Jitendra Waral Senior Analyst - Internet & Consumer Electronics. Anurag Rana Senior Analyst - Software & IT Services

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1 Jitendra Waral Senior Analyst - Internet & Consumer Electronics Anurag Rana Senior Analyst - Software & IT Services Anand Srinivasan Senior Analyst - Semiconductors & Hardware John Butler Senior Analyst - Mobile & Telecom Kevin Tynan Senior Analyst - Autos Paul Sweeney Director of Americas Research & Senior Media Analyst Tim Craighead Director of Research - Content October 2016

2 AI: Disrupt or be Disrupted Cloud Computing: Anything but Cloudy Virtual Reality: Augmenting Experiences Autonomous Driving: Assisting Growth Cyber Security: Safekeeping Connections

3 Data Explosion, Cloud Computing, Algorithms Spark Surge of AI Cloud computing and machinelearning algorithms have fueled the jump in artificial-intelligence solutions. These technologies help AI applications interpret exponentially rising data volume at manageable costs. Interest in artificial-intelligence technology has accelerated since last year, in tandem with rising investments. These tools can ingest enormous amounts of data, run self-learning algorithms and suggest implications that allow companies to better understand their customers and boost return on investment. Companies with large amounts of data and established cloud platforms such as Google, Facebook and Amazon.com have been among the first to deploy AI tools. Sales and profit growth of companies with access to data that use these solutions are likely to accelerate in the next two-to-five years.

4 Google, Facebook, Amazon Show Artificial Intelligence Advances The ways Amazon, Google and Facebook use artificial intelligence show the potential competitive edge the technology can provide. Most advancements are behind the scenes, making it difficult to gauge the pace of innovation. Early AI advances may heighten the urgency with which companies adopt the technology, as fears of being outflanked are sparked. AI-driven recommendations are stoking user engagement on YouTube, while computer vision tools have helped boost Google photos to garner a user base of 200 million. Facebook is using AI that analyzes content at a contextual level to serve users more targeted posts. Its facial recognition software helps automate photo tagging. Amazon aims to use AI to predict product demand, optimize site search and improve item recommendations.

5 Siri, How Do I Make Money? Facebook, Apple, Google Lead AI Race Facebook, Apple and Google are likely to be major players in deriving revenue from chatbots and virtual assistants by integrating services. The Android/iOS mobile phone duopoly supports each company's general purpose voice assistant, as IDC projects 72.4% of devices with embedded virtual assistants will be mobile phones in Facebook is focused on deploying chatbots on Messenger, some of which may assume customer service functions. This may yield a revenue stream for the chat platform used by 1 billion people. Tencent, Snapchat and Apple also have large audiences for their messaging services that may be monetized via chatbots. Amazon.com and Microsoft also have voice assistants, although these may be more specifically oriented toward e-commerce and enterprise functionality.

6 Wall Street's Data Dependence Makes It Ripe for AI Disruption Data-intensive industries such as financial services and those using the internet may be among the first disrupted by artificial intelligence. Tools such as machine learning and deep reinforcement learning to identify patterns are easier to apply in data-rich verticals. Half of the time spent by workers in finance and insurance is allocated to processing and collecting data, based on a McKinsey study, the highest among various industries. Among all sectors, at least 18% of work time is spent on data tasks. Companies Impacted: C.B. Insights data on private funding of AI companies suggest finance is one of the top areas for funding of companies with AI technology. McKinsey analyzed 800 occupations to quantify the amount of time spent on work that could potentially be automated by current AI technology.

7 Digital Ads and E-Commerce Revenue May Get Early Boost From AI Digital advertising and e-commerce are likely to be among the earliest sectors to get a sales boost from their adoption of artificial intelligence technologies. Machine learning is likely to improve targeting efforts for programmatic digital ads and purchase recommendations in e-commerce, which may support sales and improvements in ad ROI. Google CEO Sundar Pichai said in 2Q that AI-driven video recommendations on YouTube are already supporting increased user watch time on the site. EBay and Amazon.com are focused on using AI to spur higher buyer conversion and engagement. EBay has acquired three AI companies since 2011, while Amazon has Alexa, a virtual assistant supporting voice orders. Programmatic, or automated ads, may make up 67% of 2016 U.S. display ad spend, per emarketer.

8 Google, Amazon Data Strength Only to Tighten Market Hold With AI Dominant e-commerce and Internet companies such as Google, Facebook and Amazon.com may improve market share longer term as they integrate AI solutions into their data sets. For companies selling ads online, machine learning technology applied to user data may cause audience targeting capabilities to rise significantly, driving better return on investment and marginalizing smaller players. Amazon could improve sales conversions by using AI to improve product recommendations and tailor site search results to users. Google and Facebook may control up to 53% of the U.S. internet advertising market and have over 1 billion users on many of their services, per emarketer. Amazon has 38% of the U.S. e-commerce market. EBay is trying defend itself by deploying AI solutions to its 164 million users.

9 Cloud Forces Legacy Software Companies to Change Business Model Demand for mobile, social and bigdata technologies is driving cloud growth as customers embrace the improved flexibility, portability, time to market and lower cost that cloud products offer compared with legacy software. Public cloud revenue is forecast to reach $141 billion in 2019, growing annually by 19%, according to IDC. Salesforce.com, Workday and NetSuite are pure-play cloud vendors exposed to trends in the SaaS market. Oracle and SAP are expanding cloud offerings as alternatives to their legacy onpremise software. Public Cloud Spending Forecast Hybrid cloud is slowly emerging as a popular model for most legacy corporations that are looking at the public cloud for some portion of their data storage or applications, while maintaining a private cloud or on-premise model for other portions of their operation.

