Japan's restrictions on exports of fluorinated polyimide, resist and hydrogen fluoride to South Korea will signific… https://t.co/Z8RCnWmTIt
Technology bets: what future is Silicon Valley backing?
In late April a few big announcements in as many days came in quick succession-first from Alphabet (Google's parent company), then Apple, Facebook, and finally Amazon. The headlines were unambiguous: Alphabet missed expectations and Apple declined, while Facebook and Amazon absolutely surged. As four of the largest tech companies in the world slog it out on the world stage, is something fundamentally changing in their industries that accounted for the shifting fates and expectations in the first two but spurred glorious growth in the latter two? And what are they betting on to drive future growth?
It's worth reviewing what happened this last quarter and why companies did well, or badly. Alphabet actually grew although not by enough, having overspent on a wide variety of intended moonshots, big bets, and experimental programs-from laying fiber to launching a content delivery network, revamping its cloud service platform, creating AI for Go, sending up high-altitude drones, and investing in satellites.
Apple was impacted by something more prosaic: a decline in year-on-year (YoY) quarterly revenue for the first time in 13 years-basically since iTunes was released-caused by continued reduced iPad sales, the second straight quarter of lower YoY Mac sales, and the first-ever YoY decline in quarterly iPhone shipments. Still, the wider context shows Apple mopping up around half of Silicon Valley's technology company profits, taking in over $10 billion, compared to Alphabet's $4 billion and dwarfing Facebook's $1.5 billion, so Apple isn't in any immediate danger or trouble.
Facebook announced a stellar quarter in a departure from the previous three companies. Driven by growth in mobile ad sales, Facebook outperformed expectations and managed to grow its war chest despite major purchases such as Instagram, a huge increase in capex on data centers and servers, and big investments related to global expansion moves including a recent thwarted attempt to roll out its Free Basic partially closed version of the internet in India, where it has met resistance with net neutrality.
Last but by no means least, Amazon continues a rapid transformation from online retailer to cloud compute, storage, and devices. In a sign of how the company is positioning for the future, Amazon Web Services (AWS), Amazon's B2B cloud compute and storage business, recorded over 60% growth, raking in $2.6 billion in revenue and, perhaps more importantly, becoming the single largest contributor to Amazon's operating profits and essentially balancing out poor earnings in the giant's international retail business.
Reading into the fates of a small number of enormous companies is like reading tea leaves. Facebook's recent success in the face of Apple's slowdown may suggest that a shift from hardware to platforms is in the cards, further intimated by Apple posting YoY growth in services (apps and content) of 20% on a total value of $5.9 billion, more than all of Facebook's revenue. Where Apple loses out, Alphabet may gain via Android. Where a slowdown in smartphone hardware sales may destabilize the growth engine for Apple, the beneficiaries of the increased global installed base of devices will be service platforms like Alphabet, Amazon, and Facebook. Consumer willingness to pay via ads rather than on closed platforms may also underlie some of these changes and may be helping to drive value to B2B services supporting those platforms, rather than trying to capitalize on direct consumer spend.
The nuances in this story relate to tactics, markets, consumer interest, device ecosystems, and a myriad of local factors-not least, content and connectivity. Speculation on the short-term winners and losers in the market is important and interesting, but perhaps even more significant is to examine what each of the companies is pinning its future profitability on.
Alphabet is perhaps the most vocally forward-thinking in cannibalizing and redefining its own business, with a huge number of explicit and implicit investments in areas from artificial intelligence (DeepMind), to smart home (Nest and DropCam), to VR (Cardboard), to drones (Project Loons and Wing), to satellites imagery (Skybox), to consumer internet provision (Google Fiber), to driverless cars, as well as a significant push of a range of B2B cloud and data transmission services. Equally as interesting is the planned divestment of robotics group Boston Dynamics, although it is instructive to view that in terms of team integration and time to market as well. Alphabet bet big and widely across many market, and so leads the pack in absolute R&D spend. In the first quarter of 2016 alone Alphabet not only outspent Apple's entire annual R&D budget, it also spent twice the combined total of Apple, Amazon, and Facebook's R&D during that same three-month time period for the first quarter this year.
