2013 Global Trends in Technology, Media and Telecoms
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2013 Global Trends in Technology, Media and Telecoms

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This report offers a comprehensive, global view of the technology, media and telecom (TMT) sectors over the next 12 months. Our aim is to answer three questions: ...

This report offers a comprehensive, global view of the technology, media and telecom (TMT) sectors over the next 12 months. Our aim is to answer three questions:

 What will be the big technology cycles over the next 12 months?
 How will they affect each of the TMT sectors in the chart below?
 Which trends are likely to influence investor perceptions going forward?

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    2013 Global Trends in Technology, Media and Telecoms 2013 Global Trends in Technology, Media and Telecoms Presentation Transcript

    • SYNC.2013 TMT Sector Outlook Issue 51 2013 Trends Technology, Media & Telecoms 24 September 2012Cyrus Mewawalla www.researchcm.com CM Research Authorised and regulated by the Financial Services Authority
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 ContentsHOW TO USE THIS REPORT 3 PART I: TECHNOLOGY HARDWARE 4 PCs, Servers, Storage and Networking  6 Smartphones  8 Consumer Electronics  10 Electronic Component Makers  12 Semiconductors  14 Telecom Equipment  16 PART II: SOFTWARE 18 Applications Software  20 Infrastructure Software  22 Security Software  24 Video Game Software  26 IT Services  28 PART III: INTERNET & MEDIA 30 Internet Companies  32 Social Media  34 Advertising  36 Film & Television  38 Publishing  40 PART IV: TELECOM SERVICES 42 Telecom Operators  44 Cable & Satellite Operators  47 Data Centres  49 OUR RESEARCH APPROACH 51  www.researchcm.com 2
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 How to use this reportThis report offers a comprehensive, global view of the technology, media and telecom (TMT) sectors over the next 12 months. Our aim isto answer three questions:  What will be the big technology cycles over the next 12 months?  How will they affect each of the TMT sectors in the chart below?  Which trends are likely to influence investor perceptions going forward?To set the scene, the chart below shows the relative performance of 16 TMT sectors in each of the calendar years from 2008 to 2012. Over the last five years internet companies, software developers and data centres have been the largest outperformers whilst consumer electronics, telecom equipment, publishers and telecom operators have underperformed. Global TMT sector: Cumulative 5-year share price performance 140% 120% 100% 2008 2009 2010 2011 2012 80% 60% 40% 20% 0% ‐20% ‐40% ‐60% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in each of the sectors listed above from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 3
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Part I: Technology Hardware www.researchcm.com 4
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Technology Hardware: Executive SummaryHere is a summary of our dominant themes for the technology hardware sector over the next 12 months:PCs and ServersThe shift from the “PC generation” to the “cloud generation” changes the way data is stored and accessed. Production is shifting from PC-based devices such as laptops to cloud-based devices such as servers and tablets.StorageThere is a shift from plain vanilla storage services to one-stop-shop data management services. Storage technology is moving to solidstate drives (SSD), a more expensive but faster version of storage than traditional hard disk drives (HDD).NetworkingAs data centres handle more dispersed data, WAN (wide area network) optimisation is becoming the differentiating factor in networking.SmartphonesThe Apple business model – of owning hardware, software and an apps-based ecosystem – is being cloned by rivals. A handful ofsmartphone “platforms” will emerge, some from new entrants. Many smartphone makers will be reduced to low margin hardware players.Consumer ElectronicsConsumer electronics are fast becoming bolt-on accessories for the big internet ecosystems, reducing once great consumer electronicsbrands into subcontractors for Apple, Google, Microsoft and FacebookElectronics Component MakersThe Apple / Samsung showdown has created an opportunity for component makers who want to displace Samsung in Apple’s supply chain.SemiconductorsThe mobile internet, particularly in China, remains the most buoyant end-market for chip makers. Chipmakers in Apple’s supply chain arelikely to be insulated in the short term from any downturn in the wider chip market.Telecom EquipmentThere is a stand-off between telecom operators and regulators over how they charge for access to their networks, resulting in depresseddemand for telecom equipment despite a surge in mobile data traffic. If more mobile outages occur, regulators may encourage investment. www.researchcm.com 5
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012PCs, Servers, Storage and Networking  Dominant theme: The shift from the “PC generation” to the “cloud generation” changes the way data is stored and accessed.  Outlook: Bleak for PC and notebook makers; rosy for servers, tablets, SSD storage and niche networking products Theme What’s happening? Our conclusions for the sector Leaders Laggards Cloud Production is shifting from PC-based Smartphones and tablets will replace PCs, ARM, Quanta, Lenovo, Intel devices such as laptops to cloud-based notebooks and ultra-books. By 2015, tablet Compal, Dell, HP devices such as servers and tablets. sales are likely to exceed PC sales. Copying Apple Google and Microsoft are now making Without software, hardware makers are left with Apple, Google Everyone else hardware, creating conflicts for customers precious few means to differentiate their (possibly Microsoft) of their software. products, squeezing margins even further. Big Data Traditionally, databases and business Hardware makers like Dell, internet companies IBM, Oracle, Google, SAP, Microsoft intelligence tools were purchased like Amazon and IT services companies like Facebook separately. Now they are being combined IBM are investing in big data appliances. Expect into “data appliances”. M&A in enterprise software and data analytics. Storage There is a shift from plain vanilla storage In a cloud-based world, storage companies will EMC, NetApp, Seagate, Western business model services to one-stop-shop data differentiate their products with analytical tools, Terradata Digital management services. enterprise software and web services. Storage Storage is moving to solid state drive SSD technology is still nascent, but costs are OCZ, Stec, Intel, Seagate, Western technology (SSD) technology, a more expensive but falling and leaders in SSD technology should Sandisk Digital faster version of hard disk drive (HDD). benefit from a boom in demand for speed. WAN Within the networking space, the name of Companies with leading WAN optimisation Brocade, Fusion-IO, optimisation the game is speed. technologies should do well. Riverbed Cyber security With cyber security rising up corporate Companies focused on the enterprise security Check Point, agendas, network security software will market are in the sweet spot. Sourcefire, Verint enter a growth cycle. Systems, Palo Alto www.researchcm.com 6
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookMany Asian hardware makers are still suffering four years on from the onslaught of the banking crisis. Quanta has been one of the bestperformers because it successfully saw the move from PCs to servers, tablets and smartphones. Niche companies – like Commvault indata management software and Riverbed in WAN optimisation – have benefited from the shift from hardware-centric storage to data-centric storage. PCs, servers, storage and networks: Cumulative 5-year share price performance 400% 350% 2008 2009 2010 2011 2012 300% 250% 200% 150% 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012.Sync believes we are still in the very early stages of the storage growth cycle, with market share likely to gravitate in the medium termtowards the established market leaders like EMC, NetApp and Teradata. We see new technological advances in network technologiesaround the corner, likely adding volatility to current leaders like Brocade and F5 Networks. Data latency remains a problem, so companieslike Riverbed Technology or Fusion-IO that provide WAN optimisation solutions are well placed to ride the big data wave. www.researchcm.com 7
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Smartphones  Dominant theme: Everyone is copying the Apple business model: “hardware + software + content = ecosystem lock-in”  Outlook: Likely to get extremely competitive with several new entrants, including Amazon, Baidu, Facebook, Huawei, Lenovo and ZTE Theme What’s happening? Our conclusions for the sector Leaders Laggards Copying Apple The Apple business model – of owning A handful of smartphone “platforms” will Apple, Google, Everyone else hardware, software and an apps-based emerge. Many smartphone makers will be Microsoft (possibly) ecosystem – is being cloned by rivals. reduced to low margin hardware players. Mobile payments All of the world’s top ten technology Three are two broad technology platforms: Amazon, eBay, Gemalto, Telecom operators companies are investing heavily in NFC vs. the cloud. Google wallet runs on Facebook, Google, developing mobile payments platforms. NFC whilst EBay’s PayPal uses the cloud. Monitise, Square (unlisted) Cloud Mobile internet services are increasingly Smartphone makers who provide Apple, Google, Facebook, Nokia, LG becoming cloud-based, so smartphone integrated email, storage, social media Tencent makers are developing their own clouds. and apps on the cloud will attract more customers to their hardware. Competition In H2 2012, several new entrants will Industry margins will come under intense Amazon, Facebook, Apple, Samsung, move into the smartphone sector. pressure as copycat products emerge Huawei, Lenovo, ZTE HTC, LG, Nokia, RIM Patent wars Apple is escalating the quantity and Patent wars are fast turning into a major Apple, Samsung, ferocity of patent infringement law suits. distraction for company management. RIM, HTC, LG, ZTE M&A Drivers from the five themes above will Nokia and RIM, trading at 50% discounts Nokia, RIM lead to more M&A in the sector. to book value, rich in patents, may soon ripen into bid targets. Global slowdown If we move into another period of macro In 2008, the smartphone sector fell 45% Apple, Samsung, uncertainty, how will the sector perform? and remains 7% lower than 1 Jan 2008 Nokia, HTC, Sony, levels. Another downturn is likely to have a LG, ZTE similar effect. www.researchcm.com 8
