New Growth in the Internet Sector

By Mark Mahaney
RBC Capital Markets, LLC
Published May 27, 2020 | 7 min read

As lockdowns ease and the first coronavirus peaks pass, the focus is turning to the great economic impact of the global pandemic. Experts are predicting falls in productivity and GDP in economies across the world not seen since the Great Depression. However, these dire predictions are not hitting every industry, or every company, in the same way.

The tech sector seems to be showing some signs of resilience to the current crisis, as work, entertainment and social life all move online. But here too, the fundamentals of the sector have been tested. Mark Mahaney summarizes some of his perspectives from his research report 'Rocket Ships and Fish Hooks.'

Disclosures and Disclaimers


The tech sector today is a very changed landscape from just three months ago. As stay-at-home and shelter-in-place orders proliferate around the developed world – some strict, some less so – people found that much of their life, social and professional, is now online. These orders to fight the coronavirus epidemic have had potentially permanent effects on the tech sector, most obviously on the growing adoption of video-conferencing.

Previously lesser-known software and apps like Zoom and Houseparty have become household names, and even Alphabet is hopping on the bandwagon by bringing its Google Meet technology out of the enterprise-focused G Suite to the masses1.

Professionally, video calling and conferencing offers the real-time collaboration that many are missing, as well as a way to stay connected with colleagues. Socially, they’re replacing everything from birthday celebrations to family dinners, as well as hosting innumerable “locktail” hours.

This is a structural change to how the world works, one that is very likely to continue to a lesser or greater extent as a permanent change in consumer and enterprise behavior. Many are predicting that working from home has now hit the mainstream and even after the current crisis has completely passed, companies will be far more open to large portions of their workforce continuing to work from home. Video “parties” are doubtful to continue on the same level when people can meet in real life, but at least some of the millions of people now using this technology will still see its benefits in connecting with friends and family far afield.

 

Let’s go shopping: the rise of online purchases

Amazon’s online shopping emporium has garnered even more users, while its cloud service AWS expands to meet demand for at-home workers. The shift to shopping online was already well underway, but our research indicates that grocery shopping is up 100% in the first three months of 2020, with Amazon getting up to 50 times their typical increase in orders.

Similarly, the eCommerce platform Shopify, which allows users to create a website and use their shopping cart solution to sell, ship, and manage products, is benefitting from this trend, as is the Asian shopping behemoth Alibaba.

 

Working from home: barriers fall as employees adapt

If the work-from-home trend continues after the pandemic, it will represent a massive shift in enterprise behavior. Everything from commercial real estate to 5G, cybersecurity to video-calling, and web hosting to cloud services will be impacted. We’re already seeing that trend take shape in benefitting companies like Amazon’s AWS, Wix, GoDaddy and Akamai.

As internet traffic explodes, a whole host of related services can expect to gain in importance. Each part of the chain, from broadband and mobile network providers, to cloud computing suppliers by way of cybersecurity, is likely to see renewed investment to provide the resilience it will need to service a growing network of home offices.

 

Movie tonight? Entertainment is more at-home than ever

Streaming services are experiencing an unprecedented boom. As people are confined at home with severely narrowed leisure options (Zoom parties notwithstanding), Netflix has proved an irresistible draw. The firm added a record 15.77 million new global subscribers in the first quarter, many of whom signed up in March as the lockdowns first began2.

Disney+ already has 50 million subscribers, despite only launching in November 2019 in the US and extending to additional territories in Europe and India in March3.

Netflix is candid about the fact that subscription growth and viewing figures will decline in a post-COVID-19 world, but the boost in brand recognition and consumer inertia will help it keep many new subscribers. At the same time, seismic changes in media consumption could be coming as Hollywood opts to release new movies through streaming services in the absence of theater releases.

The resounding success of Universal Picture’s Trolls World Tour digital release, which made more money for the studio in three weeks than the original did in five months in theaters, may mark a lasting shift in film distribution4. The threat is so profound for theater operators that AMC, the largest chain in the US, has said it will no longer show Universal movies5, the first volley in a potential trade skirmish.

