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Global Trend Forecast, 2014 Issue 64

The Future of Technology, Media & Telecoms


Volume III

July 2013

Cyrus Mewawalla
cyrus@researchcm.com +44 (0) 20 3393 3866

www.researchcm.com
Authorised and regulated by the Financial Conduct Authority

CM Research
22 Upper Grosvenor Street London W1K 7PE

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Contents EXECUTIVE SUMMARY PART I: HARDWARE


TechnologyHardware:ExecutiveSummary Connecteddevices ConsumerElectronics ComponentMakers PCs,Servers,StorageandNetworking TelecomEquipment Semiconductors

4 6
7 8 10 12 14 16 18

PART II: SOFTWARE


TechnologySoftware:ExecutiveSummary ApplicationsSoftware InfrastructureSoftwareandtheCloud SecuritySoftware VideoGameSoftware ITServices

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21 22 24 26 28 30

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PART III: INTERNET & MEDIA


Internet&Media:ExecutiveSummary Internet(ecommerce) Internet(socialmedia) Advertising Film&Television Publishing

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33 34 36 38 40 42

PART IV: TELECOMS


TelecomServices:ExecutiveSummary Cable&SatelliteOperators TelecomOperators

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45 46 48

APPENDIX 1: M&A TRENDS APPENDIX 2: ABOUT CM RESEARCH APPENDIX 3: RECENT PUBLICATIONS

51 54 55

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Executive Summary
In this report, the third volume in our Global TMT Trend Forecast series, we identify the major disruptive technologies that we will see in 2014 and predict how they will impact the worlds largest technology, media and telecom (TMT) companies. Our objective is to offer investors and industry executives a comprehensive trend forecast for the global TMT sector over the next 12 months. To set the scene, the chart below shows the relative market performance of 17 TMT sectors since the beginning of 2008, benchmarked against the S&P 500 index. Future performance will be largely impacted by the trends outlined in this report. Over the last five years internet companies, software developers and data centres have been the most prominent outperformers whilst consumer electronics companies, telecom equipment makers, publishers and telecom operators have underperformed.
Global TMT sector: Cumulative 5 year share price performance
200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

Hardware

Software

Internet & Media

Telecoms

Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research. Bars show the cumulative sector performance from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013 of a selection of stocks that we believe are bellwethers for each sector aggregated on an equal weighting basis. Note: Whilst the performance of every sector is shown over a 5 year period, the performance of social media is shown over a two year period as most social media companies were not listed 5 years ago.

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Here are some of our conclusions: Consumer electronics: Wearable computing devices and internet TV will be the big consumer electronics products of 2014. Both are likely to strengthen the dominance of the bigger internet ecosystems run by Apple and Google. But the Asians are fighting back. Samsung may yet revive Bada and LG has bought HPs WebOS specifically for its smart TV offering. In addition, a host of new mobile ecosystems from Huawei, Jolla, UCweb and Mozilla have recently entered the market, threatening this cosy duopoly. Telecom equipment: Software defined networks (SDNs) will soon threaten the dominance of networking equipment leaders like Cisco and Juniper Networks. But as mobile technology moves to an all-IP environment, leading providers of fixed IP networking equipment such as Cisco will move into the wireless equipment market thus far dominated by Ericsson. Semiconductors: Cheaper smartphones and tablets will soon flood the market, many made in China, shifting the balance of power in the chip industry from expensive US chipmakers like Qualcomm to cheaper Chinese ones, like MediaTek and Spreadtrum. 3D printing: The market for 3DP services grew 29% in 2012 to reach $2.2bn worldwide. Whilst Foxconns Terry Gou describes 3DP as a gimmick, we believe it could transform manufacturing, hasten the onshoring of production and shorten product development cycles. 3D Systems and Stratasys have seen their shares rise already but CAD software firms like PTC and Autodesk could be next. Software: Apple and Google pioneered the internet ecosystem. Now the race is on to build software ecosystems that include ERP platforms, Big Data analytics, cloud and cyber-security. IBM, SAP, Oracle and Microsoft will be the main predators. Cloud: As IT infrastructure moves into the cloud, virtualisation products act as the gateway. Niche players like VMware and Citrix Systems will face fierce competition from Microsoft. Meanwhile, WAN optimisation players like Riverbed Tech help move data faster. E-commerce: Maps and mobile payments are the new battlegrounds in the war for supremacy of the mobile internet. Advertisers: Ads are going mobile. Google has a 55% share of the $16bn global mobile ads market. If Googles platform dominates internet TV as well, traditional advertisers will find themselves negotiating with the same near-monopoly in all their markets. Film & Television: TV doesnt work without content. As technology giants rush to develop their own versions of the next internet TV platform, they will bid up the price of popular content. Stellar performers like Disney and Time Warner may yet see more upside. Publishing: Whilst DMGT has shown how smart management can turn around an incumbent publisher in a declining industry, the overall outlook for publishers remains bleak. Cable & Satellite: Far more prepared for the digital world than telecom operators ever were, cable and satellite operators have a good chance of avoiding being eaten alive by Apple and Google by investing in independent platforms like FanTV. Telecom operators: As voice, messaging and internet access revenues decline, operators must act fast to avoid disaster. But we argue that competition, politics and the evolving scope of internet regulation will impact share prices more than operator strategies. www.researchcm.com 5

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Part I: Hardware

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Technology Hardware: Executive Summary


Here is a summary of our dominant themes for the technology hardware sector over the next 12 months: Connected Devices Wearable computing devices such as Sonys SmartWatch or Google Glass will be the next big thing to follow smartphones and tablets. They will help better target commercial services to us by tracking more of our personal data. Consumer Electronics Internet TV is likely to be the next big consumer product, but it is too early to pick a winning platform as yet. More generally as was the case with smartphones and tablets consumer electronics hardware makers are seeing their profits siphoned off by software ecosystems. Asia is fighting back: Samsung may yet revive Bada and LG has bought HPs WebOS specifically for its smart TV offering. Component Makers 3D printing could lead to the democratisation of manufacturing, changing how we design, manufacture and repair virtually everything we use today from medical devices to aircraft parts to houses. 3DP will shorten product development cycles and facilitate the onshoring of production. PCs, Servers, Storage and Networking The shift from the PC generation to the cloud generation is changing the way data is stored and accessed. This shift has been hastened by the flop of Windows 8. Storage technology is moving to solid state drives (SSD), a more expensive but faster version of storage than traditional hard disk drives (HDD). Software defined networks (SDNs) will soon threaten the dominance of networking equipment leaders like Cisco and Juniper Networks. Telecom Equipment As mobile technology moves to an all-IP environment, leading providers of fixed IP networking equipment such as Cisco will move into the wireless equipment market thus far dominated by Ericsson. Semiconductors Cheaper smartphones and tablets will soon flood the market, many made in China, shifting the balance of power in the chip industry from expensive US chipmakers like Qualcomm to cheaper Chinese ones, like MediaTek and Spreadtrum.

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Connected devices
Dominant theme: Wearable computing devices will be the next big thing to follow smartphones and tablets. Outlook: China is set to dominate shipment numbers for smart connected devices for several years, heralding an era of cheap phablets where Huawei, ZTE and Lenovo may edge out western rivals.
Whats happening?
Wearable connected devices such as Sonys SmartWatch, Google Glass and medical devices will be the next big product cycle after smartphones. The Apple business model of owning hardware, software and an apps-based ecosystem is being cloned by rivals. New entrants are invading the market for mobile ecosystems, challenging Apple and Googles dominant position. Chinas smartphone shipments hit 78m in Q1 2013, up by 117% compared to Q1 2012 and representing 36% of global shipments of 216m for the quarter. As Apple and Googles ecosystems grow, the risk of patent litigation and anti-trust litigation against them increases. Google and Microsoft have decided to enter the hardware market, creating conflicts for customers of their software.