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookOver the last five years, Apple and Samsung have rapidly gained market share. In Q1 2012, their respective smartphone market shares byvolume had climbed to 24.2% and 30.1%. Together, they account for 90% of the industry’s profits, according to ABI Research. In thesupply chain, ARM and Imagination Technology have both tripled in value since the start of 2008 whilst Qualcomm has increased by 46%. Smartphones: Cumulative 5-year share price performance The charts show smartphone manufacturers on the left with wireless chip and component makers on the right 500% 2008 2009 2010 2011 2012 400% 300% 200% 100% 0% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012.Over the next 12 months, the smartphone sector’s profits are likely to gravitate towards those who successfully copy the Apple businessmodel of combining hardware, software and content to retain customer lock-in. Contenders for this space are Google and Microsoft, both ofwhom have recently moved into hardware and are beefing up their apps divisions. The acquisition of Nokia and RIM, rich in patents,provides an entry point into this sector for internet companies who know their future requires a mobile operating system. Contendersinclude Amazon, Alibaba, Baidu, China Mobile, Huawei, Facebook and Tencent. www.researchcm.com 9
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Consumer Electronics  Dominant theme: Consumer electronics are fast becoming bolt-on accessories for the big internet ecosystems, reducing once great consumer electronics brands into subcontractors for Apple, Google, Microsoft and Facebook  Outlook: Great for those in the Apple or Google supply chain; poor for consumer electronics manufacturers attempting to compete on a hardware-only platform with these one-stop-shop internet ecosystems Theme What’s happening? Our conclusions for the sector Leaders Laggards Slave to the Electronic products are being transformed Top consumer brands will be reduced to Amazon, Alibaba, Canon, Samsung, system into accessories for the mobile operating subcontractors for the big internet ecosystems Apple, Facebook, LG, Nintendo, Nokia, systems of Apple, Google and others. of Apple, Alibaba, Baidu, Google and Facebook. Google, Microsoft Philips, Sony Mobile Internet Most of the profits of mobile devices were With new electronics product cycles dominated captured by Apple and Samsung, leaving by internet platforms, the outlook for these other electronics brands trailing behind. brands looks bleak. Internet TV With internet TV technology still prone to The catalyst will be the next generation of Roku (unlisted), incremental upgrades, many consumers Google TV or Apple TV. It may well be a smaller Boxee (unlisted) are holding off from buying the next tech start-up like Roku that kick-starts the IPTV generation of TV. product cycle. 3D printing In 2011, 6,500 industrial 3D printers were It will be some time before 3D printing (a.k.a. 3D Systems, sold in a market worth $1.7bn growing at additive manufacturing) transforms mass Stratasys 30% p.a., according to Wohlers. Currently market manufacturing processes. 3D printing used for prototyping, 3DP could soon be may encourage some factories to return to the used for mass-market manufacturing. West, but may also lead to higher piracy levels. Cameras With most smartphones and tablets now Canon and Nikon desperately need a product Apple, Samsung Canon, Nikon equipped with their own camera, the future differentiator in the next few quarters if they of pure camera makers is in doubt. want to avoid becoming irrelevant. Patent wars Apple is escalating the quantity and These patent wars may extend into new areas Apple, Google, LG, Panasonic, ferocity of patent infringement law suits. of consumer electronics like TVs and DVRs. Microsoft Samsung, Sony www.researchcm.com 10
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookWith the notable exceptions of Apple and Samsung, the consumer electronics sector is valued roughly at the same depressed levelsreached at the end of 2008. Samsung, despite not having its own internet ecosystem, has managed to outperform by focusing on makinghigh-quality iPhone and iPad clones. It has also benefitted from vertical integration by making many of its own chips and components. Yetwithout an operating system of its own (Samsung recently ditched Bada) it remains the most exposed company on the chart. Consumer electronics: Cumulative 5-year share price performance 300% 2008 2009 2010 2011 2012 250% 200% 150% 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012.Dell and HP are steering their respective businesses away from PC and printer hardware towards the cloud and big data and are thereforewell-positioned for a turnaround. For the rest, their only saviour will be an innovative new product or an innovative piece of software. Sonyshows the best promise for a platform-based turnaround; its new chief, Kazuo Hirai, comes from its gaming division – if he can turn his oldPlayStation box from a gaming console into an operating system that can handle music, film, social media, email and e-commerce, he willnever look back. Of course, this simple task evaded his predecessor Howard Stringer, but it may prove easier for a gamer. www.researchcm.com 11
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Electronic Component Makers  Dominant theme: The war between Apple and Samsung has created an opportunity for component makers who want to displace Samsung in Apple’s supply chain  Outlook: Good for those already in Apple’s supply chain or looking to displace Samsung’s position in Apple’s supply chain Theme What’s happening? Our conclusions for the sector Leaders Laggards Apple effect Large parts of the electronics industry are With two new Apple products – iPhone 5 and Hon Hai, TPK, LG gravitating towards the Apple platform. iTV – on the way, those companies in Apple’s Display supply chain stand to benefit from the Apple halo effect. Samsung effect Samsung’s smartphone division (which Handing over sensitive product designs to your LG Display, Sharp, Samsung competes directly with Apple’s iPhone) is strongest rival does not make commercial TPK conflicted with its components division sense, so Apple may soon switch from (which supplies chips and display panels Samsung to alternative suppliers for several for Apple products). components, including retina displays, touch screens and chips. Rising cost base Rising wages in China and concerns over Many subcontractors may find it difficult to pass Hon Hai the environmental impact of electronics on these rising costs fully, resulting in profit manufacturing are likely to add to the cost warnings. base of many subcontractors. Global slowdown If we move into another period of macro In 2008, the component sector was the worst uncertainty, how will the sector perform? performing technology sector after telecom equipment, falling by 50% in that year. Another downturn is likely to have a similar effect. www.researchcm.com 12
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookApple’s supply chain includes Hon Hai for assembly, TPK Holding and LG Display for display panels and Samsung for several componentsincluding chips and display panels.If the war between Apple and Samsung becomes more vicious, selected component makers – such as touch-screen manufacturers TPKHolding, LG Display and Sharp – could benefit by replacing Samsung in Apple’s supply chain. Electronics component makers: Cumulative 5-year share price performance 200% 2008 2009 2010 2011 2012 150% 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 13
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Semiconductors  Dominant theme: The mobile internet, particularly in China, remains the most buoyant end-market for chipmakers  Outlook: Wireless chipmakers, especially those in Apple’s or China’s local supply chain, are the best positioned for a recovery Theme What’s happening? Our conclusions for the sector Leaders Laggards Mobile Internet Only 1.5bn of the world’s 6.2bn mobile If this is true, the relative outlook for wireless ARM, Broadcom, Intel subscribers have access to the mobile and graphics chipsets in the short term remains Imagination Tech, internet. But this could double to 3bn rosy. NVidia, Qualcomm mobile internet subscribers by 2013. Overcapacity The cyclical nature of the chip sector The current oversupply in many chip markets is continues to create peaks and troughs. likely to extend for another quarter at least. Apple effect Whilst signs of weakening demand for Chipmakers in Apple’s supply chain are likely to Avago, Broadcom, iPhone sales emerged in Apple’s recent be insulated from any downturn in the wider Cirrus Logic, results, iPad sales are roaring the iPhone chip market. Omnivision, TriQuint, 5 is due out in October. Skyworks Samsung effect Samsung makes ARM-based chips for Apple already uses Intel CPUs in its Macs. If its Intel Samsung iPhones and iPads. But now that war against Samsung heats up, Apple may Samsung is the world’s largest replace Samsung chips with rival suppliers such smartphone maker by volume, Apple may as Intel, which is now making a belated move wish to remove it from its supply chain. into mobile. China effect As smartphone growth eases off in the Sync believes Chinese smartphone penetration Mediatek, West it is just getting started in China. will double over the next 12 months from 18% Spreadtrum today, benefitting local wireless chipmakers Mediatek and Spreadtrum. Big data The cloud will lead to a surge in big data Intel, the established leader for data centre Intel ARM (i.e. data than cannot be easily analysed). CPUs should benefit from this trend, but ARM’s Server technology is advancing rapidly to power-efficient chips are now entering this cope with the demands of big data. market aggressively. www.researchcm.com 14
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookOver the last couple of years, wireless chipmakers in Apple’s supply chain – such as ARM, Skyworks Solutions and Cirrus Logic haveoutperformed. Samsung’s outperformance is more to do with its meteoric climb to the number one slot in the smartphone market ratherthan its chip division. If the war between Apple and Samsung worsens, Samsung may be dropped from Apple’s supplier list – not just fordisplay panels but possibly also for ARM-based CPUs. Intel, which already supplies x86 processors to Apple’s PC division, has belatedlydeveloped mobile chip technology to rival ARM’s, is a likely replacement. Semiconductors: Cumulative 5-year share price performance 800% 700% 2008 2009 2010 2011 2012 600% 500% 400% 300% 200% 100% 0% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012.In the West, smartphone penetration has exceeded 60%, but tablet penetration is below 20%. So the mobile internet is likely to remain agrowth cycle for wireless chip makers for the medium term. www.researchcm.com 15
