GM’s Predictable, Yet Bad, Move
GM sent shockwaves through the auto and tech industries last week by saying it was moving away from Apple CarPlay and Android Auto for future electric vehicles unveiled in 2024 and beyond. The auto industry had been displaying a surprising amount of order in recent years considering the amount of change that was said to be coming. GM’s decision has likely interrupted assumptions about where the competitive battle lines will be found.
A major theme underpinning many Inside Orchard essays is technology’s gradual march into new industries. There will come a point when every company in the S&P 500 can claim to be a “tech” company based on the degree to which they depend on and utilize software and corresponding services.
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The Art of the Turnaround
Bob Iger isn’t wasting time attempting to put Disney on his preferred track. Yesterday, the WSJ reported that Iger had axed Disney’s metaverse and membership teams – two initiatives in their infancy that were spearheaded by Bob Chapek. This follows a reorganization a few weeks back that returned power to the company’s creative executives. Disney is just one of a handful of companies that have been changing strategies to get a better footing in the marketplace.
We can look at Netflix’s move into advertising – something that executives had talked down and dismissed for years - as an acknowledgement of paid streaming becoming bigger than any one company.
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A Gadget Recession
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Talk of there being a “tech recession” has picked up in recent months. Weakness in advertising, slowing revenue growth in cloud services, and even declining digital goods commerce has fueled the tech recession talk. Amidst all the chatter, one development that has flown under the radar is just how tough it’s become in the consumer gadget space.
The stage needs to be set before going any further. The consumer gadget space has had a very rocky decade with the highest of highs and some big valleys. The smartphone revolution led to generational-level changes across the industry. We saw a flood of new players enter the game with ambitions that didn’t stop at smartphones. The dramatic rise in smartphone and tablet (iPad) adoption opened doors for new gadget chapters. There’s the wearables revolution with Apple Watch leading the charge out of the gate, soon accompanied by AirPods and wireless headphones. At roughly the same time, we had the smart speaker mirage take shape. That movement quickly splintered into stationary screens and other smart home devices, both of which have been lackluster except for home security cameras. There have been other hardware/industry developments as well such as companies trying their hardest to copy Apple with vertical integration. Apple’s Silicon Mac transition is still in its infancy from the perspective of laptop/desktop market dynamics.
Macro headwinds, decades-high inflation, and a lopsided competitive landscape with the Apple ecosystem gaining momentum has brought about a gadget recession. This doesn’t necessarily mean that the total number of consumer electronic gadgets shipped will decline over a certain time period. Such metrics will be hard to verify. Instead, a gadget recession refers to a difficult stretch for playing in the space. Not all companies will come out losers from this development. But it's tough seeing anyone, even Apple, escape unscathed.
Apple. The latest earnings point to device upgrading slowing. Due to budgetary concerns, instead of moving down market to cheaper alternatives, consumers are much more likely to hold on to their current (Apple) devices for longer before upgrading. My estimate calls for the number of devices that Apple will ship in FY2023 declining 3% from FY2022.
Amazon. The Alexa HW portfolio looks and feels tired. Years of Amazon moving way too quickly and embracing ideas that should not have been released publicly has led to a bloated lineup of devices with long upgrade replacement cycles.
Microsoft. Surface is in trouble. Management has been talking about consumer weakness for some time now and signs suggest weakness moving into enterprise as well. New product launches are not capturing buzz or mindshare.
Meta. There isn’t a whole lot to point to in terms of Meta successfully giving consumers what they want from a gadget perspective. The company’s VR efforts have been lackluster.
Google. In what may be the most difficult hardware portfolio to assess, Google’s mixed signals towards hardware have shifted to focus on Pixel smartphones.
Chinese-based companies (Xiaomi, Oppo, Vivo, etc.). Global ambitions have been dialed back and the focus put on trying to stand out in an intensely competitive smartphone market with declining unit sales.
Other (Sonos, Samsung, Peloton). While some of the individual stories are better than others, no one is ringing the all-clear bells.
