Premier’s Robbins: Connectivity creates tech opportunity boom

Jake Robbins

With many industries it’s hard to pinpoint an individual who has been responsible for overhauling the landscape, revolutionizing the business and building an empire in the process. The following are two such people who operated in very different business areas:

The first is a man who was a visionary in an industry that is estimated to now be worth more than $320bn (£206bn). At the peak of his success he held an 80 per cent market share and reached seventh place on the Forbes rich list. The second turned around a company on the verge of bankruptcy, derided by market leaders whose recommendation was to sell the assets and return the cash to shareholders. He is also a man whose role in creating one of the most prevalent addictions of modern time is undeniable.

The second of these men is Steve Jobs; who oversaw the rise of Apple from a company struggling to exist in the shadow of Microsoft to a peak share in the smartphone market of over 45 per cent and the largest company in the world by market cap.

Innovation and huge leaps in technology have led to a new era for connectivity and one that comes with its own problems as well as opportunities. It’s estimated that 13 per cent of users suffer from smartphone addiction with an average of 3.6 hours spent using a phone each day. This seems likely to increase as entertainment habits continue to change; the number of hours spent on a phone or tablet has now surpassed the number of hours spent watching TV among younger age groups.

So where does this leave Apple? Empires can fall as quickly as they rise. Going back to the initial comparison; while the business was consistently successful, at its peak in the 1980s it spanned from Colombia to Asia with an estimated product value of half a billion dollars a day shipped into the US alone, it slowly succumbed to increased competition, leadership difficulties and ultimately pressure from the government.

Aside from the fact that in comparison Apple has the benefit of operating a legal business it is possible to see similar risks to the business; fears that the innovation and simplicity that resulted in a new level of brand loyalty are diminishing under new leadership, fears that it has peaked as its size and increasingly competitive peers limit growth opportunities. However, considering the broader outlook for the industry, the brand loyalty that Apple has fostered and the fact that it is still capable of continuing to disrupt traditional tech businesses – such as the new iPad Pro potentially rendering laptops obsolete – it seems that Apple is likely facing stability post a period of supernormal growth as opposed to any imminent collapse.

The changing industry that Apple has undoubtedly helped shape has created opportunities as well as challenges. The increasing capability of smartphones and tablets has had an undeniable effect on sales for more traditional tech companies such as Microsoft and IBM. The flip side is the opportunity that greater connectivity has provided. Retailers can now connect with consumers in far more innovative ways than previously and vice versa for the consumer, often across multiple devices at the same time – 40 per cent of adults are now classed as multi-device users.

This has led to a new generation of e-commerce; an area that market research firm eMarketer estimates will be north of $3.5trn within five years, compared to $1.5trn in 2014. In support of this, advertising spend is continuing to move towards online channels that provide greater ability to target ads and easier measurability as to how the ads themselves are performing. Within advertising, it is the mobile segment that has the fastest growth at around 5x the pace of desktop internet spend.

The challenge for companies looking to benefit from this shift is how to monetize the position they have without alienating users. This has been an issue regularly discussed with regard to Facebook, and to a lesser extent Snapchat. Facebook had a bumpy start after the IPO, falling to a trough of under $18 per share, with its high valuation being met with scepticism that it would be able to monetize its offering. Fast forward three years, the share price has seen a five-fold increase from lows and Facebook reported advertising revenue of $3.8bn driven by almost 1.5bn active monthly users. In addition, 76 per cent of its total advertising revenue is now contributed by mobile advertising.

The developments in connectivity have created challenges for traditional cable companies. Much new content bypasses traditional distribution, providing on-demand film and TV suited to mobile and tablet viewing. Comcast announced this year that for the first time the number of internet subscribers surpassed video subscribers. Companies such as Netflix – the inspiration behind the initial comparison in this article – has seen huge increases in the number of subscribers, recently reporting a 2.5m increase taking its total number of subscribers to 65m. It expects this figure to reach 69m by the end of the third quarter.

The above developments, while shaped by company innovation and changing consumer behaviour, are all reliant on one thing: connectivity. Just 15 years ago the technology we are used to using everyday would be incredibly limited in its functionality, prior to the start of the broadband rollout in 2000 internet connection speed was 56kbps. This would mean that at full speed a single song would take ten minutes to download with a movie taking around 28 hours. Spotify, with its 75m users worldwide, simply wouldn’t work.

As connectivity speeds continue to increase it is logical to expect further innovation from tech companies with it even now being woven into everyday life with ‘the internet of things’ resulting in everyday objects being connected to the internet and remotely accessible via phones and tablets. With the ability to communicate instantly across continents, a wealth of information to hand and a vast expanse of entertainment at your fingertips the world really is yours.

Jake Robbins, senior investment manager of the Premier Global Alpha Growth Fund at Premier Asset Management.