2014 Global Trend Forecast (Technology, Media & Telecoms)

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In this report, the third volume in our "Global TMT Trend Forecast" series, we identify the major disruptive technologies that we will see in 2014 and predict how they will impact the world’s largest technology, media and telecom (TMT) companies.

Inside, we split the global TMT sector into 17 subsectors (e.g. connected devices, consumer electronics, semiconductors, e-commerce, social media, software, telecom operators, etc.) and examine how emerging technology themes will impact each sector, highlighting the likely winners and losers. Behind many of the themes mentioned in this report we have published in-depth research reports supporting our thinking. Here, we bring all these themes together. Our objective is to offer investors and industry executives a comprehensive trend forecast for the global TMT sector over the next 12 months.

If you only read one TMT Trends report this year, make sure it is this one.

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2014 Global Trend Forecast (Technology, Media & Telecoms)

  1. 1. SYNC. Global Trend Forecast, 2014 Issue 64 The Future of Technology, Media & Telecoms Volume III July 2013 Cyrus Mewawalla cyrus@researchcm.com +44 (0) 20 3393 3866 www.researchcm.com Authorised and regulated by the Financial Conduct Authority CM Research 22 Upper Grosvenor Street London W1K 7PE
  2. 2. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 2 Contents EXECUTIVE SUMMARY 4  PART I: HARDWARE 6  Technology Hardware: Executive Summary  7  Connected devices  8  Consumer Electronics  10  Component Makers  12  PCs, Servers, Storage and Networking  14  Telecom Equipment  16  Semiconductors  18  PART II: SOFTWARE 20  Technology Software: Executive Summary  21  Applications Software  22  Infrastructure Software and the Cloud  24  Security Software  26  Video Game Software  28  IT Services  30 
  3. 3. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 3 PART III: INTERNET & MEDIA 32  Internet & Media: Executive Summary  33  Internet (e‐commerce)  34  Internet (social media)  36  Advertising  38  Film & Television  40  Publishing  42  PART IV: TELECOMS 44  Telecom Services: Executive Summary  45  Cable & Satellite Operators  46  Telecom Operators  48  APPENDIX 1: M&A TRENDS 51  APPENDIX 2: ABOUT CM RESEARCH 54  APPENDIX 3: RECENT PUBLICATIONS 55 
  4. 4. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 4 Executive Summary In this report, the third volume in our “Global TMT Trend Forecast” series, we identify the major disruptive technologies that we will see in 2014 and predict how they will impact the world’s largest technology, media and telecom (TMT) companies. Our objective is to offer investors and industry executives a comprehensive trend forecast for the global TMT sector over the next 12 months. To set the scene, the chart below shows the relative market performance of 17 TMT sectors since the beginning of 2008, benchmarked against the S&P 500 index. Future performance will be largely impacted by the trends outlined in this report. Over the last five years internet companies, software developers and data centres have been the most prominent outperformers whilst consumer electronics companies, telecom equipment makers, publishers and telecom operators have underperformed. Global TMT sector: Cumulative 5½ year share price performance Hardware Software Internet & Media Telecoms Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research. Bars show the cumulative sector performance from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013 of a selection of stocks that we believe are bellwethers for each sector aggregated on an equal weighting basis. Note: Whilst the performance of every sector is shown over a 5½ year period, the performance of social media is shown over a two year period as most social media companies were not listed 5 years ago. ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013
  5. 5. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 5 Here are some of our conclusions:  Consumer electronics: Wearable computing devices and internet TV will be the big consumer electronics products of 2014. Both are likely to strengthen the dominance of the bigger internet ecosystems run by Apple and Google. But the Asians are fighting back. Samsung may yet revive Bada and LG has bought HP’s WebOS specifically for its smart TV offering. In addition, a host of new mobile ecosystems from Huawei, Jolla, UCweb and Mozilla have recently entered the market, threatening this cosy duopoly.  Telecom equipment: Software defined networks (SDNs) will soon threaten the dominance of networking equipment leaders like Cisco and Juniper Networks. But as mobile technology moves to an all-IP environment, leading providers of fixed IP networking equipment such as Cisco will move into the wireless equipment market thus far dominated by Ericsson.  Semiconductors: Cheaper smartphones and tablets will soon flood the market, many made in China, shifting the balance of power in the chip industry from expensive US chipmakers like Qualcomm to cheaper Chinese ones, like MediaTek and Spreadtrum.  3D printing: The market for 3DP services grew 29% in 2012 to reach $2.2bn worldwide. Whilst Foxconn’s Terry Gou describes 3DP as “a gimmick”, we believe it could transform manufacturing, hasten the onshoring of production and shorten product development cycles. 3D Systems and Stratasys have seen their shares rise already but CAD software firms like PTC and Autodesk could be next.  Software: Apple and Google pioneered the internet ecosystem. Now the race is on to build software ecosystems that include ERP platforms, Big Data analytics, cloud and cyber-security. IBM, SAP, Oracle and Microsoft will be the main predators.  Cloud: As IT infrastructure moves into the cloud, virtualisation products act as the gateway. Niche players like VMware and Citrix Systems will face fierce competition from Microsoft. Meanwhile, WAN optimisation players like Riverbed Tech help move data faster.  E-commerce: Maps and mobile payments are the new battlegrounds in the war for supremacy of the mobile internet.  Advertisers: Ads are going mobile. Google has a 55% share of the $16bn global mobile ads market. If Google’s platform dominates internet TV as well, traditional advertisers will find themselves negotiating with the same near-monopoly in all their markets.  Film & Television: TV doesn’t work without content. As technology giants rush to develop their own versions of the next internet TV platform, they will bid up the price of popular content. Stellar performers like Disney and Time Warner may yet see more upside.  Publishing: Whilst DMGT has shown how smart management can turn around an incumbent publisher in a declining industry, the overall outlook for publishers remains bleak.  Cable & Satellite: Far more prepared for the digital world than telecom operators ever were, cable and satellite operators have a good chance of avoiding being eaten alive by Apple and Google by investing in independent platforms like FanTV.  Telecom operators: As voice, messaging and internet access revenues decline, operators must act fast to avoid disaster. But we argue that competition, politics and the evolving scope of internet regulation will impact share prices more than operator strategies.
  6. 6. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 6 Part I: Hardware
  7. 7. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 7 Technology Hardware: Executive Summary Here is a summary of our dominant themes for the technology hardware sector over the next 12 months: Connected Devices Wearable computing devices such as Sony’s SmartWatch or Google Glass will be the next big thing to follow smartphones and tablets. They will help better target commercial services to us by tracking more of our personal data. Consumer Electronics Internet TV is likely to be the next big consumer product, but it is too early to pick a winning platform as yet. More generally – as was the case with smartphones and tablets – consumer electronics hardware makers are seeing their profits siphoned off by software ecosystems. Asia is fighting back: Samsung may yet revive Bada and LG has bought HP’s WebOS specifically for its smart TV offering. Component Makers 3D printing could lead to the democratisation of manufacturing, changing how we design, manufacture and repair virtually everything we use today from medical devices to aircraft parts to houses. 3DP will shorten product development cycles and facilitate the onshoring of production. PCs, Servers, Storage and Networking The shift from the “PC generation” to the “cloud generation” is changing the way data is stored and accessed. This shift has been hastened by the flop of Windows 8. Storage technology is moving to solid state drives (SSD), a more expensive but faster version of storage than traditional hard disk drives (HDD). Software defined networks (SDNs) will soon threaten the dominance of networking equipment leaders like Cisco and Juniper Networks. Telecom Equipment As mobile technology moves to an all-IP environment, leading providers of fixed IP networking equipment such as Cisco will move into the wireless equipment market thus far dominated by Ericsson. Semiconductors Cheaper smartphones and tablets will soon flood the market, many made in China, shifting the balance of power in the chip industry from expensive US chipmakers like Qualcomm to cheaper Chinese ones, like MediaTek and Spreadtrum.
