Curated Insights 2018.09.07

A market shakeup is pushing Alphabet and Facebook out of the tech sector

One of the biggest impacts will be on tech—a sector that has grown so big, at 26.5% of the S&P 500, it has produced more than half of the market’s gain this year, according to Bespoke Investment Group. Tech is being cut down to size, though, as several of its biggest stocks head over to the new communication sector. The losses will chop about 23% off the tech sector’s market value. It will be more oriented to chip makers, hardware, and software.

Thankfully, S&P and MSCI don’t make such changes often. The GICS taxonomy goes back to 1999. It has grown to 11 sectors, the latest being real estate, carved out of financials in 2016. But that was minor compared with the new musical chairs—affecting more than 1,100 companies globally.

Redrawing the GICS boundaries was necessary to reflect the changing tech and media landscapes. When the old sector lines were drawn, people made calls with flip phones, used MySpace for social media, and paid AT&T for cellular service and landlines. But mergers and tech developments have jumbled things up: Netflix is threatening Hollywood, Comcast has turned into a media giant, and Alphabet is in everyone’s business. Sure, technology remains the heart of these businesses. But so what? Facebook and Alphabet aren’t like Apple and Microsoft, which develop hardware and software, says Blitzer. It makes more sense to group Facebook and Alphabet with firms making money off advertising, content delivery, and other types of “communications,” he says.

Amazon sets its sights on the $88 billion online ad market

In turn, brands are increasingly recognizing Amazon’s vast customer reach, particularly to its more than 100 million Prime subscribers. In a study conducted last summer by Catalyst, the search and social media marketing company, only 15 percent of the 250 brands marketers polled felt they were making the most out of advertising on Amazon’s platform, and 63 percent of the companies already advertising there said they planned to increase their budget in the coming year.

In India, Google races to parry the rise of Facebook

Facebook ads, compared with those on Google search or YouTube, tend to transcend language barriers more easily because they rely more on visual elements. Pinpointing younger consumers and rural populations is easier with Facebook and its Instagram app.

Facebook and Google between them took 68 percent of India’s digital ad market last year, according to advertising buyer Magna. Media agency GroupM estimates digital advertising spending will grow 30 percent in India this year.

The tension is building between Spotify and the music industry

The easiest way for Spotify to save money would be to cut labels out of the process entirely. While the company has said time and time again that it doesn’t want to operate a label or own copyrights, it has been taking on functions of a record label. The company has developed tools to help artists plan tours and collect royalties, funded music videos and recording sessions, and held workshops with songwriters.

Record companies know Spotify can’t cut them out completely. They control too much music and offer resources artists need. But Spotify’s growth poses a threat. Successful independent artists, like Chance the Rapper, have created the perception that musicians may not need labels at all. “The music industry hates that Spotify, YouTube and Apple Music reduce the relevance of the traditional music business,’’ Masuch said. “Distribution is controlled by companies that aren’t part of the traditional ecosystem.’’

4 reasons Tesla Mobility is worth a lot less than Alphabet’s Waymo

Jonas estimates that Tesla has a 13% discount rate, versus Waymo’s 10%. “Tesla likely has a higher cost of capital vs. Alphabet/Waymo,” he writes.

Tesla will have to make money on the rides themselves, while big tech companies like Alphabet can also make money off the time spent in the car as well as what it learns from drivers. “Tesla’s business model offers potentially less room for adjacent revenue monetization,” he explains.

Tesla has offered very little information on what Tesla Mobility’s business model will look like, while Waymo and General Motors (GM) have “become increasingly conspicuous with their efforts to grow the business with specific targets for commercialization and deployment,” he explains.

More than half the value assigned to Waymo by Morgan Stanley’s internet team came from logistics, by which they apparently mean moving people and stuff around. That’s an opportunity Jonas doesn’t include for Tesla. “Logistics accounts for $89bn of the total $175bn value in our internet team’s Waymo DCF,” he writes. “We have not specifically ascribed any logistics based revenue to Tesla Mobility at this time.”

Lessons from Chance the Rapper (Value chains and profit pools)

“There is what’s called a master and a publishing portion of the record. So the master is the recording of it, so if I sign a record deal or a recording deal, I sign away my masters, which means the label owns the recording of that music. On the publishing side, if I write a record, and I sign away my publishing in a publishing deal, they own the composition of work… so the idea of it, you know what I’m saying? So if I play a song on piano that you wrote, I have to pay you publishing money, because it comes from that idea. Or if I sing a line from that song, it’s from the publishing portion. If I sample the action record, if I take a piece of the actual recorded music, that’s from the master. None of that shit makes any sense right, that shit didn’t make any sense to you? ‘Cause that shit is goofy as hell.”

Peak Valley?

Silicon Valley has always had one important advantage over other regions when it comes to the tech sector. There is a much higher density of talent, capital, employment opportunity, and basic research in Silicon Valley versus other locations. When I say density, I mean physical density. If you walked a mile, how many tech companies would you pass along the way? That metric in Silicon Valley has always been higher than elsewhere and still is. So even though the return on capital (human and invested) has significant headwinds in today’s Silicon Valley, it is still a lot easier to deploy that capital there. And I think that will continue to be the case for a long time to come.

Quantum computing: the power to think outside the box

That could make it easier to design new materials, or find better ways for handling existing processes. Microsoft, for instance, predicts that it could lead to a more efficient way of capturing nitrogen from the atmosphere for use in fertilisers — a process known as nitrogen fixation, which currently eats up huge quantities of power.

When something is familiar and common, you set a low reference point. So most bad outcomes are placed in the “Oh well, you got unlucky. Next time you’ll do better,” category, while all wins are placed in the, “Easy money!” category. Index funds live here. Even in a bad year, no one thinks you’re crazy.
When something is new or unfamiliar, you have no idea where the reference point is. So you’re cautious with it, putting most bad outcomes in the “I told you so” category and most wins in the “You probably got luck” category. When something is new and unfamiliar, the high reference point means not only will bad outcomes will be punished, but some good outcomes aren’t good enough to beat “par.” So even high-probability bets are avoided.

Newcomers

We were doing something different. And anytime you’re doing something different the only people who can participate are people who don’t have career risk. Anytime you introduce the factor of career risk into the decision-making process, you have to do the norm. It’s a divergent system: If you invest in a divergent system and it goes wrong, you have massive downside for your career personally, separate from the organization. It could be the right decision – it was probabilistically a great bet. But if it goes wrong and it looks different, you could get fired. And if it goes right, you still may not have enough upside career-wise.

Deciding whether to do something isn’t just about whether or not it’ll work. It’s not even about the probability of whether it might work. It’s whether it might work within the context of a reference point – some gauge of what others consider “normal” to measure performance against. Thinking probabilistically is hard, but people do it. And when judging the outcomes of decisions, a win isn’t just a win; it’s “You won, but that was an easy bet and you should have won.” Or, “You won, but that was a gamble and you got lucky.”

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