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Telecom Equipment  Dominant theme: There is a stand-off between telecom operators and regulators over how they charge for access to their networks. That has resulted in depressed demand for telecom equipment, in spite of a 110% surge in mobile data traffic  Outlook: If more mobile outages occur, regulators may relax net neutrality rules, encouraging operators to start investing Theme What’s happening? Our conclusions for the sector Leaders Laggards Demand As telecom operators see their revenues Until operators can find a way to make money constraints slide, they are cutting back on Capex, out of rising mobile data traffic, or regulators reducing demand for telecom equipment remove price capping measures, Capex on in spite of an annual doubling of mobile equipment is unlikely to rise. A surge in mobile data traffic. outages would put pressure on regulators to act Supply Low cost Chinese suppliers will continue Industry margins will continue to fall unless Huawei (unlisted) Alcatel Lucent, constraints to undercut leading western telecom politicians intervene. Sync believes they will and ZTE Ericsson, Nokia equipment suppliers. trade wars will erupt. Siemens Trade wars Telecom equipment is the first line of As cyber warfare threats grow, protectionism in Alcatel Lucent, Huawei (unlisted) defense in cyber warfare. Huawei is the telecom equipment market is likely to rise. Ericsson, Nokia ZTE banned from bidding for big US telecom Europe may follow the US’s lead, supporting Siemens contracts on national security grounds. home-grown telecom equipment makers. Emerging Just as GE and Rolls Royce switched from Ericsson’s outsourcing deals with Bharti over Ericsson business models a hardware to a services model, so might the last decade allow operators to lease rather some telecom equipment makers. than own networks. Whilst this trend has not taken off for many years, it may now. M&A Many Western telecom equipment makers Nokia Siemens has been rumored to be up for Nokia are nursing heavy losses and may be sale and Alcatel Lucent may also be a bid Alcatel Lucent forced to sell assets. target. Patents wars Spurred by Apple’s patent war, the value Expect selected patent portfolios of weaker of the industry’s patents is rising. competitors be put up for sale. www.researchcm.com 16
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookOver the last five years, the telecom equipment sector is down 48%, by our estimates. The sector’s woes are little to do with demand forequipment – mobile data traffic is growing at 110% per annum – and far more to do with regulatory constraints that limit operators’ freedomto experiment with different charging models. LTE technology has been ready to deploy for five years, but the world has less than 100mLTE subscribers so far. Operators will continue to hold back on LTE investments (for mobile networks) and fibre investments (for fixed linenetworks) until regulators agree a business model that allows operators to make better returns from their broadband investments. So farthere is a regulatory stand-off. But the more outages we see on mobile networks, the sooner regulators are likely to encourage investment. Telecom equipment: Cumulative 5-year share price performance 150% 2008 2009 2010 2011 2012 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 17
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Part II: Software www.researchcm.com 18
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Software: Executive SummaryHere is a summary of our dominant themes for the Software and IT Services sectors over the next 12 months:Applications SoftwareThree industry trends are making life uncomfortable for many traditional software companies: the move to apps platforms, the move to thecloud and the move to the mobile internet. Large software groups, unable to innovate fast enough, are acquiring specialist software houses.Those especially in demand tend to be niche players in the cloud space, the cyber security space or the mobile internet space.Infrastructure SoftwareSoftware defined networks threaten to commoditise internet networking equipment makers. If SDN technology goes mainstream, manyinfrastructure software stocks will benefit. But investors should note that the Infrastructure software sector remains the most vulnerablesoftware sector in the event of a global economic downturn.Security SoftwareBYOD (Bring your own device) is a trend that gives IT departments a dilemma: do they insist that Apple and Google conform to theirenterprise grade IT security standards or do they acquiesce in the face of popular demand? The net effect is to expose corporations tohigher security risks. Internet security companies will likely see greater demand for their products as mobile device users and thecompanies that connect them to their networks open their eyes to the risks they are taking. The sector may also benefit from M&A fever aslarger software players boost their security assets.Video Game SoftwareAs the video games market moves rapidly from consoles to online and mobile games, the big internet platforms are picking a fight with thegames developers for ownership of the customer billing relationship. Ultimately, the big platforms are likely to win, but in the short termmobile games developers could see rapid growth.IT ServicesBig data could provide the IT services sector its new blockbuster product. The problem is that none of the big players have a big datasolution yet. In the meantime, their traditional business model, hinged on relational databases purchased by in-house IT departments, isbeing blown apart. www.researchcm.com 19
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Applications Software  Dominant theme: Three industry trends are making life uncomfortable for many traditional software companies: the move to apps platforms, the move to the cloud and the move to the mobile internet  Outlook: Large software groups, unable to innovate fast enough, are acquiring specialist software houses. Those especially in demand tend to be niche players in the cloud space, the cyber security space or the mobile internet space Theme What’s happening? Our conclusions for the sector Leaders Laggards Re-imagination “The Re-imagination of nearly everything” Internet and IT giants recognize they are too Apple, Concur, Intuit, Oracle, SAP, (a phrase first coined by Mary Meeker in slow to innovate fast enough on multiple fronts, NetSuite, Sage, Microsoft her 30 May 2012 report, 2012 Internet so they are responding by acquisition. Opera Software, Trends) has resulted in an explosion of Application software companies are key targets. Ultimate Software, app-based software. Open Text Cloud Software is moving from a licensed model Whilst most software houses now have a cloud Citrix, EMC, Google, Adobe, Oracle, SAP, to a cloud-based model where software is strategy, a rapid transition could end up NetSuite, Red Hat, Microsoft sold as a service. During the transition, lowering their revenues. Smaller cloud VMware, some customers could be lost. companies are likely to become bid targets. Salesforce.com Mobile Internet Smaller screens and lower customer Mobile-first, app-centric start-ups are unseating Apple, Most of the large cap patience levels mean that desktop current software leaders as the internet goes Opera Software technology applications have to be re-designed from mobile. A handful of established software companies scratch to have any hope of working well leaders may soon become vulnerable to mobile on the mobile internet start-ups. Facebook’s $1bn acquisition of Instagram illustrates the threat. M&A boom A host of emerging technology cycles are Between 2008 and 2012, about half of the Amdocs, BMC, Amazon, Apple, Dell, all software based. Larger software largest M&A transactions in the tech sector had Concur, Intuit, eBay, Facebook, companies, unable to keep pace with software companies as their targets. Expect this NetSuite, Sage, Google, HP, Oracle, innovation, will be forced to acquire. M&A boom in software to continue for three or Opera Software, SAP, Microsoft four more quarters at least. Ultimate Software, Open Text www.researchcm.com 20
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookThe explosion in mobile apps is heralding a new golden age for applications software. A host of emerging technology cycles – includingapps, cloud computing, cyber security, social networks and mobile payments – are all software based. Larger software companies, unableto keep pace with the level of innovation in the software sector, are being forced to make acquisitions.Sync first highlighted “Software M&A” as one of our top investment themes a year ago in our Q3 2011 TMT Outlook (12 July 2011). Sincethen over $45bn of niche applications software companies – like Autonomy, Ariba, Misys, Quest, Nicira, RightNow, Taleo and SuccessFactors – have been acquired by larger software (and hardware) houses. That M&A boom is set to continue for at least another year or so.With software development cycles getting shorter and more riskier, there is even more pressure on larger technology companies todiversify by acquisition. And cash reserves are still high – the top 100 technology companies still hold over $300bn of net cash on theirbalance sheets. Applications software: Cumulative 5-year share price performance 350% 2008 2009 2010 2011 2012 300% 250% 200% 150% 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 21
