The Internet – man’s latest “greatest marvel” – has indisputably changed the way humans conduct themselves in business, entertainment, educational, social, and political settings. Every one of its 2.2 billion users realizes that. But what few pause to take notice of is the way in which the Internet itself is changing and the profound implications that has on the future of cyberspace and – by extension – human behavior. A new Internet age is upon us.
The evolution of the Internet has been a curious one. It progressed slowly from the 1960’s and 1970’s geek underworld of university basements to the “You’ve Got Mail” excitement of the 1990s. Quickly, though, it metamorphosized from the days of screeching dial-up modem to near-instantaneous, near-omnipresent capabilities of the smartphones now in the hands of roughly a billion people around the world. A billion people with nearly the entire repository of knowledge at their fingertips. The Internet is everywhere. The digital frontier, it would seem, is no more.
This is not prophecy; mobile technology is well upon us at today’s juncture, but we are only knee deep in adoption. And abundant opportunity exists. Today, our team highlights relevant trends, goes through the numbers, and pinpoints investment opportunities to capitalize on this movement. –The Flaneur
MOBILE: A NEW INTERNET AGE
Today’s Landscape
Today, the Internet at large continues to grow at modest-to-high user growth rates. But looking a layer deeper reveals a changing makeup. While the world added internet users at an 8% clip in 2011, it added 3G subscriptions at a far greater 37% pace (167 million and 297 million, respectively). Of course, these 3G subscriptions cannot be construed as necessarily incremental to the world’s overall internet user base (as there is certainly overlap), but it nonetheless serves as an indicator of the ways in which the web and the way we engage it are changing.
Internet access has been for much of its history confined to relatively fixed points of access, cable or dial-up modems and was exclusively channeled through desk and laptops. Then, came Wi-Fi capable devices, which afforded a degree of mobility albeit on a relatively short leash – and still, via desk and laptops. Around the same time, though, arose Internet-capable mobile devices, the predecessors to today’s smartphones. This marked the turning point in internet accessibility. No longer was the Internet something one went somewhere to “check” a few times a day. It became something that we could carry with us an escape from or an additional connection to our daily lives, something we engage to communicate, to navigate, to educate.
So What’s Driving the Change?
In a word: devices. Infrastructure – cell towers, service providers, bandwidth – has been in place for some time now. But the recent proliferation of mobile devices has ushered in the wave of truly mobile connectivity. As the figure below shows, the rate of adoption has been nothing short of staggering.
Benefiting from the brand awareness built on the back of its iPod, Apple’s iPhone took flight and drove the company’s share price to newheights. In retrospect, it’s perhaps a little unsurprising. Phones were and remain a necessary part of our lives and one could argue this was just another step in the ongoing cycle of product re-design. Many mobile phone users reasoned: if a lesser phone costs only marginally less, why not opt for the one with all the bells and whistles?
The greater test lay in tablets which were an entirely new product concept. Sure, tablets sit somewhere between smartphone and laptop, but how would the market react to something it wasn’t exactly replacing or upgrading? The answer? In its first eight quarters, Apple’s iPad shipped at a growth rate three times that of the iPhone amounting to a total of roughly 66 million units shipped. And that’s not just hyping Apple’s magic marketing machine. Android smartphones ramped at a pace four times faster than the iPhone in a period just over three years.
While it may seem as though the time has passed to capitalize on the tablet movement, the figure above indicates that there remains significant potential. Less than one-third of US adults own a tablet or an e-reader, and if early adoption trends suggest anything, the market is just taking root. We are not even halfway through the mobile adoption cycle.
What do the Numbers Say About the Mobile Trend?
It was – starting out – a slow climb. Representing less than 1% of overall internet traffic for the better part of the first decade of the 2000’s, global mobile traffic has hit an inflection point, growing from approximately 1% at the end of 2009 to just under 5% by the next year’s end. By May of this year, that number had grown to roughly 10%, which appears to be the lead indicator of precipitously rapid growth.
Where to from here? As the figure below indicates, smartphones today own less than a 15% share of the global mobile phone market. And as we’ve already touched on, the market for tablets and e-readers remains in its toddler years. There remains significant opportunity.
It’s a supply-driven argument, but we feel devices drive traffic. It’s a safe assumption that combined tablet/smartphone growth will continue to drive 3G and other mobile subscription rates at double-digit growth rates into the foreseeable future in economies both developed and developing.
Investment Opportunities
Opportunities abound. In hot sectors, very much in the public eye, sifting through the noise and the irrational exuberance to find the good opportunities can be challenging. Many retail brokers and talking heads in the US are pushing investment opportunities geared around household names and concepts, such as Apple and smartphone (in this case, smartphone ETFs). We think most of those opportunities are overbought. Here are a couple of opportunities we recommend.
Where to Play
If you’re at the lower end of the risk spectrum, we recommend Vanguard’s Telecommunications Services ETF (VOX), which is a play on the US mobile industry’s services sector. This fund includes big names, such as AT&T and Verizon, and lesser known types such as Crown Castle International Corp. (CCI), an owner, operator, and lessor of wireless infrastructure. If you believe, as we believe, that the US mobile sector will continue to expand, this is a solid play.
Equally compelling, but toward the riskier end of the spectrum, is an interesting play given the figure below.
The world’s large, developing economies have posted rapid growth – well above the global average – in 3G subscriptions. As these great economies come into their own – and they will, even despite recent softening – demand is trickling down from the cities to the suburbs and beyond, driving impressive growth. We think a particularly interesting play is America Movil SAB de CV (AMX) given their strategic position in Brazil and Mexico, as well as other important Latin American economies. It’s important to note, AT&T owns a roughly 25% stake in AMX.
Where to Exercise Caution
- Tech IPOs – we’ve seen it of late as well as historically; Tech IPOs can be hit or miss; Roughly 2% of companies accounted for virtually 100% of wealth creation in the 1,720 tech IPOs in the United States from 1980-2002.
- Individual device manufacturers – Consumer preferences are always fickle and what’s in vogue one year may quickly fall into distaste the next – consumer markets change rapidly. It is much safer, and in this case, the wiser play to bet the trend. Furthermore, most manufacturers are engaged in other lines of business, such as televisions, laptops, and appliances, diluting the value of a purely mobile play.
As always, do your homework and if you have any questions let us know at theflaneur@sabrecapitalgroup.com.
Conclusion
Today, we’ve outlined the rapidly evolving framework of the Internet – it has passed the inflection point to becoming a mobile work-, market-, and social-place. There is tremendous opportunity in this transition. In a short time, humans have molded their behavior around – and some would argue become dependent upon – the mobile lifestyle. Great ideas will stick, others will falter, and a few poor ones will find a way to persist against many wishes. Bottom line: in this new world of connectivity, mobile will be the backbone.
Next week, we’ll take a look at what the build out of the mobile platform means to the digital marketplace. How will e-commerce, advertising and more be impacted? What has the desktop’s experience taught us? Where, given the trends, can one maximize investment value?