Theme
Wearable devices

Our conclusions for the sector


Wearable devices create more opportunity to collect personal data, benefitting the two dominant mobile ecosystems that are best placed to collect and sell this data. More software companies will start making their own hardware. The losers will be the hardware-only device manufacturers, whose margins will be squeezed. To enter this market, some have developed their own mobile operating systems. Others have developed mobile web browsers or mobile search platforms. As China goes mass market, average prices will fall and Chinese manufacturers will edge out western rivals. Android will remain popular for lack of competition. The risk is that management becomes distracted by litigation, taking their eye off innovation. Apple doesnt have this conflict because it doesnt license out iOS.

Leaders
Apple, Google

Laggards
Alibaba, Amazon, Baidu, Microsoft, RIM, Sony, Nokia, LG, Tencent Samsung, HP, Dell, LG, Sony, RIM, Acer, Asustek, HTC, Nokia Apple, Google

Apple copycats

Apple, Google, Microsoft, Baidu, Alibaba, Tencent, Huawei, Facebook, Amazon Jolla, Mozilla, Opera, Huawei, Baidu, Qihoo 360, Facebook, Tencent, Alibaba, Amazon, Easou Google, Samsung, Huawei, ZTE, Lenovo, Xiaomi

New mobile ecosystem entrants Cheap smartphones

Apple, Microsoft, Nokia, HTC, RIM, LG

Litigation

Huawei, ZTE, Samsung, Facebook, Amazon, Xiaomi Apple

Apple, Google

Conflicts of interest

Google, Microsoft

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Outlook Today the world has 2.8bn internet users. Of these, at least 1.5bn access the internet wirelessly. Thats up from 1.1bn a year ago. The next billion users are all likely to use their smartphone as their primary means to access the internet. Mobile now makes up 16% of all internet traffic. This internet traffic is monetised most effectively by those with the largest mobile ecosystems. So far Apple and Google dominate, with a joint 92% market share of the mobile operating system market. But with China set to remain the worlds biggest mobile internet market for the foreseeable future it is already home to 29% of the worlds mobile internet subscribers two things will change. Cheaper smartphones will flood the market, benefitting local manufacturers such as Huawei, ZTE and Xiaomi at the expense of dearer western rivals. And Google Androids hold on the low-end operating software market may be side-lined by home-grown software from the likes of Huawei, Tencent, Baidu or Alibaba. Connected devices: Cumulative 5 year share price performance
200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Consumer Electronics
Dominant theme: Internet TV is likely to be the next big consumer product, but there is no clear winner for investors as yet. Outlook: As with smartphones and tablets, consumer electronics hardware makers are seeing their profits sucked out by software ecosystems. Asia is fighting back: Samsung may yet revive Bada and LG has bought HPs WebOS.
Whats happening?
No technology company has yet mastered the three pre-requisites for (enjoyable) internet TV: a simple electronic program guide, a low latency user experience, a vast back-catalogue of licensed content. Consumer electronics are fast becoming bolt-on accessories for the internet ecosystems controlled by the second screens of Apple, Google and Microsoft. A new generation of consumer products based on robotics is emerging, including driverless cars, hands-free vacuum cleaners and personal companion robots. More technology companies are onshoring manufacturing of their latest high tech products. Apple assembles iMacs in the US; Google will manufacture Glass in California and the Moto X in Texas. While Samsung and LG have massively overspent on developing OLED displays Sony has invested more cautiously in 4K technology.

Theme
Internet TV

Our conclusions for the sector


Each player is attacking TV from a different angle. Apples strength is iTunes and iOS; Googles YouTube and Android; Microsoft and Sony have their games consoles. Streaming specialists such as FanTV also stand a chance. Once-great consumer brands are being reduced to low margin subcontractors for the big internet ecosystems of Apple, Alibaba, Baidu, Google and Facebook. Three types of beneficiaries are emerging: robot manufacturers like iRobot, motion sensor developers like Microsoft Kinect and operating software developers like Apple and Google. Selected manufacturing clusters that moved to Taiwan, Korea and China in the last decade may now move back to the US. Manufacturers like Lenovo and Hon Hai will be obliged to open plants in the west, raising costs. Sonys 4K TVs will be priced between LCDs and OLEDs and may give Sony an advantage, especially if it mandates its film division to produce 4K films.

Leaders
Apple, Google, Microsoft, Fanhattan, Roku, Boxee

Laggards
Sony, Samsung, LG, Nintendo

Slaves to the ecosystem

Amazon, Alibaba, Apple, Facebook, Google, Microsoft, Netflix iRobot, Microsoft, Apple, Google

Samsung, LG, Nintendo, Nokia, Philips, Sony, Canon

Robotics

On-shoring

Apple, Google

Lenovo, Huawei, Hon Hai, Samsung

Screen technology

Sony

Samsung, LG

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Outlook As the share performance chart below aptly illustrates, only two of the worlds leading consumer electronics companies are trading at higher valuations than five and half years ago. They are Apple and Samsung. The consumer electronics sector has become polarised by the internet. The big mobile internet ecosystems Apple, Google, Microsoft, Baidu and Tencent are sucking all the profits out of hardware manufacturing, reducing hardware-only makers to low-margin producers of commodity products. The next big product cycle for the industry is internet TV. Here too the lions share of the profits is destined to go to internet ecosystems rather than hardware makers. Samsung, the most profitable hardware-only maker, owes its manufacturing prowess to a strategy of relentless hardware innovation. It is likely to hold that lead with its new hardware innovations such as flexible screens or eye-scrolling technology. But without its own software ecosystem it tried and failed with Bada it is doomed to fail ultimately. LG Electronics, conscious of this dilemma, purchased WebOS from HP for use in its smart TV platform. If it makes the most of this opportunity LG could become the first Asian player to compete successfully on a software level with Apple, Google and Microsoft, giving it a slim chance to claim a decent slug of the profits of the internet TV market. Consumer electronics: Cumulative 5 year share price performance
200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Component Makers
Dominant theme: 3D printing could lead to the democratisation of manufacturing, changing how we design, manufacture and repair virtually everything we use today from medical devices to aircraft parts to houses. Outlook: Consumer electronics devices are increasingly controlled by two dominant operating systems: iOS and Android now account for over 90% of smartphones and tablets shipped worldwide. Successful component makers will need to align their businesses more and more to these software ecosystems.
Whats happening?
In 2012, the market for 3D printing products worldwide grew 29% to$2.2bn, according to Wohlers Associates. Used primarily for prototyping, 3DP could soon be used for manufacturing components. New display technologies will soon give us screens that have rigid curves built into them or that are bendable by the user. Apple is diversifying its supplier base away from Samsung. It is also playing a divide and rule game between its top two assemblers Hon Hai and Pegatron. As Chinese labor costs rise and industrial unrest grows, more Asian component makers will look to industrial robots to control their cost base. As industry profits move from hardware to software, component makers need to position themselves accordingly.

Theme
3D printing

Our conclusions for the sector


Foxconns Terry Gou recently called 3D printing a gimmick. But whether Mr. Gou likes it or not, 3DP is coming to mass production. Everyone from material providers like Nitto Denko to assemblers like Foxconn will be impacted. So far Samsung appears to be the clear leader, which is bad news for arch rival Apple. TSMC could displace Samsung in processors and LG Display and TPK could do so in touch screens. For its main assembly suppliers, a pricing war could send margins further down. Foxconn leads the charge with its plan to roll out 1m Foxbots. But its investment may be delayed by falling profits as it lowers margins to compete with Pegatron. Increasingly Apple, Google and perhaps of Alibaba and Baidu will be the most sought after supply chains, rather than, say, Samsung.

