The quest for the future computing platform
And also: The future of infrastructure. The global tech fragmentation. The Chinese Communist Party vs. Alibaba & Tencent. The electric car fever. Digital technologies for every industry
The quest for the next computing platform: a Big Tech (cold) civil war?
A central element in the strategy of Big Tech companies is the quest to anticipate the “next computing platform”. This would substitute the smartphones of today, as the element that concentrates end users’ attention. So the control of this platform, like the control of the smartphone OS today, could be key for future value creation in the digital economy.
In the battle to dominate the computing platform of the future, Facebook makes new moves: Facebook, a company that regrets to have missed the previous transition, from the web to the smartphone, is very active in this field. This vision led them to acquire Oculus 7 years ago, and is central to what the company is doing in its “Facebook Reality Labs”. This month they’re presenting some of the work under way, including the efforts to build what they call a “human-centric” input device to interact with Augmented Reality systems. The prototype looks like a mix between a tennis wristband and an Apple Watch. And the video (in the company’s Tech Blog) is cool (FT)(FacebookTechBlog)
This week Mark Zuckerberg discussed the future of app monetization (and talked about Apple) in Clubhouse: Josh Constine (ex-Tech Crunch) organized a Clubhouse chat this week, with Mark Zuckerberg (FB), Daniel Ek (Spotify) and Tobi Lutke (Shopify), and has published a summary (and the transcript) in his Substack blog. Zuckerberg talked about another key topic for Big Tech these days: the future of content monetization. The future of targeted advertising is under question these days, with an increasing feeling that the current model is not good enough for content creators to be profitable, which would explain why many are now shifting to paid subscriptions. The Facebook founder says here that (1) the company is trying to offer more on-platform revenue options to keep content creators on board, (2) Apple’s new privacy tools for end users won’t help with this, and could (in his opinion) hurt small advertisers, (3) the “30% tax” from Apple’s App Store is also tough for small businesses trying to shift from offline to online revenues (JoshConstine)(Podcast)
With monetization shifting to payments, Stripe emerges as “a 3% tax on the future of the internet”: This idea of internet content distribution shifting to paid subscriptions, together with the acceleration of e-commerce during the pandemic, could be the key drivers of Stripe’s massive valuation. The San Francisco-based digital payments startup is now the most valuable Silicon Valley startup ever, after closing a funding round at a $95bn valuation. The company describes their business model as “boring, low-margin, very competitive”. But the famous Benedict Evans summarizes the value proposition for investors very clearly: “they are a 3 percent tax on the future of the internet” (FT)
Apple is becoming a Facebook rival, with privacy as a weapon: Facebook seems to be on a collision course with Apple. It is not just the privacy-centric tools that Apple is incorporating to the iPhone OS, which will probably hurt Facebook’s advertising revenues. This week we’ve also seen how Facebook wants to be at the center of the next generation of devices / computing platforms, including the wristband prototype they’ve shown, which looks close to Apple’s core territory. On top of this, many people tend to think that Apple’s privacy advocacy is actually a way to generate advantages for the company’s own apps, and could help them gain share in that space, in detriment of companies like Facebook. Indeed, this FT article argues that, if it works, Apple’s initiative would shift the discovery point for apps from ads back to the App Store, where they remain in control. The conclusion? We may need a balance between privacy and competition (FT)
In its privacy-centric path, Apple finds resistance from app developers. Also in China: Apple’s new privacy rules could also fail to deliver on their objectives. App developers have technical ways of bypassing the restrictions and e.g. collect a set of parameters that can be used to uniquely identify each device, and target ads accordingly. In China, at least two apps would have started doing this, and Apple is asking them to cease and desist or they will be removed from the App Store. Let’s see what happens next, as we know that China is a (very) special market… (FT)(Bloomberg)
Regulators could become Apple’s allies in this. Look at France: In France, advertising companies and content publishers had protested to the regulator against Apple’s new privacy rules. But the French competition authority said this Wednesday that Apple’s plan “doesn’t appear to be abusive”. However, they leave the door open to investigate if Apple could use this to favor its own apps (WSJ)