  8. 8. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 8 Connected devices  Dominant theme: Wearable computing devices will be the next big thing to follow smartphones and tablets.  Outlook: China is set to dominate shipment numbers for smart connected devices for several years, heralding an era of cheap “phablets” where Huawei, ZTE and Lenovo may edge out western rivals. Theme What’s happening? Our conclusions for the sector Leaders Laggards Wearable devices Wearable connected devices – such as Sony’s SmartWatch, Google Glass and medical devices – will be the next big product cycle after smartphones. Wearable devices create more opportunity to collect personal data, benefitting the two dominant mobile ecosystems that are best placed to collect and sell this data. Apple, Google Alibaba, Amazon, Baidu, Microsoft, RIM, Sony, Nokia, LG, Tencent Apple copycats The Apple business model – of owning hardware, software and an apps-based ecosystem – is being cloned by rivals. More software companies will start making their own hardware. The losers will be the hardware-only device manufacturers, whose margins will be squeezed. Apple, Google, Microsoft, Baidu, Alibaba, Tencent, Huawei, Facebook, Amazon Samsung, HP, Dell, LG, Sony, RIM, Acer, Asustek, HTC, Nokia New mobile ecosystem entrants New entrants are invading the market for mobile ecosystems, challenging Apple and Google’s dominant position. To enter this market, some have developed their own mobile operating systems. Others have developed mobile web browsers or mobile search platforms. Jolla, Mozilla, Opera, Huawei, Baidu, Qihoo 360, Facebook, Tencent, Alibaba, Amazon, Easou Apple, Google Cheap smartphones China’s smartphone shipments hit 78m in Q1 2013, up by 117% compared to Q1 2012 and representing 36% of global shipments of 216m for the quarter. As China goes mass market, average prices will fall and Chinese manufacturers will edge out western rivals. Android will remain popular for lack of competition. Google, Samsung, Huawei, ZTE, Lenovo, Xiaomi Apple, Microsoft, Nokia, HTC, RIM, LG Litigation As Apple and Google’s ecosystems grow, the risk of patent litigation and anti-trust litigation against them increases. The risk is that management becomes distracted by litigation, taking their eye off innovation. Huawei, ZTE, Samsung, Facebook, Amazon, Xiaomi Apple, Google Conflicts of interest Google and Microsoft have decided to enter the hardware market, creating conflicts for customers of their software. Apple doesn’t have this conflict because it doesn’t license out iOS. Apple Google, Microsoft
  9. 9. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 9 Outlook Today the world has 2.8bn internet users. Of these, at least 1.5bn access the internet wirelessly. That’s up from 1.1bn a year ago. The next billion users are all likely to use their smartphone as their primary means to access the internet. Mobile now makes up 16% of all internet traffic. This internet traffic is monetised most effectively by those with the largest mobile ecosystems. So far Apple and Google dominate, with a joint 92% market share of the mobile operating system market. But with China set to remain the world’s biggest mobile internet market for the foreseeable future – it is already home to 29% of the world’s mobile internet subscribers – two things will change. Cheaper smartphones will flood the market, benefitting local manufacturers such as Huawei, ZTE and Xiaomi at the expense of dearer western rivals. And Google Android’s hold on the low-end operating software market may be side-lined by home-grown software from the likes of Huawei, Tencent, Baidu or Alibaba. Connected devices: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013
  10. 10. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 10 Consumer Electronics  Dominant theme: Internet TV is likely to be the next big consumer product, but there is no clear winner for investors as yet.  Outlook: As with smartphones and tablets, consumer electronics hardware makers are seeing their profits sucked out by software ecosystems. Asia is fighting back: Samsung may yet revive Bada and LG has bought HP’s WebOS. Theme What’s happening? Our conclusions for the sector Leaders Laggards Internet TV No technology company has yet mastered the three pre-requisites for (enjoyable) internet TV: a simple electronic program guide, a low latency user experience, a vast back-catalogue of licensed content. Each player is attacking TV from a different angle. Apple’s strength is iTunes and iOS; Google’s YouTube and Android; Microsoft and Sony have their games consoles. Streaming specialists such as FanTV also stand a chance. Apple, Google, Microsoft, Fanhattan, Roku, Boxee Sony, Samsung, LG, Nintendo Slaves to the ecosystem Consumer electronics are fast becoming bolt-on accessories for the internet ecosystems controlled by the “second screens” of Apple, Google and Microsoft. Once-great consumer brands are being reduced to low margin subcontractors for the big internet ecosystems of Apple, Alibaba, Baidu, Google and Facebook. Amazon, Alibaba, Apple, Facebook, Google, Microsoft, Netflix Samsung, LG, Nintendo, Nokia, Philips, Sony, Canon Robotics A new generation of consumer products based on robotics is emerging, including driverless cars, hands-free vacuum cleaners and personal companion robots. Three types of beneficiaries are emerging: robot manufacturers like iRobot, motion sensor developers like Microsoft Kinect and operating software developers like Apple and Google. iRobot, Microsoft, Apple, Google On-shoring More technology companies are on- shoring manufacturing of their latest high tech products. Apple assembles iMacs in the US; Google will manufacture Glass in California and the Moto X in Texas. Selected manufacturing clusters that moved to Taiwan, Korea and China in the last decade may now move back to the US. Manufacturers like Lenovo and Hon Hai will be obliged to open plants in the west, raising costs. Apple, Google Lenovo, Huawei, Hon Hai, Samsung Screen technology While Samsung and LG have massively overspent on developing OLED displays Sony has invested more cautiously in 4K technology. Sony’s 4K TVs will be priced between LCDs and OLEDs and may give Sony an advantage, especially if it mandates its film division to produce 4K films. Sony Samsung, LG
  11. 11. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 11 Outlook As the share performance chart below aptly illustrates, only two of the world’s leading consumer electronics companies are trading at higher valuations than five and half years ago. They are Apple and Samsung. The consumer electronics sector has become polarised by the internet. The big mobile internet ecosystems – Apple, Google, Microsoft, Baidu and Tencent – are sucking all the profits out of hardware manufacturing, reducing hardware-only makers to low-margin producers of commodity products. The next big product cycle for the industry is internet TV. Here too the lion’s share of the profits is destined to go to internet ecosystems rather than hardware makers. Samsung, the most profitable hardware-only maker, owes its manufacturing prowess to a strategy of relentless hardware innovation. It is likely to hold that lead with its new hardware innovations such as flexible screens or eye-scrolling technology. But without its own software ecosystem – it tried and failed with Bada – it is doomed to fail ultimately. LG Electronics, conscious of this dilemma, purchased WebOS from HP for use in its smart TV platform. If it makes the most of this opportunity LG could become the first Asian player to compete successfully – on a software level – with Apple, Google and Microsoft, giving it a slim chance to claim a decent slug of the profits of the internet TV market. Consumer electronics: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013
  12. 12. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 12 Component Makers  Dominant theme: 3D printing could lead to the democratisation of manufacturing, changing how we design, manufacture and repair virtually everything we use today from medical devices to aircraft parts to houses.  Outlook: Consumer electronics devices are increasingly controlled by two dominant operating systems: iOS and Android now account for over 90% of smartphones and tablets shipped worldwide. Successful component makers will need to align their businesses more and more to these software ecosystems. Theme What’s happening? Our conclusions for the sector Leaders Laggards 3D printing In 2012, the market for 3D printing products worldwide grew 29% to$2.2bn, according to Wohlers Associates. Used primarily for prototyping, 3DP could soon be used for manufacturing components. Foxconn’s Terry Gou recently called 3D printing “a gimmick”. But whether Mr. Gou likes it or not, 3DP is coming to mass production. Everyone from material providers like Nitto Denko to assemblers like Foxconn will be impacted. 3D Systems, Stratasys Too early to say Flexible displays New display technologies will soon give us screens that have rigid curves built into them or that are bendable by the user. So far Samsung appears to be the clear leader, which is bad news for arch rival Apple. Samsung Apple, Google, LG Display, Sony, Universal Display Apple supply chain Apple is diversifying its supplier base away from Samsung. It is also playing a divide and rule game between its top two assemblers Hon Hai and Pegatron. TSMC could displace Samsung in processors and LG Display and TPK could do so in touch screens. For its main assembly suppliers, a pricing war could send margins further down. TSMC, TPK, LG Display Hon Hai, Pegatron Robotics As Chinese labor costs rise and industrial unrest grows, more Asian component makers will look to industrial robots to control their cost base. Foxconn leads the charge with its plan to roll out 1m Foxbots. But its investment may be delayed by falling profits as it lowers margins to compete with Pegatron. Hon Hai (Foxconn), ABB, Fanuc, Kawasaki Slaves to the ecosystem As industry profits move from hardware to software, component makers need to position themselves accordingly. Increasingly Apple, Google – and perhaps of Alibaba and Baidu – will be the most sought after supply chains, rather than, say, Samsung. AAC Technologies, Goertek
  13. 13. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 13 Outlook Five years after the start of the financial crisis, two thirds of the component makers in our stock universe below are still trading at valuations below those at 1 January 2008. As profits in the consumer electronics industry shift from hardware makers to internet ecosystems, the profitability of component makers will be linked more and more to how successfully they compete for coveted places in the supply chains of the leading operating software developers such as Apple and Google rather than the leading hardware manufacturers such as Samsung. AAC Technologies – which makes miniature microphones used in the iPhone and iPad – is a case in point. Component makers: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 250% 300% 350% 2008 2009 2010 2011 2012 2013