Leaders
3D Systems, Stratasys

Laggards
Too early to say

Flexible displays

Samsung

Apple, Google, LG Display, Sony, Universal Display Hon Hai, Pegatron

Apple supply chain

TSMC, TPK, LG Display

Robotics

Hon Hai (Foxconn), ABB, Fanuc, Kawasaki AAC Technologies, Goertek

Slaves to the ecosystem

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Outlook Five years after the start of the financial crisis, two thirds of the component makers in our stock universe below are still trading at valuations below those at 1 January 2008. As profits in the consumer electronics industry shift from hardware makers to internet ecosystems, the profitability of component makers will be linked more and more to how successfully they compete for coveted places in the supply chains of the leading operating software developers such as Apple and Google rather than the leading hardware manufacturers such as Samsung. AAC Technologies which makes miniature microphones used in the iPhone and iPad is a case in point. Component makers: Cumulative 5 year share price performance
350% 300% 250% 200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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PCs, Servers, Storage and Networking


Dominant theme: SDNs will soon threaten the dominance of networking equipment leaders like Cisco and Juniper Networks. Outlook: Microsofts disastrous Windows 8 launch has had an adverse impact on the hardware sector. Outlook remains bleak for PC/ notebook makers and HDD storage; rosy for servers, tablets, SSD storage and niche networking products.
Whats happening?
SDNs will soon threaten the dominance of networking equipment leaders like Cisco. Production is shifting from PC-based devices such as laptops to cloud-based devices such as servers and tablets. As Samsung and Asustek issue tablets with dual Windows8/Android operating systems Windows decline is assured. As PCs decline and tablets rise, storage is moving from hard disk drive (HDD) to solid state drive (SSD) technology. Open source storage hardware from the likes of Backblaze shows signs of taking off, threatening leading storage companies Micro servers cheap, low-power servers represent a fraction of server shipments but are gaining market share in data centers, especially for cloud services. Data centers are becoming increasingly fragmented. That makes response speeds a differentiating factor.

Theme
Software defined networks (SDNs) Cloud

Our conclusions for the sector


Competitive power in the networking sector is moving from hardware to cloud software. Outlook continues to look bleak for PC and notebook makers; rosy for servers, tablets, SSD storage and niche networking products. In the PC/tablet sector competitive power will shift from Microsoft not only to Apple and Google but also to hardware makers. The leading HDD players argue they have mitigating strategies, but the speed of the technology shift could catch them out. Open source solutions reduce barriers to entry and exert downward pressure on margins. EMC and NetApp are first in the line of fire. ARM-based chips are likely to power many micro servers and could seriously challenge Intels domination of the high-growth data center server market. A handful of companies specializing in technologies that optimize wide area networks making data flow faster should benefit.

Leaders
VMware, Netflix, Amazon, Google Samsung, Asustek, ARM, Quanta, Lenovo, Google Apple, Google, Samsung, Lenovo, Asustek OCZ, Stec, Intel, Sandisk Backblaze, RedHat

Laggards
Cisco, Juniper Networks Intel, Microsoft

Death of Windows 8 Storage technology Open source storage Micro servers

Microsoft

Seagate, Western Digital EMC, NetApp, HP, Dell, IBM, Oracle Intel

ARM

WAN optimization

Brocade, Fusion-IO, SGI, Riverbed Technology

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Outlook In Q1 2013, PC shipments declined 14% year on year, much worse than expected, and largely down to the poor reception for Windows 8. Lenovo fared better than any other PC maker. In the short term, Microsofts troubles may give hardware makers slightly more competitive power as they play Microsoft off against Google Android Indeed Samsung and Asustek have already started, by releasing dual operating system tablets. IHS expects hard drive (HDD) sales to fall 12% in 2013 to $32.7bn as solid-state drives (SSDs) march ahead. Last quarters worldwide enterprise expenditure figures for the storage services sector generally have also been lacklustre. Looking ahead, we see continued turmoil in the PCs, Servers, Networking and Storage sectors. Storage market leaders like EMC and NetApp will see threats both from open source and a host of new entrants into the sector. But one problem that remains in the networking and storage sectors is data latency. Niche players in networking technology who can make data flow faster stand to benefit. Three names immediately spring to mind: Brocade, Riverbed Technology, and Fusion-IO. PCs, Servers, Storage and Networking: Cumulative 5 year share price performance
150% 100% 50% 0% 50% 100%
2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Telecom Equipment
Dominant theme: As mobile technology moves to an all-IP environment, leading providers of fixed IP networking equipment such as Cisco will move into the wireless equipment market thus far dominated by Ericsson. Outlook: The near term outlook for telecom equipment will be dominated by an increasingly vicious US-China dispute over state-sponsored cyber-attacks. Trade embargos and subsequent retaliation measures are likely to impact Huawei more than Cisco and Ericsson.
Whats happening?
4G is the first mobile standard to be all-IP. Whereas 3G technology involved proprietary standards, 4G is more open. Telecom equipment is the first line of defense in cyber-warfare. Huawei and ZTE are increasingly banned from bidding for western telecom contracts on national security grounds. By 2014, mobile traffic will account for 30% of total internet traffic, up from 12% in 2012, according to StatCounter. New technologies that allow seamless roaming between 4G and Wi-Fi will allow offloading of heavy data users from expensive 4G networks to cheaper Wi-Fi networks. Many Western telecom equipment makers are nursing heavy losses and may be forced to sell assets. Spurred by Apples patent war, the value of the industrys patents is rising.

Theme
Mobile moves to IP Trade wars

Our conclusions for the sector


As mobile moves to IP, fixed IP networking giants like Cisco and Juniper will find it easier to challenge 4G leaders like Ericsson. As cyber-warfare threats grow, protectionism in the telecom equipment market is likely to rise. Europe may follow the USs lead, supporting home-grown telecom equipment makers. China may retaliate. In hardware, Cisco is making the biggest push for the combined cell market. In chips, Qualcomm, Broadcom and Marvell stand to benefit. In corporate services, the likes of Aruba Networks, which provides secure Wi-Fi services, will see a growing market. Nokia Siemens has been rumored to be up for sale and Alcatel Lucent may also be a bid target. Expect selected patent portfolios of weaker competitors to be put up for sale.

Leaders
Cisco, Huawei, ZTE, Juniper Networks Alcatel Lucent, Ericsson, Nokia Siemens, Cisco

Laggards
Ericsson, Alcatel Lucent, Nokia Siemens Huawei, ZTE

LTE/Wi-Fi integration

Aruba Networks, Cisco

Ericsson

M&A

Nokia, RIM Alcatel Lucent

Patents wars

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Outlook Much of the telecom equipment sector, as the chart below illustrates, is still trading at pre-2008 valuation levels. Note that Huawei the largest telecom equipment player in the world by revenues does not feature on our share performance chart below because it is privately owned. As 4G (OFDM) technology proliferates, Huaweis lead is likely to increase for two reasons. First, the biggest problem with 4G technology is call handover from CDMA (3G) and TDMA (GSM) technology. The best way to ensure seamless handover is to buy handsets and network infrastructure from the same vendor. Huawei is the only vendor that currently provides an end to end product range. Second, since 4G is an all-IP platform, Huawei, a low-cost manufacturer of fixed IP equipment, has yet another advantage. All this is bad news for Cisco, Ericsson, Alcatel Lucent and Juniper Networks. But politics may change the balance of power. The US has started a trade war, pointing its finger at Huawei and its alleged military connections. Depending on how this war of words unfolds, western equipment players may be handed an advantage in western markets. Telecom equipment: Cumulative 5 year share price performance
200% 2008 150% 100% 50% 0% 50% 100% 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Semiconductors

Theme
Cheaper smartphones

Dominant theme: Cheaper smartphones and tablets are entering the market, many made in China, switching demand for chips from expensive US chipmakers like Qualcomm to cheaper Chinese ones, like MediaTek and Spreadtrum. Outlook: Chinese wireless chipmakers are best positioned for the rush to mass market phablets.
Whats happening?
Smartphone penetration in China has passed 15%. It should reach 50% by 2015. Huawei, Xiaomi and ZTE are likely to gain global market share as a result. As more devices from fridges to cars to hospital patients are monitored on the internet, the number of sensors around us will explode. Apple is reshuffling its supply chain away from Samsung, its main smartphone/tablet rival. Intel is the market leader for PCs and servers because of its unrivalled processing power. ARM designs dominate the mobile devices sector because of their low power consumption. But Intel and ARM are invading each others markets. ARM and Intel are incorporating graphics capability within their core chip designs. Chinese chipmakers are also entering the fray.

