2013 Global Trends in Technology, Media and Telecoms

SYNC.
2013 TMT Sector Outlook Issue 51

2013 Trends
Technology, Media & Telecoms

24 September 2012

Cyrus Mewawalla www.researchcm.com CM Research
Authorised and regulated by the Financial Services Authority

2013 Trends: Technology, Media and Telecoms SYNC, Issue 51 24 September 2012

Contents
HOW TO USE THIS REPORT 3
PART I: TECHNOLOGY HARDWARE 4
PCs, Servers, Storage and Networking 6
Smartphones 8
Consumer Electronics 10
Electronic Component Makers 12
Semiconductors 14
Telecom Equipment 16
PART II: SOFTWARE 18
Applications Software 20
Infrastructure Software 22
Security Software 24
Video Game Software 26
IT Services 28
PART III: INTERNET & MEDIA 30
Internet Companies 32
Social Media 34
Advertising 36
Film & Television 38
Publishing 40
PART IV: TELECOM SERVICES 42
Telecom Operators 44
Cable & Satellite Operators 47
Data Centres 49
OUR RESEARCH APPROACH 51

www.researchcm.com 2


How to use this report
This report offers a comprehensive, global view of the technology, media and telecom (TMT) sectors over the next 12 months. Our aim is
to answer three questions:

 What will be the big technology cycles over the next 12 months?
 How will they affect each of the TMT sectors in the chart below?
 Which trends are likely to influence investor perceptions going forward?

To set the scene, the chart below shows the relative performance of 16 TMT sectors in each of the calendar years from 2008 to 2012.

Over the last five years internet companies, software developers and data centres have been the largest outperformers whilst
consumer electronics, telecom equipment, publishers and telecom operators have underperformed.
Global TMT sector: Cumulative 5-year share price performance
140%
120%
100% 2008 2009 2010 2011 2012
80%
60%
40%
20%
0%
‐20%
‐40%
‐60%

Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research
Bars show the cumulative share price performance for a selection of large cap stocks in each of the sectors listed above from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012.



Part I: Technology Hardware



Technology Hardware: Executive Summary
Here is a summary of our dominant themes for the technology hardware sector over the next 12 months:
PCs and Servers
The shift from the “PC generation” to the “cloud generation” changes the way data is stored and accessed. Production is shifting from PC-
based devices such as laptops to cloud-based devices such as servers and tablets.
Storage
There is a shift from plain vanilla storage services to one-stop-shop data management services. Storage technology is moving to solid
state drives (SSD), a more expensive but faster version of storage than traditional hard disk drives (HDD).
Networking
As data centres handle more dispersed data, WAN (wide area network) optimisation is becoming the differentiating factor in networking.
Smartphones
The Apple business model – of owning hardware, software and an apps-based ecosystem – is being cloned by rivals. A handful of
smartphone “platforms” will emerge, some from new entrants. Many smartphone makers will be reduced to low margin hardware players.
Consumer Electronics
Consumer electronics are fast becoming bolt-on accessories for the big internet ecosystems, reducing once great consumer electronics
brands into subcontractors for Apple, Google, Microsoft and Facebook
Electronics Component Makers
The Apple / Samsung showdown has created an opportunity for component makers who want to displace Samsung in Apple’s supply chain.
Semiconductors
The mobile internet, particularly in China, remains the most buoyant end-market for chip makers. Chipmakers in Apple’s supply chain are
likely to be insulated in the short term from any downturn in the wider chip market.
Telecom Equipment
There is a stand-off between telecom operators and regulators over how they charge for access to their networks, resulting in depressed
demand for telecom equipment despite a surge in mobile data traffic. If more mobile outages occur, regulators may encourage investment.



PCs, Servers, Storage and Networking

 Dominant theme: The shift from the “PC generation” to the “cloud generation” changes the way data is stored and accessed.
 Outlook: Bleak for PC and notebook makers; rosy for servers, tablets, SSD storage and niche networking products

Theme What’s happening? Our conclusions for the sector Leaders Laggards
Cloud Production is shifting from PC-based Smartphones and tablets will replace PCs, ARM, Quanta, Lenovo, Intel
devices such as laptops to cloud-based notebooks and ultra-books. By 2015, tablet Compal, Dell, HP
devices such as servers and tablets. sales are likely to exceed PC sales.
Copying Apple Google and Microsoft are now making Without software, hardware makers are left with Apple, Google Everyone else
hardware, creating conflicts for customers precious few means to differentiate their (possibly Microsoft)
of their software. products, squeezing margins even further.
Big Data Traditionally, databases and business Hardware makers like Dell, internet companies IBM, Oracle, Google, SAP, Microsoft
intelligence tools were purchased like Amazon and IT services companies like Facebook
separately. Now they are being combined IBM are investing in big data appliances. Expect
into “data appliances”. M&A in enterprise software and data analytics.
Storage There is a shift from plain vanilla storage In a cloud-based world, storage companies will EMC, NetApp, Seagate, Western
business model services to one-stop-shop data differentiate their products with analytical tools, Terradata Digital
management services. enterprise software and web services.
Storage Storage is moving to solid state drive SSD technology is still nascent, but costs are OCZ, Stec, Intel, Seagate, Western
technology (SSD) technology, a more expensive but falling and leaders in SSD technology should Sandisk Digital
faster version of hard disk drive (HDD). benefit from a boom in demand for speed.
WAN Within the networking space, the name of Companies with leading WAN optimisation Brocade, Fusion-IO,
optimisation the game is speed. technologies should do well. Riverbed
Cyber security With cyber security rising up corporate Companies focused on the enterprise security Check Point,
agendas, network security software will market are in the sweet spot. Sourcefire, Verint
enter a growth cycle. Systems, Palo Alto



Outlook
Many Asian hardware makers are still suffering four years on from the onslaught of the banking crisis. Quanta has been one of the best
performers because it successfully saw the move from PCs to servers, tablets and smartphones. Niche companies – like Commvault in
data management software and Riverbed in WAN optimisation – have benefited from the shift from hardware-centric storage to data-
centric storage.

PCs, servers, storage and networks: Cumulative 5-year share price performance
400%
350%
2008 2009 2010 2011 2012
300%
250%
200%
150%
100%
50%
0%
‐50%
‐100%

Bars show the cumulative share price performance for a selection of large cap stocks in this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011 and 19 September 2012.

Sync believes we are still in the very early stages of the storage growth cycle, with market share likely to gravitate in the medium term
towards the established market leaders like EMC, NetApp and Teradata. We see new technological advances in network technologies
around the corner, likely adding volatility to current leaders like Brocade and F5 Networks. Data latency remains a problem, so companies
like Riverbed Technology or Fusion-IO that provide WAN optimisation solutions are well placed to ride the big data wave.



