William Geffen

At what point is a company a “tech” company?

William Geffen

At what point is a company a “tech” company?

Would your local fruit shop be a tech company if it started using a card machine instead of requiring cash? I hope most of us can agree this would be a stretch. But what if they have an online offering and started logging each sale to get data insight on their customers? I’d argue no, as this is now standard for most retail. After all, no one is lining up to call Tesco a “tech” company… yet.

What about if the shop used cutting edge proprietary AI to leverage data on its supply chain and distribution for maximum efficiency? Maybe. This could be a case of technology providing a company with a unique advantage – or there’s always the chance that management is chatting absolute rubbish.

What about fruit delivered via online order only (with no brick and mortar shop)? What if it’s an online fruit platform/app linking customers and fruit suppliers….? The possibilities are endless, so what’s the answer?

The approach we take is to step back and consider how best to invest in those best positioned to benefit in a period of technological change and disruption. To do this, we categorise each company in our universe by the opportunity they present and apply a range of quantitative and qualitative characteristics to boot. These are:

Tech Titans - These are the big guys. Prolific. Everywhere. They often act as gatekeepers to the internet (like the internet advertising duopolists Facebook and Google) or provide essential infrastructure (like Amazon’s AWS or Microsoft’s Azure). Chinese tech giants Tencent and Alibaba, which have similar offerings and characteristics, are also included. These companies are mega caps, exhibit enormous established network effects and have dominant market share, sometimes in several markets.

Enablers - These are companies that provide others with essential software, tools or services necessary to remain competitive in a fast changing and disruptive business environment. These can range from chip companies like NVidia, providing top of the line circuitry for advanced machine learning and AI, to software companies like Intuit that allow small businesses to easily manage their finances with their QuickBooks offering. These companies have good unit economics, high growth and excellent customer satisfaction and retention.

Adopters - These are a rarer breed: a company that employs technology to create a unique and irreplicable advantage, often not able to be captured by investment in the prior two categories. These companies must have capable, far-sighted management teams, and an understanding and willingness to invest in their long run technological advantages. This is the category where our new friend Disney resides.

I’d like to introduce you to a new entrant in the portfolio: media giant Disney. Do Mickey, Simba and Winnie-the-Pooh have a place in a tech fund? It’s a valid question – what makes a “Tech Company” a tech company, rather than a company that happens to use tech, is a question we often grapple with, and one that doesn’t have a straightforward answer.

 

To best understand and explain Disney’s tech opportunity, we can look at two important (and related) technological projects that Disney has embarked on.

1. Disney+

In November 2018, chairman and chief executive Bob Iger announced the future launch of its much-speculated DTC streaming service for Disney, which he named Disney+. This marked Disney’s foray into the so-called “streaming wars”. It’s a war we have previously stayed out of, due to fierce competition and high capital intensity, focusing instead on the “enablers” that the streamers rely on, for example Netflix running on Amazon’s AWS. But we believe Disney’s offering represents a unique opportunity. While Disney will forgo the steady, generous fees it currently gets for licensing its properties to TV and streaming services, it has the potential to become the most lucrative DTC offering thanks to two key reasons.

First, its IP monopoly. 

Disney doesn’t need to ramp up expenditure and build a studio and franchises from scratch, it already has a collection of successful studios and, most importantly, all the IP you could want. This includes Marvel, Star Wars, Pixar, Fox, as well as all the Disney classics and Disney animations. They released 12 of the 20 highest grossing films of the last decade and now have the rights over a 13th (Avatar), now slated to have four more follow up films. This IP means Disney already has the range of unique offerings and track record that rivals will have to spend years and many billions to compete with.

Second, its data.

Getting source data from customers directly is greatly beneficial both for tailoring your product to your customers’ tastes and needs, but also to yield advertising opportunities. Just ask Facebook and YouTube (owned by Google parent company Alphabet).