  14. 14. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 14 PCs, Servers, Storage and Networking  Dominant theme: SDNs will soon threaten the dominance of networking equipment leaders like Cisco and Juniper Networks.  Outlook: Microsoft’s disastrous Windows 8 launch has had an adverse impact on the hardware sector. Outlook remains bleak for PC/ notebook makers and HDD storage; rosy for servers, tablets, SSD storage and niche networking products. Theme What’s happening? Our conclusions for the sector Leaders Laggards Software defined networks (SDNs) SDNs will soon threaten the dominance of networking equipment leaders like Cisco. Competitive power in the networking sector is moving from hardware to cloud software. VMware, Netflix, Amazon, Google Cisco, Juniper Networks Cloud Production is shifting from PC-based devices such as laptops to cloud-based devices such as servers and tablets. Outlook continues to look bleak for PC and notebook makers; rosy for servers, tablets, SSD storage and niche networking products. Samsung, Asustek, ARM, Quanta, Lenovo, Google Intel, Microsoft Death of Windows 8 As Samsung and Asustek issue tablets with dual Windows8/Android operating systems Windows’ decline is assured. In the PC/tablet sector competitive power will shift from Microsoft not only to Apple and Google but also to hardware makers. Apple, Google, Samsung, Lenovo, Asustek Microsoft Storage technology As PCs decline and tablets rise, storage is moving from hard disk drive (HDD) to solid state drive (SSD) technology. The leading HDD players argue they have mitigating strategies, but the speed of the technology shift could catch them out. OCZ, Stec, Intel, Sandisk Seagate, Western Digital Open source storage Open source storage hardware from the likes of Backblaze shows signs of taking off, threatening leading storage companies Open source solutions reduce barriers to entry and exert downward pressure on margins. EMC and NetApp are first in the line of fire. Backblaze, RedHat EMC, NetApp, HP, Dell, IBM, Oracle Micro servers Micro servers – cheap, low-power servers – represent a fraction of server shipments but are gaining market share in data centers, especially for cloud services. ARM-based chips are likely to power many micro servers and could seriously challenge Intel’s domination of the high-growth data center server market. ARM Intel WAN optimization Data centers are becoming increasingly fragmented. That makes response speeds a differentiating factor. A handful of companies specializing in technologies that optimize wide area networks – making data flow faster – should benefit. Brocade, Fusion-IO, SGI, Riverbed Technology
  15. 15. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 15 Outlook In Q1 2013, PC shipments declined 14% year on year, much worse than expected, and largely down to the poor reception for Windows 8. Lenovo fared better than any other PC maker. In the short term, Microsoft’s troubles may give hardware makers slightly more competitive power as they play Microsoft off against Google Android – Indeed Samsung and Asustek have already started, by releasing dual operating system tablets. IHS expects hard drive (HDD) sales to fall 12% in 2013 to $32.7bn as solid-state drives (SSDs) march ahead. Last quarter’s worldwide enterprise expenditure figures for the storage services sector generally have also been lacklustre. Looking ahead, we see continued turmoil in the PCs, Servers, Networking and Storage sectors. Storage market leaders like EMC and NetApp will see threats both from open source and a host of new entrants into the sector. But one problem that remains in the networking and storage sectors is data latency. Niche players in networking technology who can make data flow faster stand to benefit. Three names immediately spring to mind: Brocade, Riverbed Technology, and Fusion-IO. PCs, Servers, Storage and Networking: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 2008 2009 2010 2011 2012 2013
  16. 16. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 16 Telecom Equipment  Dominant theme: As mobile technology moves to an all-IP environment, leading providers of fixed IP networking equipment such as Cisco will move into the wireless equipment market thus far dominated by Ericsson.  Outlook: The near term outlook for telecom equipment will be dominated by an increasingly vicious US-China dispute over state-sponsored cyber-attacks. Trade embargos and subsequent retaliation measures are likely to impact Huawei more than Cisco and Ericsson. Theme What’s happening? Our conclusions for the sector Leaders Laggards Mobile moves to IP 4G is the first mobile standard to be all-IP. Whereas 3G technology involved proprietary standards, 4G is more open. As mobile moves to IP, fixed IP networking giants like Cisco and Juniper will find it easier to challenge 4G leaders like Ericsson. Cisco, Huawei, ZTE, Juniper Networks Ericsson, Alcatel Lucent, Nokia Siemens Trade wars Telecom equipment is the first line of defense in cyber-warfare. Huawei and ZTE are increasingly banned from bidding for western telecom contracts on national security grounds. As cyber-warfare threats grow, protectionism in the telecom equipment market is likely to rise. Europe may follow the US’s lead, supporting home-grown telecom equipment makers. China may retaliate. Alcatel Lucent, Ericsson, Nokia Siemens, Cisco Huawei, ZTE LTE/Wi-Fi integration By 2014, mobile traffic will account for 30% of total internet traffic, up from 12% in 2012, according to StatCounter. New technologies that allow seamless roaming between 4G and Wi-Fi will allow offloading of heavy data users from expensive 4G networks to cheaper Wi-Fi networks. In hardware, Cisco is making the biggest push for the combined cell market. In chips, Qualcomm, Broadcom and Marvell stand to benefit. In corporate services, the likes of Aruba Networks, which provides secure Wi-Fi services, will see a growing market. Aruba Networks, Cisco Ericsson M&A Many Western telecom equipment makers are nursing heavy losses and may be forced to sell assets. Nokia Siemens has been rumored to be up for sale and Alcatel Lucent may also be a bid target. Nokia, RIM Alcatel Lucent Patents wars Spurred by Apple’s patent war, the value of the industry’s patents is rising. Expect selected patent portfolios of weaker competitors to be put up for sale.
  17. 17. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 17 Outlook Much of the telecom equipment sector, as the chart below illustrates, is still trading at pre-2008 valuation levels. Note that Huawei – the largest telecom equipment player in the world by revenues – does not feature on our share performance chart below because it is privately owned. As 4G (OFDM) technology proliferates, Huawei’s lead is likely to increase for two reasons. First, the biggest problem with 4G technology is call handover from CDMA (3G) and TDMA (GSM) technology. The best way to ensure seamless handover is to buy handsets and network infrastructure from the same vendor. Huawei is the only vendor that currently provides an end to end product range. Second, since 4G is an all-IP platform, Huawei, a low-cost manufacturer of fixed IP equipment, has yet another advantage. All this is bad news for Cisco, Ericsson, Alcatel Lucent and Juniper Networks. But politics may change the balance of power. The US has started a trade war, pointing its finger at Huawei and its alleged military connections. Depending on how this war of words unfolds, western equipment players may be handed an advantage in western markets. Telecom equipment: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013
  18. 18. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 18 Semiconductors  Dominant theme: Cheaper smartphones and tablets are entering the market, many made in China, switching demand for chips from expensive US chipmakers like Qualcomm to cheaper Chinese ones, like MediaTek and Spreadtrum.  Outlook: Chinese wireless chipmakers are best positioned for the rush to mass market “phablets”. Theme What’s happening? Our conclusions for the sector Leaders Laggards Cheaper smartphones Smartphone penetration in China has passed 15%. It should reach 50% by 2015. Huawei, Xiaomi and ZTE are likely to gain global market share as a result. Domestic Chinese chip manufacturers like MediaTek and Spreadtrum will see beneficial knock on effects, with Qualcomm being the biggest loser. MediaTek, Spreadtrum Qualcomm, Marvell, Broadcom Internet of things As more devices – from fridges to cars to hospital patients – are monitored on the internet, the number of sensors around us will explode. Manufacturers of these sensors and the embedded microprocessors that control them will benefit. Microchip Tech, Freescale, Asia Optical, Infineon, Micronas, Omnivision Apple’s supply chain Apple is reshuffling its supply chain away from Samsung, its main smartphone/tablet rival. TSMC could be the biggest beneficiary amongst chipmakers, with orders for both the A6 and A7 chipsets. TSMC, Avago, Cirrus Logic, Omnivision, TriQuint, Skyworks Samsung Intel vs. ARM Intel is the market leader for PCs and servers because of its unrivalled processing power. ARM designs dominate the mobile devices sector because of their low power consumption. But Intel and ARM are invading each other’s markets. Intel now powers the Samsung Galaxy Tab 3 with its Atom processor, but has few other wins in mobile. ARM, on the other hand, is moving fast into the high-growth micro-server market for data centers. It has recent orders from Baidu for cloud servers. It’s too early to pick a winner, but both moves are game-changing. Too early to say Graphics chips ARM and Intel are incorporating graphics capability within their core chip designs. Chinese chipmakers are also entering the fray. Competition within the graphics chips market is heating up. Nvidia and Imagination could see their pricing power eroded faster than expected. MediaTek, ARM Imagination Tech, Nvidia, Qualcomm
  19. 19. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 19 Outlook In 2013, Gartner estimates that 2.35bn IT devices will be shipped. Of these, 305m will be PCs and laptops, 201m will be tablets and 1.8bn will be mobile phones. Within the mobile phone category, smartphone shipments are expected to reach 958m units this year, up from 722m last year. With connected devices being the most lucrative end market for chips, it is not unsurprising that the fortunes of many chip companies are tied to the most profitable IT device maker, Apple. Chip companies in Apple’s supply chain – like Cirrus Logic, Skyworks Solutions, Omnivision, Avago and ARM – saw their share prices rise with Apple’s until mid-September 2012, when Apple’s shares peaked. Now, during the next phase of the smartphone cycle – when smartphones go mass market, particularly in China – it is the turn of Chinese chip makers to rise. MediaTek and Spreadtrum are closely integrated with the supply chains of Huawei, Xiaomi and ZTE and are likely to benefit as Chinese smartphone penetration grows from 15% to 50% (the steepest section of the typical S-shaped growth curve) over the next three years. Semiconductors: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% 0% 100% 200% 300% 400% 500% 600% 2008 2009 2010 2011 2012 2013
  20. 20. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 20 Part II: Software
  21. 21. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 21 Technology Software: Executive Summary Here is a summary of our dominant themes for the Software and IT Services sectors over the next 12 months: Applications Software Apple and Google pioneered the internet ecosystem. Now the race is on to build software ecosystems that include ERP platforms, Big Data solutions, cloud services, cyber-security and search functionality. IBM, SAP, Oracle and Microsoft will be the main predators. Cloud Software As IT infrastructure moves into the cloud, virtualisation products act as the gateway. Niche players like VMware and Citrix Systems now face fierce competition from the bigger software houses like Microsoft. Security Software Our interviews with executives in the insurance industry confirm that board level of awareness, understanding and accountability structures for cyber-threats is low. As a result, corporations have for some time been underinvesting in cyber-security assets. When a respected CEO gets fired for mishandling cyber-risk, market sentiment will change: boards will be forced to increase expenditure on cyber-security services, lifting earnings prospects for the cyber-security industry. Video Game Software The shift from console games to online and mobile games is happening faster than many expected. EA, Activision Blizzard and Ubisoft will see their core business under attack whilst mobile-only games developers like Gameloft and Gamevil could benefit from being in the right space at the right time. At the same time, in the short term, mobile and online games developers are losing competitive power to the big apps platforms like Apple and the big social media platforms like Facebook and Tencent. But, in the longer term, HTML5 technology may reverse that trend. IT Services The IT services industry’s business model is changing: the typical customer today runs the marketing department rather than the IT department; key vendor partnerships are shifting from ERP vendors like SAP to cloud services vendors like Salesforce; most importantly, the industry’s future as a middleman in a world where cheap, cloud-based services can be purchased directly is threatened.