Chips will be a vehicle for future differentiation: We’ve seen that the collision between different Big Tech companies, as they enter each other’s spaces looking for growth, is a clear trend. In the coming competition, semiconductors could be a key differential element. Consistently with this, Big Tech firms have started designing their own chips. Initially (as this Bloomberg article says) it could be a way to differentiate their computing infrastructure offers from the cloud, where AI requires more capacity, but where cost and sustainability considerations are increasing the pressure to reduce energy consumption. Improving performance / energy ratios is actually among the key design requirements for all these new chips. But on top of that, in the future these chips, and their energy efficiencies, could also be critical to enable attractive form factors (often under pressure from the need of space for larger batteries). That’s one of the reasons why Apple is also very much into the chip design game, and why Facebook will probably have to look at it too (Bloomberg)
We may be overestimating Big Tech’s ability to control the future: Using Amazon as an example, Shira Ovide from the New York Times argues that Big Tech companies are continuously trying different ideas and projects, rather than following a clear plan to dominate the future. This ability to try the different opportunities and adapt to capture the ones that work would be the “secret sauce” for these companies’ success. As a consequence of all this, the trajectories of Amazon, Google or Facebook, are full of failures. And successful products are often more a consequence of serendipity than the result of a sustained work with a pre-established purpose. Maybe we shouldn’t be so convinced that regulation is the only way to avoid being fully “dominated” by these giants… (NYTimes)
But the pandemic has reinforced the power of Big Tech companies: However, the pandemic is showing how strong the tech giants are. The disruptions that the virus has caused in the ways we live and work have increased these companies’ power. The WSJ this week looks at the case of advertising: the market was already shifting to online, but the COVID crisis has accelerated the trend. There has been a contraction in advertising expenditure, but as a result of the massive explosion in online activity, this contraction has been suffered exclusively by the non-digital segment. So now digital advertising is more than 50% of the market. And on top of this, the market share of Google, Facebook and Amazon on digital ads in the US has increased +10pp, from 80% to 90%. Therefore these three companies effectively control around half of the total advertising market. Amazon is the (only) emerging challenger here, in one more example of Big Tech firms in collision course with each other (WSJ)
New infrastructures will be required
The next computing platform(s) will require new infrastructures to support them. As in previous stages, the next computing platforms are expected to emerge from a higher “digital density”, with computing capabilities getting closer to us, and even increasingly embedded in more physical things around us. This will require pervasive, high speed and low latency connectivity, that will have to be supported from a new generation of infrastructures, still to be built
5G networks will only be possible through neutral infrastructure. We know that tower sales or spin-offs by operators have recently become the norm in Europe. And many people initially thought that these decisions were driven by pure financial “engineering”, with multiples for infrastructure companies at much higher levels than the ones for integrated operators, and with operators also under pressure from heavy leverage loads. This is partially correct, but it is not the whole story. The additional question is that if there is a 5G opportunity, linked to better customer experiences with connectivity vs. previous generations, this implies building more towers. And the business case for that is often unsustainable for individual operators. So the strategic rationale is to share (at least) the physical infrastructure, and TowerCos are a perfect, credible, well-tested vehicle for that. In practice, as the WSJ said this week, tower sales deals are “a back-door path to (much needed) industry consolidation” in telecoms. The article goes so far as to suggest that “towers are the most direct play in the 5G rollout investors are likely to find”. And we tend to agree (WSJ)
5G is bringing large M&A deals to consolidate networks: a first step for further transformation? Meanwhile, more traditional consolidation moves, driven by the same rationale, are happening where regulators allow them. This week we learned about the case of Rogers, a leading cable company in Canada, which is on the way to acquire Shaw, the other cable giant in the market, in a $80bn deal. The reason for this would be to reinforce Rogers’ position to capture the 5G opportunity. Shaw launched its own mobile brand last summer and has already 1.8m wireless subscribers. If we believe in a future where fixed access “dilutes” with mobile access, with 5G in the middle, then the future of cable companies is linked to 5G, and the only way to make it work is scale (Bloomberg)