Our conclusions for the sector


Domestic Chinese chip manufacturers like MediaTek and Spreadtrum will see beneficial knock on effects, with Qualcomm being the biggest loser. Manufacturers of these sensors and the embedded microprocessors that control them will benefit. TSMC could be the biggest beneficiary amongst chipmakers, with orders for both the A6 and A7 chipsets. Intel now powers the Samsung Galaxy Tab 3 with its Atom processor, but has few other wins in mobile. ARM, on the other hand, is moving fast into the high-growth micro-server market for data centers. It has recent orders from Baidu for cloud servers. Its too early to pick a winner, but both moves are game-changing. Competition within the graphics chips market is heating up. Nvidia and Imagination could see their pricing power eroded faster than expected.

Leaders
MediaTek, Spreadtrum

Laggards
Qualcomm, Marvell, Broadcom

Internet of things

Microchip Tech, Freescale, Asia Optical, Infineon, Micronas, Omnivision TSMC, Avago, Cirrus Logic, Omnivision, TriQuint, Skyworks Too early to say Samsung

Apples supply chain Intel vs. ARM

Graphics chips

MediaTek, ARM

Imagination Tech, Nvidia, Qualcomm

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Outlook In 2013, Gartner estimates that 2.35bn IT devices will be shipped. Of these, 305m will be PCs and laptops, 201m will be tablets and 1.8bn will be mobile phones. Within the mobile phone category, smartphone shipments are expected to reach 958m units this year, up from 722m last year. With connected devices being the most lucrative end market for chips, it is not unsurprising that the fortunes of many chip companies are tied to the most profitable IT device maker, Apple. Chip companies in Apples supply chain like Cirrus Logic, Skyworks Solutions, Omnivision, Avago and ARM saw their share prices rise with Apples until mid-September 2012, when Apples shares peaked. Now, during the next phase of the smartphone cycle when smartphones go mass market, particularly in China it is the turn of Chinese chip makers to rise. MediaTek and Spreadtrum are closely integrated with the supply chains of Huawei, Xiaomi and ZTE and are likely to benefit as Chinese smartphone penetration grows from 15% to 50% (the steepest section of the typical S-shaped growth curve) over the next three years. Semiconductors: Cumulative 5 year share price performance
600% 500% 400% 300% 200% 100% 0% 100%
2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Part II: Software

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Technology 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 Apple and Google pioneered the internet ecosystem. Now the race is on to build software ecosystems that include ERP platforms, Big Data solutions, cloud services, cyber-security and search functionality. IBM, SAP, Oracle and Microsoft will be the main predators. Cloud Software As IT infrastructure moves into the cloud, virtualisation products act as the gateway. Niche players like VMware and Citrix Systems now face fierce competition from the bigger software houses like Microsoft. Security Software Our interviews with executives in the insurance industry confirm that board level of awareness, understanding and accountability structures for cyber-threats is low. As a result, corporations have for some time been underinvesting in cyber-security assets. When a respected CEO gets fired for mishandling cyber-risk, market sentiment will change: boards will be forced to increase expenditure on cyber-security services, lifting earnings prospects for the cyber-security industry. Video Game Software The shift from console games to online and mobile games is happening faster than many expected. EA, Activision Blizzard and Ubisoft will see their core business under attack whilst mobile-only games developers like Gameloft and Gamevil could benefit from being in the right space at the right time. At the same time, in the short term, mobile and online games developers are losing competitive power to the big apps platforms like Apple and the big social media platforms like Facebook and Tencent. But, in the longer term, HTML5 technology may reverse that trend. IT Services The IT services industrys business model is changing: the typical customer today runs the marketing department rather than the IT department; key vendor partnerships are shifting from ERP vendors like SAP to cloud services vendors like Salesforce; most importantly, the industrys future as a middleman in a world where cheap, cloud-based services can be purchased directly is threatened.

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Applications Software

Theme
Software ecosystems

Dominant theme: Apple and Google pioneered the internet ecosystem. Now the race is on to build software ecosystems that include ERP platforms, Big Data solutions, cloud services, cyber-security and search functionality. Outlook: Large software groups, unable to innovate fast enough, will continue to acquire smaller application software houses.
Whats happening?
Internet companies such as Apple and Google pioneered the internet ecosystem. Now it is the turn of software companies to build their own ecosystems. Smaller screens and lower customer patience levels mean that desktop applications have to be re-designed from scratch to have any hope of working well on the mobile internet. The success of Adobes Creative Cloud subscription model makes it more likely that software will move from a licensing model to a cloud-subscription model. The 3D printing market was worth $1.7bn in 2012 and is growing at 30% p.a., according to Wohlers Associates. So far no software company has even come close to analyzing large amounts of unstructured data in a quick and meaningful way.

Our conclusions for the sector


A host of emerging technology cycles are all software based. Larger software companies, unable to keep pace with innovation, will be forced to acquire. Mobile-first, app-centric start-ups are unseating current software leaders as the internet goes mobile. New mobile operating systems from Jolla (Sailfish) and mobile browsers from Amazon (Silk) are fast entering the market. If monthly subscription fees replace larger, oneoff license fees, revenues will fall in the short term. Whilst Adobe has succeeded here, other houses may issue profit warnings. 3D printers are used mainly for prototyping. If 3DP technology is adopted in mass manufacturing, the first wave of beneficiaries will be CAD software companies. The leaders in complex analytical engines are IBM (Watson) and the large internet companies that have developed complex search algorithms.

Leaders
Targets: small/ medium sized application software companies Twitter, Jolla, Amazon, Mozilla, UCWeb, Opera

Laggards
Acquirers: IBM, Oracle, SAP, Apple, Google, Yahoo, Microsoft, Baidu Apple, Facebook, Google, Baidu, Tencent

Mobile-first, app-centric start-ups

Cloud business model

Adobe, Salesforce, NetSuite, Apple, Google, Red Hat, VMware, Citrix, EMC PTC, Autodesk, Dassault Systemes

Microsoft, SAP, Oracle, IBM

Computer aided design (CAD) software Big Data

Amazon, Baidu, Google, Facebook, Alibaba, IBM

SAP, Oracle

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook Three industry trends are making life uncomfortable for many traditional software companies: the move to app platforms, the move to the cloud and the move to the mobile internet. In addition to these new dimensions, there are a myriad of emerging technology cycles including 3D printing, robotics, software defined networks, smart TVs, cloud computing and mobile payments that are all software based. All of this is heralding a new golden age for applications software. Large software groups, unable to innovate fast enough, are acquiring specialist software houses. The M&A timeline charts on pages 50 and 51 illustrate the scale of the upheaval taking place in the software industry: software companies account for just 11% of the market capitalization of the global TMT sector, by our estimates, but made up 55% of M&A transactions, by value, in the TMT sector over the last three years. With the exception of IBM, SAP and Oracle, many of the application software companies listed below are likely to become takeover targets as the sector consolidates further. Applications software: Cumulative 5 year share price performance
300% 250% 200% 150% 100% 50% 0% 50% 100%
2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Infrastructure Software and the Cloud



Theme
Virtualization

Dominant theme: As IT infrastructure moves into the cloud, virtualisation products act as the gateway. Niche players like VMware and Citrix Systems now face fierce competition from the bigger software houses like Microsoft. Outlook: Infrastructure software stocks are the most susceptible to a dramatic fall in value during an economic downturn.
Whats happening?
Virtualization allows computing resources (e.g. infrastructure, operating software or storage solutions) to be deployed as and when required, cutting corporate IT costs. Emerging cloud-only companies are attacking ERP incumbents IBM, Oracle and SAP who are encumbered by legacy systems which cant easily switch to cloud. OpenStack is the open cloud standard used by Rackspace, HP, Dell and others. Proprietary cloud platforms include Citrixs CloudStack, VMwares vCloud, Amazons AWS and Microsofts Azure. Software defined networking (SDN) is an emerging architecture for data networks. SDNs allow software to control the network path along which data packets flow. In theory, this would reduce network hardware to commodity boxes. Mobile networks are increasingly offloading heavy data users onto Wi-Fi.