While economic and competitive pressures are genuine, there is another factor unfolding in the gadget space that can’t be ignored. Beginning at the tail end of the pandemic, various tech YouTubers began to speak up about a marked slowdown in views and engagement. Things felt off in the tech vertical, and the pandemic didn’t seem to fully explain the situation. In retrospect, the changes may be the byproduct of something akin to a settling out process in the gadget space. We aren’t quite ready to jump into the face wearables era. Apple is expected to unveil their move into the space in a few months with a launch later in the year. Meanwhile, the smartphone and tablet space has been unfolding along ecosystem grounds. The iPhone business has been a replacement business for years with the majority of sales going to existing iPhone users upgrading their device.
Taking a step back to look at broader industry trends, a gadget recession likely won’t be met with a wave of M&A. Instead, it is far more likely management teams will reassess their commitment to hardware in the first place. News of Microsoft and Google getting out of hardware altogether would not surprise me. There comes a point when years of investment dollars and managerial/talent resources just become too hard to justify when there is little to nothing to show for such efforts. The rationale that these companies gave for being in hardware in the first place has never been strong either. Amazon and Meta have publicly demonstrated more of a long-term commitment to their gadget businesses relative to Microsoft and Google. However, both are facing revenue growth pressures that require their respective hardware bars to be raised in order to receive ongoing investment dollars.
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Silicon Valley Bank Isn’t the Canary in the Tech Coal Mine
Last week, Silicon Valley Bank (SVB), known for its 35-year relationship with the tech start-up scene, imploded. It's very easy, and maybe even tempting, to position Silicon Valley Bank’s collapse as something bigger - a canary in the coal mine for Peak Tech. Such thinking breaks down into the following:
The way SVB’s meteoric rise in deposits, driven by Silicon Valley momentum during the pandemic, masked inadequate risk assessment is analogous to how private tech companies saw ballooning private valuations while avoiding scrutiny over unsustainable business models by delaying IPOs.
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Rivian Is Early
In the electric vehicle (EV) space, some of the most interesting observations aren’t found with Tesla or legacy auto. Instead, we need to turn to an EV startup called Rivian.
With a lineup consisting of the $73,000 R1T pickup (accepting reservations with deliveries expected later this year) and the $78,000 R1S SUV (accepting reservations with deliveries expected in 2024), Rivian learned from those who came before it by skipping smaller sedans and crossovers and going straight to selling large vehicles.
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The Future of Search
The recent chatbot craze fueled by ChatGPT, which needs a good dose of cold water thrown on it, has led to renewed talk of search’s future. Microsoft’s investment in OpenAI led some to conclude that Google should be nervous. The thinking goes that the combination of Bing and massive language models will impact Google’s search dominance. I find such thinking rudimentary at best.
Much of the chatbot craze will fizzle out. We are still in the buzz part of the current curve. It would not be surprising if the fizzle burns out quicker than people are expecting.
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Movie Theater Shenanigans Continue
Movie theater operators can’t get out of their own way. Last week, AMC, the largest movie theater chain in the world with 950 theaters, unveiled variable seat pricing in the U.S. Customers will be charged based on where they sit in the theater. Seating will be split into tiers:
Value Sightline: Seats that few people want, like the front row. AMC would charge $1 to $2 less for these seats although there are strings attached.
Preferred Sightline: The “best” seats. AMC would charge $1 to $2 more for these seats.
The move is modeled after what is already found in Europe – something that AMC’s CEO was quick to point out. The new pricing follows another movie theater pricing experiment involving variable pricing by movie title, charging more for in demand movies.
AMC claims that charging different prices based on a seat’s location within a movie theater is similar to what is done with seats in other “experience-based” venues.
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Mark Zuckerberg’s Bet
Meta is the latest company to take a ride on the Wall Street roller coaster. After a horrendous year in 2022 with shares trading down 65%, Meta turned heads last week with the stock popping 25% after reporting earnings. The wild swings left observers scratching their heads as to what may have changed. How could a company considered by some to be fatally wounded see its shares more than double in just three months?