In the (parallel) IT world, neutral data center hosts have soared under the pandemic. The IT industry could illustrate what kind of asset structures should we expect for telecoms in the coming future. This is more than a theoretical analogy, because the evolution of technology is driving a convergence between IT and telecoms, deeper than the one initiated within corporate networks in the 1990s. If we look at IT, we see that neutral infrastructure providers already dominate the market. And in the physical layer, companies like Digital Realty or Equinix are growing fast and have sky-high valuation multiples. The pandemic has accelerated the trend, with remote work needs increasing the demand for cloud services and, as a consequence, of data center capacity(FT)
Is the future of internet access in the space? More stories in the press about the promise of satellite-based broadband. This week it was in Christopher Mims’ column. The glamour of these projects comes from (1) being supported by tech celebrities like Elon Musk (Starlink / SpaceX) or Jeff Bezos (Amazon and its more secretive Project Kuiper) and (2) potentially being able to solve the problem of the “digital gap” both in emerging markets and in some large advanced markets like the US or Australia, where significant areas remain unconnected or underserved. The trend is consolidating, and there are projects being started also in Europe and China. However, significant cost barriers remain, and a new challenge is emerging from the environmental implications that low-orbit constellations of satellites, like the ones needed for a good broadband service, could have (WSJ)
Like Ericsson 4 years ago, Nokia starts a turnaround to capture the 5G opportunity. Nokia is doing something similar to what Ericsson did in 2017, when the top management was renovated and the company decided to focus on its core business. So the messages from Nokia to investors this week sound familiar. The company plans to cut between 5,000 and 10,000 jobs in the next 2 years, and will focus almost exclusively on becoming more competitive in 5G equipment, against Huawei and Ericsson. Indeed, Nokia has a problem of competitiveness, as shown by the fact that they lost -1pp market share in 2020, even amid the Huawei bans, and controls now only 15% of the total telecom equipment market. Now the priority is to turnaround this trend, and reinforce R&D activity, which had recently suffered from budget restrictions due to the need to integrate the Alcatel-Lucent business(WSJ)
Rakuten gets (a lot of) money to subsidize its telecom infrastructure bet. Rakuten has issued new shares to raise more than $2bn, in the middle of very high investor expectations for e-commerce, triggered by the acceleration of adoption during the pandemic. This sounds pretty natural for a leading e-commerce player in Japan. Their partners in the deal also make sense for everyone, including Japan Post, that contributes its chain of 24,000 post offices across the country, to reinforce Rakuten’s delivery network, or Tencent, with its expertise in digital payments and its massive presence in China. However, some investors are concerned about how Rakuten will use the funds. Apparently the company wants to invest in its nascent, disruptive telecom business, with a next generation “open” network that could revolutionize the way mobile services are provided. Concerns are probably justified, as the project is difficult to execute, and telecoms are a challenging market. But technology could be on Rakuten’s side. If an e-commerce company (like Amazon) succeeded in dominating the cloud computing infrastructure market, the convergence of telecom infrastructure with cloud computing could create opportunities to expand the scope further, and there could be a connection between e-commerce companies and telecoms, after all. The question is if this technology “revolution” is enough to offset a (large) number of additional problems (spectrum, regulation, competitive dynamics, …)(WSJ)
The tech world’s fragmentation and the Second Cold War
Risks of economic value destruction are growing due to tech protectionism. The coronavirus has increased countries’ concerns on the fragility of current supply chains, and this could lead to a new wave of protectionism that could hurt economic growth globally. The nationalist / protectionist current started with the 2008 financial crash, as many local policymakers started to blame free global commerce for the crisis. This brought us Trump and Brexit. But the problem has grown during the pandemic, as supply chain bottlenecks on medical material at the start of the crisis, and on vaccines today, have created a new appetite for “sovereignty” in many countries. So there is an increasing divergence between political priorities (looking for “self-sufficiency’) and business needs (demanding global competition). As we’ve been discussing here since last year, this is also affecting technology, as the backbone of the new economic paradigm that countries now need to develop, and could lead to a global fragmentation of technology stacks that could eventually slow down progress (FT)
The Chinese government is clear in its “digital sovereignty” objectives