Our conclusions for the sector


The big software houses are creating their own virtualization products, squeezing niche players: in 2012, VMware's virtualization share fell to 56.8%, as Microsoft's rose to 27.5%. IBM, SAP and Oracle acknowledge the problem and are rapidly acquiring cloud companies. The problem is that revenues and profits could fall significantly during the transition to cloud. Barriers to entry for open source cloud platforms are low, pushing margins down. Proprietary cloud services providers stand the best chance of making big money. New standards like the Open Flow protocol are gaining traction and may soon take SDNs from the abstract into the mainstream. SDNs will speed up the transition to the cloud by making cloud services work faster and more efficiently. The downside is that security risk rises. As Wi-Fi becomes a core part of corporate IT world, Wi-Fi infrastructure firms will benefit.

Leaders
Microsoft

Laggards
VMware, Citrix

Cloud ERP

NetSuite, WorkDay, Salesforce

IBM, SAP, Oracle

Open source

Amazon, Citrix, VMware, Microsoft, EMC, NetApp

Rackspace, Equinix, HP, Dell

Software defined networks

Google, VMware

Cisco, Oracle, IBM, Akamai, Juniper Networks

Wi-Fi offloading

Aruba Networks

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook In the short term, the big trends likely to impact investors in communications infrastructure stocks are the cloud and, particularly, virtualisation. Microsoft, VMware and Citrix are fighting it out in the virtualization market. Meanwhile, Oracle, IBM and SAP are fighting cloud-only ERP platforms like Salesforce, NetSuite and WorkDay by making cloud acquisitions of their own. The incumbents legacy product base of expensive, difficult-to-implement, semi-redundant ERP systems turn customers away. In the longer term, software defined networks (SDNs) could have a far more profound impact than the cloud. Just as internet protocol (IP) standards made proprietary telecom equipment makers like Lucent and Nortel less relevant, so SDNs may turn todays leading IP networking equipment makers like Cisco and Juniper Networks 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. The winners will be the communications infrastructure software companies who will be able to program the networking equipment boxes to carry their traffic efficiently without having to invest in expensive hardware boxes. Infrastructure software and cloud: Cumulative 5 year share price performance
800% 700% 600% 500% 400% 300% 200% 100% 0% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Security Software
Dominant theme: Our interviews with executives in the insurance industry confirm that board level of awareness, understanding and accountability for cyber-threats is low. As a result, corporations have long underinvested in cyber-security assets. Outlook: When a respected CEO gets fired for mishandling cyber-risk market sentiment will change: boards will be forced to increase expenditure on cyber-security services, lifting earnings prospects for the cyber-security industry.
Whats happening?
Several countries have launched national security initiatives to raise cyber-security awareness at board level, with banks and critical infrastructure seen as the most at risk sectors. Apple pioneered the internet ecosystem. Now IBM, Oracle and SAP are building their own software ecosystems. Telecom equipment is the first line of defense against a cyber-attack. Telecom equipment companies may soon be viewed as strategic military assets. Financial fraud is on the rise. Criminal gangs are targeting banks to access credit or loans on the back of stolen identities via the internet. Regulators may force greater corporate disclosure of cyber-related issues (e.g. cost to shareholders) for listed companies.

Theme
Corporate awareness levels

Our conclusions for the sector


Until a high-profile CEO of a multinational company gets fired for presiding over a largescale cyber-attack, boards will not take cybersecurity seriously. When they finally wake up, demand for cyber-security services will climb. Larger software houses will strengthen their cyber-security capability, especially in network security and enterprise firewalls. Trade wars may break out. The west may become more protectionist when awarding contracts for telecom equipment, cyber-security, IT services and semiconductors. As online personal data balloons, credit checks will involve more complex Big Data algorithms. Demand for credit analysis products will rise as a cyber-fraud prevention measure. This will raise security awareness of investors, ramping up demand for cyber-security companies products.

Leaders
Check Point, Sourcefire, Symantec, Qihoo, Verint, Websense Fortinet, ProofPoint, Targets: Fortinet, ProofPoint, Palo Alto, Sourcefire, Verint Alcatel-Lucent, Cisco, Ericsson, Intel

Laggards
Banks, stock exchanges, telecom operators, power grids Acquirers: IBM, SAP, Oracle, Salesforce, Apple, Google Huawei (unlisted), ZTE

Software ecosystems Trade wars

Credit fraud

Experian, Equifax

Regulation

Palo Alto, Qihoo 360, Symantec, Trend Micro, Websense

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook Recent technology trends have triggered new cyber-security risks for corporations: the bring-your-own-device (BYOD) trend coupled with the fact that mobile workers travel all over the globe mean that corporate IT managers have to protect corporate data across more IT platforms at a time when budgets are tight. The explosion in personal data online makes it easier for criminal gangs to steal identities and fraudulently access bank accounts. The proliferation of third party apps has led to a dramatic rise in reported malware. In 2012, the number of malicious web links grew by almost 600% worldwide, according to Websenses 2013 Threat Report. As IT infrastructure and software move to the cloud, physical security gets replaced by cyber-security but a worldwide skills shortage means that many IT managers are out of their depth when it comes to cyber security. In the longer term, the move to software defined networks is the most worrying trend: as network hardware becomes a commodity, cyber-security risk which is currently contained in the top four layers of the 7-layer OSI protocol stack (applications, presentation, session, transport) spreads to the bottom three layers (network, data, physical) as well. Boards arent taking cyber-security seriously. The catalyst is just around the corner. When a respected CEO gets fired for being asleep at the wheel during a cyber-attack, boards will be forced to spend more on cyber-security and market sentiment will change in favour of the cyber-security sector. Cyber-security software: Cumulative 5 year share price performance
700% 600% 500% 400% 300% 200% 100% 0% 100% Ahnlab CheckPoint Software F5Networks FSecure Gemalto NiceSystems Sourcefire Symantec TrendMicro VerintSystems Verisign Websense 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Video Game Software


Dominant theme: Mobile and online games developers are losing competitive power to the big apps platforms like Apple and the big social media platforms like Facebook and Tencent. Longer term, HTML5 technology may reverse that trend. Outlook: The shift from console games to online and mobile games is happening faster than many expected. Mobile-first games developers like Gameloft and Gamevil could benefit from being in the right space at the right time.
Whats happening?
Video games are moving away from consoles towards apps platforms like iOS or Android and social media platforms like Facebook or Tencent. Native apps offer better user experience, but are expensive to maintain across multiple platforms. HTML5 technology allows developers to build web-based apps that run on any smart device using a standard web browser. Motion sensors that have been developed for gaming consoles could generate lucrative revenues in other industries. Microsoft and Sony launch new games consoles this year Xbox One and PS4. Both have integrated their games console with their smart TV offerings. In the freemium model, games are given away for free and the games developer makes money by selling virtual goods to the user, often via in-app purchases.