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Infrastructure Software  Dominant theme: Software defined networks threaten to commoditise internet networking equipment makers  Outlook: SDNs could uplift infrastructure software stocks, but the sector remains highly vulnerable to an economic downturn Theme What’s happening? Our conclusions for the sector Leaders Laggards Software defined Software defined networking (SDN) is an New standards like the Open Flow protocol are Google, VMware Cisco, Oracle, IBM networks emerging architecture for data networks. gaining traction and may soon take SDNs from SDNs allow software to control the the abstract into the mainstream. SDNs will network path along with data packets flow. speed up the transition to the cloud by making In theory, this would reduce network cloud services work faster and more efficiently. hardware to commodity boxes. The downside is that security risk rises. Big data The internet infrastructure software sector PC makers, server makers, networking and Amazon, Cisco, Dell, is restructuring itself to be able to analyse storage companies are trying to build vertically EMC, Facebook, unstructured data – like emails and integrated manufacturing businesses. Google, Google, HP, IBM, Net videos. Those companies that learn how for example is the third largest server App, Oracle to move data around faster will ultimately manufacturer globally. The race is on to develop become the winners in this new internet a cutting edge data analytics engine. paradigm. Virtualisation Virtualisation allows computing resources Virtualisation technology requires a complex VMware, Citrix, Red Oracle, IBM, (e.g. hardware platforms, operating combination of hardware and software to work Hat Microsoft, SAP, systems, storage devices or networks) to well. Just as a web browser provides easy, Progress Software be deployed on a utility basis (i.e. only cheap access to the internet, a virtual platform when required). Corporate IT allows cheap access to corporate cloud environments are using virtualisation to services. Those companies who control virtual cut hardware and software costs. gateways will gain considerable competitive advantage. Global economic Infrastructure software spending tends to Investors expecting a global downturn should slowdown be the worst hit during an economic expect high share price volatility (relative to the downturn, relative to other software rest of the software sector) for infrastructure sectors. software stocks. www.researchcm.com 22
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookSoftware defined networks (SDNs) could have a profound impact on investors in communications infrastructure stocks. Just as internetprotocol (IP) standards made proprietary telecom equipment makers like Lucent and Nortel less relevant, so SDNs may turn today’sleading IP networking equipment makers into commodity box makers, with all the power to control data flows resting with softwaredevelopers, using standards like the Open Flow protocol as the communication medium between these boxes. In the last couple of months,two relatively underreported M&A transactions highlight this emerging investment theme: Oracle acquired Xsigo for an undisclosed sum(rumored to be $800m) and VMware paid $1.3bn for Nicira. Both these companies use software-defined network technology to flexiblyconnect any server to any network or storage facility, expediting the transition to simpler, cheaper cloud services.Whilst SDNs, big data and virtualisation offer three long-term growth themes for the infrastructure software sector, investors should notethat our analysis suggests infrastructure software companies tend to be the most volatile in a global downturn. Infrastructure software: Cumulative 5-year share price performance 400% 2008 2009 2010 2011 2012 350% 300% 250% 200% 150% 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 23
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Security Software  Dominant theme: BYOD is exposing corporations to higher security risks. It is a train wreck waiting to happen.  Outlook: Internet security companies will likely see greater demand for their products as mobile device users open their eyes to the risks they are taking. The sector may also benefit from M&A fever as larger software players boost their security assets Theme What’s happening? Our conclusions for the sector Leaders Laggards BYOD Wooed by their shiny new smartphones, IT depts. are being pressured into conforming RIM, NQ Mobile Apple, Google many CEOs have coerced their IT with Apple and Google’s standards rather than departments to connect previously vice versa. Internet security stocks should unapproved mobile devices to corporate gradually see an entirely new market for their networks. This “Bring Your Own Device” products open up in the mobile internet. trend increases IT security risk. Software defined SDNs will speed up the transition to the Larger software houses will be looking to Check Point Fortinet, Cisco, HP, Dell, IBM, networks cloud. The downside is that they will raise strengthen their security capability in the cloud, F-Secure, Sourcefire, Oracle, SAP, security risk by allowing servers that were especially in network security and enterprise Verint, Nice Systems Salesforce, EMC formerly blocked by proprietary hardware firewalls. to be remotely accessed by hackers. Trade wars Telecom equipment is the first line of Trade wars may break out. The west may Alcatel-Lucent, Cisco, Huawei (unlisted), defense against a cyber-attack. Telecom become more protectionist when awarding Ericsson, Intel ZTE equipment companies may soon be contracts for telecom equipment, cyber security, viewed as strategic military assets. IT services and semiconductors. Regulation SEC may force greater corporate This will raise security awareness of investors, Palo Alto, Qihoo 360, Apple, Google, disclosure of cyber-related issues (e.g. ramping up demand for cyber security Symantec, Trend Microsoft, Amazon, cost to shareholders) for listed companies. companies’ products. Micro, Websense eBay National security Since Stuxnet, governments everywhere Financial services and infrastructure are seen Banks, stock are prioritising spending on cyber security as the most exposed sectors. Governments exchanges, telecom in their military budgets, often in may be forced to rescue some of these sectors operators, power collaboration with the private sector. should they come under attack. grids www.researchcm.com 24
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookIn the corporate world, RIM used to be king of enterprise security with its encrypted physical corporate servers screening corporate emailand access to corporate communication systems. But BYOD changed all that, decimating RIM’s share price in the process. The rapid risein the popularity of Apple products, especially amongst senior executives, has meant that IT managers have reluctantly succumbed toallowing employees to “Bring Your Own Device”. Many apps are not adequately vetted and potentially pose a firm-wide malware risk. ITmanagers are being pressured to adapt their security protocols around Apple’s and Google’s standards rather than forcing Apple andGoogle to conform to enterprise-class security standards. Even in respect of simple anti-virus software, mobile device users tend to bemore lax about internet security than desktop users. Very few mobile devices, for example, have specialist anti-virus software loaded onthem, despite the rising use of apps. This makes the mobile internet a prime target for cyber criminals. Security software: Cumulative 5-year share price performance 700% 2008 2009 2010 2011 2012 600% 500% 400% 300% 200% 100% 0% ‐100% Ahnlab Check Point F5 Networks F‐Secure Gemalto Nice Systems Sourcefire Symantec Trend Micro Verint Systems Verisign Websense Software Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012.Over the last five years, enterprise security companies like Check Point Software, Fortinet, Sourcefire and Verint Systems haveoutperformed and could continue to do so if cyber security threat levels rise. However, over the next five years it may be consumer relatedstocks like Symantec and mobile security stocks like NQ Mobile that benefit the most as mobile Internet users wake up to the security risksthey are taking. www.researchcm.com 25
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Video Game Software  Dominant theme: As the video games market moves rapidly from consoles to online and mobile games, the big internet platforms are fighting the games developers for ownership of the customer billing relationship  Outlook: Ultimately, the big platforms are likely to win, but in the short term mobile games developers could see rapid growth Theme What’s happening? Our conclusions for the sector Leaders Laggards The platform Apple’s business model, centred on its The large internet platforms are attempting to Amazon, Apple, Giant Interactive, effect ability to control an entire internet disintermediate games developers, reducing them DeNA, Google, Gree, Perfect World, ecosystem through its iOS platform, is to white label suppliers rather than customer- Amazon, Facebook, Zynga, Activision being widely copied by other technology facing brands. Facebook’s treatment of Zynga is a Mixi, Renren, Sohu, Blizzard, EA, companies. case in point. Tencent Ubisoft, Zynga Emerging The free-to-play (F2P) business model is Relative to the subscription model, the F2P (or Activision Blizzard, EA, Ubisoft business models spreading from Asia to the west. This “freemium”) model is good at increasing users but DeNA, NCSoft model – where digital item sales or not always profits. Several variants of the F2P advertising is the main revenue stream – model will emerge. The big winners will be those is particularly popular in China (the world’s who can develop their own platforms, independent largest online gaming market). of the big internet ecosystems. Online games Online and mobile games are rapidly This trend is set to continue. The three big console Amazon, Apple, Microsoft, displacing console games, primarily games makers are developing their own online DeNA, Google, Gree, Nintendo, Sony because they are cheaper. games platforms/media centres, but may lose out Amazon, Facebook, to the big internet platforms. Renren, Tencent Mobile games Apple’s iOS has transformed mobile It is incredibly hard to transfer a successful Gamevil, Gameloft Microsoft, gaming into the fastest growing subsector desktop game to a mobile handset. The best Nintendo, Sony of the games market, making handheld mobile games are developed purely for mobile. games consoles obsolete in the process. Mobile first games developers should benefit. Chinese video China’s gaming sector is 85% online. It Many of China’s top players like Perfect World are Tencent Changyou, Giant games market suffers from excessive competition and expanding overseas. A safer way to get exposure Interactive, Perfect rapidly evolving business models. to Chinese video games is via the platforms. World www.researchcm.com 26
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookShare prices for most traditional video games developers have not yet recovered to their pre-2008 levels. Aside from the global downturn,gamers are rapidly shifting from console games to online and mobile games. China has the largest and fastest-growing online gamesmarket – worth $5.9bn – but is dogged by excess competition. Much of the sector is in uncharted waters: players are experimenting withseveral variants of the “freemium” model, not all of which may turn out to be successful.Meanwhile, the big internet players are attempting to relegate many games developers to a back office role as far as the customer isconcerned by promoting their own internet ecosystems as the gaming platforms of the future. If they succeed, a large chunk of the profitsof the video games software industry will shift from the games developers to Internet companies like Apple, Google and Tencent and tosocial networks like Facebook, Renren and DeNA. Gaming software: Cumulative 5-year share price performance 600% 2008 2009 2010 2011 2012 500% 400% 300% 200% 100% 0% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 27
