January 6, 2014 – TMT: 10 Predictions for 2014
New Years is a time for predictions. Here are ten fairly controversial forecasts that we think are likely to be true for TMT in 2014, and that, if true, will make money for investors who play accordingly.
AAPL and Samsung will lose device share, Chinese vendors and MSFT will take it. The high end smartphone market is slowing down, while demand for cheaper models surges. This is bad for Apple, which affirmed its commitment to high prices and margins in 2013, but also for Samsung, which will face aggressive competition from Chinese vendors in markets all over the world. We suspect both device leaders will miss a quarter or two in 2014, forcing investors to adjust expectations a bit. Meanwhile, MSFT seems to have found its sea-legs with Nokia’s well-priced Lumia line, and is poised to gain from a more active enterprise market for devices next year.
Little progress will occur in patent conflicts, leaving IPR law firms the only winners. Steve Jobs vision of “Thermonuclear War” is a bad analogy for the battle against Android – think “Cold War” instead. Court decisions face years of appeals, and injunctions get stayed or worked around, while governments contemplating patent reform dither. None of the major IPR conflicts (Apple/Samsung, Nokia/HTC, Google/Oracle, etc.) will be settled in 2014 – or in 2015, for that matter – unless the companies involved agree to cross-license at reasonable terms. We’re waiting…
Digital ad growth will accelerate, with video/mobile/social driving upside. Digital advertising is almost 25% of total US ad spending, prompting many to predict a decelerating trajectory. A substantial part of this thesis is a faith that traditional media ad sales, and in particular, TV (39% of total spending) and magazine (9%), can remain somewhat stable. We expect this assumption to be found wanting in 2014, with ad buyers shifting budget toward on-line video, mobile and social ads. GOOG, FB and TWTR will be the biggest beneficiaries, while ad-driven TV networks will suffer.
The on-line video diaspora will hit MSOs and networks in the bottom line. Total TV viewership and, in particular, primetime ratings have turned down over the past few years, a trend that shows signs of accelerating. Add to this a growing population of cord cutters, increasingly satisfied by the expanding availability of on-line programming, and cable, satellite, and telco MSOs share a problem with their big media partners that will hit total subs, ARPU, and advertising revenues in 2014. Meanwhile, expect negotiations to get even more contentious, if that is possible.
Wireless fixed broadband will be considered a viable future business. Cable boosters declared broadband victory long ago, as cable modem’s broadband share pushed 60%, industry profits soared and would-be rival telcos backed off on fiber deployment plans. In 2014, fixed wireless residential broadband will emerge as a realistic long-term alternative, with the DISH/S plan just the start. Given relentless improvement in LTE technology, falling equipment prices, new spectrum auctions likely for 2015, and deep pocketed internet players edging toward involvement, we expect big talk about wireless broadband to drive valuations for spectrum and raise questions for cable MSOs.
VZ and T subs will churn to S and TMUS and wireless capex will be up – big time. TMUS’s “un-carrier” strategy is working and S’s shiny new 4G network is coming on line. Meanwhile, “Can you hear me now?” is shifting to “Can I check my e-mail on my lunch hour?” as the critical measure of network quality – a bad portent for VZ and T, who frequently subject subs to data service brown-outs on their overcrowded networks at the most inconvenient times. By the end of 2014, subscriber churn to S and TMUS will be a real “thing” and VZ and T will be stepping up capex and dropping prices to compete. BTW, we would be surprised if the DoJ and FCC said yes to a S/TMUS merger.
Slow progress of cloud-based payments will give false confidence to traditional players. We are true believers – mobile, cloud-based electronic payments mechanisms WILL erode the powerful position of credit cards in the future. However, it is very early, and progress to date has been spotty. For every SBUX success, there has been a GOOG Wallet disappointment, and meanwhile, credit card use continues to expand, displacing cash and checks in developed economies and penetrating to new consumers in emerging markets. A number of new initiatives will splash in 2014 – the WMT-led MCX consortium, the VZ/T Isis JV, Apple’s iBeacon, etc.. We believe the near-term uptake will be slow, leading many to incorrectly downplay their long-term potential.
Big enterprise shift to the cloud will benefit AMZN, MSFT, GOOG and few others. Enterprise IT departments have begun to shift to a new paradigm, looking to move computing workloads and data storage to increasingly low-cost public cloud providers and minimizing investment on internal data centers. As a result, IaaS will grow at a fierce pace in 2014, while sales of traditional IT systems and software will suffer. Within IaaS, AMZN, MSFT and GOOG will hammer smaller rivals with price cuts, service expansions and performance improvements, while driving a robust market for data center components, such as disk drives. AWS will remain in the lead, and may even grow big enough to force AMZN to break it out as a separate line item.
New enterprise SaaS applications will emerge to challenge incumbents. The trend toward application software sold as a service (SaaS) has been in place for a long time – hence the success of pioneers like CRM, N and WDAY. However, these leaders share an Achilles heel – all were built too early to exploit the shift to unstructured data base technology or the rise of cheap and powerful web-scale cloud infrastructure. In 2014, new SaaS solutions that fully leverage modern cloud architecture will rise to further challenge the packaged application incumbents, but also threaten the future growth of those SaaS pioneers.
Our 2014 top five picks – MSFT, QCOM, STX, S, and GOOG. MSFT begins 2014 poised to continue its momentum under a new CEO. We believe that the strength of its enterprise position, and its Azure, Windows 8, Office365, and Xbox businesses are underappreciated. QCOM is taking market share and adding addressable market, extending its dominance of the hot wireless semiconductor market. STX will gain from its strong position supplying storage to cloud operators against manageable competition. S will thrive, as consumer demand shifts to reward its ample data capacity. GOOG can deliver surprising growth, even after a great 2013.
For our full research notes, please visit our published research site.