Theme
The platform effect

Our conclusions for the sector


The big games developers are being marginalized as their distribution becomes dependent on the app platforms of the larger internet ecosystems. Apples new game controller will hasten this trend. If HTML5 technology supersedes native apps as the developers platform of choice, it will threaten the stickiness of Apple and Googles app ecosystems, loosening their respective walled gardens. Competitive power would then shift back to the video game developers. Microsoft Kinect and Leap Motion are the market leading motion sensors. They could provide the critical component for robots and smart TVs. There is no clear winner in the internet TV market. Apple has iTunes, Google has Android, Microsoft and Sony have their new consoles and several start-ups like Fanhattan are eyeing the space. The biggest market for freemium games is Chinas $8bn online games market. But the model is failing. The safest way to play the Chinese gaming market is via the platforms, not the developers.

Leaders
Amazon, Apple, DeNA, Google, Gree, Facebook, Tencent Gameloft, Gamevil, Activision, EA, Netease, Ubisoft, NCsoft

Laggards
Perfect World, Zynga, Activision Blizzard, EA, Ubisoft, Zynga Apple, Google, Microsoft

HTML5

Motion sensors

Microsoft, Leap Motion Too early to say

Nintendo

Smart TV strategy

Freemium model failing

Tencent

Changyou, Perfect World, Giant Interactive

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook Sales of console games worldwide peaked at $32bn in 2008, according to PwC. By end 2012 they had fallen 15% to $27bn. PwC expect console game sales to start rising again, but we believe they will continue to decline. The online gaming market was worth $19.5bn last year, up 80% on 2008, and is expected to increase another 60% by 2016 China accounts for 37% of this market. The mobile games market was worth $10bn last year, up 73% on 2008, and expected to increase another 44% by 2016 Korea, Japan and China account for 22%, 17% and 10% respectively of this market. Whilst the online and mobile gaming sectors are growing, a sizeable chunk of the industrys profits are likely to gravitate towards the big platforms Apple, Google, Facebook and Tencent. Meanwhile, as Microsoft, Sony and Nintendo see their customers move towards cheaper gaming platforms, they are working hard to adapt their games consoles to become the digital hub for home entertainment, though with limited success so far. For now, however, the mobile games developers like Gameloft and Gamevil seem to be in the sweet spot. Gaming software: Cumulative 5 year share price performance
600% 500% 400% 300% 200% 100% 0% 100%
2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

IT Services
Dominant theme: The IT services industrys business model is changing: the typical customer is now the Chief Marketing Officer rather than the Chief Technology Officer; its key partnerships are shifting from ERP vendors to cloud services vendors; most importantly, its future as a middleman in a world where cheap, cloud-based services can be bought directly is threatened. Outlook: The IT services sector faces significant downside risk.
Whats happening?
Traditionally, databases and business intelligence tools were purchased separately. Now they are being combined into Big Data appliances. Increasingly, it is the marketing executives of multinationals rather than IT executives that are becoming the key accounts of IT services companies. Businesses are learning to cut IT costs by shifting in-house Capex to outsourced Opex in the cloud. Traditional relational databases are not capable of handling unstructured data. Many next generation database platforms like Hadoop are open source. IT services companies risk being disintermediated by the big software ecosystems just as book shops have been disintermediated by Amazon.

Theme
Big Data

Our conclusions for the sector


To survive, IT services companies need to metamorphosise into one-stop-shop datamanagement houses because soon they will compete with internet companies like Amazon and Google who deal with Big Data for a living. Advertising and brand marketing once a people-oriented industry is, in the digital age, very much an algorithm-based IT service. IT services companies will change their business partners from traditional ERP giants like SAP to cloud companies like EMC. Oracle, IBM and Microsoft the three largest SQL database manufacturers have the most to lose and are belatedly embracing Hadoop. The danger is that open source platforms drag the entire industrys margins down. As a result, some will transform themselves into software ecosystems. Niche cloud-based application software and cyber-security companies could become their bid targets.

Leaders
Amazon, IBM, Oracle, Google, Facebook, SAP, Microsoft Acxiom, Marketo, Constant Contact, ValueClick, Responsys Amazon, EMC, NetSuite, Red Hat, Salesforce, Teradata Red Hat

Laggards
Accenture, Atos, Capgemini, Infosys, TCS, Tieto, WIPRO, Apple, HP, Dell,

Digital Marketing

Cloud services

Accenture, Atos, Capgemini, IBM, TCS Tieto, Infosys, Wipro HP, Oracle, IBM, Microsoft, Progress Software, SAP

Open source databases

Software ecosystems

Citrix, Fortinet, NetApp, Progress Software, Red Hat, SGI, Informatica

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook The IT services sector is in a digital transition phase that, in many ways, resembles the retail sector. It risks becoming irrelevant as internet services companies cut out the middle man and offer IT services storage, data analytics, ERP systems directly via the cloud. Ironically, Amazon who destroyed much of the retail sector is now taking direct aim at the IT services industry with its enterprise cloud offering. Revenue models for IT services companies are changing. One-off fees for expensive, large-scale ERP systems implementations are being replaced by monthly subscription fees for Infrastructure-as-a-service (IAAS). That could reduce revenues in the short term and raise upfront costs (because IT services companies would have to invest in their own infrastructure). Oracles partnership with Salesforce, announced last month, is an admission that Salesforces cloud-based strategy is the future. On 12 March 2013, we issued a Sell note on the Indian IT services sector. Since then there have been profit warnings not only from Infosys but right across the industry from IBM, SAP, Oracle, and Tieto. We may be witnessing the start of a painful industry restructuring. IT Services: Cumulative 5 year share price performance
200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Part III: Internet & Media

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Internet & Media: Executive Summary


Here is a summary of our dominant themes for the Internet and Media sectors over the next 12 months: Internet (e-commerce) Maps and mobile payments are the new battlegrounds in the war for supremacy of the mobile internet. Internet (Social Media) Crowd-funding is the next big thing in social media. The growth potential for this market is almost limitless as it expands to include corporate loans, mortgages, credit cards and insurance services. Traditional advertising As advertising expenditure moves away from TV towards mobile, advertisers fortunes will be tied ever more closely to the technology platforms that control internet TV and mobile advertising. With respect to internet TV, no platform has emerged as the clear winner yet. But with respect to mobile advertising, Google already commands over half the global market. Film & Television Broadcasters are resisting the integration of live TV into the internet TV offerings of Apple, Google and Microsoft. Their hope is that an independent platform like FanTV will emerge that will give them more control. But in the short term, the price of popular content is likely to be bid up as technology companies keen to get into the internet TV hardware game realise that success is as much to do with access to licenced content as it is to do with great technology. Traditional Publishing Like the music industry before it, the publishing sector is being destroyed by digitisation. Whilst DMGT has shown how smart management can turn around an incumbent publisher in a declining industry, the overall outlook for publishers remains bleak.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Internet (e-commerce)

Theme
Map wars

Dominant theme: Maps and mobile payments are the new battlegrounds in the war for supremacy of the mobile internet. Outlook: A host of new mobile ecosystems are coming onto the market, threatening the dominance of Apple and Google.
Whats happening?
Knowing where your customer is located and which direction hes heading is critical to selling him something. Cloud-based solutions are displacing Near Field Communications (NFC) as the likely global mobile payments standard. Google Wallet is the most prominent NFC failure. Now that we know investing in big internet ecosystems are the best way to make money, new entrants are piling in, both by way of new mobile web browsers and new mobile operating systems. Internet services companies tend to pay considerably less tax than their peers in other industries. The political will to address this anomaly is strengthening worldwide. The internet of things refers to the identification of objects via sensors in order to monitor them or share information about them via the web.