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012IT Services  Dominant theme: Big data could provide the IT services sector its new blockbuster product. The problem is that none of the players have a solution yet. Meanwhile, their traditional business model, hinged on relational databases, is being blown apart.  Outlook: With the exception of IBM, few IT services companies are well positioned for the changes about to hit them. Theme What’s happening? Our conclusions for the sector Leaders Laggards Big Data Traditionally, IT depts. purchased specific To survive, IT services companies need to Amazon, Baidu, Accenture, Atos, IT tools to perform specific functions with metamorphosise into one-stop-shop data- Google, Facebook, Capgemini, Infosys, specific data. Now, corporations want all management houses. Soon they will compete IBM TCS, Tieto, WIPRO incoming data feeds to be analysed fast for business with internet companies like and efficiently by big data appliances Amazon and Google who deal with big data for (databases with analytical engines). a living. Cloud The cloud allows IT managers to swap As IT expenditure moves from in-house Capex Amazon, Citrix, Accenture, Capex for Opex, cutting costs in the to outsourced Opex in the cloud, IT services Commvault, EMC, Capgemini, IBM, process. As in-house IT budgets shrink, companies need to change their business NetSuite, Red Hat, Tieto the core revenue base of the IT services model. Soon they will compete for business with Rackspace, TeleCity, sector gets deconstructed. storage companies like EMC and cloud Salesforce, Teradata, companies like Amazon. VMware Open source Since the 1970s, relational databases Oracle, IBM and Microsoft – the three largest Red Hat HP, Oracle, IBM, have been the industry standard. But SQL database manufacturers – have the most Microsoft, Progress these databases are not capable of to lose. But all three appear to be embracing Software, SAP handling big data. Many of the leading Hadoop. The danger is that open source next generation database platforms – like platforms drag the entire industry’s margins Hadoop – are open source. down. M&A As IT services companies have to do more Open source, cloud, security and data BMC Software, Citrix, for less, they will shed staff and acquire management will be some of the core skills sets Fortinet, NetApp, cutting edge cloud companies, analytical they will be looking for. Niche companies in Progress Software, engines and data management software. these markets are likely to become bid targets. Red Hat, SGI www.researchcm.com 28
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookTraditionally, IT services companies had a simple objective: get their customers to spend more on in-house IT projects. But in a worldwhere in-house IT expenditure is being replaced by outsourced expenditure – much of it in the cloud – IT services companies have toadapt quickly. Whereas yesterday their core asset was their people, tomorrow their core asset will need to be their infrastructure. Their newrivals will be internet companies like Amazon and Google who excel in big data analytics, storage companies like EMC and Teradata andcloud companies like Salesforce who offer ready-made solutions.Many of the trends affecting the IT services sector have already driven a dramatic restructuring of large parts of the global technologysector: software companies like Oracle are being forced to move into the cloud; hardware companies like HP and Dell are being forced tomove into software; and IT services companies are being forced to transform themselves into one-stop-shop data-management houses tosurvive. Even those IT services whose managements know exactly what to do – Infosys is a case in point – may travel a rocky road to getthere. IT Services: Cumulative 5-year share price performance 200% 2008 2009 2010 2011 2012 150% 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 29
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Part III: Internet & Media www.researchcm.com 30
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Internet & Media: Executive SummaryHere is a summary of our dominant themes for the Internet and Media sectors over the next 12 months:InternetApple’s business model, centred on its ability to control an entire internet ecosystem through its iOS platform, has set the benchmarkothers are now following. Established internet champions like Amazon, Apple, Google and Tencent are likely to become more powerful.Innovative start-ups will get acquired. The middle will get squeezed.Social MediaSocial networks are finding it difficult to monetise the mobile internet. Their business models appear to be running out of vision and steam.The social media sector may be a bubble about to burst. Other technologies – like mobile payments – could replace social networks as thedarlings of the technology sector.AdvertisingDigitisation will remain the biggest driver of change in the advertising sector. Mobile search, video search and internet TV may also proveto be disruptive forces. The leading traditional advertising companies are rapidly digitising their revenues – about a third of WPP’s revenuebase is digital – but remain vulnerable to threats from industry outsiders, especially in the area of internet TV.Film & TelevisionEmerging internet TV platforms are likely to turn the film and television sector upside down. Apple, Google, Sony and Microsoft have hadmany false starts, but one day soon they will get their version of a TV box just right. Broadcasters are the most exposed. Content ownersmay use HTML5 technology to bypass the big internet platforms, though they may need regulators’ help.PublishingLike the music industry before it, the publishing sector is being destroyed by digitisation. In the absence of a credible in-house technologyplatform being developed by one (or more) of the major players, the outlook for publishers remains bleak. www.researchcm.com 31
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Internet Companies  Dominant theme: Apple’s business model, centred on its ability to control an entire internet ecosystem through its iOS platform, has set the benchmark others will follow.  Outlook: Established internet champions will get bigger; innovative start-ups will get acquired; the middle will get squeezed. Theme What’s happening? Our conclusions for the sector Leaders Laggards Platform effect Most of what we do on the internet is The established internet champions will get Amazon, Apple, Sina, Asos, Expedia, Mixi, gravitating towards the big internet bigger. Innovative start-ups will get acquired. Baidu, Google, Gree, moneysupermarket, platforms, based on Apple’s model. The middle will get squeezed. Facebook, Tencent RightMove, Wotif Re-imagination “The Re-imagination of nearly everything” Old ways of doing things are being replaced by Start-ups like All the big guys (as Mary Meeker put it in her 2012 Internet new ones, involving software, the cloud and Authentec, Face.com, Trends) is generating a wave of creative web access. Expect a wave of new start-ups Gaikai, Instagram, destruction on the internet. and IPOs. Nicira, Square Big data Unstructured data is difficult to analyse. The big money lies in the complex analytical Amazon, Facebook, Microsoft, Yahoo The big internet companies control where engines and databases that will make sense of Google, IBM, Oracle data comes from and where it goes to. this big data. Mobile payments Mobile data accounts for 11% of global Mobile payments offer a way to dominate the Alibaba, eBay, Telecom operators, internet traffic – up from 1% in 2009. The mobile internet. Every major internet company Google, Square Banks market for apps and ads was just $12bn in is investing heavily in mobile payment (unlisted), Tencent 2011. Monetisation of the mobile internet technologies. Several start-ups are attracting is developing much slower than expected. capital too. Tax avoidance Internet companies tend to pay less tax Recently authorities everywhere have started to Amazon Apple, eBay, Google, than their peers in other sectors. The retail clamp down on tax avoidance measures. For Facebook, Renren sector is fighting back. Politicians are keen many internet companies, effective tax rates are to charge tax on domestic internet activity. likely to rise. Cloud As we move from a PC world to a tablet Cloud software companies could become one of Citrix, VMware, world, more will be done in the cloud. the fastest growing technology sectors. Salesforce.com www.researchcm.com 32
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookOn a cumulative basis, the internet sector has outperformed each of our 16 TMT sectors over the last five years, as illustrated on page 3.Online travel agencies like Expedia and online recruitment portals like Seek have proved most vulnerable in a downturn. Price comparisonsites like moneysupermarket.com and wotif.com are at risk of being made obsolete by big platforms like Google and Baidu. Smaller e-commerce sites like Asos will face stiffer competition from Amazon and eBay.In China, the three big internet ecosystems – Alibaba, Baidu and Tencent – are likely to extend their tentacles into more digital markets, ashave their peers in the west.Finally, expect more companies like Netflix (i.e. high-growth firms that come out of nowhere by creating a new market based on a newniche technology, but then see their share prices pop as the technology they sponsored gets copied by the big internet platforms). Internet content: Cumulative 5-year share price performance 900% 2008 2009 2010 2011 2012 800% 700% 600% 500% 400% 300% 200% 100% 0% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 33