Apple, for its part, has remained typically cagey, but is still talking up the Apple Watch (and by extension, wearables) as a growth driver. While this may not look as convincing right now, investment in AI on Siri might suggest a longer-term strategic position around personal assistants, search and generalised AI. Other long-suggested but as yet not public strategies include electric car and machine-learning for connected car, most clearly showcased in the recent $1 billion investment into China's Didi Chuxing ridesharing platform. A significant investment in automotive technology would certainly go a long way to explaining the $8 billion Apple spent on R&D in 2015 (since the Apple Watch was developed), which has not led to any noteworthy consumer technology, and is around eight times the amount spent on developing the iPhone.
Meanwhile, Facebook-much like the other Silicon Valley giants-has showcased wide-ranging machine-learning initiatives allowing for things like facial recognition, but has taken a step further and announced what it calls the Bot Engine, which will run a platform called Bot for Messenger. This is essentially Facebook's AI platform, but not only will it respond to requests, it will also start conversations such as asking if you'd like the top news stories. The other major future investment is on its virtual reality business Oculus, which, much like Apple's play toward wearables, is premised on a change ostensibly in the future involving the core human interface with consumer electronics and technology. Facebook is, like Alphabet, also investing in data transmission drones, an extension of global internet infrastructure to spread its service to new geographies of consumers.
Amazon is, in many ways, the clearest example of what all these companies are doing-diversifying their spoils from the internet era into future technologies for the next decade. Amazon's recent investments in online content via Amazon Prime and Kindle, its device-as-shopping-trolley, were early moves away from selling physical goods via the internet. More recently illustrative is the Fire TV platform, now reaching into almost 14 million homes-a scale comparable with some of the largest global pay-TV operators. In fact, the launch of late of Amazon Video Direct is a clear play toward becoming a platform operator in a more variegated sense than Amazon Prime's VOD catalog has allowed.
Outside of media and associated devices, Amazon is investing in a global supply chain to rival DHL or Fedex, automated delivery, and advance drone technology for navigation and imaging. And let's not forget Amazon's own play in AI via Alexa, now hosted on Amazon Echo and the new Echo Dot and Tabs-all ways to control and channel buying behavior in the home.
While the most recent round of reporting might suggest that there are some more fundamental changes within the industry, the wide array of future technologies being invested in provides tantalizing hints at the future of big tech. Artificial intelligence, wearables, connected cars, virtual reality, and next-generation data infrastructure all come up in the current portfolio of future technologies and moonshots on the books for the biggest companies in the industry. Overall, Alphabet, Apple, and Facebook make profits in the range of $50-70 billion per year and have a combined war chest of almost $300 billion in cash-70% of which is Apple's-to invest in the next decade of must-have consumer and commercial technology.
Like the diversification of major industrial companies in the 20th century, where global behemoths such as General Electric, Mitsubishi, Siemens, or Sony branched out across heavy industries, finance, shipping, and consumer, the new web giants are balancing their future opportunities on a small core of their successful present.
Alphabet and Facebook are the big winners in online advertising for search and social, respectively, while Apple has led the most profitable end of the smartphone surge and Amazon has capitalized on the shift to online retail. Combined they spent almost $22 billion on research and development last quarter alone and hold over $300 billion in cash to acquire companies or invest in technology.
As they place their bets on the future and branch out into new technologies, services, industries, and business models, they all retain a foothold in their core businesses-cash cows that define their current position and influence future decisions. Keeping an eye on where the money goes will be a key indicator on what happens not only in the next 5 years but also over the next 15.
Tom Morrod is the Senior Director for Consumer Electronics, Broadband and Video Technology at IHS
Posted on 16 May 2016
- Know the limitations of your machine
- IoT devices evolve as transformative technologies like AI and 5G converge
- Where are the robots? The wait for mission-critical IoT and massive IoT
- With its latest flagship smartphones, Huawei affirms continued support of AMOLED
- Bright prospects for both photovoltaics and battery storage
- Transformative technologies will cause considerable disruption in business and industry
- Breaking down IoT silos: the move toward data exchange platforms (DEPs)
- Healthcare systems face ongoing challenges with aging populations and chronic diseases on the rise