Our conclusions for the sector


Controlling the maps function is key to controlling mobile commerce. Google Maps (now including Wave) is the clear leader, followed by Nokias Navteq and Tomtom. Square and PayPal lead in the West. Alibaba and Tencent in China. Apple and Facebook have yet to enter the race. Several outliers like Amazon and Groupon remain in the game. For Apple and Google this may be in the price. But for emerging contenders Alibaba, Amazon, Baidu, Huawei, Jolla, Microsoft, Mozilla, Tencent, Tizen, Twitter, Ubuntu, UCweb, Yahoo there may still be upside. Authorities everywhere are attempting to close down tax loopholes. If they succeed, effective tax rates for internet companies will rise and net earnings will fall. New connected devices such as Google Glass will provide innovative ways to collect more data about our digital lives, enabling internet companies to target more services to us.

Leaders
Google, Nokia, Tomtom

Laggards
Apple, AOL, Baidu, Microsoft, Yahoo, Facebook, Tencent Amazon, Apple, Google, Facebook, VeriFone Alibaba, Baidu, Huawei, Jolla, Microsoft, Mozilla, Tencent, Easou, Ubuntu, UCweb Amazon, Apple, eBay, Google, Facebook, Renren

Mobile payments

eBay, Square, Groupon, Alibaba, Tencent, Monitise Apple, Google

Mobile ecosystems

Tax avoidance

Internet of Things

Google, Facebook, Apple, Microsoft, Huawei

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook Global B2C e-commerce sales hit $1.04tn in 2012, up 22% on 2011, according to eMarketer. In 2013, they are expected to grow by 17% to $1.22tn. The US accounts for 32%, China 14% and Japan 10% of the global total. But China is catching up fast. Whilst the US and Japanese markets are expected to grow this year by 12% and 7% respectively, Chinas will grow by 65%. In our last TMT Trends report (CM Research, 24 September 2012) we concluded that profits would gravitate towards the leading internet ecosystems Apple, Amazon and Google in the west and Baidu, Tencent and Alibaba (whenever it listed) in China. Now the story has moved on. There are far more entrants offering competing internet ecosystems and there is certainly room for five or six ecosystems to coexist in each market. Investors should watch Huawei, Jolla, Microsoft, Mozilla, Opera, Qihoo 360, Tizen, Ubuntu, UCweb and Yahoo. Internet (e-commerce): Cumulative 5 year share price performance
1500% 1300% 1100% 900% 700% 500% 300% 100% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Internet (social media)


Dominant theme: Crowd-funding is the next big thing in social media. Outlook: The fortunes of social media companies have been mixed. With so many unproven business models lining up for IPO, investors should do their homework before investing.
Whats happening?
With credit markets seizing up over the last five years, crowd-funding sites are filling the gap. People are sharing more things online, especially in Asia. In this model, everyone wins: I help you; you help me; we help others; and the social network profits. Social networks make money by collecting personal data. Wearable devices such as Google Glass or fitness tracking watches will help them collect more personal data. Internet TV is the natural follow-on advertising market for many social media companies. Social networks are developing their own virtual currencies as well as investing in mobile payments technology. Both strategies will raise barriers to entry. The EU is threatening the future profitability of leading US technology companies by steadfastly sticking to its principles on data privacy.

Theme
Crowd-funding

Our conclusions for the sector


Growth potential for this market is almost limitless as it expands to corporate loans, mortgages, credit cards and insurance services. Waze is an example of this type of social sharing model where everyones a winner. New sharing models, especially in mobile, will threaten incumbent social networks. This is where social media truly converges with consumer electronics. Wearable devices will be designed specifically to collect personal data. Apple and Google are best positioned to do this. Competition in the internet TV market will be intense and thus far no social network has come up with a credible business model for TV. A virtual currency if it reaches critical mass helps to convey a sense of widespread trust in an ecosystem, reducing customer churn. Amazon Coins is the latest. Expect many more. If the EU refuses to back down on data privacy issues, the US social media sector will be the worst hit, with ad revenues lower and data collection costs higher.

Leaders
Kickstarter, Lending club, Wonga Waze, Yelp, TripAdvisor, Pinterest, Instagram, Tumblr, Foursquare Apple, Google

Laggards
Banks and insurance companies Facebook, Linked In, Renren, Sina, Gree, DeNa Microsoft, Yahoo, Facebook

New social sharing models

Wearable connected devices Internet TV

Apple, Google, Microsoft, Fanhattan, Roku, Boxee Alibaba, Amazon, eBay, Facebook, Monitise, Square, Tencent, Bitcoin

Facebook, Twitter, Yahoo, Tencent, Sina, Renren

Virtual currencies

Data privacy

Apple, Google, Facebook, Twitter, Groupon, Microsoft, Linked In

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook A year ago, many analysts including us expressed concern that the big social networks would have trouble moving to mobile. Smaller screens, fewer keyboard strokes and shorter attention spans made it harder to monetize mobile social networkers. By Q1 2013, those concerns had evaporated as Facebook and Google both saw mobile ad revenues rise steeply. Facebook reported that 30% of its revenue base that quarter had come from mobile. But now we have bigger concerns. The world has 2.8bn internet users, half of whom already use social media, according to eMarketer. The next billion internet users will likely be poorer, less literate and live in conflict zones. Most will use social media and most will do so via mobile. What these users will want of social networks will differ markedly from the wants of their current user base. The nature of social networks is such that they are constantly under threat from the next big thing. Current threats include virtual currencies, crowd-funding, wearable devices, internet TV and, of course, regulators. We expect high volatility over the next 12 months in the social media sector as these trends unfold, taking some of the established leaders by surprise. Social networks: Cumulative 1-year share price performance
Note: Social networks simply havent been around for long enough for us to show 5 year share price performance data
250% 200% 150% 100% 50% 0% 50% 100% Baidu Demand Media DeNa Facebook Google Gree Groupon Linkedin Mail.Ru Mixi Netease NHN Renren Shutterfly Sina Tencent TripAdvisor Yahoo! Youku Tudou 2012 2013

Source: Company data, FT, Bloomberg, S&P Capital IQ, CM Research Bars show the year-to-date share price performance for a selection of large cap stocks in this sector from 1 January 2012 to 30 June 2013. Where companies have floated during this 1 year period, the share price performance is shown since the IPO date.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Advertising
Dominant theme: As advertising expenditure moves away from TV towards mobile, advertisers fortunes will be tied ever more closely to the technology platforms that control internet TV and mobile advertising. With respect to internet TV, a winning platform has not yet emerged. But with respect to mobile advertising, Google already commands over half the global market. Outlook: Traditional advertisers probably have about a year before disruptive forces in the TV advertising market hit them.
Whats happening?
The range of direct digital threats is expanding. Cloud-based marketing software from the likes of Marketo and Contact Contact is one; so are price comparison sites like moneysupermarket, social shopping sites like Groupon, and content generators like Demand Media. TV advertising still accounts for 35% of the global advertising market. It remains the core market for traditional advertisers. Traditional advertisers are not just competing with digital marketing agencies. They are competing with IT companies who are busy building software ecosystems which include advertising modules as part of the package... Mobile internet ad revenues are expected to quadruple worldwide from $4bn in 2011 to $16bn in 2013. Google should account for 55% of this market in 2013, Facebook 12% and Twitter 2%.

Theme

Our conclusions for the sector


The traditional advertisers have been quick to acquire digital marketing agencies. Most, like WPP and Havas, now generate at least 30% of their revenues from digital advertising. To stay ahead of the game, they are likely to acquire more. With the advent of smart TVs, broadcasting will switch rapidly to narrowcasting and advertisers could see their core TV market fall off a cliff. ... Salesforces acquisition of ExactTarget is a case in point. IT services companies are integrating their corporate software offerings. Digital advertising and marketing services are now being bundled with other enterprise software applications, including ERP systems. As traditional advertisers core end markets move from TV to mobile, their fortunes will be tied even closer to Google. If Google does well in the internet TV space too it could make large parts of the media buying industry redundant.

