic could be causing (WSJ)
The big content moderation battle: Facebook and Twitter under the storm
Under pressure, Facebook is deploying tools to “shape” social media content in countries at risk of political instabilities (WSJ)
Should platforms be made responsible for the content they carry? An ongoing debate:
In Europe in particular, Facebook and others (including Google and TikTok) are looking for legal protection to address the “disinformation” problem. Current EU legislation makes digital platforms liable for any “bad post” if they’re conscious of its existence. This rule actually makes it possible for apps to argue that they don’t know what content they’re carrying, so it has been seen as a form “protection”. But now, under social and political pressure to act anyway, platforms are worried that by removing some “toxic” posts they would indicate they “see” the content, and could be forced to do an exhaustive “cleaning” that would be operationally challenging (Bloomberg)
Meanwhile, in a parallel move, Mark Zuckerberg has called on the US Congress to update the Section 230 of the 1996 Communications Decency Act, which gives tech platforms immunity from being sued over user-generated content. The message was positioned as an offer to solve the current “content moderation” challenges through a dialogue between policymakers, Big Tech companies and other stakeholders (FT)
This is seen as a test of leadership for CEOs: The current challenges, and the enormous test that the coming US election this week is going to be for the social media apps, is also perceived as a test for the companies’ leaders. Very particularly, everyone is looking at Twitter’s CEO Jack Dorsey, apparently much less used to this kind of public exposure than Mark Zuckerberg, and with a very different approach to management, based on “laissez faire” (WSJ)
The Second Cold War (and the semiconductors battle)
Could the pressure on China be counterproductive for the West? The tensions between US and China over strategic technologies, with semiconductors quite at the center, continue to be seen as a potential double-edged sword for the American side, which in the short-time would decelerate Chinese progress towards a position of global technology leadership, but that could be pushing China to develop a full self-sufficiency in chips, supporting an even stronger position in a longer term. Indeed, the Chinese government is planning to invest $1.4trn in its tech sector in the next 5 years, and it is expected that local chipmakers will be prioritized in this effort (FT)
Signs of de-escalation in the conflict are starting to appear: We learned this week that the US were relaxing their prohibitions to sell chips to Huawei, and analysts are now speculating that the sanctions could be less threatening than they initially seemed. It now looks like component sales targeted at Huawei’s smartphone business, as well as all network generations previous to 5G, will be accepted. This could ensure the survival of the Chinese group (FT)
An earthquake under way in the chips industry: Partly because of this Second Cold War, but also because of structural trends, the semiconductor industry is changing fast, as the demand evolves, linked to the emerging drivers for new performance breakthroughs (data center processors, AI, 5G, …). This week AMD, the traditional rival of Intel (e.g. PC chips in the 90s), announced the acquisition of Xilinx, a company specialized in FPGA processors typically used in 5G equipment, for $35bn (not a small deal). Together with Nvidia’s $40bn acquisition of Arm, this is seen as a first sign of a new, “post-Intel” order in the industry (WSJ)
Nokia shows signs of recovery, with the help of the Huawei bans: Nokia is clearly one of the companies that can see the US push against Huawei as something very beneficial. One year ago they (at the 3Q19 results presentation) they cancelled their dividend, to stop a concerning erosion of the company’s net cash position. Now, with a new CEO and in the middle of an apparently radical prioritization of the things they do, they’re close to recover the Eur2bn level that they claim they need. It looks like they’re abandoning their view of “end-to-end network offers” as a differential attribute, and very much focused on being competitive in 5G, a market where they’ve been suffering some delays (Bloomberg)
India emerging as an opportunity. Amazon fighting for a leading position there: Amazon is trying to capture the opportunities that the current geo-strategic context is opening for US tech companies in India. With the Chinese giants largely out of the game (for now), Western “Big Tech” firms are having to deal with emerging local giants, like the Reliance Group. In some cases (e.g. Reliance Jio) this is leading to strategic partnerships (including stakes in the company acquired by Facebook and Google). But in other cases, like e-commerce, there is competition. As an example, Amazon is fighting against Reliance for the control of Future Group, a local retail and fashion conglomerate (FT)
B2B apps: a relatively open space (in the Cloud)
The enterprise app market continues to give signs of more competitive pressure than the equivalent consumer markets, largely dominated by the Big Tech players. This week Microsoft announced a new partnership with Adobe and C3.ai (a company founded by Tom Siebel) to directly compete with Salesforce for the $56bn CRM market. This is one more step in Microsoft’s ambitions to dethrone Salesforce, the leading player with 20% market share, from the top of this segment (Bloomberg)
The future of SAP is in the Cloud: SAP presented its 3Q20 results last Monday, and shares crashed almost -25% after the company reduced their FY2020 guidance, arguing that the pandemic was hitting enterprise demand. But in the middle of this, The Financial Times sees some positive signs, linked to the opportunity for SAP to transform license sales into cloud-centric service revenues, taking advantage of the current shift of customers to the cloud, also triggered by the pandemic (FT)
Is Netflix getting old?
Does Netflix need to increase prices to keep growing? In the consumer space, we had a relatively counterintuitive move by Netflix this week, with the announcement of a price increase to its standard streaming plan, from $13 to $14/month. This may look strange as the company is fighting against increasing competition in a space that they created, but where now Amazon, Disney, Warner / AT&T and many others are aggressively trying to gain market share. On the other hand this would make sense if we consider that Netflix has just missed its 3Q20 subscriber projections, so the price would be a lever to offset the lack of growth in units with an increasing revenue per unit. Let’s see how customer react (WSJ)
A disruption of streaming might appear in the future, but it still looks far away. Postmortem analysis of Quibi continue to be published, now looking beyond the obvious inconvenience of having been launched just at the start of the pandemic. Watching previous tries by different companies, including Verizon (Go90) and the Hollywood majors (Vessel) it looks like the professional short-video format is not an obvious market to capture (WSJ)
More interesting things happening
The IPO of the century: Ant Group finally filed last Monday for its IPO in Shanghai and Hong Kong, “the largest in human history”, according to Jack Ma (the biggest current shareholder). The target was to raise at least $34.4bn. Then, on Thursday, the offer was a massive success, with more than $2.8trn of orders from more than 5m individual investors in mainland China. The figure is higher than the aggregated value of all the stocks listed on the Germany stock exchange, for example. It is also equivalent to more than 870x the value of the shares reserved for this retail investor segment (Bloomberg)(WSJ)
Limits to connectivity as a barrier to life and work in these times: The pandemic is highlighting some clear inefficiencies in how connectivity is managed and offered in the US, with users now hit by internet usage limits that companies like Comcast, leveraging their quasi-monopolistic position, have forced into their wireline home broadband offerings. With average data usage per fixed connection now going beyond 400 GB/month in the US, providers are increasingly forced to raise their data allowances (WSJ)
In Japan, previous investments in robotics start to pay-off: Japan, a traditional hotspot for robotics, is now seeing how local suppliers of home, industry or medical goods are better position to deal with the massive wave of online orders during the pandemic, thanks to their previous investments in robots and operational automation. Technologies used at warehouses and distribution centers are making possible for companies like Askul, MonotaRo and As One to efficiently deal with demand, while complying with social distancing restrictions for workers (FT)