Polar Capital

Polar Capital Global Technology Fund

Disruption: driven by technology
Eighteen years after the bubble of 2000, technology as an investment sector is in a good place as the industry delivers on much of what was promised nearly two decades ago. At that time, the world was fascinated by the long-term promise of the internet, a PC-based network with 361 million users (5.8% of the world’s population) connected via dial-up modems, mostly in the developed world. There was no broadband, no smartphone, no WiFi, no connected games consoles. Instead of Candy Crush or Fortnite, Snake (embedded in most Nokia handsets) was one of the most widely played mobile games. There were no applications (apps), just browser-based searching, banner ads and rudimentary B2C eCommerce.
Today, the internet is more than 10 times larger than it was in 2000, with four billion users accounting for 53% of the world’s population. Much of the growth has been driven by smartphones (more than 3.4 billion users worldwide), particularly in the developing world that lacked legacy, fixed-line telecom infrastructure. As such, today’s internet is very much a smartphone-driven network powered by the cloud and the app economy, an ecosystem of millions of apps that act as the interface for connected devices. This ecosystem – worth nearly $1trn today – is the engine room for the smartphone-fuelled disruption that is reordering much of the world right now.
This dynamic is most apparent in consumer-facing domains such as advertising where online already accounts for 19% of worldwide spending¹, dominated by Google and Facebook who have been capturing 90% of incremental growth². In the US, advertising delivered on mobile devices accounted for 57% of online advertising revenues in 2017³. Likewise, eCommerce – fuelled by the growth of mobile commerce and payments – grew 20% y/y in 2017. While the stunning success of both Alibaba and Amazon is well known, global eCommerce penetration remains relatively low at 13% which should prove supportive for future growth.
While online spending has been growing steadily (taking 1% share from the offline world per annum⁴), today’s winners are not sitting on their laurels. Amazon’s surprise purchase of upscale grocer Whole Foods in August 2017 epitomised how today’s online winners are instead looking to press home their scale and data advantage at a time when traditional retailers are struggling. The remarkable growth of Amazon Prime (more than 100 million members worldwide) is in stark contrast to record levels of US retail store closures. Together with its Go checkout-less concept store, Amazon has continued to push the boundary of what is possible today. It has also shown how
the combination of smartphones and the cloud can be harnessed to forever change user experience and expectations resulting in widespread disruption and reinvention.
Once contained to a few industries, disruption is both broadening and deepening at an accelerating pace. Today’s disruptors know more about their customers and are able to better tailor products and services. The ability to mass-personalise the news has elevated both Facebook and Twitter at the expense of newspapers while on-demand or over-the-top TV has seen Netflix grow its base dramatically as traditional broadcast peers flounder. This dynamic is clearly playing out elsewhere as algorithms – and increasingly artificial intelligence (AI) – replace the need for curated content while the unprecedented scale of today’s networks fuels disintermediation. Trusted intermediaries, including travel agents, stockbrokers and minicab controllers to name a few, are each falling foul of a better-informed consumer, empowered by their smartphones, price transparency and the so-called network effect.
Past is prologue as it relates to incumbent businesses that now find themselves under siege like never before from new competitors, distribution and pricing models, together with demographic headwinds associated with digital natives – younger consumers brought up during the so-called digital age. The need to remain both relevant and competitive in an increasingly digital world is driving a so-called digital transformation, the business imperative of being able to respond to the needs of a new generation of consumers, partners and suppliers who expect transactions to be seamless and real-time – Facebook-like in experience, Amazon-like in reliability.
Together with a strengthening US economy and aided by tax reforms that have put more money in company coffers, the need for reinvention has resulted in a much-improved IT-spending backdrop with budgets forecast to grow in excess of 6% y/y this year, the highest level this cycle. While current concerns and trade-war rhetoric may continue to provide buffeting (and increased stock market volatility) disruption and its causes are likely to persist. While it may be a truism that history books are written by the victors, they are also littered with myriad examples of corporate failure at times of momentous, often technology-driven, change.
At times like these, it is nearly impossible to know how profound technological change will prove. While those living at the time of the printing press would have felt its impact on their daily lives, they would have had trouble predicting the societal shockwaves created by mass communication and the democratisation of knowledge. Similarly, it is not possible for us today to know the scope of internet-fuelled, public cloud computing-enabled and AI-accelerated disruption, but history as a guide suggests we are barely scratching the surface. Gutenberg’s invention saw printed volumes increased tenfold in the century after its introduction, a similar experience to the growth in internet users during the past 18 years. However, technology does not stand still and in the case of printing it was the use of steam power and cylinders that made newspapers and the mass production of printed works possible.
The internet may currently be fuelled by smartphones and the app economy but there is a plethora of emerging technologies that are likely to dramatically increase both its breadth and depth, not to mention its power as an agent of social change. In the future, smartphones are likely to prove a small minority of connected devices as imagined by the so-called internet of
things (IoT). Algorithms that augment decision-making today are likely to give way to true AI where machines are able to act with increasing autonomy (albeit within a narrow field of decision-making). The pace of innovation around AI and machine learning (ML) is accelerating such that we now look for all our investments to be beneficiaries of (or at least not negatively impacted by) this powerful trend. Just as public cloud computing (epitomised by Amazon AWS, Microsoft Azure etc) has been a significant driver of this technology cycle and become the default choice for new computer workloads, we believe AI will be the platform which enables the next wave of innovation.
Nick Evans, Fund Manager
Polar Capital Global Technology Fund