Smartphones

 Dominant theme: Everyone is copying the Apple business model: “hardware + software + content = ecosystem lock-in”
 Outlook: Likely to get extremely competitive with several new entrants, including Amazon, Baidu, Facebook, Huawei, Lenovo
and ZTE

Copying Apple The Apple business model – of owning A handful of smartphone “platforms” will Apple, Google, Everyone else
hardware, software and an apps-based emerge. Many smartphone makers will be Microsoft (possibly)
ecosystem – is being cloned by rivals. reduced to low margin hardware players.
Mobile payments All of the world’s top ten technology Three are two broad technology platforms: Amazon, eBay, Gemalto, Telecom operators
companies are investing heavily in NFC vs. the cloud. Google wallet runs on Facebook, Google,
developing mobile payments platforms. NFC whilst EBay’s PayPal uses the cloud. Monitise, Square (unlisted)
Cloud Mobile internet services are increasingly Smartphone makers who provide Apple, Google, Facebook, Nokia, LG
becoming cloud-based, so smartphone integrated email, storage, social media Tencent
makers are developing their own clouds. and apps on the cloud will attract more
customers to their hardware.
Competition In H2 2012, several new entrants will Industry margins will come under intense Amazon, Facebook, Apple, Samsung,
move into the smartphone sector. pressure as copycat products emerge Huawei, Lenovo, ZTE HTC, LG, Nokia, RIM
Patent wars Apple is escalating the quantity and Patent wars are fast turning into a major Apple, Samsung,
ferocity of patent infringement law suits. distraction for company management. RIM, HTC, LG, ZTE
M&A Drivers from the five themes above will Nokia and RIM, trading at 50% discounts Nokia, RIM
lead to more M&A in the sector. to book value, rich in patents, may soon
ripen into bid targets.
Global slowdown If we move into another period of macro In 2008, the smartphone sector fell 45% Apple, Samsung,
uncertainty, how will the sector perform? and remains 7% lower than 1 Jan 2008 Nokia, HTC, Sony,
levels. Another downturn is likely to have a LG, ZTE
similar effect.



Outlook
Over the last five years, Apple and Samsung have rapidly gained market share. In Q1 2012, their respective smartphone market shares by
volume had climbed to 24.2% and 30.1%. Together, they account for 90% of the industry’s profits, according to ABI Research. In the
supply chain, ARM and Imagination Technology have both tripled in value since the start of 2008 whilst Qualcomm has increased by 46%.

Smartphones: Cumulative 5-year share price performance
The charts show smartphone manufacturers on the left with wireless chip and component makers on the right

500%
2008 2009 2010 2011 2012
400%

300%

200%

100%

0%

‐100%


Over the next 12 months, the smartphone sector’s profits are likely to gravitate towards those who successfully copy the Apple business
model of combining hardware, software and content to retain customer lock-in. Contenders for this space are Google and Microsoft, both of
whom have recently moved into hardware and are beefing up their apps divisions. The acquisition of Nokia and RIM, rich in patents,
provides an entry point into this sector for internet companies who know their future requires a mobile operating system. Contenders
include Amazon, Alibaba, Baidu, China Mobile, Huawei, Facebook and Tencent.



Consumer Electronics

 Dominant theme: Consumer electronics are fast becoming bolt-on accessories for the big internet ecosystems, reducing once
great consumer electronics brands into subcontractors for Apple, Google, Microsoft and Facebook
 Outlook: Great for those in the Apple or Google supply chain; poor for consumer electronics manufacturers attempting to
compete on a hardware-only platform with these one-stop-shop internet ecosystems

Slave to the Electronic products are being transformed Top consumer brands will be reduced to Amazon, Alibaba, Canon, Samsung,
system into accessories for the mobile operating subcontractors for the big internet ecosystems Apple, Facebook, LG, Nintendo, Nokia,
systems of Apple, Google and others. of Apple, Alibaba, Baidu, Google and Facebook. Google, Microsoft Philips, Sony
Mobile Internet Most of the profits of mobile devices were With new electronics product cycles dominated
captured by Apple and Samsung, leaving by internet platforms, the outlook for these
other electronics brands trailing behind. brands looks bleak.
Internet TV With internet TV technology still prone to The catalyst will be the next generation of Roku (unlisted),
incremental upgrades, many consumers Google TV or Apple TV. It may well be a smaller Boxee (unlisted)
are holding off from buying the next tech start-up like Roku that kick-starts the IPTV
generation of TV. product cycle.
3D printing In 2011, 6,500 industrial 3D printers were It will be some time before 3D printing (a.k.a. 3D Systems,
sold in a market worth $1.7bn growing at additive manufacturing) transforms mass Stratasys
30% p.a., according to Wohlers. Currently market manufacturing processes. 3D printing
used for prototyping, 3DP could soon be may encourage some factories to return to the
used for mass-market manufacturing. West, but may also lead to higher piracy levels.
Cameras With most smartphones and tablets now Canon and Nikon desperately need a product Apple, Samsung Canon, Nikon
equipped with their own camera, the future differentiator in the next few quarters if they
of pure camera makers is in doubt. want to avoid becoming irrelevant.
Patent wars Apple is escalating the quantity and These patent wars may extend into new areas Apple, Google, LG, Panasonic,
ferocity of patent infringement law suits. of consumer electronics like TVs and DVRs. Microsoft Samsung, Sony



Outlook
With the notable exceptions of Apple and Samsung, the consumer electronics sector is valued roughly at the same depressed levels
reached at the end of 2008. Samsung, despite not having its own internet ecosystem, has managed to outperform by focusing on making
high-quality iPhone and iPad clones. It has also benefitted from vertical integration by making many of its own chips and components. Yet
without an operating system of its own (Samsung recently ditched Bada) it remains the most exposed company on the chart.

Consumer electronics: Cumulative 5-year share price performance
300%
2008 2009 2010 2011 2012
250%
200%
150%
100%
50%
0%
‐50%
‐100%


Dell and HP are steering their respective businesses away from PC and printer hardware towards the cloud and big data and are therefore
well-positioned for a turnaround. For the rest, their only saviour will be an innovative new product or an innovative piece of software. Sony
shows the best promise for a platform-based turnaround; its new chief, Kazuo Hirai, comes from its gaming division – if he can turn his old
PlayStation box from a gaming console into an operating system that can handle music, film, social media, email and e-commerce, he will
never look back. Of course, this simple task evaded his predecessor Howard Stringer, but it may prove easier for a gamer.