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Social Media  Dominant theme: Social networks are finding it difficult to monetise the mobile internet.  Outlook: The social media sector may be a bubble about to burst. Other technologies – like mobile payments – could replace social networks as the darlings of the technology sector. Theme What’s happening? Our conclusions for the sector Leaders Laggards Mobile Internet Smaller screens, fewer keyboard strokes Mobile ARPUs are likely to remain much lower Mobile-first start-ups Google, Facebook, and shorter attention spans make it harder than desktop ARPUs for some time. Mobile-first Microsoft to monetise mobile social networkers. social networks could displace market leaders. Opaque Analysts are becoming frustrated at the Many social networks may issue profit warnings Gree, DeNA, Facebook, Groupon, business models lack of vision, strategy or empirical over the next few quarters. Those who cannot LinkedIn, Tencent Zynga, Renren, evidence to support future earnings articulate a clear vision on how they will raise Sohu, Youku, Tudou growth, especially in mobile. mobile ARPUs will lose investor confidence. Big data Social networks accumulate valuable data If social networks can develop their big data Facebook, Twitter, Microsoft, Yahoo about users’ likes and dislikes. When appliances into world class analytical engines Sina, Tencent, analysed in real time, this big data can they will be able to sell big data services in the Google become a revenue stream in its own right. same way IBM hires out Watson. Mobile payments Apps, games and ads offer limited growth Social networks are developing their own virtual Alibaba, eBay, potential, especially under the “freemium” currencies as well as investing in mobile Facebook, Monitise, model. Mobile payments offer a way to payments technology. Both strategies will raise Square, Tencent dominate the mobile internet. barriers to entry. Regulation New rules on data privacy, censorship and Regulators may give users more control over Most social networks net neutrality may increase the cost of their personal data. Telcos may soon charge gathering personal data. social networks directly for internet bandwidth. Cyber security In order to optimise the collection of Cyber security is the social media industry’s Most social networks personal data, social networks deliberately Achilles heel. A major cyber-attack on a large lower their security settings. social network could scare away customers. www.researchcm.com 34
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookAcross the world, internet users spend 22% of their online hours on social networks – more time than on any other online activity. Over halfof Facebook’s active users now access the site from a mobile device. Yet Facebook – and most of its competitors – are struggling tomonetise the mobile internet. Their mobile business models appear muddled. Smaller screens, fewer keystrokes and lower attention spansmake mobile customers difficult to please and advertising dollars harder to come by. According to Kleiner Perkins Caufield & Byers, themobile internet now captures 10% of media consumers’ time in the US, but only generates 1% of advertising dollars. That translates into ashortfall of $14bn annually in the US alone.It is notoriously difficult to move from a social media website designed for desktops to one that works seamlessly on smartphones andtablets. Mobile devices force you to make apps that work simply and respond quickly. Social networks may have to be re-invented formobile devices. If the history of technology companies teaches us anything it is that this re-invention is likely to come out of a mobile-firststart-up rather than an established social network. As the world moves to mobile, established social networks could find themselves a has-been technology, usurped by investors for more sexy technologies like mobile payments. Social networks: Year-to-date share price performance Note: Social networks simply haven’t been around for long enough for us to show 5-year share price performance data 200% 2012 150% 100% 50% 0% ‐50% ‐100% Demand Media DeNa Facebook Gree Groupon Linkedin Mail Ru Mixi Renren Shutterfly Tudou Yelp Youku.Com Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the year-to-date share price performance for a selection of large cap stocks in this sector from 1 January 2012 to 19 September 2012. Where companies have floated this year, the share price performance is shown since the IPO date. Note that Tudou and Youku merged in August 2012. www.researchcm.com 35
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Advertising  Dominant theme: Digitisation will remain the biggest driver of change in the advertising sector. Mobile search, video search and internet TV may also prove to be disruptive forces.  Outlook: The leading traditional advertising companies are rapidly digitising their revenues – about a third of WPP’s revenue base is digital – but remain vulnerable to threats from industry outsiders, especially in the area of internet TV. Theme What’s happening? Our conclusions for the sector Leaders Laggards Digitisation The internet’s share of the global Many of the traditional advertising companies Google, Baidu, Aegis, advertising market has grown from 8% in have prepared for the digital age by acquiring Havas, Publicis, WPP 2006 to 18% in 2011. By 2016, PwC digital marketing companies. In future, their expects the internet’s share to rise to 26%. mobile strategies will be the differentiator. Mobile Internet According to Kleiner Perkins Caufield & Conversion rates on mobile advertising tend to Easau (unlisted) Apple, Baidu, Byers, the mobile internet now captures be much lower than for desktop search, despite Velti, Millenial Media Facebook, Google, 10% of media consumers’ time in the US, generally higher click-through rates. There is Microsoft, Yahoo but only 1% of ad dollars. Search needs to room for mobile-first start-ups to take market be re-engineered to work well on mobile. share from the search market leaders. Video search In 2011, video accounted for 35% of Video search technology will open new Google, Facebook, internet traffic and 52% of mobile data advertising markets up. Several start-ups like Blinkx traffic. Cisco expects video traffic to grow Blinkx will enter this field, though they will likely by 51% and 143% respectively in the fixed be bought up by the big internet champions. and mobile internet. Internet TV Whilst TV advertising has retained a 37% Whilst traditional advertisers like WPP have a Apple, Google, Broadcasters market share for much of the last decade, clear digital strategy, many broadcasters do not. Microsoft new TV operating systems from Apple, As a result, much of their TV ad dollars may Google, Microsoft and others may prove soon have to be shared with technology highly disruptive. companies. Global slowdown In 2008, shares in traditional advertisers The sector remains particularly vulnerable to an Most advertising halved, on average. economic slowdown. companies www.researchcm.com 36
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookThe global advertising market was worth $508bn in 2011 and is likely to grow by at least 6% in each of the next three years, according toPwC. Surprisingly, TV advertising has increased its share of the global advertising market slightly from a 34% market share in 2006 to a36% market share in 2011. Newspapers and magazines have been the hardest hit sector, seeing their combined share of global ad spendfalling from 33% in 2006 to 24% in 2011. The highest growth sector at about 19% per annum has been internet advertising, worth $90bn in2011. Its share of the global ad pie is up from 8% to 18% in the last five years. About half of internet advertising expenditure is on searchand a quarter on display ads. Internet video ads make up just 3%, but are the fastest growing segment in internet advertising.Digital advertising revenues are not seamlessly transferable to smaller screens. Recent earnings releases show that internet advertisingcompanies appear to be having difficulty monetising their services on the mobile internet. ARPUs are much lower in mobile. In Q2 2012,Google posted a 16% decline in CPC (cost per click), with mobile being the likely cause.Many of the traditional advertisers – including WPP, Publicis and Aegis – already generate over 30% of their revenues from digital streams.Digitisation of their businesses is likely to continue. But few have a successful model for mobile campaigns. That will be the differentiator. Advertising: Cumulative 5-year share price performance 100% 2008 2009 2010 2011 2012 80% 60% 40% 20% 0% ‐20% ‐40% ‐60% ‐80% ‐100% Aegis Group Cheil Clear Channel Clear Media Dentsu Focus Media Havas Interpublic JC Decaux Omnicom Publicis WPP Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 37
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Film & Television  Dominant theme: Emerging internet TV platforms are likely to turn the film and television sector upside down. Apple, Google, Sony and Microsoft have had many false starts, but one day soon they will get their version of a TV box just right.  Outlook: Broadcasters are the most exposed. Content owners may use HTML5 technology to bypass the big internet platforms, though they may need regulators’ help. Theme What’s happening? Our conclusions for the sector Leaders Laggards Internet TV TV still accounts for 36% of all advertising, The technology sector will transform the film Netflix, Apple, Most broadcasters supporting prices for content owners. and TV sector as it has transformed the music Google, Microsoft Internet TV threatens that supremacy, and publishing sectors. Value will flow away both for broadcasters and content owners. from broadcasters towards the new internet TV platforms, but popular content is likely to retain its value, provided regulators enforce copyright. Lack of credible Content owners are still experimenting The BSkyB model – which involves owning both BSkyB, Comcast Everyone else business models with new distribution technologies. The the content and the distribution channel – is industry’s attempts to develop its own likely to remain the most credible business digital platform (e.g. Hulu) aren’t working. model for now (though satellite transmission may soon become obsolete). HTML 5 HTML 5 technologies give savvy content HTML 5 will also make it easier for developers BSkyB, CBS, Disney, Everyone else owners a mechanism to offer apps directly to create apps for multiple platforms. Late Time Warner, to customers even on Apple devices, starters like Microsoft will get a window to Viacom, Zee, bypassing App stores, thus avoiding attract developers to WP8. That, in turn, may Goko (unlisted) paying Apple or Google a revenue share. shift competitive advantage towards the content owners by leveling the playing field between the big internet “supermarkets”. Piracy Authorities all round the world are cracking Firm enforcement of copyright law increases the BSkyB, CBS, Disney, down much harder than in the past on net present value of film and TV rights. Time Warner, Zee piracy (e.g. jailing of Pirate Bay founder) Viacom www.researchcm.com 38
