It is somewhat unsurprising that 2022 was also characterised by widespread technology layoffs, with 97,000 in total compared to 13,000 in 2021, and already in 2023 we are seeing more.1https://www.cnbc.com/2023/01/05/tech-jobs-hit-the-hardest-by-layoffs-last-year-report.html#:~:text=Tech%20job%20cuts%20were%20up,the%20lowest%20occurring%20in%202021 Despite a challenging year, 2023 will no doubt see continued innovation, strategic shifts and M&A activity. Below is an overview of some major trends and developments investors are watching across five key areas: semiconductors, Big Tech, AI, streaming video on demand (SVOD) and M&A. A sample of relevant Forum transcripts that Third Bridge clients are using to fuel faster and smarter investment decisions is also provided with each category.
Macroeconomic factors weigh on semiconductors
It has been a turbulent few years for semiconductor players, with COVID-driven supply issues elongating lead times and now a simultaneous softening of demand in some markets amid fears of a recession.2https://www.bloomberg.com/news/articles/2022-10-07/chipmakers-see-breathtaking-drop-in-demand-as-recession-looms Indeed, macroeconomic factors are emerging as primary forces shaping the semiconductor industry in 2023.3https://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/articles/semiconductor-industry-outlook.html
With the pandemic underscoring the industry’s reliance on major players such as TSMC, the US’s “historic” efforts to tighten China export rules continue to make industry headlines and there is also an intensifying focus on investment in local chip manufacturing. This comes as Goldman Sachs analysis shows that although semiconductors represent 0.3% of US GDP, they directly impact 15% of total GDP.
Regarding NAND and DRAM, we learned the market could quadruple in size by 2028 but CAGR estimates of 14.5 are unrealistic, with 8% a more likely figure. We also understand that 40-50% of memory demand currently stems from PCs and smartphones but supply issues are still present despite more inventory being available.
Meanwhile, one Interview suggests Wolfspeed is leading the 8-inch silicon carbide (SiC) wafer revolution as Deloitte predicts that chips made of high-power semiconducting materials – namely gallium nitride and SiC – will sell a combined USD 3.3bn in 2023, up almost 40% from 2022.4https://www2.deloitte.com/us/en/insights/industry/technology/technology-media-and-telecom-predictions.html
On lithography, we explored deep ultraviolet and extreme ultraviolet (EUV) developments, ASML’s advancements in high-NA (numerical aperture) EUV lithography, and the effects of wafer fab equipment supply-demand dynamics.
Read what the experts are saying:
- US-China Semiconductor Foreign Policy – Geopolitical Landscape & 2023 Outlook
- Forum Pulse: NAND & DRAM Pricing – Q3 2022 Update
- Global Lithography Overview – Major Industry Trends & Environment Outlook
- Wolfspeed – SiC Developments, Competitive Dynamics & Q4 2022 Update
- Nvidia – Q4 2022 Update – Trends & Developments in AI
Big Tech feeling the macro pressure
After a chapter of sustained growth and a pandemic-driven boom, Big Tech behemoths are feeling the pressure from today’s macroeconomic headwinds, namely inflation and currency volatility, as well as global supply chain challenges.
Layoffs were rife in 2022, with Meta cutting 11,000 jobs – around 13% of its workforce – and announcing a hiring freeze in November. Already in 2023 Amazon is reportedly cutting 18,000 jobs, or 6% of its workforce5https://www.reuters.com/business/retail-consumer/amazon-lay-off-over-17000-workers-wsj-2023-01-04/, with Google parent Alphabet doing the same – eliminating about 12,000 jobs, or 6% of its workforce.6https://edition.cnn.com/2023/01/20/tech/google-job-cuts/index.html#:~:text=Google%20parent%20Alphabet%20is%20eliminating,on%20the%20company%27s%20website%20Friday
Concerns regarding potential breaches of antitrust law have also intensified and 2023 looks set to be another defining year for legislation as governments attempt to put the brakes on the spiralling influence of Apple, Microsoft, Alphabet, Amazon and Meta.