10 Cloud's Agility, Cost Are Among Top Advantages Over Legacy Tech Software and IT infrastructure delivered over the cloud has various advantages over the legacy IT model, including greater agility for software development, lower upfront costs, shorter deployment times and greater security. Customers can get the latest version of an application at a much lower upfront cost, given they're now mostly sold on a subscription basis. Vendors can also deploy new features with minimal disruption to the client's workflow. SaaS, PaaS, IaaS Components While pure-play companies such as Salesforce.com and Workday have had a first-mover advantage, legacy software providers like SAP and Oracle are using their financial strength to acquire companies and expand their product portfolios. Meanwhile, Amazon has been the biggest disruptor in the technology industry by offering on-demand, pay-per-use IT infrastructure services to clients.

11 Amazon s Cloud Has Enough Space to Keep Microsoft, Google at Bay Amazon's cloud business still has room to expand amid rising competition, given demand continues to surge. Microsoft and Google are gearing up services to compete with Amazon, yet the e-commerce giant's trailing 12- month cloud revenue of $11 billion is ahead of the competition due to the company's early-mover advantage. Google is pitching artificial intelligence as a key differentiator to accelerate its cloud adoption, while Microsoft sees its long-standing enterprise relationships as a unique selling proposition. AWS, Cloud Infrastructure-as-a-Service Revenue Infrastructure-as-a-service is projected to grow at a 33% compound annual rate through 2020 to top $70 billion, according to Gartner. Amazon cloud accounted for 42% of Amazon s operating income and 73.6% of sales in Amazon Web Services sales grew 70% in 2015, while profit surged 182%.

12 Google Aims to Pull an Android on Virtual Worlds With Daydream Google's mobile virtual-reality platform Daydream aims to get every large Android smartphone maker to adopt VR, a move that could accelerate content, innovation and consumer awareness for the nascent industry. This suggests Google wants to become the dominant VR platform, replicating its Android ubiquity on smartphones. Google's solution won't compete with Facebook initially, given Google's products serve more casual audiences. Longer term, Google may be a bigger challenge for Facebook in virtual reality. Google's Daydream-ready Pixel smartphones, will work with the platforms' reference specifications and controller The company built a dedicated version of YouTube for VR to drive content. Facebook's Oculus Rift currently doesn't work with smartphones.

13 Companies Use Virtual Reality to Broaden Consumer Interest Many companies have begun using virtual reality as a marketing technique to broaden consumer interest. Early examples include virtual tours of vacation locations and homes, sports games and online shopping. Corporate marketing via virtual reality may broaden overall VR interest and adoption in the near term. Corporations Using VR Online retailers such as Amazon have been some of the first adopters of virtual reality, but adoption is spreading through other verticals such as healthcare. MindMaze, now valued at $1 billion, produces a headset used to help stroke victims regain motor function through virtual interactions.

14 Self-Driving Autos the Final Evolution of Driver Assist Systems Advanced driver-assistance systems (ADAS) are likely to show some of the highest volume growth rates of all component sectors through 2030, as regulation, consumer preference and automaker investment help further and spread the technology. The adoption of active safety systems is expected to grow exponentially over the next 15 years as progress in the use of cameras, radar, and lidar increases the capabilities of ADAS. The technology-heavy content is higher-margin and a step toward selfdriving vehicles. Amazon specializes in Infrastructure-as-a-Service and Platform-as-a-Service and generated annualized revenue of over $11 billion as of 2Q. Various tech segments disrupted by Amazon include branded servers, operating systems, databases, networking equipment and certain categories of chips.

15 Connected-Vehicles Internet of Things May Climb to $43 Billion The rapid increase in the number of sensors in an automobile, a drop in the cost of storing data and new cloud-computing platforms are creating growth opportunities for technology companies including Google, Microsoft and Amazon. Digital maps, voice recognition, cloud, Internet connectivity, vehicle-toinfrastructure and vehicle-to-vehicle dialog are critical components for the development of autonomous cars. The connected cars Internet-of-Things industry is expected to grow 22% annually to $43 billion by 2019, according to IDC. Connected Vehicles IoT Revenue by Region Tesla, Toyota, Honda and General Motors are some of the early adopters of these emerging technologies. Nuance is one of the primary providers of voice recognition technologies in the tech industry.

16 Rising Cyberattacks Support Growth in Security Software Market Security software is seeing strong demand due to increasing cyberattacks across all industries. IDC expects security software to grow 7% a year through 2019 to $46 billion. In addition to the absolute number, the sophistication of these attacks has also risen, spurring demand for advanced security products that are growing faster than the overall industry. The number of unique malware discovered in 2015 rose 36% over the prior year and instances of stolen identities increased 23%, according to Symantec. National Cybersecurity Reported Vulnerabilities Microsoft spends over $1 billion in security R&D a year, which is much higher than total such spending for other leading pure-play security companies such as Check Point (under $175 million) and Palo Alto Networks (less than $200 million).

17 Next-Generation Security Products Focus on Cloud, Mobile, IoT Legacy security software products were largely focused on monitoring network traffic and end-points such as PCs and servers. Increased proliferation of smartphones in the workplace and the greater use of cloud-based computing and applications are creating new growth opportunities for the security software industry. These next-generation products are growing much faster than the overall security market. The rapid adoption of Internet of Things will likely become another growth driver for these products. Companies such as Palo Alto Networks, Checkpoint, Fortinet and FireEye are growing sales much faster than legacy product companies such as Symantec and Intel's McAfee.

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