Electronic Component Makers

 Dominant theme: The war between Apple and Samsung has created an opportunity for component makers who want to
displace Samsung in Apple’s supply chain
 Outlook: Good for those already in Apple’s supply chain or looking to displace Samsung’s position in Apple’s supply chain

Apple effect Large parts of the electronics industry are With two new Apple products – iPhone 5 and Hon Hai, TPK, LG
gravitating towards the Apple platform. iTV – on the way, those companies in Apple’s Display
supply chain stand to benefit from the Apple
halo effect.
Samsung effect Samsung’s smartphone division (which Handing over sensitive product designs to your LG Display, Sharp, Samsung
competes directly with Apple’s iPhone) is strongest rival does not make commercial TPK
conflicted with its components division sense, so Apple may soon switch from
(which supplies chips and display panels Samsung to alternative suppliers for several
for Apple products). components, including retina displays, touch
screens and chips.
Rising cost base Rising wages in China and concerns over Many subcontractors may find it difficult to pass Hon Hai
the environmental impact of electronics on these rising costs fully, resulting in profit
manufacturing are likely to add to the cost warnings.
base of many subcontractors.
Global slowdown If we move into another period of macro In 2008, the component sector was the worst
uncertainty, how will the sector perform? performing technology sector after telecom
equipment, falling by 50% in that year. Another
downturn is likely to have a similar effect.



Outlook
Apple’s supply chain includes Hon Hai for assembly, TPK Holding and LG Display for display panels and Samsung for several components
including chips and display panels.

If the war between Apple and Samsung becomes more vicious, selected component makers – such as touch-screen manufacturers TPK
Holding, LG Display and Sharp – could benefit by replacing Samsung in Apple’s supply chain.

Electronics component makers: Cumulative 5-year share price performance
200%
2008 2009 2010 2011 2012
150%

100%

50%

0%

‐50%

‐100%




Semiconductors

 Dominant theme: The mobile internet, particularly in China, remains the most buoyant end-market for chipmakers
 Outlook: Wireless chipmakers, especially those in Apple’s or China’s local supply chain, are the best positioned for a recovery

Mobile Internet Only 1.5bn of the world’s 6.2bn mobile If this is true, the relative outlook for wireless ARM, Broadcom, Intel
subscribers have access to the mobile and graphics chipsets in the short term remains Imagination Tech,
internet. But this could double to 3bn rosy. NVidia, Qualcomm
mobile internet subscribers by 2013.
Overcapacity The cyclical nature of the chip sector The current oversupply in many chip markets is
continues to create peaks and troughs. likely to extend for another quarter at least.
Apple effect Whilst signs of weakening demand for Chipmakers in Apple’s supply chain are likely to Avago, Broadcom,
iPhone sales emerged in Apple’s recent be insulated from any downturn in the wider Cirrus Logic,
results, iPad sales are roaring the iPhone chip market. Omnivision, TriQuint,
5 is due out in October. Skyworks
Samsung effect Samsung makes ARM-based chips for Apple already uses Intel CPUs in its Macs. If its Intel Samsung
iPhones and iPads. But now that war against Samsung heats up, Apple may
Samsung is the world’s largest replace Samsung chips with rival suppliers such
smartphone maker by volume, Apple may as Intel, which is now making a belated move
wish to remove it from its supply chain. into mobile.
China effect As smartphone growth eases off in the Sync believes Chinese smartphone penetration Mediatek,
West it is just getting started in China. will double over the next 12 months from 18% Spreadtrum
today, benefitting local wireless chipmakers
Mediatek and Spreadtrum.
Big data The cloud will lead to a surge in big data Intel, the established leader for data centre Intel ARM
(i.e. data than cannot be easily analysed). CPUs should benefit from this trend, but ARM’s
Server technology is advancing rapidly to power-efficient chips are now entering this
cope with the demands of big data. market aggressively.



Outlook
Over the last couple of years, wireless chipmakers in Apple’s supply chain – such as ARM, Skyworks Solutions and Cirrus Logic have
outperformed. Samsung’s outperformance is more to do with its meteoric climb to the number one slot in the smartphone market rather
than its chip division. If the war between Apple and Samsung worsens, Samsung may be dropped from Apple’s supplier list – not just for
display panels but possibly also for ARM-based CPUs. Intel, which already supplies x86 processors to Apple’s PC division, has belatedly
developed mobile chip technology to rival ARM’s, is a likely replacement.

Semiconductors: Cumulative 5-year share price performance

800%
700% 2008 2009 2010 2011 2012
600%
500%
400%
300%
200%
100%
0%
‐100%


In the West, smartphone penetration has exceeded 60%, but tablet penetration is below 20%. So the mobile internet is likely to remain a
growth cycle for wireless chip makers for the medium term.



Telecom Equipment

 Dominant theme: There is a stand-off between telecom operators and regulators over how they charge for access to their
networks. That has resulted in depressed demand for telecom equipment, in spite of a 110% surge in mobile data traffic
 Outlook: If more mobile outages occur, regulators may relax net neutrality rules, encouraging operators to start investing

Demand As telecom operators see their revenues Until operators can find a way to make money
constraints slide, they are cutting back on Capex, out of rising mobile data traffic, or regulators
reducing demand for telecom equipment remove price capping measures, Capex on
in spite of an annual doubling of mobile equipment is unlikely to rise. A surge in mobile
data traffic. outages would put pressure on regulators to act
Supply Low cost Chinese suppliers will continue Industry margins will continue to fall unless Huawei (unlisted) Alcatel Lucent,
constraints to undercut leading western telecom politicians intervene. Sync believes they will and ZTE Ericsson, Nokia
equipment suppliers. trade wars will erupt. Siemens
Trade wars Telecom equipment is the first line of As cyber warfare threats grow, protectionism in Alcatel Lucent, Huawei (unlisted)
defense in cyber warfare. Huawei is the telecom equipment market is likely to rise. Ericsson, Nokia ZTE
banned from bidding for big US telecom Europe may follow the US’s lead, supporting Siemens
contracts on national security grounds. home-grown telecom equipment makers.
Emerging Just as GE and Rolls Royce switched from Ericsson’s outsourcing deals with Bharti over Ericsson
business models a hardware to a services model, so might the last decade allow operators to lease rather
some telecom equipment makers. than own networks. Whilst this trend has not
taken off for many years, it may now.
M&A Many Western telecom equipment makers Nokia Siemens has been rumored to be up for Nokia
are nursing heavy losses and may be sale and Alcatel Lucent may also be a bid Alcatel Lucent
forced to sell assets. target.
Patents wars Spurred by Apple’s patent war, the value Expect selected patent portfolios of weaker
of the industry’s patents is rising. competitors be put up for sale.