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookThe broadcasting sector has significantly underperformed the global TMT sector over the last five years. As internet TV technologypenetrates more households, its future looks bleak.The chart below shows that three of the top four performers – Discovery, Lions Gate and Walt Disney – were content owners, rather thanbroadcasters. The fourth – Naspers – outperformed the sector largely on the back of its equity stakes in Mail.ru, Facebook and Tencentrather than its core media business.Rising Asian per capita incomes are likely to result in increased demand for US-based content. New technologies like HTML 5 could helpshift competitive power from the big platforms towards the content owners. Improved touch-screen technology, faster mobile processersand 4G networks will enable the mobile internet to provide an entirely new revenue stream for popular content. CBS, News Corp, TimeWarner, Walt Disney and Zee Entertainment are likely to be beneficiaries. Film and Television: Cumulative 5-year share price performance 250% 2008 2009 2010 2011 2012 200% 150% 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 39
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Publishing  Dominant theme: Like the music industry before it, the publishing sector is being destroyed by digitisation.  Outlook: In the absence of a credible in-house technology platform being developed by one (or more) of the major players, the outlook for publishers remains bleak. Theme What’s happening? Our conclusions for the sector Leaders Laggards Digitisation The global newspaper sector has shrunk The newspaper and magazine sector will suffer Pearson Newspaper and by 14% since 2005 because of the the same fate as the music industry unless it magazine publishers internet. Yet the industry has only can come up with its own technology platform. managed to convert 0.3% of its circulation Yet things may already be too late: even Nook’s revenues to digital format. Magazine success is not enough to reverse the decline of publishing is a similar story. Barnes & Noble. The Google Google plans to create the world’s largest Lawmakers are re-writing copyright law. If Google Book publishers effect digital books library, with over 20m books Google wins the case, then publishers will see already scanned. The Authors Guild seeks assets they thought they owned being legally a class action settlement, but Google expropriated by Google. wants authors to sue it individually. The Amazon If the US Dept. of Justice’s proposed If Amazon wins, margins for the book publishing Amazon Book publishers effect eBook pricing settlement in favour of sector will plummet. Amazon holds, the book industry is likely to see average selling prices for their products plummet. www.researchcm.com 40
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookThe publishing sector is in the middle of a long, drawn-out downturn. In the absence of an industry-led push for an in-house technologyplatform to compete with the invaders, the profits of the industry will be siphoned out by Amazon, Apple and Google. But it may already betoo late. Even the Nook – despite its success as an eBook platform – appears unable to stem Barnes & Noble’s decline.The publishing industry’s situation is best summed up by the comments of Greg Hywood, CEO of Fairfax Media, an Australian publisher,who said at a recent earnings call, “I have been in this industry since the late 1970s and I have never seen an advertising environment ofthe type we are currently experiencing. We are managing Fairfax Media with no expectation of an early recovery.” Publishing: Cumulative 5-year share price performance 80% 2008 2009 2010 2011 2012 60% 40% 20% 0% ‐20% ‐40% ‐60% ‐80% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 41
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Part IV: Telecom Services www.researchcm.com 42
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Telecom Services: Executive SummaryHere is a summary of our dominant themes for the Telecom Services sector over the next 12 months:Telecom operatorsThe core telecom services revenue base of voice and messaging are declining and being replaced by wireless internet access revenues.But margins in the wireless access sector are declining even as subscriber numbers are growing because end users still expect all-you-can-eat data packages despite the fact that average data traffic per user is doubling every year. So telecom operators are looking for newcharging mechanisms and are lobbying regulators to relax net neutrality rules, which have allowed internet companies to profit from high-speed broadband infrastructure without having to pay for it. Sync believes that regulators may soon start turn a blind eye to a two-tierinternet, as Apple, Google and others show willingness to pay for preferential treatment for their customers. If this occurs, industry marginswill rise. If not, operators will see margins squeezed from 30-40% today to utility-like levels of 10% in the near future, further stuntinginvestment in high-speed networks. The most innovative operators are already moving beyond wireless internet access to focus on next-generation services such as their own software platforms (e.g. SK Telecom), data centres (e.g. China Telecom), social networks (e.g.Telefonica), cloud services (e.g. Verizon), app stores (e.g. China Mobile) and mobile payments (virtually everyone).Cable and satellite operatorsMany cable and satellite operators realised several years ago that they would become dumb pipes unless they built integrated ecosystemsthat packaged in-house content with their distribution platform. But the missing element from most cable ecosystems is software. Industryoutsiders are looking to exploit this weakness and invade the pay-TV market by developing internet TV software that is as user friendly ascurrent electronic programming guides (EPGs). So far the main candidates – Apple, Google, Microsoft and Sony – have failed to impresscustomers with their set-top boxes, but one day soon one of them will crack this last bastion of traditional media.Data centresCompetition is heating up in the data centre market, with a host of industry outsiders making waves in the sector. Some, like Amazon, arenakedly building market share with scant regard to profitability. Others, like Google see it as a way to monetise a core in-house skill set.Others still like EMC or NetApp – from the storage sector – are redefining data management solutions. Hardware makers like HP and Dellare trying to move to the higher margin services sector. And telecom operators are launching their own data centres as a means to escaperegulated activity. After a four-year boom for traditional data centre players like Equinix, Rackspace and Telecity, the sector is beginning tolook quite crowded. Margins may start to fall. www.researchcm.com 43
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Telecom Operators  Dominant theme: Telecom operators are lobbying regulators to give them a bigger share of the profits of the mobile internet.  Outlook: Voice and messaging revenues are falling. Broadband access revenue streams could see margins squeezed to utility-like levels of 10%, further stunting investment. But regulators may soon start to turn a blind eye to a two-tier internet, as internet companies show greater willingness to pay for preferential treatment for their customers, raising operator margins. Theme What’s happening? Our conclusions for the sector Leaders Laggards Net neutrality Telecom operators are lobbying regulators Sync believes that regulators will have no Likely to happen in May follow in Asian to relax net neutrality rules, which have choice but to allow operators and internet Europe and the US countries as a means allowed internet companies to profit from companies to come to commercial charging first, where mobile to tax profits high-speed broadband infrastructure arrangements (currently illegal in the USA) in bandwidth shortages expatriated by US without having to pay for it. order to encourage broadband investment. are acute internet companies Shift to utility Core services of voice and messaging are App stores, M2M revenues and data services China Mobile, SK status declining and being replaced by wireless can only go so far. Without a new killer app, the Telecom, Verizon, access. But investment in LTE networks is industry’s margins may fall from current levels Vodafone slow because of poor expected returns. of 30-40% to utility-like levels of 10-12%. Cloud In pursuit of growth, many operators are Telecom operators tried going down the IT China Telecom, KPN, acquiring cloud services companies to services route a decade ago and failed because SK Telecom, Verizon cash in on the big data / cloud wave. they did not have the required skill sets. Mobile payments Operators failed to profit from the mobile Leading operators in the UK, USA, Scandinavia Apple, Alibaba, eBay, Most operators internet. Many see mobile payments as and other regions are building mobile wallet Google, Square, their second chance to ride the wave and platforms. But they are competing with more Tencent are investing in mobile payment platforms. nimble technology companies. Big data 90% of stored data in the world has been Operators are trying to transfer the intelligence China Mobile, SK created in the last two years. Much of it is that is built into their networks via APIs to the Telecom, Vodafone unstructured and generated automatically developer community. Some, like SK Telecom, from machine-to-machine (M2M). There is are focusing on in-house software; others, like a market for real-time analysis of big data. China Mobile, are growing their app stores. www.researchcm.com 44
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookThe changing face of the telecom sector is best summed up by a recently published research paper by Mobile Future Forward in which theauthor, Chetan Sharma, describes four waves of development. The first wave was voice, which dominated operator revenue streamsbetween 1980 and 2000. The second wave was messaging, which became the growth driver in operator revenues between 1991 and 2010.The third and current phase is internet access, which took off with the iPhone launch in 2007. The fourth wave represents new applicationssuch as cloud services, internet TV, mobile payments, enterprise software and “big data” analytics. In most developed markets, the firstand second wave revenue streams are in decline whilst the third – broadband access revenues – is flattening out. The fourth is still someway off. In the medium term, the driver for share prices for telecom operators will be regulation and, in particular, net neutrality. Syncbelieves regulators in Europe and the US are under pressure to increase broadband infrastructure investment and may soon turn a blindeye to the development of a two-tier internet in which Apple, Google and others start paying – willingly – for preferential treatment for theircustomers on operator pipes. If we are right, analysts’ earnings expectations for operators will be lifted. North American telecom operators: Cumulative 5-year share price performance 40% 2008 2009 2010 2011 2012 20% 0% ‐20% ‐40% ‐60% ‐80% ‐100% AT&T CenturyLink Clearwire Frontier Comms Level 3 Rogers Comms Sprint Nextel Telus US Cellular Verizon Windstream Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 45
