If I were to tell you Netflix may disappear in the near future, you would look at me as if I were crazy. But when Needham Senior Analyst Laura Martin says it, it makes sense.
At TPI’s event on March 5, 2019, entitled Who Will Survive in Big Tech’s New Competitive Landscape? The View from Wall Street, Martin the findings of her new report. The report details how competition between billion dollar tech companies with large user bases will unfold over the next 3 to 5 years. The FAANGs (Facebook, Apple, Amazon, Netflix, and Google) once had to compete with smaller companies, but that era is over. They will increasingly have to compete with each other, and not all will survive.[note]February 25, 2019 Industry Report, “FAANGs with Fangs” pg 1.[/note]
Martin supports her analysis with a discussion of network effects to differentiate the FAANGs. Network effects occur when each additional user adds value to existing users within the network. Among S&P 500 firms, Martin argues that “the companies with the most powerful Network Effects… are the FAANGs.”[note]March 4, 2019, “Initiating GOOGL at BUY Based on SOTP, YouTube & Network Effects Report,” pg 16.[/note] Network effects change the competitive landscape in the big tech market, and will help predict which companies will thrive and which will struggle.
As artificial intelligence and algorithms market personalized products and services to consumers, companies will need to collect data from diverse sources to ensure accurate advertising. Not all FAANGs are made equal in their strategies for data collection. Amazon, Apple, and Netflix cater to people in the upper income bracket, while Facebook’s and Google’s users span a wider demographic. The high-income customers of Apple, Amazon, and Netflix may limit the accuracy of their algorithms to predict behavior of a wide-range of global users, making expansion difficult. Conversely, the massive amount of data gathered by Facebook and Google’s diverse user bases means that their AI has greater growth potential.
Out of the five FAANGs, Martin predicts that Amazon and Netflix will lag behind due to weaker network effects.[note]Id. at 24.[/note] As Facebook and Google develop platforms and launch products based on algorithms, their user bases will grow. We can think about a future where Facebook Marketplace and Google Shopping may crowd out Amazon. Different streaming services, including the ones announced by AT&T/Time Warner Cable and Disney, may begin to overtake Netflix. Apple, meanwhile, has a special user base, and a strong “belief” network effect, called which is often found in religions. The cult-like following of Apple products gives the company leeway to introduce new products with success; people will buy what Apple makes.
Martin’s predictions are bold, but her track record and evidence supports her theories. She dazzled in her presentation, and is making waves with her new report. Only time will tell if she’s right.
To hear more about Martin’s predictions, listen to her on Bloomberg’s morning show (recorded April 3, 2019).