They want China to be self-sufficient in semiconductors. This week the leading chip manufacturer in China, SMIC, announced they will receive a $2.4bn government subsidy to build a manufacturing plant in Shenzhen. The company justified this investment arguing that China needs to ramp up domestic production capacity, to avoid the disruption of many Chinese businesses, due to chip shortages (Bloomberg)
They want to bypass the “rules” from foreign Big Tech firms. We’ve already mentioned here that Chinese apps have started to use an alternative technology to get information about iPhone user profiles, bypassing Apple’s tools, and Apple’s new privacy rules to ask user permission before using them. This may also be seen as a sign that the local technology ecosystem won’t easily accept to abide by rules defined by tech giants elsewhere (FT)
Huawei’s patents are a tool to control technology (both within China and elsewhere)
The company has been focused on expanding its patent portfolio. 2020 was a record year. 2020 has been the year with the largest annual growth in Huawei’s patent portfolio. This has happened amid US commercial pressures, and shows the strong commitment of the company with technology innovation. Huawei now holds more than 100,000 active patents, and is particularly strong in telecoms, specially in 5G. Huawei has become the global leader in intellectual property, with Samsung, Mitsubishi, LG and Qualcomm behind (FT)
Patents can become a (strategic) revenue source for Huawei. Huawei plans to use this large patent portfolio to offset the revenue pressures triggered by the US bans. The company will start charging companies like Apple or Samsung what they’ve described as a “reasonable” fee for access to some 5G functionalities. Some of these patents could affect emerging fields like connected cars, smart homes or robotic surgery, and this Bloomberg article says that they could provoke intellectual property battles that might dwarf the smartphone patent wars… (Bloomberg)
The company is also pivoting to less glamorous businesses: digital systems for fish farms or mine pits. Huawei has seen how the American bans, and specifically those affecting to their ability to get access to advanced semiconductors, have hurt the company’s P&L. But they’re reacting, and they’re now diversifying to (much) less glamorous, but potentially more profitable businesses. As examples, Bloomberg here mentions a first project to install devices that shield a fish farm from excessive sunlight, and a second one about sensors monitoring oxygen levels in a mine pit. These industrial projects, and many others, can be addressed with low-tier technologies that are less affected by the commercial bans (Bloomberg)
China: a long-term fight between local Big Tech and the Communist Party
The Chinese government is officially after “platform companies”: In a Communist Party meeting last Monday, Xi Jinping confirmed that his government is stepping up oversight of the Chinese Big Tech firms, which they believe that have “amassed data and market power”. The objective is the “improvement of laws governing platform economies in order to fill in gaps and loopholes in a timely fashion”(Bloomberg)
This week Tencent lost $62bn because of this: The Chinese government’s regulatory ambitions are far from being just theory. There were plenty of examples in the past few weeks. And this week there were actions against the two largest Chinese Big Tech. First, Tencent lost more than $60bn market cap, mostly attributed to its online finance business. The reason is the rumor that the company will be forced to spin off its banking, insurance and payments units, into a financial holding company that would be subject to China’s financial supervisors. On top of this, also this week we learned that the Chinese antitrust regulator has fined Tencent for not seeking prior approval to earlier investments and acquisitions. The only silver lining for Tencent is that they depend less on their fintech business than Alibaba, so their perspectives are a bit more positive (Bloomberg)(WSJ)
Albaba is (even more) in the spotlight too
The government sees Alibaba’s media assets as a threat: This week the Chinese government took one step further in its move to reduce the power of Alibaba, and asked the company to sell its media assets. This is apparently linked to concerns in the Chinese authorities about Alibaba’s increasing power to shape public opinion in the country, using its assets. Alibaba owns stakes in Weibo (the Chinese Twitter) and in a Hong Kong leading newspaper, the South China Morning Post. On top of this, the regulators are preparing to impose a fine of close to $1bn to Alibaba, for anticompetitive practices in its e-commerce business (WSJ)
The company is being forced to make changes in its core e-commerce business: As a consequence of the antitrust process against their e-commerce business, Alibaba will start offering some of its e-commerce services through competitors’ platforms, including Tencent’s WeChat. This will include the currently fast-growing bargains app, Taobao Deals, that will now have to accept payments through WeChat Pay (an arch-rival of Alibaba’s own payments platforms) (Bloomberg)
Alibaba’s browser has (almost) been banned: One more action against Alibaba this week came in a more indirect way, when a TV show about consumer rights made some negative comments on misleading ads shown in searches through Alibaba’s internet browser, UC. The result was a massive reaction by most Chinese Android app stores to either block the downloads or completely remove UC from their sites (FT)
