Just like Abba, for the High Tech Shark, The Winner Takes It All
The Winner Takes It All Abba
The Winner Takes It All was a number one hit in 5 countries and Top 10 in 13 others. Abba had nine UK number one singles and five RIAA gold albums, three platinum status, and one 6x platinum. Translate that to today’s start-up or exponential terminology that’s 3 unicorns and 1 decacorn.
In a mere 2.5 years the High Tech Sharks have devoured the competition. In late 2015 there was a clear separation around clusters of Disruptors, Challengers, Followers and Laggards. That positioning has deteriorated as Sharks have pulled away.
As we mentioned previously, our class of 2015 FANGS; Facebook, Amazon and Netflix, Salesforce has been joined by Microsoft, Alibaba, Baidu, and wait for it Best Buy.
Analysis Innovators Index 2018
What is their recipe for success? As we mentioned in the Introduction to the Innovation Index 2018, a company with a technology platform (wide moat = high ROIC), a subscription based business model with Monthly Recurring Revenues and a huge Annuity of un-booked revenue if Churn is managed well, is now the preeminent model across both Consumer and Business verticals.
A Tale of Two Apples
We could make a case that Apple should be considered a Shark. It added more EV than the rest of the Challenger Group combined and is still the world’s most valuable company. In 2015 we compared the fortunes of Apple vs Verizon in How to Analyze Ecosystem for an Industry?
Using our Strategy Science Toolkit, we start by looking at Enterprise Value and Competitive Advantage Period to see who has greater momentum for driving the Consumer TMT Ecosystem moving forward.
| APPLE | VERIZON | |||||
| 2018 | 2015 | 2010 | 2018 | 2015 | 2010 | |
| Enterprise Value $ Blns | 954 | 692 | 324 | 319 | 190.44 | 120 |
| WACC | 8.95% | 12.26% | 9.00% | 6.18% | 3.05% | 6.50% |
| NPOAT $ Blns | 46.0 | 39.5 | 25.9 | 43 | 9.6 | 2.54 |
| ROIC | 30.20% | 28.00% | 29.32% | 29.00% | 13.39% | 15.00% |
| Investment $ Blns | 13.1 | 15 | 1.1 | 25 | 10 | 15 |
| CAP Years | 15.4 | 21.6 | 15.8 | (4.3) | (3.8) | 4.4 |
Competitive Advantage Period or CAP is a measure of how long returns above the cost of capital will be earned. CAP is also known as “value growth duration” or “T” in the economic literature and is also similar in concept to Credit Suisse “fade rate” or CFROI. Clearly Apple’s CAP is shortening from 21.6 to 15.4 and EV creation is slowing.
One Product Apple faces a Saturated Market and Substitution from Samsung and Xaomi
Saturating smartphone markets meant the only manufacturers to enjoy growth during the first quarter of 2018 was the Chinese pair of Huawei and Xiaomi. According to figures from IHS Markit, The market as a whole increased by 2 per cent to 345.5 million, with Samsung and Apple retaining the top two positions.
Samsung Xaomi
Samsung shifted 78 million handsets and has 22 per cent of the market, while Apple sold 52.2 million and has 15 per cent and profits reaching £11 billion during its first quarter. Xiaomi recorded an astonishing 129 per cent rise, selling 29.3 million units and securing eight per cent of the market. Chinese phone firms have done well in their domestic market, where low cost and the absence of brand loyalty has allowed multiple new entrants to flourish, but there are signs that even here there is saturation. Fifth and sixth position are held by two other Chinese firms Oppo and Vivo.
Apple knows it needs to become a leader in the subscriber business soon or buy into another growth category like Electric Cars (Hint Tesla @tim_cook, our top performing Disrupter from 2016).
Disney vs Netflix
Only Comcast can challenge Disney in breadth and depth in media and distribution. But as the move from the physical world to digital platforms gathers pace, Netflix, driven by subscriber growth has crossed the chasm and is leading our combined Enterprise Value Multiples Ranking.
| Company | EV | X EV / EBITDA | X EV / SALES | Rank EV / EBITDA | Rank EV / Sales |
| NETFLIX | 147.5 | 134.09 | 11.61 | 2 | 1 |
| BABA | 431.6 | 30.42 | 11.99 | 1 | 4 |
| SALESFORCE | 93.27 | 104.02 | 8.97 | 4 | 2 |
| 497.3 | 19.40 | 11.30 | 3 | 6 | |
| MICROSOFT | 707 | 20.15 | 7.13 | 5 | 5 |
While Disney or Comcast could bulk up on Fox (plus Sky), the value driver for Disney going forward is how well their streaming platform performs vs incumbents?
Where are the Societal Benefits of Big Tech?
Finally as I mentioned the business forum from Hannover Messe, one of the key areas of discussion in the negotiation of NAFTA was the inclusion of digital products and services. In a country heavily weighted in Manufacturing, how much corporation tax has Facebook, Netflix, and Salesforce paid in Mexico? As in the World Cup, The Winner Takes It All. Always!