  22. 22. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 22 Applications Software  Dominant theme: Apple and Google pioneered the internet ecosystem. Now the race is on to build software ecosystems that include ERP platforms, Big Data solutions, cloud services, cyber-security and search functionality.  Outlook: Large software groups, unable to innovate fast enough, will continue to acquire smaller application software houses. Theme What’s happening? Our conclusions for the sector Leaders Laggards Software ecosystems Internet companies such as Apple and Google pioneered the internet ecosystem. Now it is the turn of software companies to build their own ecosystems. A host of emerging technology cycles are all software based. Larger software companies, unable to keep pace with innovation, will be forced to acquire. Targets: small/ medium sized application software companies Acquirers: IBM, Oracle, SAP, Apple, Google, Yahoo, Microsoft, Baidu Mobile-first, app-centric start-ups Smaller screens and lower customer patience levels mean that desktop applications have to be re-designed from scratch to have any hope of working well on the mobile internet. Mobile-first, app-centric start-ups are unseating current software leaders as the internet goes mobile. New mobile operating systems from Jolla (Sailfish) and mobile browsers from Amazon (Silk) are fast entering the market. Twitter, Jolla, Amazon, Mozilla, UCWeb, Opera Apple, Facebook, Google, Baidu, Tencent Cloud business model The success of Adobe’s “Creative Cloud” subscription model makes it more likely that software will move from a licensing model to a cloud-subscription model. If monthly subscription fees replace larger, one- off license fees, revenues will fall in the short term. Whilst Adobe has succeeded here, other houses may issue profit warnings. Adobe, Salesforce, NetSuite, Apple, Google, Red Hat, VMware, Citrix, EMC Microsoft, SAP, Oracle, IBM Computer aided design (CAD) software The 3D printing market was worth $1.7bn in 2012 and is growing at 30% p.a., according to Wohlers Associates. 3D printers are used mainly for prototyping. If 3DP technology is adopted in mass manufacturing, the first wave of beneficiaries will be CAD software companies. PTC, Autodesk, Dassault Systemes Big Data So far no software company has even come close to analyzing large amounts of unstructured data in a quick and meaningful way. The leaders in complex analytical engines are IBM (Watson) and the large internet companies that have developed complex search algorithms. Amazon, Baidu, Google, Facebook, Alibaba, IBM SAP, Oracle
  23. 23. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 23 Outlook Three industry trends are making life uncomfortable for many traditional software companies: the move to app platforms, the move to the cloud and the move to the mobile internet. In addition to these new dimensions, there are a myriad of emerging technology cycles – including 3D printing, robotics, software defined networks, smart TVs, cloud computing and mobile payments – that are all software based. All of this is heralding a new golden age for applications software. Large software groups, unable to innovate fast enough, are acquiring specialist software houses. The M&A timeline charts on pages 50 and 51 illustrate the scale of the upheaval taking place in the software industry: software companies account for just 11% of the market capitalization of the global TMT sector, by our estimates, but made up 55% of M&A transactions, by value, in the TMT sector over the last three years. With the exception of IBM, SAP and Oracle, many of the application software companies listed below are likely to become takeover targets as the sector consolidates further. Applications software: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 250% 300% 2008 2009 2010 2011 2012 2013
  24. 24. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 24 Infrastructure Software and the Cloud  Dominant theme: As IT infrastructure moves into the cloud, virtualisation products act as the gateway. Niche players like VMware and Citrix Systems now face fierce competition from the bigger software houses like Microsoft.  Outlook: Infrastructure software stocks are the most susceptible to a dramatic fall in value during an economic downturn. Theme What’s happening? Our conclusions for the sector Leaders Laggards Virtualization Virtualization allows computing resources (e.g. infrastructure, operating software or storage solutions) to be deployed as and when required, cutting corporate IT costs. The big software houses are creating their own virtualization products, squeezing niche players: in 2012, VMware's virtualization share fell to 56.8%, as Microsoft's rose to 27.5%. Microsoft VMware, Citrix Cloud ERP Emerging cloud-only companies are attacking ERP incumbents IBM, Oracle and SAP who are encumbered by legacy systems which can’t easily switch to cloud. IBM, SAP and Oracle acknowledge the problem and are rapidly acquiring cloud companies. The problem is that revenues and profits could fall significantly during the transition to cloud. NetSuite, WorkDay, Salesforce IBM, SAP, Oracle Open source OpenStack is the open cloud standard used by Rackspace, HP, Dell and others. Proprietary cloud platforms include Citrix’s CloudStack, VMware’s vCloud, Amazon’s AWS and Microsoft’s Azure. Barriers to entry for open source cloud platforms are low, pushing margins down. Proprietary cloud services providers stand the best chance of making big money. Amazon, Citrix, VMware, Microsoft, EMC, NetApp Rackspace, Equinix, HP, Dell Software defined networks Software defined networking (SDN) is an emerging architecture for data networks. SDNs allow software to control the network path along which data packets flow. In theory, this would reduce network hardware to commodity boxes. New standards like the Open Flow protocol are gaining traction and may soon take SDNs from the abstract into the mainstream. SDNs will speed up the transition to the cloud by making cloud services work faster and more efficiently. The downside is that security risk rises. Google, VMware Cisco, Oracle, IBM, Akamai, Juniper Networks Wi-Fi offloading Mobile networks are increasingly off- loading heavy data users onto Wi-Fi. As Wi-Fi becomes a core part of corporate IT world, Wi-Fi infrastructure firms will benefit. Aruba Networks
  25. 25. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 25 Outlook In the short term, the big trends likely to impact investors in communications infrastructure stocks are the cloud and, particularly, virtualisation. Microsoft, VMware and Citrix are fighting it out in the virtualization market. Meanwhile, Oracle, IBM and SAP are fighting cloud-only ERP platforms like Salesforce, NetSuite and WorkDay by making cloud acquisitions of their own. The incumbents’ legacy product base of expensive, difficult-to-implement, semi-redundant ERP systems turn customers away. In the longer term, software defined networks (SDNs) could have a far more profound impact than the cloud. Just as internet protocol (IP) standards made proprietary telecom equipment makers like Lucent and Nortel less relevant, so SDNs may turn today’s leading IP networking equipment makers – like Cisco and Juniper Networks – into commodity box makers, with all the power to control data flows resting with software developers, using standards like the Open Flow protocol as the communication medium between these boxes. The winners will be the communications infrastructure software companies who will be able to program the networking equipment boxes to carry their traffic efficiently without having to invest in expensive hardware boxes. Infrastructure software and cloud: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% 0% 100% 200% 300% 400% 500% 600% 700% 800% 2008 2009 2010 2011 2012 2013
  26. 26. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 26 Security Software  Dominant theme: Our interviews with executives in the insurance industry confirm that board level of awareness, understanding and accountability for cyber-threats is low. As a result, corporations have long underinvested in cyber-security assets.  Outlook: When a respected CEO gets fired for mishandling cyber-risk market sentiment will change: boards will be forced to increase expenditure on cyber-security services, lifting earnings prospects for the cyber-security industry. Theme What’s happening? Our conclusions for the sector Leaders Laggards Corporate awareness levels Several countries have launched national security initiatives to raise cyber-security awareness at board level, with banks and critical infrastructure seen as the most “at risk” sectors. Until a high-profile CEO of a multinational company gets fired for presiding over a large- scale cyber-attack, boards will not take cyber- security seriously. When they finally wake up, demand for cyber-security services will climb. Check Point, Sourcefire, Symantec, Qihoo, Verint, Websense Fortinet, ProofPoint, Banks, stock exchanges, telecom operators, power grids Software ecosystems Apple pioneered the internet ecosystem. Now IBM, Oracle and SAP are building their own software ecosystems. Larger software houses will strengthen their cyber-security capability, especially in network security and enterprise firewalls. Targets: Fortinet, ProofPoint, Palo Alto, Sourcefire, Verint Acquirers: IBM, SAP, Oracle, Salesforce, Apple, Google Trade wars Telecom equipment is the first line of defense against a cyber-attack. Telecom equipment companies may soon be viewed as strategic military assets. Trade wars may break out. The west may become more protectionist when awarding contracts for telecom equipment, cyber-security, IT services and semiconductors. Alcatel-Lucent, Cisco, Ericsson, Intel Huawei (unlisted), ZTE Credit fraud Financial fraud is on the rise. Criminal gangs are targeting banks to access credit or loans on the back of stolen identities via the internet. As online personal data balloons, credit checks will involve more complex Big Data algorithms. Demand for credit analysis products will rise as a cyber-fraud prevention measure. Experian, Equifax Regulation Regulators may force greater corporate disclosure of cyber-related issues (e.g. cost to shareholders) for listed companies. This will raise security awareness of investors, ramping up demand for cyber-security companies’ products. Palo Alto, Qihoo 360, Symantec, Trend Micro, Websense