Year to date, the best-performing stocks in tech are those that struggled the most last year. Peloton has doubled in share price in just a few weeks. Spotify is up 80%. Roku up 60%. Market participants, represented by many different viewpoints and perspectives, are betting on a turnaround even if consensus isn’t quite sure what a turnaround will look like. Instead, it’s simply assumed to be better than what things were.
As we discussed three months earlier, the market was valuing Meta as having about a decade of life remaining.
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The EV Price War Has Arrived
The auto industry is in a weird place right now. Automakers have benefited from software’s inevitable march into their space. However, the auto space is nowhere near where the tech industry thought it would be by now. In the mid-2010s, autonomy was considered by many to be a problem that would be solved by 2020. Elon Musk positioned full autonomy as a “next year” goal for years although he interestingly stopped making such predictions recently. Now we see signs of a price war unfolding in the electric vehicle (EV) space with Tesla and now Ford looking to cut prices. These developments leave me scratching my head.
Tesla is in an interesting spot. In the second half of 2022, the company saw some cracks form in its growth story.
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Don’t Overthink Big Tech Layoffs
Last week, Microsoft and Google joined Amazon and Meta in announcing layoffs. In total, 51,000 jobs will have been eliminated among the four companies in just the past two months.
Amazon: 18,000 layoffs
Google: 12,000
Meta: 11,000
Microsoft: 10,000
Total 51,000
This development has led pundits to run with various theories explaining the layoffs, ranging from Big Tech being in a recession to the pandemic contributing to something of a tech bubble. Some are even saying Big Tech has had a complete rethink of their approach to talent. When it comes to these layoffs, the simplest explanation will prove to be the most accurate.
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Throwing Cold Water on ChatGPT
The late 2010s was witness to one the largest head fakes in consumer technology: voice-first or voice only interfaces. Tech pundits and analysts fumbled over themselves with projections that we would converse with speakers positioned around the house instead of looking at screens. Such an idea even permeated through several tech giants including Amazon and Google.
Scott Galloway, who gained a following in tech circles for his bold predictions, said in 2018 that a third of computing will be done on devices without a screen in 2020, with two thirds of that processed by Alexa. Of course, Galloway was wrong.
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CES Lost Its Meaning
Last week, the largest tech trade show in the world was held in Las Vegas. At least based on my tech-oriented Twitter timeline, you wouldn’t have even known CES took place. For the past few years, CES was increasingly at the receiving end of jokes and mockery for what it has turned into. In what is a worrying sign for CES, this year was different as there weren’t even that many jokes. CES just didn’t create the buzz that it did in the past.
Many people believe CES lost relevancy because tech has become boring or uninspiring.
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Elon Musk Isn’t Twitter’s Problem
Elon Musk continues to make unforced errors as he molds Twitter into his liking. Unnecessary controversies and illogical strategy moves are not only increasing stress and anxiety among some Twitter users, but also clouding what Musk has done correctly. Yes, there actually have been a few positive changes such as the “What’s happening” editorial trends coming to an end.
In finding the top tech story in 2022, the Musk/Twitter saga makes the short list.
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Bob Iger’s Mandate at Disney
It would be an understatement to say the past month has been an interesting one at Disney. At the request of Disney’s board, Bob Iger, who led Disney for 15 years during the 2000s and 2010s, made a dramatic return as CEO.
Iger’s return was met with sighs of relief and hope from various Disney stakeholders. Something of a Disney wish list materialized overnight. Iger would “fix” Disney parks, reinvigorate Disney animation, give a shot in the arm to movie theaters, stop the Disney+ financial losses, and give power back to Imagineering. Such lofty expectations will inevitably lead to disappointment.
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FTX and Crypto’s Buzz Drain
The media loves its villains. While Elon Musk’s Twitter escapades took over much of November’s news flow, Musk is something of a known entity at this point. Sam Bankman-Fried now wins the award for fastest up-and-coming villain. Just a few weeks ago, his name (or SBF initials) only meant something to those in crypto circles. Today, fallout from FTX’s collapse, the crypto exchange that he founded in 2019, continues to grow and has infiltrated politics, Wall Street, and pop culture circles.