Forgive me two brief anecdotes which I believe demonstrate why Disney’s opportunity here is greater than its predecessors and rivals.

The first comes from YouTube and its problem with kids. Kids love watching YouTube and, frankly, YouTube loves kids, as they have the time and attention to watch videos, driving up views on the platform (videos aimed at kids are some of their most viewed). On top of this, their views are the most lucrative to sell to advertisers, due to their appetite for merchandise and games, susceptibility to marketing gimmicks and their inability to tell advertisement from reality. Due to strict laws on collecting and selling children’s data, however, YouTube was forced to create a new app, called YouTube Kids, to avoid accidently showing inappropriate content to minors, or harvesting their data for third parties.

The riches still available in getting content on the children’s platform, however, led to video creators playing the algorithms to get their videos onto the kids’ app. This led to a series of scandals including videos of super heroes and Disney princesses doing inappropriate pranks or even going on a gunning spree.

The second observation comes from looking at one of Disney’s franchises, Cars. Cars was a very mediocre film that was met with little enthusiasm and grossed a very average (for Disney!) $462m. Disney, however, produced two sequels with similar box office figures. Why?

While the first film only grossed $462m (and the Cars franchise $1.4bn total), Disney announced in 2011 that is had pulled in a fat $10bn from Cars merchandise on the first film alone. The films aren’t about box office returns or even DVD sales. They are, in fact, a big advertisement for a collection of toys that kids went crazy for.

The point where these two tales come together is that for Disney, the film is the advert. They have no need to sell that data to third parties for advertising as they are the ones who will best use that data and insights gleaned from it. They can use the lucrative data to not only tailor the Disney+ experience to each user, but also to inform future content creation, as well as illuminate merchandising opportunities to their enthralled young viewers.

So if your child watches Frozen 20 times a week on your Disney+ account then, at some point around Christmas, assuming the repeated lyrics of “Let it Go” haven’t caused you to have a breakdown, you may well receive an email from Disney informing you of a new Frozen themed land at Disneyland, the upcoming release date of Frozen 2 (22nd of November by the way) and an offer on the latest Elsa doll. In your sleep deprived  and troubled state, you will be relieved to have one fewer gift to worry about.

2. The MagicBand and My Disney Experience App

If you visit Disney World in Orlando, as I admittedly have recently, then you will quickly find there are two new essentials (on top of the usual walking shoes, sun cream and Mickey ears). These are the MagicBand wristband and the My Disney Experience app. Both are synced up at the beginning of your trip for you and your family and allow you to do literally everything.

The MagicBand is equipped with a short-range tracker, or “RFID”, and can be used at the ticket gate, as a room key, for making frictionless payments and generally “touching in” at interactive areas around the parks. The long-range RFID allows the band to be traced around the park with such accuracy that Disney will automatically upload ride photos to your account as it knows which ride carriage you were on and when. If you ask how, they rather cynically reply with one word – “magic”. This doubles up with the app that allows you to manage any reservations (including your room), see a map with all the current wait times in each park, order food and even reserve places in lines. The parks have full Wi-Fi coverage along with Bluetooth sensors that link up with the app, again allowing Disney to track your every move and increase accuracy.

This means Disney has literally thousands of precise data points on millions of yearly theme park attendees. They have data on everything from exact movement/locations, to purchases and even photos. Disney no longer has to guess how best to expand and streamline their parks (as well as other offerings), instead they are now an omniscient, omnipresent and omnipotent God to the 10s of millions who walk through those magic gates each year.

The common theme here is data. Disney has begun to embrace and adopt technology that will allow them to not only collect data in all areas of its business but also to leverage this data in a more effective way than any other company, without the need to sell it to third parties.

I believe this will allow Disney to go from a loosely connected collection of film/tv studios, merchandise shops and amusement parks into a fully cohesive, constructive and collaborative media company for the modern world.

For a comprehensive list of common financial words and terms, see our glossary here

 

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, November 21, 2019, 9:49 AM