  27. 27. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 27 Outlook Recent technology trends have triggered new cyber-security risks for corporations: the bring-your-own-device (BYOD) trend coupled with the fact that mobile workers travel all over the globe mean that corporate IT managers have to protect corporate data across more IT platforms at a time when budgets are tight. The explosion in personal data online makes it easier for criminal gangs to steal identities and fraudulently access bank accounts. The proliferation of third party apps has led to a dramatic rise in reported malware. In 2012, the number of malicious web links grew by almost 600% worldwide, according to Websense’s 2013 Threat Report. As IT infrastructure and software move to the cloud, physical security gets replaced by cyber-security but a worldwide skills shortage means that many IT managers are out of their depth when it comes to cyber security. In the longer term, the move to software defined networks is the most worrying trend: as network hardware becomes a commodity, cyber-security risk – which is currently contained in the top four layers of the 7-layer OSI protocol stack (applications, presentation, session, transport) – spreads to the bottom three layers (network, data, physical) as well. Boards aren’t taking cyber-security seriously. The catalyst is just around the corner. When a respected CEO gets fired for being asleep at the wheel during a cyber-attack, boards will be forced to spend more on cyber-security and market sentiment will change in favour of the cyber-security sector. Cyber-security software: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% 0% 100% 200% 300% 400% 500% 600% 700% Ahnlab Check Point Software F5 Networks F‐Secure Gemalto Nice Systems Sourcefire Symantec Trend Micro Verint Systems Verisign Websense 2008 2009 2010 2011 2012 2013
  28. 28. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 28 Video Game Software  Dominant theme: Mobile and online games developers are losing competitive power to the big apps platforms like Apple and the big social media platforms like Facebook and Tencent. Longer term, HTML5 technology may reverse that trend.  Outlook: The shift from console games to online and mobile games is happening faster than many expected. Mobile-first games developers like Gameloft and Gamevil could benefit from being in the right space at the right time. Theme What’s happening? Our conclusions for the sector Leaders Laggards The platform effect Video games are moving away from consoles towards apps platforms like iOS or Android and social media platforms like Facebook or Tencent. The big games developers are being marginalized as their distribution becomes dependent on the app platforms of the larger internet ecosystems. Apple’s new game controller will hasten this trend. Amazon, Apple, DeNA, Google, Gree, Facebook, Tencent Perfect World, Zynga, Activision Blizzard, EA, Ubisoft, Zynga HTML5 Native apps offer better user experience, but are expensive to maintain across multiple platforms. HTML5 technology allows developers to build web-based apps that run on any smart device using a standard web browser. If HTML5 technology supersedes native apps as the developers’ platform of choice, it will threaten the stickiness of Apple and Google’s app ecosystems, loosening their respective walled gardens. Competitive power would then shift back to the video game developers. Gameloft, Gamevil, Activision, EA, Netease, Ubisoft, NCsoft Apple, Google, Microsoft Motion sensors Motion sensors that have been developed for gaming consoles could generate lucrative revenues in other industries. Microsoft Kinect and Leap Motion are the market leading motion sensors. They could provide the critical component for robots and smart TVs. Microsoft, Leap Motion Nintendo Smart TV strategy Microsoft and Sony launch new games consoles this year – Xbox One and PS4. Both have integrated their games console with their smart TV offerings. There is no clear winner in the internet TV market. Apple has iTunes, Google has Android, Microsoft and Sony have their new consoles and several start-ups like Fanhattan are eyeing the space. Too early to say Freemium model failing In the freemium model, games are given away for free and the games developer makes money by selling virtual goods to the user, often via in-app purchases. The biggest market for freemium games is China’s $8bn online games market. But the model is failing. The safest way to play the Chinese gaming market is via the platforms, not the developers. Tencent Changyou, Perfect World, Giant Interactive
  29. 29. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 29 Outlook Sales of console games worldwide peaked at $32bn in 2008, according to PwC. By end 2012 they had fallen 15% to $27bn. PwC expect console game sales to start rising again, but we believe they will continue to decline. The online gaming market was worth $19.5bn last year, up 80% on 2008, and is expected to increase another 60% by 2016 – China accounts for 37% of this market. The mobile games market was worth $10bn last year, up 73% on 2008, and expected to increase another 44% by 2016 – Korea, Japan and China account for 22%, 17% and 10% respectively of this market. Whilst the online and mobile gaming sectors are growing, a sizeable chunk of the industry’s profits are likely to gravitate towards the big platforms – Apple, Google, Facebook and Tencent. Meanwhile, as Microsoft, Sony and Nintendo see their customers move towards cheaper gaming platforms, they are working hard to adapt their games consoles to become the digital hub for home entertainment, though with limited success so far. For now, however, the mobile games developers like Gameloft and Gamevil seem to be in the sweet spot. Gaming software: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% 0% 100% 200% 300% 400% 500% 600% 2008 2009 2010 2011 2012 2013
  30. 30. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 30 IT Services  Dominant theme: The IT services industry’s business model is changing: the typical customer is now the Chief Marketing Officer rather than the Chief Technology Officer; its key partnerships are shifting from ERP vendors to cloud services vendors; most importantly, its future as a middleman in a world where cheap, cloud-based services can be bought directly is threatened.  Outlook: The IT services sector faces significant downside risk. Theme What’s happening? Our conclusions for the sector Leaders Laggards Big Data Traditionally, databases and business intelligence tools were purchased separately. Now they are being combined into “Big Data appliances”. To survive, IT services companies need to metamorphosise into one-stop-shop data- management houses because soon they will compete with internet companies like Amazon and Google who deal with Big Data for a living. Amazon, IBM, Oracle, Google, Facebook, SAP, Microsoft Accenture, Atos, Capgemini, Infosys, TCS, Tieto, WIPRO, Apple, HP, Dell, Digital Marketing Increasingly, it is the marketing executives of multinationals rather than IT executives that are becoming the key accounts of IT services companies. Advertising and brand marketing – once a people-oriented industry – is, in the digital age, very much an algorithm-based IT service. Acxiom, Marketo, Constant Contact, ValueClick, Responsys Cloud services Businesses are learning to cut IT costs by shifting in-house Capex to outsourced Opex in the cloud. IT services companies will change their business partners from traditional ERP giants like SAP to cloud companies like EMC. Amazon, EMC, NetSuite, Red Hat, Salesforce, Teradata Accenture, Atos, Capgemini, IBM, TCS Tieto, Infosys, Wipro Open source databases Traditional relational databases are not capable of handling unstructured data. Many next generation database platforms – like Hadoop – are open source. Oracle, IBM and Microsoft – the three largest SQL database manufacturers – have the most to lose and are belatedly embracing Hadoop. The danger is that open source platforms drag the entire industry’s margins down. Red Hat HP, Oracle, IBM, Microsoft, Progress Software, SAP Software ecosystems IT services companies risk being disintermediated by the big software ecosystems just as book shops have been disintermediated by Amazon. As a result, some will transform themselves into software ecosystems. Niche cloud-based application software and cyber-security companies could become their bid targets. Citrix, Fortinet, NetApp, Progress Software, Red Hat, SGI, Informatica
  31. 31. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 31 Outlook The IT services sector is in a digital transition phase that, in many ways, resembles the retail sector. It risks becoming irrelevant as internet services companies cut out the middle man and offer IT services – storage, data analytics, ERP systems – directly via the cloud. Ironically, Amazon – who destroyed much of the retail sector – is now taking direct aim at the IT services industry with its enterprise cloud offering. Revenue models for IT services companies are changing. One-off fees for expensive, large-scale ERP systems implementations are being replaced by monthly subscription fees for Infrastructure-as-a-service (IAAS). That could reduce revenues in the short term and raise upfront costs (because IT services companies would have to invest in their own infrastructure). Oracle’s partnership with Salesforce, announced last month, is an admission that Salesforce’s cloud-based strategy is the future. On 12 March 2013, we issued a Sell note on the Indian IT services sector. Since then there have been profit warnings not only from Infosys but right across the industry from IBM, SAP, Oracle, and Tieto. We may be witnessing the start of a painful industry restructuring. IT Services: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013
  32. 32. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 32 Part III: Internet & Media
  33. 33. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 33 Internet & Media: Executive Summary Here is a summary of our dominant themes for the Internet and Media sectors over the next 12 months: Internet (e-commerce) Maps and mobile payments are the new battlegrounds in the war for supremacy of the mobile internet. Internet (Social Media) Crowd-funding is the next big thing in social media. The growth potential for this market is almost limitless as it expands to include corporate loans, mortgages, credit cards and insurance services. Traditional advertising As advertising expenditure moves away from TV towards mobile, advertisers’ fortunes will be tied ever more closely to the technology platforms that control internet TV and mobile advertising. With respect to internet TV, no platform has emerged as the clear winner yet. But with respect to mobile advertising, Google already commands over half the global market. Film & Television Broadcasters are resisting the integration of live TV into the internet TV offerings of Apple, Google and Microsoft. Their hope is that an independent platform – like FanTV – will emerge that will give them more control. But in the short term, the price of popular content is likely to be bid up as technology companies keen to get into the internet TV hardware game realise that success is as much to do with access to licenced content as it is to do with great technology. Traditional Publishing Like the music industry before it, the publishing sector is being destroyed by digitisation. Whilst DMGT has shown how smart management can turn around an incumbent publisher in a declining industry, the overall outlook for publishers remains bleak.