New rules for the digital economy are under discussion elsewhere
Uber’s UK concessions change game for gig economy. After a UK Supreme Court decision to classify its drivers as workers and not self-employed, Uber has announced that they will receive a holiday pay, a workplace pension and a minimum earnings guarantee. But the problem is still far from being fully solved, with workers in other countries asking for the same conditions, and with the UK ones claiming for a minimum wage based on the number of hours spent on the app, and not just on time spent during trips. Still, this looks like a precedent for the whole gig-economy, that will now potentially have less attractive economics, but will also be more sustainable and “socially acceptable” (FT)
Face recognition is under the (privacy) radar: A face recognition app called Clearview offers investigators the possibility to match pictures of suspects’ faces with those stored in the internet, including social networks, for identification purposes. Of course this has lots of privacy implications, and even if the company was operating in a basically “stealth mode”, Facebook, LinkedIn, Venmo and Google had already sent cease-and-desist letters to them. But now that they have closed a new funding round of $17m the legal threats are increasing. Beyond the specific case of Clearview, this shows some of the emerging problems with digital privacy, including the implications of how tolerant most of us have been about uploading our pictures to a diversity of internet sites (NYTimes)
Google reacts to accusations of monopolistic behavior in the App Store: Google has decided to reduce the fee that it gets from app developers at the App Store. Up to now, the fee has been similar to the one that Apple gets (and many developers are criticizing). Now Google will reduce it from 30% to 15% on the first $1m generated by each app. (Unsurprisingly), Apple has declined to comment (WSJ)
A “guerrilla war” against Big Tech is starting in US State Capitals. As we have already discussed here, the “Techlash” against Big Tech companies in the US has now shifted to the States, where progress is potentially easier than under the complex federal bureaucracy in Washington DC. This WSJ article mentions processes under way in Texas, Arizona, Maryland and Virginia, on a range of issues including privacy, digital advertising and app-store fees. The example of the 2018 privacy law in California shows that if legislation is approved in a state it can then become a federal “standard” and a reference for elsewhere in the country. So these processes are important (WSJ)
The Electric Car fever is here to stay
Electric vehicle startups promise the fastest revenue growth ever. What can possibly go wrong? Not just one, but several electric car startups have plans to reach $10bn revenues faster than Google or Uber. Three of them, Faraday Future, Arrival Group and Fisker are promising investors to surpass that figure within the first three years (it took Google eight, and Tesla had to wait eleven). This apparent exuberance is a consequence of the increasing use of forward looking financial plans to convince investors in SPACs to support acquisitions of startups. This is not possible in conventional IPOs, where rules to protect retail investors only authorize the publication of actual financial numbers (WSJ)
Volkswagen is embracing the change, and just announced its commitment to lead the Electric Vehicle market. Volkswagen announced a full transformation plan this week, focused on releasing cash to invest in electric-vehicle capabilities, which emerge as the company’s focus for the next 5 years. Volkswagen wants to lead the global electric car market by 2025, and expects that 60% of car sales in 2030 will be fully electric. To achieve this, they will build several battery production factories and will use a “platform approach” to efficiently deploy the required assets (software, batteries, charging infrastructure) across the company’s 12 brands. As expected these days, investors were excited, and the share price has gone up more than +15% in just one week (Bloomberg)
Also BMW said this week that more than 50% of their vehicles will be electric by 2030. BMW also made a series of electric car related announcements last Wednesday, including a target of more than 50% vehicles sold in 2030 being fully electric (a very similar number to Volkswagen’s). The WSJ interprets all this as the week when “the electric car fever spread to Europe”. For now, BMW’s strategy differs vs. Volkswagen’s in their approach to batteries. While Volkswagen is planning to build its own battery factories in Europe, BMW continues to talk about “flexibility” and is still focused only on research facilities to monitor the evolution of the technology (WSJ)
Technology changing industry landscapes in all sectors
Payments / Finance