Outlook
Over the last five years, the telecom equipment sector is down 48%, by our estimates. The sector’s woes are little to do with demand for
equipment – mobile data traffic is growing at 110% per annum – and far more to do with regulatory constraints that limit operators’ freedom
to experiment with different charging models. LTE technology has been ready to deploy for five years, but the world has less than 100m
LTE subscribers so far. Operators will continue to hold back on LTE investments (for mobile networks) and fibre investments (for fixed line
networks) until regulators agree a business model that allows operators to make better returns from their broadband investments. So far
there is a regulatory stand-off. But the more outages we see on mobile networks, the sooner regulators are likely to encourage investment.

Telecom equipment: Cumulative 5-year share price performance

150% 2008 2009 2010 2011 2012

100%

50%

0%

‐50%

‐100%




Part II: Software



Software: Executive Summary
Here is a summary of our dominant themes for the Software and IT Services sectors over the next 12 months:
Applications Software
Three industry trends are making life uncomfortable for many traditional software companies: the move to apps platforms, the move to the
cloud and the move to the mobile internet. Large software groups, unable to innovate fast enough, are acquiring specialist software houses.
Those especially in demand tend to be niche players in the cloud space, the cyber security space or the mobile internet space.
Infrastructure Software
Software defined networks threaten to commoditise internet networking equipment makers. If SDN technology goes mainstream, many
infrastructure software stocks will benefit. But investors should note that the Infrastructure software sector remains the most vulnerable
software sector in the event of a global economic downturn.
Security Software
BYOD (Bring your own device) is a trend that gives IT departments a dilemma: do they insist that Apple and Google conform to their
enterprise grade IT security standards or do they acquiesce in the face of popular demand? The net effect is to expose corporations to
higher security risks. Internet security companies will likely see greater demand for their products as mobile device users and the
companies that connect them to their networks open their eyes to the risks they are taking. The sector may also benefit from M&A fever as
larger software players boost their security assets.
Video Game Software
As the video games market moves rapidly from consoles to online and mobile games, the big internet platforms are picking a fight with the
games developers for ownership of the customer billing relationship. Ultimately, the big platforms are likely to win, but in the short term
mobile games developers could see rapid growth.
IT Services
Big data could provide the IT services sector its new blockbuster product. The problem is that none of the big players have a big data
solution yet. In the meantime, their traditional business model, hinged on relational databases purchased by in-house IT departments, is
being blown apart.



Applications Software

 Dominant theme: Three industry trends are making life uncomfortable for many traditional software companies: the move to
apps platforms, the move to the cloud and the move to the mobile internet
 Outlook: Large software groups, unable to innovate fast enough, are acquiring specialist software houses. Those especially in
demand tend to be niche players in the cloud space, the cyber security space or the mobile internet space

Re-imagination “The Re-imagination of nearly everything” Internet and IT giants recognize they are too Apple, Concur, Intuit, Oracle, SAP,
(a phrase first coined by Mary Meeker in slow to innovate fast enough on multiple fronts, NetSuite, Sage, Microsoft
her 30 May 2012 report, 2012 Internet so they are responding by acquisition. Opera Software,
Trends) has resulted in an explosion of Application software companies are key targets. Ultimate Software,
app-based software. Open Text
Cloud Software is moving from a licensed model Whilst most software houses now have a cloud Citrix, EMC, Google, Adobe, Oracle, SAP,
to a cloud-based model where software is strategy, a rapid transition could end up NetSuite, Red Hat, Microsoft
sold as a service. During the transition, lowering their revenues. Smaller cloud VMware,
some customers could be lost. companies are likely to become bid targets. Salesforce.com
Mobile Internet Smaller screens and lower customer Mobile-first, app-centric start-ups are unseating Apple, Most of the large cap
patience levels mean that desktop current software leaders as the internet goes Opera Software technology
applications have to be re-designed from mobile. A handful of established software companies
scratch to have any hope of working well leaders may soon become vulnerable to mobile
on the mobile internet start-ups. Facebook’s $1bn acquisition of
Instagram illustrates the threat.
M&A boom A host of emerging technology cycles are Between 2008 and 2012, about half of the Amdocs, BMC, Amazon, Apple, Dell,
all software based. Larger software largest M&A transactions in the tech sector had Concur, Intuit, eBay, Facebook,
companies, unable to keep pace with software companies as their targets. Expect this NetSuite, Sage, Google, HP, Oracle,
innovation, will be forced to acquire. M&A boom in software to continue for three or Opera Software, SAP, Microsoft
four more quarters at least. Ultimate Software,
Open Text



Outlook
The explosion in mobile apps is heralding a new golden age for applications software. A host of emerging technology cycles – including
apps, cloud computing, cyber security, social networks and mobile payments – are all software based. Larger software companies, unable
to keep pace with the level of innovation in the software sector, are being forced to make acquisitions.

Sync first highlighted “Software M&A” as one of our top investment themes a year ago in our Q3 2011 TMT Outlook (12 July 2011). Since
then over $45bn of niche applications software companies – like Autonomy, Ariba, Misys, Quest, Nicira, RightNow, Taleo and Success
Factors – have been acquired by larger software (and hardware) houses. That M&A boom is set to continue for at least another year or so.
With software development cycles getting shorter and more riskier, there is even more pressure on larger technology companies to
diversify by acquisition. And cash reserves are still high – the top 100 technology companies still hold over $300bn of net cash on their
balance sheets.

Applications software: Cumulative 5-year share price performance

350% 2008 2009 2010 2011 2012
300%
250%
200%
150%
100%
50%
0%
‐50%
‐100%




Infrastructure Software

 Dominant theme: Software defined networks threaten to commoditise internet networking equipment makers
 Outlook: SDNs could uplift infrastructure software stocks, but the sector remains highly vulnerable to an economic downturn

Software defined Software defined networking (SDN) is an New standards like the Open Flow protocol are Google, VMware Cisco, Oracle, IBM
networks emerging architecture for data networks. gaining traction and may soon take SDNs from
SDNs allow software to control the the abstract into the mainstream. SDNs will
network path along with data packets flow. speed up the transition to the cloud by making
In theory, this would reduce network cloud services work faster and more efficiently.
hardware to commodity boxes. The downside is that security risk rises.
Big data The internet infrastructure software sector PC makers, server makers, networking and Amazon, Cisco, Dell,
is restructuring itself to be able to analyse storage companies are trying to build vertically EMC, Facebook,
unstructured data – like emails and integrated manufacturing businesses. Google, Google, HP, IBM, Net
videos. Those companies that learn how for example is the third largest server App, Oracle
to move data around faster will ultimately manufacturer globally. The race is on to develop
become the winners in this new internet a cutting edge data analytics engine.
paradigm.
Virtualisation Virtualisation allows computing resources Virtualisation technology requires a complex VMware, Citrix, Red Oracle, IBM,
(e.g. hardware platforms, operating combination of hardware and software to work Hat Microsoft, SAP,
systems, storage devices or networks) to well. Just as a web browser provides easy, Progress Software
be deployed on a utility basis (i.e. only cheap access to the internet, a virtual platform
when required). Corporate IT allows cheap access to corporate cloud
environments are using virtualisation to services. Those companies who control virtual
cut hardware and software costs. gateways will gain considerable competitive
advantage.
Global economic Infrastructure software spending tends to Investors expecting a global downturn should
slowdown be the worst hit during an economic expect high share price volatility (relative to the
downturn, relative to other software rest of the software sector) for infrastructure
sectors. software stocks.



