Not all FAANGs are the same – some have more teeth than others (Part 2)
This is part one of two – read part one here.
Apple rampant
This has been a good year for Apple (NASDAQ:AAPL) and one in which a new business model seems to be emerging. Hitherto, the company was largely dependent on the sale of handsets; now it looks possible that most of its revenue stream in the future will come from services.
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What is so extraordinary about Apple as a corporate case study is that, after stardom in the 1980s, it was considered doomed by the mid-1990s. Its mainstay Macintosh range of computers was perceived to be inferior to personal computers (PCs) which ran on Microsoft Windows. Its founder, Steve Jobs (1955-2011) who was sent packing in a boardroom coup in 1985 made a dramatic comeback as CEO when the second company he founded, NeXT merged with Apple in 1997. Thereafter, Jobs reinvented the business, issuing new products almost every year — the iMac, iPod, iPhone, iPad and so forth. These products harnessed the extraordinary information revolution bought about by the evolution of the internet and advances in communications technology.
When Jobs unveiled the first iPhone at a packed San Francisco press conference in 2007 it seemed like a revolution had begun. Yet for all of its brilliance, the original iPhone had a major weakness: it was impossible to install new software on it. Users just had to contend with pre-installed “apps” (though that term only gained currency later). Jobs saw the device as principally a telephone and probably did not foresee at that point that, ultimately, people would regard the ability to actually speak to one another as its least important function.
According to Walter Isaacson, his biographer, Jobs initially resisted pressure to allow third-party developers to create apps for the iPhone. However, he changed his mind. On 10 July 2008, Apple launched the App Store – a portal for developers to release their own iPhone apps. 500 apps became available from the first day including Myspace (a social networking site which, amazingly, is still in business) and AOL Messenger. Ten years later there are more than two million apps available on the App Store – ranging in functionality from fitness to taxi-hailing (Uber).
Last year the punters spent $38 billion in the Apple App Store – 35 percent more than the year before. Apple is reckoned to trouser about 30 percent of that with the balance going to the developers. As sales of smartphones have decelerated given near global saturation, so Apple CEO Tim Cook has sought to prioritise the App Store. Some analysts think that it is the App Store which has given the iPhone the edge over Google’s rival Android smartphone operating system.
At Apple’s annual software conference in July the company announced that the latest version of its operating system would be made available to developers for iPhones that date back as far as 2013[i]. This is significant: it means that Apple knows that people will be keeping their phones for longer before upgrading them to the latest model. The fall-off in sales of new units, hopefully, will be offset by the increased revenue from the App Store.
Apple maintains strict rules about what software is allowed for sale in its App Store. Recently Apple banned software that purportedly could mine cryptocurrency. It has also banned certain apps in China at the request of the Chinese authorities. The company revealed earlier this year that over $100 billion had been paid to developers since the App Store opened. Clash of Clans, developed by Finish software giant Supercell (owned by China’s Tencent (HKG:0700) has generated $4 billion of revenue alone.
In July Apple announced that iPhones would henceforth allow users to impose time limits on how long they use particular apps. This is a response to growing concerns that many people, especially children, are becoming “addicted” to smartphone use and game playing.
Early on in the history of the smartphone, manufacturers started to build-in cameras to mobile phones – because the marginal cost of installing them was fractional, rather than because there was overwhelming demand. It was only after the rise of social media (remember that Facebook only launched in 2003) that people began to post their photos to social media. Most people now access social media on smartphones rather than on PCs.
So the life cycles of smartphones and social media have been inextricably entwined. Until now, that is.
Facebook undeterred
Certainly Facebook (NASDAQ:FB) had an awful spring with Mr Zuckerberg being hauled before a joint committee of both the House of Representatives and the Senate in early April. But, by mid-June, things were looking up when Instagram revealed that it had one billion users. It has signed up 200 million new users in the last three quarters. When Facebook acquired Instagram in 2012 for a cool $1 billion, the niche photo-posting portal had just 30 million users and just ten employees.