  34. 34. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 34 Internet (e-commerce)  Dominant theme: Maps and mobile payments are the new battlegrounds in the war for supremacy of the mobile internet.  Outlook: A host of new mobile ecosystems are coming onto the market, threatening the dominance of Apple and Google. Theme What’s happening? Our conclusions for the sector Leaders Laggards Map wars Knowing where your customer is located and which direction he’s heading is critical to selling him something. Controlling the maps function is key to controlling mobile commerce. Google Maps (now including Wave) is the clear leader, followed by Nokia’s Navteq and Tomtom. Google, Nokia, Tomtom Apple, AOL, Baidu, Microsoft, Yahoo, Facebook, Tencent Mobile payments Cloud-based solutions are displacing Near Field Communications (NFC) as the likely global mobile payments standard. Google Wallet is the most prominent NFC failure. Square and PayPal lead in the West. Alibaba and Tencent in China. Apple and Facebook have yet to enter the race. Several outliers like Amazon and Groupon remain in the game. eBay, Square, Groupon, Alibaba, Tencent, Monitise Amazon, Apple, Google, Facebook, VeriFone Mobile ecosystems Now that we know investing in big internet ecosystems are the best way to make money, new entrants are piling in, both by way of new mobile web browsers and new mobile operating systems. For Apple and Google this may be in the price. But for emerging contenders – Alibaba, Amazon, Baidu, Huawei, Jolla, Microsoft, Mozilla, Tencent, Tizen, Twitter, Ubuntu, UCweb, Yahoo – there may still be upside. Apple, Google Alibaba, Baidu, Huawei, Jolla, Microsoft, Mozilla, Tencent, Easou, Ubuntu, UCweb Tax avoidance Internet services companies tend to pay considerably less tax than their peers in other industries. The political will to address this anomaly is strengthening worldwide. Authorities everywhere are attempting to close down tax loopholes. If they succeed, effective tax rates for internet companies will rise and net earnings will fall. Amazon, Apple, eBay, Google, Facebook, Renren Internet of Things The “internet of things” refers to the identification of objects via sensors in order to monitor them or share information about them via the web. New connected devices such as Google Glass will provide innovative ways to collect more data about our digital lives, enabling internet companies to target more services to us. Google, Facebook, Apple, Microsoft, Huawei
  35. 35. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 35 Outlook Global B2C e-commerce sales hit $1.04tn in 2012, up 22% on 2011, according to eMarketer. In 2013, they are expected to grow by 17% to $1.22tn. The US accounts for 32%, China 14% and Japan 10% of the global total. But China is catching up fast. Whilst the US and Japanese markets are expected to grow this year by 12% and 7% respectively, China’s will grow by 65%. In our last TMT Trends report (CM Research, 24 September 2012) we concluded that profits would gravitate towards the leading internet ecosystems – Apple, Amazon and Google in the west and Baidu, Tencent and Alibaba (whenever it listed) in China. Now the story has moved on. There are far more entrants offering competing internet ecosystems and there is certainly room for five or six ecosystems to co- exist in each market. Investors should watch Huawei, Jolla, Microsoft, Mozilla, Opera, Qihoo 360, Tizen, Ubuntu, UCweb and Yahoo. Internet (e-commerce): Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% 100% 300% 500% 700% 900% 1100% 1300% 1500% 2008 2009 2010 2011 2012 2013
  36. 36. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 36 Internet (social media)  Dominant theme: Crowd-funding is the next big thing in social media.  Outlook: The fortunes of social media companies have been mixed. With so many unproven business models lining up for IPO, investors should do their homework before investing. Theme What’s happening? Our conclusions for the sector Leaders Laggards Crowd-funding With credit markets seizing up over the last five years, crowd-funding sites are filling the gap. Growth potential for this market is almost limitless as it expands to corporate loans, mortgages, credit cards and insurance services. Kickstarter, Lending club, Wonga Banks and insurance companies New social sharing models People are sharing more things online, especially in Asia. In this model, everyone wins: I help you; you help me; we help others; and the social network profits. Waze is an example of this type of social sharing model where everyone’s a winner. New sharing models, especially in mobile, will threaten incumbent social networks. Waze, Yelp, TripAdvisor, Pinterest, Instagram, Tumblr, Foursquare Facebook, Linked In, Renren, Sina, Gree, DeNa Wearable connected devices Social networks make money by collecting personal data. Wearable devices such as Google Glass or fitness tracking watches will help them collect more personal data. This is where social media truly converges with consumer electronics. Wearable devices will be designed specifically to collect personal data. Apple and Google are best positioned to do this. Apple, Google Microsoft, Yahoo, Facebook Internet TV Internet TV is the natural follow-on advertising market for many social media companies. Competition in the internet TV market will be intense and thus far no social network has come up with a credible business model for TV. Apple, Google, Microsoft, Fanhattan, Roku, Boxee Facebook, Twitter, Yahoo, Tencent, Sina, Renren Virtual currencies Social networks are developing their own virtual currencies as well as investing in mobile payments technology. Both strategies will raise barriers to entry. A virtual currency – if it reaches critical mass – helps to convey a sense of widespread trust in an ecosystem, reducing customer churn. Amazon Coins is the latest. Expect many more. Alibaba, Amazon, eBay, Facebook, Monitise, Square, Tencent, Bitcoin Data privacy The EU is threatening the future profitability of leading US technology companies by steadfastly sticking to its principles on data privacy. If the EU refuses to back down on data privacy issues, the US social media sector will be the worst hit, with ad revenues lower and data collection costs higher. Apple, Google, Facebook, Twitter, Groupon, Microsoft, Linked In
  37. 37. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 37 Outlook A year ago, many analysts – including us – expressed concern that the big social networks would have trouble moving to mobile. Smaller screens, fewer keyboard strokes and shorter attention spans made it harder to monetize mobile social networkers. By Q1 2013, those concerns had evaporated as Facebook and Google both saw mobile ad revenues rise steeply. Facebook reported that 30% of its revenue base that quarter had come from mobile. But now we have bigger concerns. The world has 2.8bn internet users, half of whom already use social media, according to eMarketer. The next billion internet users will likely be poorer, less literate and live in conflict zones. Most will use social media and most will do so via mobile. What these users will want of social networks will differ markedly from the wants of their current user base. The nature of social networks is such that they are constantly under threat from the next big thing. Current threats include virtual currencies, crowd-funding, wearable devices, internet TV and, of course, regulators. We expect high volatility over the next 12 months in the social media sector as these trends unfold, taking some of the established leaders by surprise. Social networks: Cumulative 1½-year share price performance Note: Social networks simply haven’t been around for long enough for us to show 5½ year share price performance data 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 30 June 2013. Where companies have floated during this 1½ year period, the share price performance is shown since the IPO date. ‐100% ‐50% 0% 50% 100% 150% 200% 250% Baidu Demand Media DeNa Facebook Google Gree Groupon Linkedin Mail.Ru Mixi Netease NHN Renren Shutterfly Sina Tencent TripAdvisor Yahoo! Youku Tudou 2012 2013
  38. 38. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 38 Advertising  Dominant theme: As advertising expenditure moves away from TV towards mobile, advertisers’ fortunes will be tied ever more closely to the technology platforms that control internet TV and mobile advertising. With respect to internet TV, a winning platform has not yet emerged. But with respect to mobile advertising, Google already commands over half the global market.  Outlook: Traditional advertisers probably have about a year before disruptive forces in the TV advertising market hit them. Theme What’s happening? Our conclusions for the sector Leaders Laggards Digital marketing The range of direct digital threats is expanding. Cloud-based marketing software from the likes of Marketo and Contact Contact is one; so are price comparison sites like moneysupermarket, social shopping sites like Groupon, and content generators like Demand Media. The traditional advertisers have been quick to acquire digital marketing agencies. Most, like WPP and Havas, now generate at least 30% of their revenues from digital advertising. To stay ahead of the game, they are likely to acquire more. Targets: Marketo, Constant Contact Demand Media Groupon, inContact Millennial Media Moneysupermarket Responsys Acquirers: Dentsu, Havas, Interpublic, Publicis, WPP Internet TV TV advertising still accounts for 35% of the global advertising market. It remains the core market for traditional advertisers. With the advent of smart TVs, broadcasting will switch rapidly to narrowcasting and advertisers could see their core TV market fall off a cliff. Apple, Baidu, NHN, Google, Microsoft, Facebook Dentsu, Havas, Interpublic, Omnicom, Publicis, WPP Software ecosystems Traditional advertisers are not just competing with digital marketing agencies. They are competing with IT companies who are busy building software ecosystems which include advertising modules as part of the package... ... Salesforce’s acquisition of ExactTarget is a case in point. IT services companies are integrating their corporate software offerings. Digital advertising and marketing services are now being bundled with other enterprise software applications, including ERP systems. Oracle, SAP, IBM, Microsoft Dentsu, Havas, Interpublic, Omnicom, Publicis, WPP Mobile Internet Mobile internet ad revenues are expected to quadruple worldwide from $4bn in 2011 to $16bn in 2013. Google should account for 55% of this market in 2013, Facebook 12% and Twitter 2%. As traditional advertisers’ core end markets move from TV to mobile, their fortunes will be tied even closer to Google. If Google does well in the internet TV space too it could make large parts of the media buying industry redundant. Google, Facebook, Twitter, Millennial Media Media buying agencies