Outlook
Software defined networks (SDNs) could have a profound impact on investors in communications infrastructure stocks. Just as internet
protocol (IP) standards made proprietary telecom equipment makers like Lucent and Nortel less relevant, so SDNs may turn today’s
leading IP networking equipment makers into commodity box makers, with all the power to control data flows resting with software
developers, using standards like the Open Flow protocol as the communication medium between these boxes. In the last couple of months,
two relatively underreported M&A transactions highlight this emerging investment theme: Oracle acquired Xsigo for an undisclosed sum
(rumored to be $800m) and VMware paid $1.3bn for Nicira. Both these companies use software-defined network technology to flexibly
connect any server to any network or storage facility, expediting the transition to simpler, cheaper cloud services.

Whilst SDNs, big data and virtualisation offer three long-term growth themes for the infrastructure software sector, investors should note
that our analysis suggests infrastructure software companies tend to be the most volatile in a global downturn.

Infrastructure software: Cumulative 5-year share price performance

400% 2008 2009 2010 2011 2012
350%
300%
250%
200%
150%
100%
50%
0%
‐50%
‐100%




Security Software

 Dominant theme: BYOD is exposing corporations to higher security risks. It is a train wreck waiting to happen.
 Outlook: Internet security companies will likely see greater demand for their products as mobile device users open their eyes
to the risks they are taking. The sector may also benefit from M&A fever as larger software players boost their security assets

BYOD Wooed by their shiny new smartphones, IT depts. are being pressured into conforming RIM, NQ Mobile Apple, Google
many CEOs have coerced their IT with Apple and Google’s standards rather than
departments to connect previously vice versa. Internet security stocks should
unapproved mobile devices to corporate gradually see an entirely new market for their
networks. This “Bring Your Own Device” products open up in the mobile internet.
trend increases IT security risk.
Software defined SDNs will speed up the transition to the Larger software houses will be looking to Check Point Fortinet, Cisco, HP, Dell, IBM,
networks cloud. The downside is that they will raise strengthen their security capability in the cloud, F-Secure, Sourcefire, Oracle, SAP,
security risk by allowing servers that were especially in network security and enterprise Verint, Nice Systems Salesforce, EMC
formerly blocked by proprietary hardware firewalls.
to be remotely accessed by hackers.
Trade wars Telecom equipment is the first line of Trade wars may break out. The west may Alcatel-Lucent, Cisco, Huawei (unlisted),
defense against a cyber-attack. Telecom become more protectionist when awarding Ericsson, Intel ZTE
equipment companies may soon be contracts for telecom equipment, cyber security,
viewed as strategic military assets. IT services and semiconductors.
Regulation SEC may force greater corporate This will raise security awareness of investors, Palo Alto, Qihoo 360, Apple, Google,
disclosure of cyber-related issues (e.g. ramping up demand for cyber security Symantec, Trend Microsoft, Amazon,
cost to shareholders) for listed companies. companies’ products. Micro, Websense eBay
National security Since Stuxnet, governments everywhere Financial services and infrastructure are seen Banks, stock
are prioritising spending on cyber security as the most exposed sectors. Governments exchanges, telecom
in their military budgets, often in may be forced to rescue some of these sectors operators, power
collaboration with the private sector. should they come under attack. grids



Outlook
In the corporate world, RIM used to be king of enterprise security with its encrypted physical corporate servers screening corporate email
and access to corporate communication systems. But BYOD changed all that, decimating RIM’s share price in the process. The rapid rise
in the popularity of Apple products, especially amongst senior executives, has meant that IT managers have reluctantly succumbed to
allowing employees to “Bring Your Own Device”. Many apps are not adequately vetted and potentially pose a firm-wide malware risk. IT
managers are being pressured to adapt their security protocols around Apple’s and Google’s standards rather than forcing Apple and
Google to conform to enterprise-class security standards. Even in respect of simple anti-virus software, mobile device users tend to be
more lax about internet security than desktop users. Very few mobile devices, for example, have specialist anti-virus software loaded on
them, despite the rising use of apps. This makes the mobile internet a prime target for cyber criminals.

Security software: Cumulative 5-year share price performance
700%
2008 2009 2010 2011 2012
600%

500%

400%

300%

200%

100%

0%

‐100%
Ahnlab Check Point F5 Networks F‐Secure Gemalto Nice Systems Sourcefire Symantec Trend Micro Verint Systems Verisign Websense
Software

Over the last five years, enterprise security companies like Check Point Software, Fortinet, Sourcefire and Verint Systems have
outperformed and could continue to do so if cyber security threat levels rise. However, over the next five years it may be consumer related
stocks like Symantec and mobile security stocks like NQ Mobile that benefit the most as mobile Internet users wake up to the security risks
they are taking.



Video Game Software

 Dominant theme: As the video games market moves rapidly from consoles to online and mobile games, the big internet
platforms are fighting the games developers for ownership of the customer billing relationship
 Outlook: Ultimately, the big platforms are likely to win, but in the short term mobile games developers could see rapid growth