 

More eyeballs, fewer dollars: ad spend dives across the board

This downturn is unique compared to historical recessions. While there were weaknesses in the global economy, and the oil price war has had an effect, for many firms, it’s only the lockdowns that are inhibiting growth. While we’re living online and spending more time on social media and websites than ever, these firms may be impacted as ad spend is down.

Facebook, Google, Pinterest and Spotify are strong companies, but their mechanism for turning views into dollars can be hindered if companies won’t spend money on advertising. For these firms, first the lockdown itself and then the recovery period will be key elements in deciding their fate. It rarely makes business sense to dump marketing costs, but it’s an easy cut for firms in an uncertain environment and business sentiment will have to improve before some companies will invest in advertising again.

However, once the money is there, digital ad spend is likely to be the first port of call. Savvy firms won’t have missed the rise in media consumption that has accompanied the pandemic and will follow their audiences online. This trend will likely propel strong recovery for online advertisers in 2021.

 

Let’s not go for a ride: cab companies suffer

For ridesharing firms, it’s a simple equation. If people can’t go outside, they can’t grab Uber and Lyft cabs to go places. That’s not going to look good on the balance sheets. But Uber has a card up its sleeve that Lyft does not. It has its Uber Eats division, which should see a bump from food deliveries, even if it’s only a small spot of sunshine.

As cities reopen, ridesharing’s interrupted growth trajectories should resume. There will still be headwinds from the global recession to weather, as well as potential questions about the stability of the gig economy. The sector was already subject to criticism about how its business model works. Then the pandemic threw into stark relief the problems with workers who are dependent on temporary work and zero-hour contracts, with no benefits such as sick pay.

 

No place in the sun

The travel and tourism sector has seen arguably the heaviest impact from the necessary measures against the coronavirus. The World Travel and Tourism Council has warned that the pandemic could cut 50 million jobs from the industry worldwide, which accounts for 10% of global GDP6. With flights grounded and many governments recommending against all but essential international travel, the road to recovery for the sector is unclear. Even as the outbreak abates, reopening international borders is likely to be in the final stages of many countries’ plans.

Once the pandemic recedes, the news may not be good either. Leisure travel is often hard hit when recession impedes consumer sentiment, and many wonder if the growing work-from-home trend and adoption of video-conferencing may also impact the lucrative business travel sector. There’s a lot of uncertainty for the near-term survival of airlines, hotel and holiday lets and supporting industry, and also for the medium-term direction of the industry, dependent on the severity and depth of the economic recession to come.

For those internet firms in the travel niche, such as AirBnB, Booking.com, Expedia and TripAdvisor, recovery is likely to be slow and hard-fought.

 

If and when

The much-used phrase “new normal” remains undefined. Consumer and business expectations, political and economic pivots, and any widespread behavioral changes remain to be seen post-COVID-19.

But the impact this crisis has had on technology adoption is clear. We can expect the “new normal” to be more powered by digital change than ever, and that will create winning companies in the tech sector.


1 https://www.forbes.com/sites/ilkerkoksal/2020/04/30/google-meet-is-now-free-for-everyone/#2d052bfe4a0a
2 https://qz.com/1842471/netflix-had-its-best-quarter-ever-because-of-coronavirus/
3 https://www.businessinsider.com/disney-plus-streaming-subscriber-count-growth-50-million-2020-4?r=US&IR=T
4 https://www.wsj.com/articles/trolls-world-tour-breaks-digital-records-and-charts-a-new-path-for-hollywood-11588066202
5 https://time.com/5829213/trolls-world-tour-release-amc/
6 https://www.weforum.org/agenda/2020/03/world-travel-coronavirus-covid19-jobs-pandemic-tourism-aviation


Mark Mahaney authored the report “Internet: Rocket Ships & Fish Hooks.” published on April 15, 2020. For more information about the full report, please contact your RBC sales representative.


Mark Mahaney

Mark Mahaney
Managing Director, Internet Research Analyst
RBC Capital Markets, LLC


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