  39. 39. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 39 Outlook For the last decade a third of advertising revenues have come from TV broadcasting. In 2012, the TV advertising market was worth $200m, double the internet advertising market. If you believe the TV industry is about to be hit by a new wave of disruptive technologies spearheaded by Apple and Google, then expect the advertising industry to undergo a bumpy ride. Apple, Google and Microsoft will almost certainly integrate their existing mobile operating systems and ad platforms with their forthcoming internet TV offerings. Without regulatory intervention, they will suck the profits out of the TV advertising industry as they have done in so many other “old media” industries. Simply generating a third of their revenues from digital marketing services will not be enough to secure WPP, Havas and Publicis’ future because those digital market services will be sold to a duopoly of advertising platforms who will dictate pricing terms. More broadly, it is interesting to note from the chart below that many “new media” digital marketing companies have not done much better than the traditional media advertising agencies they have supposedly usurped. . Advertising: Cumulative 5½ year share price performance Old media advertisers New media advertisers 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 250% 2008 2009 2010 2011 2012 2013
  40. 40. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 40 Film & Television  Dominant theme: Broadcasters are resisting the integration of live TV into the internet TV offerings of Apple, Google and Microsoft. Their hope is that an independent platform – like FanTV – will emerge that gives them more control.  Outlook: In the short term, the price of popular content is likely to be bid up as technology companies keen to get into the internet TV hardware game realise that success is as much to do with access to licenced content as it is to do with great technology. Theme What’s happening? Our conclusions for the sector Leaders Laggards Third screens Third screens involve seamless transfer of data between 3 screens: a smartphone, tablet and TV. Second and third screens work best when the same operating system is used across all three screens (e.g. Microsoft SmartGlass with Xbox One). Broadcasters will not integrate live TV content with Apple, Google or Microsoft’s offerings for fear of losing control. That’s why their versions of internet TV provide a disjointed user experience. Expect to see a host of new streaming set-top boxes with “independent” platforms that play to content owners’ fears over a potential Apple/Google internet TV duopoly. Fanhattan, Apple, Google, Microsoft, LG Cisco, Ericsson, Intel, Pace, TiVo, Roku, Netflix, Amazon, Samsung, LG, Sony HTML 5 Native apps tied to an operating system like iOS or Android make the content provider beholden to Apple or Google, But web-based apps using HTML 5 technology allow them to retain control. TV channels will turn into web-based apps. This will allow film and TV content providers to keep their own brand identity, user interface (EPG) and revenue stream, without having to pay a cut to Apple or Google. BSkyB, CBS, Disney, Time Warner, Zee Viacom, Comcast, News Corp Bidding war for content It’s only worth buying an internet TV if you can access the range of content you want, both on-demand content and live TV. As more technology players move into the market for next generation TV software they will have to sign a string of content deals, bidding up the price of content in the process. Technology companies are queuing up to license popular content to ensure their TV offerings are attractive to customers. They include internet companies (Apple and Google); games console makers (Sony and Microsoft), (telecom equipment makers (Ericsson and Cisco), streaming services (Netflix and Amazon) and telecom operators (BT and Verizon). BSkyB, CBS, Comcast, Disney, Discovery, Lions Gate, News Corp, Time Warner, Viacom, Zee
  41. 41. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 41 Outlook The clumsy “smart TVs” sold today are just the precursor for what is to come. True internet TV will allow the customer to access any content – live sports, broadcast TV, catch-up TV or on-demand programming – through a single electronic programming guide (EPG) without the latency one gets today. But we are still in the very early stages of this technology cycle – streamed TV content still represents less than 2% of the pay-TV market. Internet TV offers big prizes. At $200bn, the TV advertising market is still double the size of the internet advertising market. Soon your smartphone or tablet will be the second or third screen used to control your television. Apple, Google and Microsoft are well positioned to win in this market. Several other players – Cisco, Intel, Ericsson, Sony, Samsung, LG, BT, Netflix, Facebook and Amazon – are lining up to play too. Start-ups like Zeebox and Fanhattan offer platforms that are independent of Apple or Google and so appeal to the broadcasters. But their products will never sell in the high street unless they include access to a wide range of content. So in the short term owners of popular content will remain in the driving seat. Film and Television: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 250% 300% 2008 2009 2010 2011 2012 2013
  42. 42. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 42 Publishing  Dominant theme: Like the music industry before it, the publishing industry finds itself outmanoeuvred by the internet.  Outlook: Whilst DMGT has shown how smart management can turn around an incumbent in a declining industry, the overall outlook for publishers remains bleak. Theme What’s happening? Our conclusions for the sector Leaders Laggards Business turnaround models Print revenues are falling at a rate of 20% per annum for some publishers. But digital revenues are not rising fast enough to counter this. DMGT has shown that publishers with a focused strategy can turn their businesses around by moving away from print into events, digital media and financial news. DMGT, Pearson Most newspaper and magazine publishers Google news tax In March 2013, Germany’s parliament passed a ‘Google tax’ law, forcing Google to pay royalties to newspaper publishers for providing excerpts of their news articles in its search results. Germany’s law may backfire on German publishers by referring less traffic to their websites from Google searches. But more countries may become emboldened to start levying usage taxes on US internet companies. Google Google’s digital library Google is creating the world’s largest digital books library, with over 25m books already scanned. The problem is that it faces multiple copyright-infringement claims from authors who did not give their permission to Google to publish their copyrighted works. Copyright cases are continuing against Google in the US and other countries. Lawmakers are still re-writing copyright law. If Google wins these cases, then authors and publishers will see assets they thought they owned being legally expropriated by Google under “fair use” provisions. Google Hachette (Lagardere), HarperCollins (News Corp), Macmillan (Holtzbrinck), Simon & Schuster (CBS), Penguin (Pearson) Apple’s eBook anti-trust case The US Dept. of Justice has taken Apple to court over allegations that it conspired with five publishers to raise e-book prices. All the publishers involved have now settled, but Apple has chosen to fight the case. If Apple loses the case, its “agency” model (which allows publishers to set the price) fails and Amazon’s “wholesale” model (which allows Amazon to set the price) wins. The price of books will plummet, spelling bad news for all book publishers. Amazon Apple Hachette (Lagardere), HarperCollins (News Corp), Macmillan (Holtzbrinck), Simon & Schuster (CBS), Penguin (Pearson)
  43. 43. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 43 Outlook The publishing sector is in the thralls of a downward spiral. Take the global newspaper market. It has shrunk by 14% since 2005 because of the internet. Yet by end 2012, the industry had only managed to convert 0.5% of its circulation revenues to digital format. Magazine publishing tells a similar story. With books, things are even worse. In the US and Europe over 15% of book sales are digital and 90% of the market is cornered by Amazon. Moreover, the big five book publishers have all reached a settlement with the US Department of Justice on a price fixing scam originally engineered by Apple. Daily Mail & General Trust and Pearson stand out as two companies that have braved this new world and come out on top. Each has a focused digital strategy and each is leaving its traditional print publishing businesses to die. But they are exceptions to the rule. For now, we expect more carnage in the publishing sector. Publishing: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 2008 2009 2010 2011 2012 2013
  44. 44. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 44 Part IV: Telecoms
  45. 45. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 45 Telecom Services: Executive Summary Here is a summary of our dominant themes for the Telecom Services sector over the next 12 months: Cable and satellite operators Many cable and satellite operators realised several years ago that they would become dumb pipes unless they built integrated ecosystems that packaged in-house content with their distribution platform. But the missing element from most cable ecosystems is software. Industry outsiders have long been scheming to exploit this weakness and invade the pay-TV market by developing internet TV software that is as user friendly as current electronic programming guides (EPGs). So far the main candidates – Apple, Google, Microsoft and Sony – have failed to impress customers with their set-top boxes. FanTV from Fanhattan is the latest in a line of new entrants. But one day soon an enterprising technology company will crack this last bastion of traditional media. Telecom operators The Internet of Things, mobile payments, Big Data, software defined networks, internet TV and cloud services all present potential new revenue streams for operators as voice, messaging and internet access revenues decline. Strategies differ from operator to operator, but three factors outside their control are likely to influence their earnings prospects significantly. The first is the level of competition: a lack of competition in the US, following a decade of mergers and acquisitions, has helped AT&T and Verizon raise tariffs, especially in the wireless space. The second is politics: China’s state-controlled operators may soon be given a nod and a wink by the Communist Party to clobber privately owned internet companies like Tencent and Alibaba with higher charges for carrying their traffic. China Mobile is already rumoured to be negotiating a deal with Tencent for its WeChat messaging service. The third is the scope of regulation: telecom operators are the only segment of the internet value chain to be heavily regulated. That has held broadband investment levels down, especially in Europe. There is a growing view all over the world that regulation of the internet needs to be overhauled. Many countries, for example, are eager to ensure US internet companies pay more local taxes. There is a small chance that telecom operators could benefit from such an overhaul.