The platform Apple’s business model, centred on its The large internet platforms are attempting to Amazon, Apple, Giant Interactive,
effect ability to control an entire internet disintermediate games developers, reducing them DeNA, Google, Gree, Perfect World,
ecosystem through its iOS platform, is to white label suppliers rather than customer- Amazon, Facebook, Zynga, Activision
being widely copied by other technology facing brands. Facebook’s treatment of Zynga is a Mixi, Renren, Sohu, Blizzard, EA,
companies. case in point. Tencent Ubisoft, Zynga
Emerging The free-to-play (F2P) business model is Relative to the subscription model, the F2P (or Activision Blizzard, EA, Ubisoft
business models spreading from Asia to the west. This “freemium”) model is good at increasing users but DeNA, NCSoft
model – where digital item sales or not always profits. Several variants of the F2P
advertising is the main revenue stream – model will emerge. The big winners will be those
is particularly popular in China (the world’s who can develop their own platforms, independent
largest online gaming market). of the big internet ecosystems.
Online games Online and mobile games are rapidly This trend is set to continue. The three big console Amazon, Apple, Microsoft,
displacing console games, primarily games makers are developing their own online DeNA, Google, Gree, Nintendo, Sony
because they are cheaper. games platforms/media centres, but may lose out Amazon, Facebook,
to the big internet platforms. Renren, Tencent
Mobile games Apple’s iOS has transformed mobile It is incredibly hard to transfer a successful Gamevil, Gameloft Microsoft,
gaming into the fastest growing subsector desktop game to a mobile handset. The best Nintendo, Sony
of the games market, making handheld mobile games are developed purely for mobile.
games consoles obsolete in the process. Mobile first games developers should benefit.
Chinese video China’s gaming sector is 85% online. It Many of China’s top players like Perfect World are Tencent Changyou, Giant
games market suffers from excessive competition and expanding overseas. A safer way to get exposure Interactive, Perfect
rapidly evolving business models. to Chinese video games is via the platforms. World



Outlook
Share prices for most traditional video games developers have not yet recovered to their pre-2008 levels. Aside from the global downturn,
gamers are rapidly shifting from console games to online and mobile games. China has the largest and fastest-growing online games
market – worth $5.9bn – but is dogged by excess competition. Much of the sector is in uncharted waters: players are experimenting with
several variants of the “freemium” model, not all of which may turn out to be successful.

Meanwhile, the big internet players are attempting to relegate many games developers to a back office role as far as the customer is
concerned by promoting their own internet ecosystems as the gaming platforms of the future. If they succeed, a large chunk of the profits
of the video games software industry will shift from the games developers to Internet companies like Apple, Google and Tencent and to
social networks like Facebook, Renren and DeNA.

Gaming software: Cumulative 5-year share price performance
600%
2008 2009 2010 2011 2012
500%

400%

300%

200%

100%

0%

‐100%




IT Services

 Dominant theme: Big data could provide the IT services sector its new blockbuster product. The problem is that none of the
players have a solution yet. Meanwhile, their traditional business model, hinged on relational databases, is being blown apart.
 Outlook: With the exception of IBM, few IT services companies are well positioned for the changes about to hit them.

Big Data Traditionally, IT depts. purchased specific To survive, IT services companies need to Amazon, Baidu, Accenture, Atos,
IT tools to perform specific functions with metamorphosise into one-stop-shop data- Google, Facebook, Capgemini, Infosys,
specific data. Now, corporations want all management houses. Soon they will compete IBM TCS, Tieto, WIPRO
incoming data feeds to be analysed fast for business with internet companies like
and efficiently by big data appliances Amazon and Google who deal with big data for
(databases with analytical engines). a living.
Cloud The cloud allows IT managers to swap As IT expenditure moves from in-house Capex Amazon, Citrix, Accenture,
Capex for Opex, cutting costs in the to outsourced Opex in the cloud, IT services Commvault, EMC, Capgemini, IBM,
process. As in-house IT budgets shrink, companies need to change their business NetSuite, Red Hat, Tieto
the core revenue base of the IT services model. Soon they will compete for business with Rackspace, TeleCity,
sector gets deconstructed. storage companies like EMC and cloud Salesforce, Teradata,
companies like Amazon. VMware
Open source Since the 1970s, relational databases Oracle, IBM and Microsoft – the three largest Red Hat HP, Oracle, IBM,
have been the industry standard. But SQL database manufacturers – have the most Microsoft, Progress
these databases are not capable of to lose. But all three appear to be embracing Software, SAP
handling big data. Many of the leading Hadoop. The danger is that open source
next generation database platforms – like platforms drag the entire industry’s margins
Hadoop – are open source. down.
M&A As IT services companies have to do more Open source, cloud, security and data BMC Software, Citrix,
for less, they will shed staff and acquire management will be some of the core skills sets Fortinet, NetApp,
cutting edge cloud companies, analytical they will be looking for. Niche companies in Progress Software,
engines and data management software. these markets are likely to become bid targets. Red Hat, SGI



Outlook
Traditionally, IT services companies had a simple objective: get their customers to spend more on in-house IT projects. But in a world
where in-house IT expenditure is being replaced by outsourced expenditure – much of it in the cloud – IT services companies have to
adapt quickly. Whereas yesterday their core asset was their people, tomorrow their core asset will need to be their infrastructure. Their new
rivals will be internet companies like Amazon and Google who excel in big data analytics, storage companies like EMC and Teradata and
cloud companies like Salesforce who offer ready-made solutions.

Many of the trends affecting the IT services sector have already driven a dramatic restructuring of large parts of the global technology
sector: software companies like Oracle are being forced to move into the cloud; hardware companies like HP and Dell are being forced to
move into software; and IT services companies are being forced to transform themselves into one-stop-shop data-management houses to
survive. Even those IT services whose managements know exactly what to do – Infosys is a case in point – may travel a rocky road to get
there.

IT Services: Cumulative 5-year share price performance
200%
2008 2009 2010 2011 2012
150%

100%

50%

0%

‐50%

‐100%




Part III: Internet & Media



Internet & Media: Executive Summary
Here is a summary of our dominant themes for the Internet and Media sectors over the next 12 months:
Internet
Apple’s business model, centred on its ability to control an entire internet ecosystem through its iOS platform, has set the benchmark
others are now following. Established internet champions like Amazon, Apple, Google and Tencent are likely to become more powerful.
Innovative start-ups will get acquired. The middle will get squeezed.
Social Media
Social networks are finding it difficult to monetise the mobile internet. Their business models appear to be running out of vision and steam.
The social media sector may be a bubble about to burst. Other technologies – like mobile payments – could replace social networks as the
darlings of the technology sector.
Advertising
Digitisation will remain the biggest driver of change in the advertising sector. Mobile search, video search and internet TV may also prove
to be disruptive forces. The leading traditional advertising companies are rapidly digitising their revenues – about a third of WPP’s revenue
base is digital – but remain vulnerable to threats from industry outsiders, especially in the area of internet TV.
Film & Television
Emerging internet TV platforms are likely to turn the film and television sector upside down. Apple, Google, Sony and Microsoft have had
many false starts, but one day soon they will get their version of a TV box just right. Broadcasters are the most exposed. Content owners
may use HTML5 technology to bypass the big internet platforms, though they may need regulators’ help.
Publishing
Like the music industry before it, the publishing sector is being destroyed by digitisation. In the absence of a credible in-house technology
platform being developed by one (or more) of the major players, the outlook for publishers remains bleak.