In fact, Facebook has transformed Instagram’s business model. Initially, Instagram’s main functionality was to add filters to improve blurred smartphone shots. Under Facebook, Instagram has become the preferred way for people (especially youngsters) to share their holiday snaps and videos. It does not have a sharing feature so that photos posted do not go viral – they can just be viewed by the poster’s friends. As a result, Instagram has been entirely untouched by the global furore about “fake news”.
Two years ago Instagram shamelessly copied one of Snapchat’s unique features. It allowed users to post photos that would automatically disappear after 24 hours. Within eight months Instagram sailed past Snapchat in terms of users. In June, Instagram launched Instagram TV – a service designed to go head-to-head with YouTube (owned by Google). This has the capacity to attract the TV advertising market – something that Facebook proper has failed to do as yet.
E-Marketer expects Instagram to generate $1.8 billion of advertising revenue this year – nearly double last year’s level.
In late July it was revealed that Facebook plans to put its own satellite into low-Earth orbit by early next year. The purpose of this is to provide internet access in some of the most remote parts of the planet. Currently there are an estimated three billion people – especially in parts of Africa, Asia and South America who have no internet access. Last year, a SpaceX rocket due to carry a satellite for Facebook into space exploded on the launch pad. The new satellite will be launched by a French Ariane rocket from French Guyana.
Just to get things in perspective, investors should consider that Facebook is still worth more than the entire market cap of the Mumbai market. And Mr Zuckerberg is unlikely to be seen in Walmart. The question is: has the model changed?
Amazon unbound
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Amazon (NASDAQ:AMZN), having conquered the world of online retail, is now fast becoming dominant in the video streaming sector where it is going head-to-head with Netflix (NASDAQ:NFLX) in 200 countries. In 2011 Amazon paid £200 million for the British video service Lovefilm. In 2015 it exploited Jeremy Clarkson’s defenestration by the BBC to poach the entire cast of Top Gear, a show which had a global following – at a cost rumoured to be around £250 million. Top Gear was rebranded The Grand Tour. And last month Amazon secured the rights to 20 Premier League football games each season – thus parking its tanks on the live sports lawn previously controlled by BT (LON:BT.A) and Sky (LON:SKY).
Amazon’s video streaming service comes with membership of its Prime package which currently costs about £80 a year in the UK. There are about 4.3 million Prime members in the UK who download videos as against 8.2 million Netflix subscribers – but Amazon’s market share is growing faster. Globally, Amazon has 100 million Prime subscribers while Netflix has 125 million. Until recently, the main advantage of Amazon’s Prime membership was that free next-day delivery was guaranteed for any products purchased; increasingly Amazon’s own-content programming and video downloads are seen as a not-to-be-missed perk.
Amazon is now making a five-season TV series of the Lord of the Rings trilogy at a cost thought to be $1 billion. Reportedly, when this is streamed new features will become available such as “X-ray mode”, whereby viewers can find out the name of actors they are watching on the screen. Amazon’s total annual budget for new content, at $4.5 billion is still below Netflix’s $6.3 billion – but its strategy seems to be different. While Netflix is offering a broad range of content, Amazon wants to focus on a few unmissable epics.
The $250,000 that Jeff Bezos’s parents Miguel and Jackie put into his start-up in 1995 is now worth a staggering $30 billion[ii]. That’s a nifty return of 12 million percent over 23 years. As I write the company is worth $926 billion and is the second largest in the world by market cap after Apple. It can’t be long before there are two members of the trillion dollar club.
Uber redeemed
Uber is not strictly a FAANG but is now the world’s most valuable technology start-up, preparing to float on the NASDAQ supposedly during 2019. A deal between Alphabet’s Waymo and Uber in February valued the taxi hailing service, founded in 2009, at $72 billion[iii]. It exists by virtue of the fact that people now have access to the internet on their smartphones which are also equipped with GPS devices. Without those two things Uber’s model simply could not work.
The company has been beset by management issues and reputational damage over the last year and was famously deprived of its license to operate in London by Transport for London (TfL) last September. (In practice, Uber was allowed to continue to operate until it exhausted the appeals process in the courts.) In April, the company’s founder, the combative Travis Kalanick, was replaced as CEO by Dara Khosrowshahi after allegations of sexual harassment.
