Mary Meeker, the celebrated internet analyst, published her annual “Internet Trends” report Monday. The 2019 edition is a 333-slide presentation filled with insights and inconvenient truths about the present and future of the networked world.
All serious investors should read it.
We all constantly consume news on the internet and scan social media feeds. And we probably all believe we understand the big, important trends.
Unfortunately, our beliefs are often shaped by uninformed opinions. Which means it’s too easy to dismiss giant, investable trends as hype.
Meanwhile, much of what we think we know about technology and the internet just isn’t true.
Meeker has been putting out an internet trends report since 1995. Back then, she was an analyst at Morgan Stanley, and it was early days for Amazon.com (AMZN) and Google, a kooky search engine business that would evolve into Alphabet (GOOGL).
In an era rich with naysayers, she saw the bigger trends developing in ecommerce and search. Later, she anticipated the rise of Chinese internet, mobile and video game culture, too.
Meeker is now a principal at Bond, a $1.25 billion venture capital firm. She earned her “Queen of the Internet” nickname by looking past opinion and sifting through mounds of data to get the big trends right.
One of the bigger takeaways from her 2019 report is the idea that big technology companies are still riding massive, important digital trends like online advertising and cloud computing.
Digital advertising is the lifeblood of Alphabet and Facebook (FB). Contrary to popular opinion, sales accelerated 22% in the United States in 2018. And programmatic ad placement, a part of the market dominated by Trade Desk (TTD), now commands 62% of the marketplace.
While privacy challenges are growing, investors are missing a major trend if they buy into the mindset that digital adverting, as a business model, is doomed.
Eventually, the vast majority of all ads will be digital because their effectiveness is more measurable, and consumers have grown to accept advertisements.
This acceptance is enabling freemium business models to emerge.
Related post: Digital ad businesses know what you did last night
Meeker notes that there are now 2.4 billion interactive gamers worldwide, a figure that grew 6% in 2018. Fortnite, an online gaming phenomenon, has 250 million active users. They are attracted to the free-to-play platform because they can play, build communities and interact with other gamers in real time.
Epic Games, the publisher of Fortnite, makes money by selling V-Bucks, which can be used to buy digital items like dance moves, extra lives and avatar skins. Players can also purchase battle passes that unlock various parts of the game.
|Image credit: LendEDU|
LendEDU, an online student lending outfit, surveyed Fortnite gamers in 2018. Researchers found that 69% of players made in-game purchases, spending an average of $84.67 per year. And 25% also subscribed to Twitch, a streaming service owned by Amazon.com, where they uploaded and watched gameplay.
According to a TechCrunch story published in January, selling virtual trinkets and passes allowed Epic to generate $3 billion in profits during 2018.
This isn’t the first time a company struck gold by giving away its product. Google Documents, a free equivalent to the Microsoft Office productivity suite, became wildly popular with students and small businesses when it was officially launched a decade ago. Users grew to more than 1 billion.
Today, G Suite, the enterprise version, has more than 5 million paid customers.
It’s a business model being successfully emulated by Zoom (ZM) and Slack (Pending: WORK), two smaller enterprise communications firms. The goal is to find an audience with an intuitive user experience, then entice patrons to pay to unlock more features.
These new freemium businesses are built around software that lives in the cloud.
Moving workloads to the cloud is a persistent theme in Meeker’s work. She notes that 22% of enterprise workloads have migrated to the cloud, a 2x improvement over five years ago. And the trend is accelerating as more digital tools like machine learning and data analytics are developed to enhance customer experiences.
Cloud infrastructure is dominated by Amazon Web Services, Microsoft’s Azure and Google Cloud.
This may be the biggest and most persistent internet trend: Three massive companies have become the building blocks for the future of commerce and commercial interaction.
Managers at these companies understand the landscape. They see the bigger trends when most are dismissing tectonic shifts as hype.
Amazon stunned analysts and industry watchers in 2014 when managers paid $970 million cash to buy Twitch. The 3-year-old streaming site had only 55 million users, and catered mostly to people who watched others play video games.
The fit with ecommerce escaped most observers.
Bidding for Twitch was hotly contested. Google and Yahoo! were also in the mix before ultimately losing out.
What Amazon managers saw then is the bigger trend Meeker is explaining today: Gaming is the natural evolution of sport for a generation raised with PlayStation and Xbox consoles. It’s also a purely digital experience ripe for transformative business models built in the cloud.
In the weeks ahead, there is likely to be plenty of naysaying about the future of these online behemoths. Some will warn that breaking up big tech will destroy synergies and shareholder value.
Amazon, Alphabet and Microsoft trade at 48x, 20x and 26x forward earnings. While that may seem expensive, the best part of their business expansion is still ahead as enterprises move more workloads to the cloud.
Investors should consider using any near-term weakness for Amazon, Alphabet, Microsoft and Trade Desk to build long-term positions. Digital transformation of our business and social worlds is still a major trend that has many miles to go before it’s complete.
Jon D. Markman