An expert interviewed by Forum believes the strongest US government case against Alphabet/Google is the DoJ case involving mobile phone OEMs requiring company mobile apps be pre-installed with certain Android versions. They also believe US cases against Meta/Facebook are relatively weak, noting there is a higher chance that Alphabet/Google will be forced to divest an advertising business, such as DoubleClick or AdMob, than Meta will have to divest Instagram or WhatsApp. Of note last week, a district court judge in California reportedly ruled against the Federal Trade Commission in its challenge to Meta’s proposed acquisition to buy Within, which owns a VT fitness app.7https://www.cnbc.com/2023/02/01/ftc-loses-attempt-to-block-meta-acquisition-of-within.html
The rising threat of social media platforms is another headwind this year. Macro challenges, data privacy changes and a pullback in ad spending has hurt ad revenue, but TikTok’s exploding popularity has conversely served as a magnet for revenue. However, the rise of TikTok is not without its controversy, with a number of US legislators looking to ban the app and some states not allowing it on government-issued devices in response to concerns over national security.
Read what the experts are saying:
- Microsoft Power Platform – Automation & Analytics Platform Growth & Competitive Dynamics
- Amazon – 2023 US E-commerce Demand Outlook & Buy with Prime Programme Launch Implications
- Apple’s Supply Chain Management – Chinese Component Suppliers
- Big Tech – Q4 2022 Antitrust Update Post-US Mid-term Elections – Alphabet/Google & Meta/Facebook Focus
- Meta Platforms & Instagram – Economic & IDFA Impacts, Short-form Video & E-commerce
AI is not just a buzzword
In 2023, AI seems to be taking the world by storm, with Microsoft’s investment in OpenAI, the creator of chatbot ChatGPT and image generation tool Dall-E, squarely in the spotlight. Although Microsoft is planning up to 10,000 redundancies, it said it would still hire in key strategic areas – of which AI is certainly one.8https://www.bbc.co.uk/news/technology-64374283
In an Interview with a regional VP at New York-headquartered software company, we discussed how chatbots are ripe for disruption as well as how the introduction of ChatGPT has “raised the profile” of this area and could also “provoke much more interest in regulation”.
In another Forum Interview, a former manager at OpenAI said a challenge for OpenAI and ChatGPT is the cost associated with each query and response, amounting to at least USD 0.06 on average. However, monetisation is not a primary focus at present, we learned. They also said financial services, healthcare/life sciences and gaming are areas offering the most opportunities for ChatGPT.
With AI the next era of IT, enterprises are prioritising AI-focused investments, Interviews suggest. However, companies are also spending cautiously given the difficult macro conditions, with some even underspending on their dedicated budgets. Among the key players examined in Forum Interviews were C3.ai and H2O.ai.
Looking ahead, one expert sees synthetic data in particular as a “huge market” and does not expect a recession-driven slowdown in natural language processing technology and large language models, such as Generative Pre-trained Transformer-3.
Read what the experts are saying:
- OpenAI, ChatGPT & Potential Impacts on Microsoft & Google
- C3.ai – Operating Environment, Growth Outlook & Market Positioning
- H2O.ai – Product Positioning & Industry Outlook for AI & Machine Learning Offerings
- Machine Learning Industry Dynamics & Data Science Products – Trends & Sector Update
- AI & Database Management – Sector Update & Market Outlook
Fundamental shift with ad-supported streaming
The shift over the past year to ad-supported streaming tiers, driven by Netflix and Disney, has been a fundamental change to the SVOD landscape. The appeal of advertising video on demand (AVOD) has surged as consumers reduce discretionary spending and demonstrate a willingness to view ads if they can enjoy discounted or free streaming. Deloitte Global predicted that nearly two-thirds of consumers will use at least one AVOD service monthly by 2023, up by 5% compared with 2022.9https://www2.deloitte.com/us/en/insights/industry/technology/technology-media-and-telecom-predictions.html/#everyones-watching
Looking more closely at some of the key players, an expert said the launch of Disney+ with ads in December 2022 was “a terrific opportunity” to boost monetisation. But Walt Disney Company’s biggest opportunity is cementing its streaming strategy, they said, citing increased competition and Disney’s bifurcated product suite consisting of ESPN, Hulu and Disney+.