TfL’s case against Uber was that it had failed to report crimes committed by its drivers, many of whom it had failed to screen properly with lax background checks. As a result, Uber took the contract for checking applicants’ bona fides away from technology start-up Onfido and awarded it to GB group.
There is another issue that Uber faces in the UK. Last year an Employment Appeal Tribunal ruled that Uber drivers in the UK are employees, not freelance contractors. That means the company has to pay its drivers the minimum wage and holiday pay. Uber appealed against that ruling though its bid to take the matter directly to the UK Supreme court was denied.
In the event, on 26 June, Uber won back its license after a two-day court battle with TfL. But it was not an overwhelming victory. The new license will last only for 15 months and the company will have to comply with new conditions laid down by the regulator. The Chief Magistrate was critical of Uber, saying the company seemed to think that it was “above the law”. Uber countered that it had made extensive changes to its management practices but Mayor Khan pronounced that the company was still “on probation”.
Notwithstanding its travails in London, Uber cars operate in 83 countries and 674 cities around the world. The Uber app is available for free download on Android devices via the Google Play store and on iOS devices (i-Phones and similar) from the Apple App Store. There is no app for Microsoft Windows, but rides can be booked on Uber’s mobile web page. In 2016, Uber facilitated 2 billion customer rides for about 40 million users every month– though that is probably less than DiDi, its Chinese competitor. It has 160,000 drivers in the USA alone and had revenues of around $20 billion in 2016.
Uber is diversifying its range of niche services, offering limousines, lifts for pets and teaming up with hospitals to ferry patients to and from their homes. In April this year it acquired Jump Bikes a bicycle sharing service in California. In 2015, the company hired a team of researchers from the robotics department of Carnegie Mellon University in order to establish the Advanced Technologies Center in Pittsburgh. This is dedicated to the development of self-driving cars. In September 2016, the company announced that it was looking into urban transportation with flying vehicles – effectively drones with passengers.
Uber does not have a monopoly on ride hailing applications. Lyft founded in 2012 in San Francisco operates in over 300 cities in the USA and Canada and was estimated to be worth $15.1 billion in June.
Google: the Alpha and Omega of the tech Alphabet
I cannot share my insights into where Alphabet/Google (NASDAQ:GOOGL) is at without a long discourse on the theme of Artificial Intelligence (AI). I’m leaving that for my article in the September edition of the MI Magazine (sign-up HERE for free). I’ll show that the keys to this world-changing technology are held by just a few players, of which Google is the most pre-eminent. There are many reasons to suppose that Google will continue to astound us for many years to come.
By the way, its share price is up 25 percent on a 12-month basis.
A parting of the ways?
It is quite likely that we are at a fork in the road. In the first phase of the internet revolution, all eyes were on the internet service providers (ISPs). Nowadays, these are just considered dull utilities. In the second phase, social media changed the way that we interacted with one another and the way in which we consumed information. This was extensively facilitated by Apple which created user-friendly, beautifully designed devices on which billions could get access to it.
In the third phase of the internet revolution, I think it is likely that social media itself will just become another kind of utility – and an increasingly regulated one at that, thus impacting the bottom line. The curve of new user numbers is flattening rapidly. Facebook’s revenues come from advertising, which is a function of aggregate user hours spent online. That revenue stream now looks vulnerable to a decline in user numbers and changes in behaviour – driven largely by demographics.
Companies that facilitate the flow of information and which provide critical software and high-quality own-content media still have huge further growth potential. But social media – Facebook and Twitter – has probably already peaked.
[i]See App Store defies founder’s fears, by James Titcomb, The Sunday Telegraph, 05 August 2018.
[ii]It’s payback for the Bank of Mum and Dad, by Harry de Quetteville, The Sunday Telegraph, 05 August 2018.
[iii]See: https://www.recode.net/2018/2/9/16996834/uber-latest-valuation-72-billion-waymo-lawsuit-settlement
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