Internet Companies

 Dominant theme: Apple’s business model, centred on its ability to control an entire internet ecosystem through its iOS
platform, has set the benchmark others will follow.
 Outlook: Established internet champions will get bigger; innovative start-ups will get acquired; the middle will get squeezed.

Platform effect Most of what we do on the internet is The established internet champions will get Amazon, Apple, Sina, Asos, Expedia, Mixi,
gravitating towards the big internet bigger. Innovative start-ups will get acquired. Baidu, Google, Gree, moneysupermarket,
platforms, based on Apple’s model. The middle will get squeezed. Facebook, Tencent RightMove, Wotif
Re-imagination “The Re-imagination of nearly everything” Old ways of doing things are being replaced by Start-ups like All the big guys
(as Mary Meeker put it in her 2012 Internet new ones, involving software, the cloud and Authentec, Face.com,
Trends) is generating a wave of creative web access. Expect a wave of new start-ups Gaikai, Instagram,
destruction on the internet. and IPOs. Nicira, Square
Big data Unstructured data is difficult to analyse. The big money lies in the complex analytical Amazon, Facebook, Microsoft, Yahoo
The big internet companies control where engines and databases that will make sense of Google, IBM, Oracle
data comes from and where it goes to. this big data.
Mobile payments Mobile data accounts for 11% of global Mobile payments offer a way to dominate the Alibaba, eBay, Telecom operators,
internet traffic – up from 1% in 2009. The mobile internet. Every major internet company Google, Square Banks
market for apps and ads was just $12bn in is investing heavily in mobile payment (unlisted), Tencent
2011. Monetisation of the mobile internet technologies. Several start-ups are attracting
is developing much slower than expected. capital too.
Tax avoidance Internet companies tend to pay less tax Recently authorities everywhere have started to Amazon Apple, eBay, Google,
than their peers in other sectors. The retail clamp down on tax avoidance measures. For Facebook, Renren
sector is fighting back. Politicians are keen many internet companies, effective tax rates are
to charge tax on domestic internet activity. likely to rise.
Cloud As we move from a PC world to a tablet Cloud software companies could become one of Citrix, VMware,
world, more will be done in the cloud. the fastest growing technology sectors. Salesforce.com



Outlook
On a cumulative basis, the internet sector has outperformed each of our 16 TMT sectors over the last five years, as illustrated on page 3.
Online travel agencies like Expedia and online recruitment portals like Seek have proved most vulnerable in a downturn. Price comparison
sites like moneysupermarket.com and wotif.com are at risk of being made obsolete by big platforms like Google and Baidu. Smaller e-
commerce sites like Asos will face stiffer competition from Amazon and eBay.

In China, the three big internet ecosystems – Alibaba, Baidu and Tencent – are likely to extend their tentacles into more digital markets, as
have their peers in the west.

Finally, expect more companies like Netflix (i.e. high-growth firms that come out of nowhere by creating a new market based on a new
niche technology, but then see their share prices pop as the technology they sponsored gets copied by the big internet platforms).

Internet content: Cumulative 5-year share price performance

900% 2008 2009 2010 2011 2012
800%
700%
600%
500%
400%
300%
200%
100%
0%
‐100%




Social Media

 Dominant theme: Social networks are finding it difficult to monetise the mobile internet.
 Outlook: The social media sector may be a bubble about to burst. Other technologies – like mobile payments – could replace
social networks as the darlings of the technology sector.

Mobile Internet Smaller screens, fewer keyboard strokes Mobile ARPUs are likely to remain much lower Mobile-first start-ups Google, Facebook,
and shorter attention spans make it harder than desktop ARPUs for some time. Mobile-first Microsoft
to monetise mobile social networkers. social networks could displace market leaders.
Opaque Analysts are becoming frustrated at the Many social networks may issue profit warnings Gree, DeNA, Facebook, Groupon,
business models lack of vision, strategy or empirical over the next few quarters. Those who cannot LinkedIn, Tencent Zynga, Renren,
evidence to support future earnings articulate a clear vision on how they will raise Sohu, Youku, Tudou
growth, especially in mobile. mobile ARPUs will lose investor confidence.
Big data Social networks accumulate valuable data If social networks can develop their big data Facebook, Twitter, Microsoft, Yahoo
about users’ likes and dislikes. When appliances into world class analytical engines Sina, Tencent,
analysed in real time, this big data can they will be able to sell big data services in the Google
become a revenue stream in its own right. same way IBM hires out Watson.
Mobile payments Apps, games and ads offer limited growth Social networks are developing their own virtual Alibaba, eBay,
potential, especially under the “freemium” currencies as well as investing in mobile Facebook, Monitise,
model. Mobile payments offer a way to payments technology. Both strategies will raise Square, Tencent
dominate the mobile internet. barriers to entry.
Regulation New rules on data privacy, censorship and Regulators may give users more control over Most social networks
net neutrality may increase the cost of their personal data. Telcos may soon charge
gathering personal data. social networks directly for internet bandwidth.
Cyber security In order to optimise the collection of Cyber security is the social media industry’s Most social networks
personal data, social networks deliberately Achilles heel. A major cyber-attack on a large
lower their security settings. social network could scare away customers.



Outlook
Across the world, internet users spend 22% of their online hours on social networks – more time than on any other online activity. Over half
of Facebook’s active users now access the site from a mobile device. Yet Facebook – and most of its competitors – are struggling to
monetise the mobile internet. Their mobile business models appear muddled. Smaller screens, fewer keystrokes and lower attention spans
make mobile customers difficult to please and advertising dollars harder to come by. According to Kleiner Perkins Caufield & Byers, the
mobile internet now captures 10% of media consumers’ time in the US, but only generates 1% of advertising dollars. That translates into a
shortfall of $14bn annually in the US alone.

It is notoriously difficult to move from a social media website designed for desktops to one that works seamlessly on smartphones and
tablets. Mobile devices force you to make apps that work simply and respond quickly. Social networks may have to be re-invented for
mobile devices. If the history of technology companies teaches us anything it is that this re-invention is likely to come out of a mobile-first
start-up rather than an established social network. As the world moves to mobile, established social networks could find themselves a has-
been technology, usurped by investors for more sexy technologies like mobile payments.

Social networks: Year-to-date share price performance
Note: Social networks simply haven’t been around for long enough for us to show 5-year share price performance data
200%
2012
150%

100%

50%

0%

‐50%

‐100%
Demand Media DeNa Facebook Gree Groupon Linkedin Mail Ru Mixi Renren Shutterfly Tudou Yelp Youku.Com

Bars show the year-to-date share price performance for a selection of large cap stocks in this sector from 1 January 2012 to 19 September 2012.
Where companies have floated this year, the share price performance is shown since the IPO date. Note that Tudou and Youku merged in August 2012.