When the dust settles, one truth that will be found with FTX is that the company relied on crypto buzz to get itself in a position to lose billions of its client’s dollars.
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Valuing Meta
As Mark Zuckerberg contemplates some of his toughest business strategy decisions to date, Wall Street has already weighed in with its verdict on Meta: The company has about a decade left. While that dire prediction will likely morph with Wall Street’s always-changing mood, a closer examination of Meta’s valuation reveals several intriguing questions applicable to valuing Big Tech in general.
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The Year of Paid Video Streaming Price Hikes
Paid video streaming has provided analysts and pundits plenty to talk about in 2022. Competition has intensified as Disney goes after Netflix for the subscriber crown (Disney has already won). Wall Street also turned sour on most streamers, driven by the higher competition and concerns with business model sustainability.
Set within this change and chaos, there is one theme that ended up being quite reliable: subscription price hikes.
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Elon’s Twitter
If there were still questions as to how Elon Musk was going to run Twitter, his tweeting a video of himself walking into an empty Twitter HQ carrying a bathroom sink to denote the change of ownership told us that this was going to be an unconventional transition. We were about to see the Musk show, and the first 12 days have certainly lived up to that description.
Unfortunately, much of the analysis focused on Twitter and Musk has left much to be desired. It has been both superficial and biased. Many have allowed their personal views of Musk to get in the way of critical analysis.
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Wall Street Was Caught Sleeping on Digital Advertising
Judging by stock price moves, Wall Street experienced quite a few surprises last week. Consider the following price moves registered the day after reporting CY3Q22 earnings:
Meta: -25%
Alphabet: -10%
Microsoft: -8%
Amazon: -7%
Apple: 8%
The odd thing about these moves is that 3Q22 earnings contained very few surprises in Big Tech land. All of the major themes found in the numbers and on management conference calls have been on display for the past year (and discussed in these weekly essays).
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Receive Exclusive Essays. The cornerstone of an Inside Orchard subscription is access to Neil’s weekly essays on the latest developments in the technology industry. Weekly essays are 1,000 words and sent via email on Tuesdays. Essays revolve around the following topics: technology industry analysis, business model analysis, technology’s impact on societal and consumer trends. A sample essay can be viewed here.
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Snap Is a Feature, Not a Company
Snap positions itself as “a camera company.” It’s the first thing that a visitor to their website will likely see. On its Investor Relations page, the slogan can’t be missed. The aspirational messaging has served two functions for the company:
Attract talent intrigued by new opportunities that smartphone camera ubiquity has fueled.
Convince Wall Street investors that there is something deeper at play with Snap than just a communication platform (Snapchat) unable to match the scale found with larger competitors.
Last week, Snap reported 3Q22 results. They weren’t pretty.
An Inside Orchard subscription is required to continue reading this essay. Subscribers can read the essay here.
(Subscribers: The password for reading exclusive essays is always accessible by logging in and going to Downloads.)
Inside Orchard Subscriptions
Payment is processed and secured by Stripe. Apple Pay and other mobile payment options are accepted. Special bundle pricing is available for Above Avalon members.
Subscriber Privileges and Benefits
Receive Exclusive Essays. The cornerstone of an Inside Orchard subscription is access to Neil’s weekly essays on the latest developments in the technology industry. Weekly essays are 1,000 words and sent via email on Mondays. Essays revolve around the following topics: technology industry analysis, business model analysis, technology’s impact on societal and consumer trends. A sample essay can be viewed here.
Access Exclusive Private Podcast. Listen to Inside Orchard essays via an exclusive private podcast. After becoming a paid subscriber, all previously-published podcast episodes become available in your favorite podcast player. Podcast episodes never become available to the public.
Inside Orchard Support. Play an active role in supporting Inside Orchard as an independent source of analysis and perspective. Inside Orchard is 100% supported by its subscribers.