A Fintech company becomes the most valuable Silicon Valley startup ever. The transition to e-commerce has accelerated during the pandemic. Many businesses have been forced to move online fast, and companies like Shopify have grown explosively by helping these businesses with the transition. Stripe is another example of this. It’s a startup that processes online payments, and its addressable market is now much bigger than at the start of the pandemic. Its valuation has also soared, and has recently reached $95bn, after their latest funding round, which officially turns them into the most valuable Silicon Valley startup ever (FT)
Urban mobility
The Chinese Uber plans a $62bn IPO. Didi Chuxing, a Chinese Uber lookalike, is planning its IPO, with a valuation above $62bn (not bad). The company has accelerated the plan, as the recovery from COVID in China has driven a fast recovery for the car-hailing business (take note, Uber investors). Didi is already active outside China (e.g. in Latin America and Russia) but wants to use the cash to expand its geographical scope (into Europe). They would also like to expand its business into e-commerce (Bloomberg)
Communications / Messaging
Messaging apps have a massive impact… and a monetization problem. No one can deny the huge impact that messaging apps like WhatsApp or Telegram have had on the way we communicate. But monetization is another story. Neither WhatsApp, which Facebook keeps trying to turn into a revenue growth engine, or Telegram have been succeeded in becoming sustainable business. Apple’s iMessage, the other big player in the West, is fully subsidized by the sales of the devices where it’s installed. So there doesn’t seem to be a successful model yet, unless we think about WeChat in China, which is a fully different story. The WSJ tells us this week that Telegram in particular has a potential liquidity problem, because they owe creditors approx. $700m to be returned by the end of April, and they’re issuing debt to cover that. But it doesn’t look like a sustainable model… (WSJ)
Pharma
Artificial Intelligence invades drug discovery. Drug discovery has become a hot topic in the last few months, for obvious reasons. And digital technologies, in particular Machine Learning, are a promising tool to drastically improve performance, or accelerate the process. A startup called Insitro has just raised $400m from investors like SoftBank or Temasek, to fund its activities in this space. Fro now they’re building strong data sets to train the algorithms. The promise is that AI will help accelerate the discovery process (often as long as 10 years) for effective drugs (FT)
Call centers
Call-center jobs are on the way to extinction. Customer care is one more field where digital technologies and AI are revolutionizing the approach. The pandemic has boosted automation at the call center, with now more than 25% customers using chat and AI bots (vs. only 10% at the start of the crisis). The expectation is for this figure to keep growing up to 35% by the end of 2021. The substitution of call center agents by robots implied by this is creating concerns in countries like Philippines, where 9% of GDP comes from this activity (BusinessWeek)
Entertainment
Entertainment has changed: There are already more than 1bn video streaming subscribers. The pandemic has also accelerated a rather drastic turnaround in the entertainment industry, where people have stopped going to cinemas and have massively adopted streaming services like Netflix. Global box office revenues fell more than -$30bn this year (almost -75%), while the global number of global subscriptions to online video streaming services just reached 1.1bn. So more than 10% of the global population is already subscribed to a streaming video service. Production studios are shifting priorities according to this, and now content for streaming services, including episodic series, has the highest priority (WSJ)
A generation of “digital video natives” is emerging. Also in China. Together with this explosion of streaming, new video formats and apps, targeting the youngest population segments, keep appearing. This week we learned about a new Chinese app called Bilibili, which is now planning a $2.8bn stock sale in Hong Kong, at an implied valuation of $40bn (4x vs. last year). The app offers videos on a diversity of themes, on top of which users can discuss in a “bullet chat” format (with comments flying across the screen while a video is being played). The target segment is Gen Z (kids born between 1997 and 2012, if we trust Wikipedia) (WSJ)
Education
Digital apps on the way to change education. Education has been another field where the pandemic has started a massive shakeout. The need to address the need student needs during the lockdown has accelerated the development of online educational propositions. However, the first ones have been quite frustrating, as they were focused on replicating the physical / “traditional” experience online, with VC apps like Zoom. At the same time, investors have embraced Edtech startups (financing has grown from $4.8bn in 2019 to $12.6bn in 2020). Now everyone believes that there is no turning back, and many students will keep choosing digital experiences. But there is also consensus on the need to re-think the approach to the tools. For instance, apps enabling more personalized interactions between teachers and students are a promising field (NYTimes)