Advertising

 Dominant theme: Digitisation will remain the biggest driver of change in the advertising sector. Mobile search, video search
and internet TV may also prove to be disruptive forces.
 Outlook: The leading traditional advertising companies are rapidly digitising their revenues – about a third of WPP’s revenue
base is digital – but remain vulnerable to threats from industry outsiders, especially in the area of internet TV.

Digitisation The internet’s share of the global Many of the traditional advertising companies Google, Baidu, Aegis,
advertising market has grown from 8% in have prepared for the digital age by acquiring Havas, Publicis, WPP
2006 to 18% in 2011. By 2016, PwC digital marketing companies. In future, their
expects the internet’s share to rise to 26%. mobile strategies will be the differentiator.
Mobile Internet According to Kleiner Perkins Caufield & Conversion rates on mobile advertising tend to Easau (unlisted) Apple, Baidu,
Byers, the mobile internet now captures be much lower than for desktop search, despite Velti, Millenial Media Facebook, Google,
10% of media consumers’ time in the US, generally higher click-through rates. There is Microsoft, Yahoo
but only 1% of ad dollars. Search needs to room for mobile-first start-ups to take market
be re-engineered to work well on mobile. share from the search market leaders.
Video search In 2011, video accounted for 35% of Video search technology will open new Google, Facebook,
internet traffic and 52% of mobile data advertising markets up. Several start-ups like Blinkx
traffic. Cisco expects video traffic to grow Blinkx will enter this field, though they will likely
by 51% and 143% respectively in the fixed be bought up by the big internet champions.
and mobile internet.
Internet TV Whilst TV advertising has retained a 37% Whilst traditional advertisers like WPP have a Apple, Google, Broadcasters
market share for much of the last decade, clear digital strategy, many broadcasters do not. Microsoft
new TV operating systems from Apple, As a result, much of their TV ad dollars may
Google, Microsoft and others may prove soon have to be shared with technology
highly disruptive. companies.
Global slowdown In 2008, shares in traditional advertisers The sector remains particularly vulnerable to an Most advertising
halved, on average. economic slowdown. companies



Outlook
The global advertising market was worth $508bn in 2011 and is likely to grow by at least 6% in each of the next three years, according to
PwC. Surprisingly, TV advertising has increased its share of the global advertising market slightly from a 34% market share in 2006 to a
36% market share in 2011. Newspapers and magazines have been the hardest hit sector, seeing their combined share of global ad spend
falling from 33% in 2006 to 24% in 2011. The highest growth sector at about 19% per annum has been internet advertising, worth $90bn in
2011. Its share of the global ad pie is up from 8% to 18% in the last five years. About half of internet advertising expenditure is on search
and a quarter on display ads. Internet video ads make up just 3%, but are the fastest growing segment in internet advertising.

Digital advertising revenues are not seamlessly transferable to smaller screens. Recent earnings releases show that internet advertising
companies appear to be having difficulty monetising their services on the mobile internet. ARPUs are much lower in mobile. In Q2 2012,
Google posted a 16% decline in CPC (cost per click), with mobile being the likely cause.

Many of the traditional advertisers – including WPP, Publicis and Aegis – already generate over 30% of their revenues from digital streams.
Digitisation of their businesses is likely to continue. But few have a successful model for mobile campaigns. That will be the differentiator.

Advertising: Cumulative 5-year share price performance

100% 2008 2009 2010 2011 2012
80%
60%
40%
20%
0%
‐20%
‐40%
‐60%
‐80%
‐100%
Aegis Group Cheil Clear Channel Clear Media Dentsu Focus Media Havas Interpublic JC Decaux Omnicom Publicis WPP




Film & Television

 Dominant theme: Emerging internet TV platforms are likely to turn the film and television sector upside down. Apple, Google,
Sony and Microsoft have had many false starts, but one day soon they will get their version of a TV box just right.
 Outlook: Broadcasters are the most exposed. Content owners may use HTML5 technology to bypass the big internet
platforms, though they may need regulators’ help.

Internet TV TV still accounts for 36% of all advertising, The technology sector will transform the film Netflix, Apple, Most broadcasters
supporting prices for content owners. and TV sector as it has transformed the music Google, Microsoft
Internet TV threatens that supremacy, and publishing sectors. Value will flow away
both for broadcasters and content owners. from broadcasters towards the new internet TV
platforms, but popular content is likely to retain
its value, provided regulators enforce copyright.
Lack of credible Content owners are still experimenting The BSkyB model – which involves owning both BSkyB, Comcast Everyone else
business models with new distribution technologies. The the content and the distribution channel – is
industry’s attempts to develop its own likely to remain the most credible business
digital platform (e.g. Hulu) aren’t working. model for now (though satellite transmission
may soon become obsolete).
HTML 5 HTML 5 technologies give savvy content HTML 5 will also make it easier for developers BSkyB, CBS, Disney, Everyone else
owners a mechanism to offer apps directly to create apps for multiple platforms. Late Time Warner,
to customers even on Apple devices, starters like Microsoft will get a window to Viacom, Zee,
bypassing App stores, thus avoiding attract developers to WP8. That, in turn, may Goko (unlisted)
paying Apple or Google a revenue share. shift competitive advantage towards the content
owners by leveling the playing field between the
big internet “supermarkets”.
Piracy Authorities all round the world are cracking Firm enforcement of copyright law increases the BSkyB, CBS, Disney,
down much harder than in the past on net present value of film and TV rights. Time Warner, Zee
piracy (e.g. jailing of Pirate Bay founder) Viacom



Outlook
The broadcasting sector has significantly underperformed the global TMT sector over the last five years. As internet TV technology
penetrates more households, its future looks bleak.

The chart below shows that three of the top four performers – Discovery, Lions Gate and Walt Disney – were content owners, rather than
broadcasters. The fourth – Naspers – outperformed the sector largely on the back of its equity stakes in Mail.ru, Facebook and Tencent
rather than its core media business.

Rising Asian per capita incomes are likely to result in increased demand for US-based content. New technologies like HTML 5 could help
shift competitive power from the big platforms towards the content owners. Improved touch-screen technology, faster mobile processers
and 4G networks will enable the mobile internet to provide an entirely new revenue stream for popular content. CBS, News Corp, Time
Warner, Walt Disney and Zee Entertainment are likely to be beneficiaries.

Film and Television: Cumulative 5-year share price performance
250%
2008 2009 2010 2011 2012
200%
150%
100%
50%
0%
‐50%
‐100%



2013 Global Trends in Technology, Media and Telecoms

2013 Global Trends in Technology, Media and Telecoms

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