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 European telecom operators: Cumulative 5-year share price performance 80% 60% 2008 2009 2010 2011 2012 40% 20% 0% ‐20% ‐40% ‐60% ‐80% ‐100% Asian telecom operators: Cumulative 5-year share price performance 150% 2008 2009 2010 2011 2012 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 46
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Cable & Satellite Operators  Dominant theme: The optimum business model is one that combines in-house content with in-house distribution. But the weakness in these cable and satellite ecosystems is the lack of a common software platform.  Outlook: Apple, Google and others are using software to enter these tightly guarded ecosystems. One day they will succeed. Theme What’s happening? Our conclusions for the sector Leaders Laggards Content-filled Many cable and satellite operators Cable operators will continue to acquire content BSkyB, Comcast walled gardens realised they would become dumb pipes assets to strengthen their walled gardens. unless they built integrated ecosystems Simultaneously, internet companies like Google which packaged in-house content with are commissioning their own original content. their distribution platform. Film and TV companies will benefit. Software The missing bit of most cable ecosystems As user preferences shift from broadcasting to Apple, Google, Most cable operators is software. If sufficiently user-friendly, narrowcasting, cable operators are adapting Microsoft, Sony, internet TV software developed by their set-top boxes accordingly. Whilst Apple Samsung industry outsiders may cause cracks in and Google have thus far failed to conquer TV, Cable-TV business models. it is only a matter of time before someone does. Dual screening TV viewers are increasingly dual- Cable and satellite operators are trying to Amazon, Apple, Most cable operators screening: interacting with their TV via control the “second screen” by providing Facebook, Google, their PC or mobile device, talking about subscribers free mobile TV or interactive apps Netflix live TV content on social media, or using that communicate with their TV. But loss of their mobile device as a remote control. control of this second screen is a real threat. IPTV Telecom operators have tried to replace Leading IPTV players in mature Asian Google, PCCW, cable-TV with IPTV for a decade, but broadband markets like Hong Kong, Korea, SingTel progress has been slow. Korea Telecom Singapore and Taiwan have learned that it is and Chunghwa Telecom were one of the difficult to displace incumbent pay-TV operators early starters back in 2003, but have only without offering a larger content library. Until managed to acquire 3.5m and 1.2m IPTV operators acquire content on a large scale, they subscribers respectively since then. are unlikely to pose a significant threat. www.researchcm.com 47
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookAs the chart on page 3 illustrates, cable and satellite operators have outperformed the telecom services sector by 40% over the last fiveyears. Like the internet sector, successful companies in this industry will be those that build an ecosystem around content. Telecomoperators trying to push incumbent pay-tv operators out of subscriber homes are unlikely to succeed unless they can provide superiorcontent catalogues. The risk to cable and satellite operators comes from the trend towards dual screening and internet TV software.Smartphones and tablets provide this second screen and could replace the electronic programming guide (EPG) that sits at the heart of thecable TV proposition. In terms of internet TV software, Apple, Google, Microsoft and others have had several attempts but failed so far toimpress. Investors, however, should not write them off, for one day soon an industry outsider will disrupt the cosy walled garden of cableoperators. Cable & satellite operators: Cumulative 5-year share price performance 150% 2008 2009 2010 2011 2012 100% 50% 0% ‐50% ‐100% Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. www.researchcm.com 48
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Data Centres  Dominant theme: Competition is heating up in the data centre market, with a host of industry outsiders poised to enter, many with new, disruptive business models. Some, like Amazon, are nakedly building market share with scant regard to profitability.  Outlook: After a four-year boom for leading data centre players – like Equinix and Rackspace – margins may start to fall. Theme What’s happening? Our conclusions for the sector Leaders Laggards Emerging Traditionally data centres hosted websites New entrants are flooding the market with their Amazon, Baidu, Equinix, Rackspace, business models and provided data recovery solutions. version of the data management business China Telecom, Dell, Telecity Tomorrow’s data centre will be a one-stop- model. Amazon and Google are entering from EMC, Facebook, shop for outsourcing IT infrastructure, the internet sector; Dell and HP from servers; Google, HP, NetApp, operating platforms, software, storage, Salesforce from the applications sector; EMC Salesforce, Teradata software and analytics. from storage; and telecom operators too. Virtualisation The surge in big data (i.e. unstructured Data centres are investing in the latest Citrix, Microsoft, data than cannot be easily analysed) is hardware and software, and then selling Oracle, Red Hat, creating the need for expensive databases virtualised services. As more corporate and VMware and operating platforms accessed personal databases move to the cloud, remotely. virtualisation companies will benefit WAN Data centres are becoming increasingly During this growth phase, a handful of Brocade, Fusion-IO, optimisation fragmented, but they have to handle companies specialising in technologies that SGI, Riverbed queries in real time. That makes response optimise wide area networks – making data flow Technology speeds a differentiating factor. faster – should benefit Cyber security Smartphones and tablets are leading the Several catalysts could re-rate the cyber Check Point shift from the “PC generation” to the security sector: the SEC may force companies Software, Fortinet, “cloud generation”. These devices change to disclose the cost of cyber-attacks; the BYOD Sourcefire, Palo Alto the way data is stored and accessed. trend is exposing corporate networks to higher Networks, Qihoo 360, Physical security is replaced by cyber threat levels; mobile operating systems like security. Most smartphones have no form Android are largely open source; and Google’s of third-party internet protection. vetting of apps remains minimal. www.researchcm.com 49
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012OutlookData centres have been amongst the best performers in the global TMT sector over the last five years, with Rackspace Hosting up 400%since its IPO in August 2008 and Teradata, Telecity and Equinix all up around 100% since the start of 2008. Stored data is growing at 57%per annum, according to IDC. In the short term, this means that the leading data centre operators such as Equinix, Rackspace and Telecitymay have another couple of quarters of consensus-busting earnings. But much of the data is unstructured – video, emails and documents– making real time analysis difficult. So new entrants like Amazon and Google are trying to exploit this market opportunity – the need forspeed – by using their core skill sets to develop big data appliances. In the longer term, data centre margins are likely to fall as newentrants with new technology move in. Facebook and Google already run some of the world’s largest data centres for their internal use andmay start selling these “big data” services within separate business units. Data centres: Cumulative 5-year share price performance 500% 2008 2009 2010 2011 2012 400% 300% 200% 100% 0% ‐100% Amazon EMC Equinix Google NetApp Rackspace hosting Telecity Teradata Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012. The Rackspace Hosting chart shows cumulative share price performance since its IPO date, 8 August 2008. www.researchcm.com 50
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012 Our research approachWe study what’s new and what’s changing… the rest we leave to mainstream research Our research approach: Global Investment Technology, Media  Search for emerging technology trends & Telecoms  Spot global investment themes themes  Screen for local companies affected Sector Investment Thematic Strategy Research Our recent themes: Our research product: App revolution, Chinese Internet, Big Data, Cloud  TMT sector outlook (bi-annual) Computing, Cyber Security, Digital Media, HTML5,  In-depth thematic research (fortnightly) LTE, Mobile Internet, Mobile Payments, Net  Technology briefings Neutrality, Regulation, Smartphones, Social networks,  Analyst access Video Games  Bespoke research www.researchcm.com 51
    • 2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012Important disclosuresThis document refers to industry trends in general. This document is provided for information purposes only and should not be regarded asan offer, solicitation, invitation, inducement or recommendation relating to the subscription, purchase or sale of any security or otherfinancial instrument. This document does not constitute, and should not be interpreted as, investment advice.About CM ResearchCM Research is an independent research house based in London. We offer a subscription service covering the global technology, mediaand telecom (TMT) sectors. Our clients include investors, corporations, consultancies and governments. We analyse emerging TMT trendswith a focus on disruptive technologies: how will they unfold; which industries will be impacted; and who will be the ultimate winners andlosers.For our institutional investor clients, we convert these trends into global investment themes, highlighting local stocks that might beimpacted. Our aim is to help investors formulate a TMT investment strategy that is global, thematic, timely and coherent. For our corporateclients, we convert these trends into global sector outlooks. Our aim is to help them stay one step ahead of the technology trends that areshaping their industry.At a time when many of our competitors have had their reputations mired by conflicts of interest, we fiercely guard our independence. Ourresearch is unbiased and free of any conflicts of interest. CM Research is a member of the European Association of Independent ResearchProviders (EuroIRP) and is authorised and regulated by the Financial Services Authority. www.researchcm.com 52