  46. 46. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 46 Cable & 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 walled gardens Many cable and satellite operators realized they would become dumb pipes unless they built integrated ecosystems which packaged in-house content with their distribution platform. Cable operators will continue to acquire content assets to strengthen their walled gardens. Simultaneously, internet companies like Google are commissioning their own original content. Film and TV companies will benefit. BSkyB, Comcast Software The missing bit of most cable ecosystems is software. If sufficiently user-friendly, internet TV software developed by industry outsiders may cause cracks in Cable-TV business models. As user preferences shift from broadcasting to narrowcasting, cable operators are adapting their set-top boxes accordingly. Whilst Apple and Google have thus far failed to conquer TV, it is only a matter of time before someone does. Apple, Google, Microsoft, Sony, Samsung, Fanhattan Most cable operators Dual screening TV viewers are increasingly dual- screening: interacting with their TV via their PC or mobile device, talking about live TV content on social media, or using their mobile device as a remote control. Cable and satellite operators are trying to control the “second screen” by providing subscribers free mobile TV or interactive apps that communicate with their TV. But loss of control of this second screen is a real threat. Amazon, Apple, Facebook, Google, Netflix, Zeebox, Fanhattan Most cable operators IPTV Telecom operators have found it difficult to sell IPTV to cable customers. By end 2012, Korea Telecom was one of the most successful with 6m IPTV subscribers (almost a quarter of households). But Verizon FiOS TV had just 4.7m; BT Vision just 0.7m and SingTel mio TV just 0.4m. Leading IPTV players in mature Asian broadband markets like Hong Kong, Korea, Singapore and Taiwan have learned that it is difficult to displace incumbent pay-TV operators without offering a larger content library. Until operators acquire content on a large scale, they are unlikely to pose a significant threat. BT, PCCW, Chunghwa Telecom, SingTel, Korea Telecom, Verizon
  47. 47. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 47 Outlook Many cable and satellite operators realised several years ago that they would become dumb pipes unless they built integrated ecosystems that packaged in-house content with their distribution platform. But the missing element from most cable ecosystems is software. Industry outsiders are looking to exploit this weakness and invade the pay-TV market by developing internet TV software that is as user friendly as current electronic programming guides (EPGs). Technology companies like Apple and Google are further down the line in terms of developing TV operating systems. But the missing element of their internet ecosystems is content, especially live TV content. Both industries can help each other fill in the gaps in their business model, but neither is likely to let the other into their domain. For cable and satellite operators, the best strategy appears to be to acquire technology platforms built by start-ups like Fanhattan and stream their content to connected TVs via web-based apps. Comcast and BskyB are investing in such technologies. The cable and satellite operators have a hell of a fight ahead of them, but they are more prepared than the telecom operators ever were and some of them might even win. Cable & satellite operators: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013
  48. 48. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 48 Telecom Operators  Dominant theme: The Internet of Things, mobile payments, Big Data, software defined networks, internet TV and cloud services all present potential new revenue streams for operators as voice, messaging and internet access revenues decline.  Outlook: As long as operators sit on the regulated side of the internet, they are unlikely to substantially increase profits. Theme What’s happening? Our conclusions for the sector Leaders Laggards Internet of Things More and more objects are being connected to the internet – from heating systems to engine parts – to enable them to be controlled centrally and managed more efficiently. Operators have an opportunity not just to make money from carrying machine-to-machine (M2M) traffic but by creating a set of cloud- based enterprise software services and data centers built around the Internet of Things. NTT, KT, China Mobile, KPN, Telefonica Regulation A geopolitical fault line is developing that pits emerging markets against the USA. Outside the US, the internet is becoming more regulated. But this means different things in different countries. In the West, the big regulatory issues are net neutrality, price capping and data privacy. In developing markets, it tends to mean political censorship of the internet. In Europe and the US operators are lobbying regulators to relax net neutrality rules on the grounds that they hold back broadband investment. In China, state-controlled operators are attempting to bully privately owned internet companies to pay more for the traffic they send through their pipes. In Korea, operators want broadcasting rules relaxed to allow operators to compete. Situation fluid: Regulators all over the world are debating net neutrality, data privacy, internet censorship Mobile payments Operators failed to profit from the first round of the mobile internet. Many see mobile payments as their second chance to ride the mobile commerce wave. Operators are grouping together regionally (e.g. ISIS in the US and Weve in the UK). But they are competing with more nimble technology companies and will probably lose. Apple, Alibaba, eBay, Google, Square, Tencent Most telecom operators Software defined networks (SDNs) SDNs transfer the intelligence currently held in a network equipment box to a software layer, enabling the network to be centrally controlled. SDNs allow operators to manage networks more efficiently and offer new services. But operators risk losing control of their network to industry outsiders. Too early to say
  49. 49. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 49 Outlook Voice and messaging revenues have peaked for many operators. Indeed, instant messaging apps like WhatsApp – which now has 250m users – is destroying operators’ messaging revenues faster than anyone expected only a year ago. Internet access services are becoming less profitable because data traffic is rising at a rate of 100% per annum prompting higher capex, but competition and regulatory controls make it difficult for operators to raise prices in line with higher investment costs. If operators do not find new revenue streams soon, their profitability levels will decline rapidly, especially in mobile. Operator strategies on how to combat this decline differ: BT is trying to move into the TV market with its live sports channels. AT&T, Verizon, PCCW and many others are doing the same. SK Telecom has been the most active operator in the world in selling OTT services such as mobile TV and online games over its advanced LTE network. Telefonica, Verizon and China Telecom are moving into cloud services. China Mobile is investing in a platform supporting the Internet of Things but is also using its political clout to force internet companies like Tencent (whose WeChat service generates a lot of network traffic) to pay more. North American telecom operators: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐80% ‐60% ‐40% ‐20% 0% 20% 40% 60% AT&T CenturyLink Clearwire Frontier Comms Level 3 Rogers Comms Sprint Nextel Telus US Cellular Verizon Windstream 2008 2009 2010 2011 2012 2013
  50. 50. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 50 European telecom operators: Cumulative 5½ year share price performance Asian telecom operators: Cumulative 5½ year share price performance 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, 2012 and 30 June 2013. ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013 ‐100% ‐50% 0% 50% 100% 150% 200% 2008 2009 2010 2011 2012 2013
  51. 51. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 51 Appendix 1: M&A trends Summary of recent mergers and acquisitions deals in the sector. This gives us an idea of which sectors and themes are hot. Global Mergers and Acquisitions in Technology, Media and Telecoms: Two year transaction history Q2 2013 Q1 2013 Q4 2012 Source: Company data, CM Research 0 5 10 15 20 25 30 Oracle acquires Eloqua (Cloud marketing platform) Windstream acquires Paetec (Telecom operators) Adtran acquires Nokia Siemens Broadband Access business (Telecom… Nielson acquires Arbitron (Digital ratings) Arris acquires Moto Home (TV set top boxes) Belkin acquires Linksys (Networking gear) Cisco acquires Intucell (Software defined networks) Oracle acquires Acme Packet (Session border control) IBM acquires Star Analytics (Software analytics) Google acquires Channel Intelligence (e‐commerce tracking) Liberty Global acquires Virgin Media (Cable operators) Amazon acquires Goodreads (Book review site) Ericsson acquires Microsoft's Mediaroom IPTV business (IPTV) Cisco acquires Ubiquisys (small cells) Baidu acquires PPS (internet video provider) Intel acquires Stonesoft Oyj (internet security ‐ network firewall) Yahoo acquires Tumblr (Short form blogging with pictures) Bain Capital and Golden Gate Capital acquires BMC Software (Software… IBM acquires Softlayer (Web hosting and cloud infrastructure) Softbank acquires Sprint Nextel (Telecom operators) Cisco acquires JouleX (Energy managemnet software for data centres) Sprint acquires Clearwire (Telecom operators) Salesforce.com acquires ExactTarget (Cloud marketing software) Google acquires Waze (Crowdsourced traffic navigation software) Gannett acquires Belo (TV broadcasting) Stratasys acquires MakerBot (3D printing) Acquisition price (US$bn)
  52. 52. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 52 Global Mergers and Acquisitions in Technology, Media and Telecoms: Two year transaction history (cont.) Q4 2012 Q3 2012 Q2 2012 Source: Company data, CM Research 0 1 2 3 4 5 6 Oracle acquires Vitrue (Social marketing platform) Facebook acquires Karma (Social media app) Dell acquires Quest Software (Software management ) Salesforce.com acquires Buddy Media (social media) Agilent Tech acquires Dako Denmark (Life science diagnostics tools) Lam Research acquires Novellus (Semiconductor equipment maker) Microsoft acquires Yammer (Social media) Oracle acquires Collective Intellect (Cloud based social intelligence) Sony acquires Gaikai (Cloud gaming) Dentsu acquires Aegis (Advertising ) Vmware acquires Nicira (Network efficiency) Apple acquires Authentec (Fingerprint ID, mobile payments) Google acquires Wildfire (social media ad solutions provider) Oracle acquires Xsigo (data centre networking virutalisation ) Google acquires Frommers (travel guides) Cicso acquires NDS (Video and content delivery solutions) Oracle acquires Involver (Social media marketing) Cisco acquires Cloupia (Data centre software) Consolidated Comms acquires Surewest  (Telecom operators) Zayo acquires Abovenet (Telecom operators) AT&T acquires NextWave (wireless spectrum) Carlyle acquires Getty Images (Distributor of stock photos and videos) IBM acquires Kenexa (HR software) Verint Systems acquires Comverse Tech (cyber security) Cisco acquires Meraki (Cloud networking) Cisco acquires Caridien (Network traffic management software) Priceline acquires Kayak (Online travel) RedPrairie acquires JDA Software (Application software (supply chain… Acquisition price (US$bn)
  53. 53. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 53 Global Mergers and Acquisitions in Technology, Media and Telecoms: Two year transaction history (cont.) Q2 2012 Q1 2012 Q4 2011 Source: Company data, CM Research 0 2 4 6 8 10 12 14 eBay acquires Zong (Mobile payments) HTC acquires S3 Graphics (Mobile phone patents) Vodafone acquires Vodafone Essar (33%) (telecom consolidation) Teradata acquires Aster Data (Data analysis software) Apple, RIM, Microsoft acquires Nortel Networks (Technology patents) Google acquires Motorola Mobility (Technology patents) HP acquires Autonomy (Search engine) IBM acquires Algorithmics (Risk management software for banks) Broadcom acquires Netlogic (Wireless chips) SK Telecoms acquires Hynix (21%) (Chip manufacturing) Permira acquires Genesys (Call centre services) Oracle acquires RightNow (Cloud computing) Huawei acquires Huawei Symantec JV (50%) (Cyber security software) Blinkx acquires Prime Visibility Media (Digital advertising) SAP  acquires Success Factors (Online HR software) Verizon acquires AWS spectrum from Comcast, Time Warner Cable and… Seagate acquires Samsung Electronics Hard Disk (Hard disk drives) Apple acquires Anobit Technologies (Flash memory maker) AT&T acquires Spectrum from Qualcomm (mobile spectrum) 3D Systems acquires Z Corp (3D printing) SingTel acquires amobee (provider of mobile advertising services to… Oracle acquires Taleo (HR software) YouKu acquires Tudou (online video site) Zayo acquires 360networks (Telecom operators) Western Digital acquires Viviti Tech (formerly Hitachi Global Storage… Facebook acquires Instagram (Photosharing service) Stratasys acquires Objet (3D printing) SAP  acquires Ariba (e‐commerce (enterprise software for procurement)) LinkedIn acquires Slideshare (Social media) Acquisition price (US$bn)
  54. 54. Global Trend Forecast, 2014 (Vol. III) July 2013 www.researchcm.com 54 Appendix 2: About CM Research We provide global thematic research in the Technology, Media and Telecoms (TMT) sectors. Our focus is on disruptive technologies. How will they unfold? Which industries will be impacted? Who will be the ultimate winners and losers? Our research approach:  Search for emerging technology trends  Spot global investment themes  Screen for local companies affected Our research product:  Global TMT Trend Forecast (annual)  In-depth thematic research (fortnightly)  Technology briefings  Analyst access  Bespoke research Our clients:  Asset managers  Family offices  Industry executives  Consultancy houses  Governments Our recent themes: 3D printing, App revolution, Chinese Internet, Big Data, Chinese Internet, Cloud Computing, Cyber Security, Digital Media, HTML5, LTE, Mobile Internet, Mobile Payments, Net Neutrality, Regulation, Robotics, Smartphones, Social networks, Video Games Technology, Media & Telecoms Thematic Research Strategy Forward thinking

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