Q1 and Q2 2022 were “shaky” for Netflix given its subscriber losses, but also a time for the company to reevaluate its spending and strategic goals. Advertising will be a major growth catalyst as the company switches its focus to content quality over quantity, and driving acquisition, engagement and retention. How Netflix’s ban on password sharing will impact its user base remains to be seen in 2023.
Against the backdrop of an increasingly penetrated and saturated market, industry consolidation is expected over the next 12 months, with players such as Paramount and Peacock potentially vulnerable, according to one expert. Studies suggest that three is the magic number for SVOD subscriptions, another expert said, ranking Netflix number one, followed by Disney. “Four or five other players are vying for that third spot.”
Read what the experts are saying:
- International Content Production, Distribution & Demand Update – Netflix, Warner Bros Discovery, Paramount & Others
- Netflix – Growth Strategy & Q4 2022 Business Update
- Disney – Streaming Developments, Ad-tier Roll-out & Leadership Changes
- Paramount Global – Q1 2023 Positioning, Priorities & Streaming Strategy
- Warner Bros Discovery – Operational Challenges & International Positioning
M&A – a consistent theme across sub-sectors
M&A remains a consistent theme across the TMT sector at large, with today’s macro challenges paving the way for tomorrow’s deals and, ultimately, the competitive landscape. According to PwC, TMT was the most active sector for M&A last year and in 2023 software, the metaverse and gaming are among the areas where deals are likely to be concentrated.10https://www.pwc.com/gx/en/services/deals/trends/telecommunications-media-technology.html Forum also observed that last year’s deals were driven by financial buyers, but 2023 could be characterised by a greater volume of strategic or company buyers.
Among the many deals examined by Forum were the Citrix-Tibco merger; Microsoft’s planned acquisition of Activision Blizzard; and Adobe’s acquisition of Figma.
The Federal Trading Commission’s attempt to block Microsoft’s acquisition was largely anticipated and a specialist we spoke to sees a 50% chance of the deal going through. Indeed, they noted that “you could come up with three strong reasons why it’s going to, then three strong reasons why it isn’t.”
On Adobe’s acquisition of Figma, one expert sees this as an offensive move to fill a key product gap within the Creative Cloud segment, and will result in the addition of Figma’s estimated, largely accretive, USD 16.5bn TAM.
Meanwhile, among the key insights from an Interview on Citrix is that Tibco is seen as a means of helping the company move Workspace clients to the cloud – but we heard this is not necessarily a logical combination and execution will be critical. In a worst case scenario, there could be a 25% decline in revenues by 2025.
Forum also looked at Anaplan, which an expert told us wins in the marketplace via its cloud platform, time to deployment and relationships with global system integrators – but loses due to lacking a reporting solution and pricing. An acquisition of a financial reporting cloud software company could therefore be on the cards at some stage.
There have also been reports regarding potential private equity interest in Coupa Software, and a specialist believes an acquisition could make sense to unlock value in the company.
Read what the experts are saying:
- Activision Blizzard – Challenges & Microsoft Acquisition Outlook
- Citrix Systems – Recent Cloud Challenges & Pending Tibco Combination
- Adobe’s Recent Acquisition of Figma – Financial & Product Impact & New Competitive Landscape
- Anaplan – Product Evolution, Competitive Dynamics & M&A Possibilities
- Coupa Software – Macroeconomic Impact, Competitive Dynamics & Corporate Culture
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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