Leaders
Targets: Marketo, Constant Contact Demand Media Groupon, inContact Millennial Media Moneysupermarket Responsys Apple, Baidu, NHN, Google, Microsoft, Facebook Oracle, SAP, IBM, Microsoft

Laggards
Acquirers: Dentsu, Havas, Interpublic, Publicis, WPP

Digital marketing

Internet TV

Dentsu, Havas, Interpublic, Omnicom, Publicis, WPP Dentsu, Havas, Interpublic, Omnicom, Publicis, WPP

Software ecosystems

Mobile Internet

Google, Facebook, Twitter, Millennial Media

Media buying agencies

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Outlook For the last decade a third of advertising revenues have come from TV broadcasting. In 2012, the TV advertising market was worth $200m, double the internet advertising market. If you believe the TV industry is about to be hit by a new wave of disruptive technologies spearheaded by Apple and Google, then expect the advertising industry to undergo a bumpy ride. Apple, Google and Microsoft will almost certainly integrate their existing mobile operating systems and ad platforms with their forthcoming internet TV offerings. Without regulatory intervention, they will suck the profits out of the TV advertising industry as they have done in so many other old media industries. Simply generating a third of their revenues from digital marketing services will not be enough to secure WPP, Havas and Publicis future because those digital market services will be sold to a duopoly of advertising platforms who will dictate pricing terms. More broadly, it is interesting to note from the chart below that many new media digital marketing companies have not done much better than the traditional media advertising agencies they have supposedly usurped. . Advertising: Cumulative 5 year share price performance
250% 2008 200% 150% 100% 50% 0% 50% 100% 2009 2010 2011 2012 2013

Old media advertisers

New media advertisers

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Global Trend Forecast, 2014

(Vol. III)

July 2013

Film & Television


Dominant theme: Broadcasters are resisting the integration of live TV into the internet TV offerings of Apple, Google and Microsoft. Their hope is that an independent platform like FanTV will emerge that gives them more control. Outlook: In the short term, the price of popular content is likely to be bid up as technology companies keen to get into the internet TV hardware game realise that success is as much to do with access to licenced content as it is to do with great technology.
Whats happening?
Third screens involve seamless transfer of data between 3 screens: a smartphone, tablet and TV. Second and third screens work best when the same operating system is used across all three screens (e.g. Microsoft SmartGlass with Xbox One). Native apps tied to an operating system like iOS or Android make the content provider beholden to Apple or Google, But web-based apps using HTML 5 technology allow them to retain control. Its only worth buying an internet TV if you can access the range of content you want, both on-demand content and live TV. As more technology players move into the market for next generation TV software they will have to sign a string of content deals, bidding up the price of content in the process.

Theme
Third screens

Our conclusions for the sector


Broadcasters will not integrate live TV content with Apple, Google or Microsofts offerings for fear of losing control. Thats why their versions of internet TV provide a disjointed user experience. Expect to see a host of new streaming set-top boxes with independent platforms that play to content owners fears over a potential Apple/Google internet TV duopoly. TV channels will turn into web-based apps. This will allow film and TV content providers to keep their own brand identity, user interface (EPG) and revenue stream, without having to pay a cut to Apple or Google. Technology companies are queuing up to license popular content to ensure their TV offerings are attractive to customers. They include internet companies (Apple and Google); games console makers (Sony and Microsoft), (telecom equipment makers (Ericsson and Cisco), streaming services (Netflix and Amazon) and telecom operators (BT and Verizon).

Leaders
Fanhattan, Apple, Google, Microsoft, LG Cisco, Ericsson, Intel, Pace, TiVo, Roku, Netflix, Amazon, Samsung, LG, Sony

Laggards

HTML 5

BSkyB, CBS, Disney, Time Warner, Zee Viacom, Comcast, News Corp BSkyB, CBS, Comcast, Disney, Discovery, Lions Gate, News Corp, Time Warner, Viacom, Zee

Bidding war for content

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Outlook The clumsy smart TVs sold today are just the precursor for what is to come. True internet TV will allow the customer to access any content live sports, broadcast TV, catch-up TV or on-demand programming through a single electronic programming guide (EPG) without the latency one gets today. But we are still in the very early stages of this technology cycle streamed TV content still represents less than 2% of the pay-TV market. Internet TV offers big prizes. At $200bn, the TV advertising market is still double the size of the internet advertising market. Soon your smartphone or tablet will be the second or third screen used to control your television. Apple, Google and Microsoft are well positioned to win in this market. Several other players Cisco, Intel, Ericsson, Sony, Samsung, LG, BT, Netflix, Facebook and Amazon are lining up to play too. Start-ups like Zeebox and Fanhattan offer platforms that are independent of Apple or Google and so appeal to the broadcasters. But their products will never sell in the high street unless they include access to a wide range of content. So in the short term owners of popular content will remain in the driving seat. Film and Television: Cumulative 5 year share price performance
300% 250% 200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Publishing
Dominant theme: Like the music industry before it, the publishing industry finds itself outmanoeuvred by the internet. Outlook: Whilst DMGT has shown how smart management can turn around an incumbent in a declining industry, the overall outlook for publishers remains bleak.
Whats happening?
Print revenues are falling at a rate of 20% per annum for some publishers. But digital revenues are not rising fast enough to counter this. In March 2013, Germanys parliament passed a Google tax law, forcing Google to pay royalties to newspaper publishers for providing excerpts of their news articles in its search results. Google is creating the worlds largest digital books library, with over 25m books already scanned. The problem is that it faces multiple copyright-infringement claims from authors who did not give their permission to Google to publish their copyrighted works. The US Dept. of Justice has taken Apple to court over allegations that it conspired with five publishers to raise e-book prices. All the publishers involved have now settled, but Apple has chosen to fight the case.

Theme
Business turnaround models Google news tax

Our conclusions for the sector


DMGT has shown that publishers with a focused strategy can turn their businesses around by moving away from print into events, digital media and financial news. Germanys law may backfire on German publishers by referring less traffic to their websites from Google searches. But more countries may become emboldened to start levying usage taxes on US internet companies. Copyright cases are continuing against Google in the US and other countries. Lawmakers are still re-writing copyright law. If Google wins these cases, then authors and publishers will see assets they thought they owned being legally expropriated by Google under fair use provisions. If Apple loses the case, its agency model (which allows publishers to set the price) fails and Amazons wholesale model (which allows Amazon to set the price) wins. The price of books will plummet, spelling bad news for all book publishers.

Leaders
DMGT, Pearson

Laggards
Most newspaper and magazine publishers

Google

Googles digital library

Google

Hachette (Lagardere), HarperCollins (News Corp), Macmillan (Holtzbrinck), Simon & Schuster (CBS), Penguin (Pearson)

Apples eBook anti-trust case

Amazon

Apple Hachette (Lagardere), HarperCollins (News Corp), Macmillan (Holtzbrinck), Simon & Schuster (CBS), Penguin (Pearson)

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Outlook The publishing sector is in the thralls of a downward spiral. Take the global newspaper market. It has shrunk by 14% since 2005 because of the internet. Yet by end 2012, the industry had only managed to convert 0.5% of its circulation revenues to digital format. Magazine publishing tells a similar story. With books, things are even worse. In the US and Europe over 15% of book sales are digital and 90% of the market is cornered by Amazon. Moreover, the big five book publishers have all reached a settlement with the US Department of Justice on a price fixing scam originally engineered by Apple. Daily Mail & General Trust and Pearson stand out as two companies that have braved this new world and come out on top. Each has a focused digital strategy and each is leaving its traditional print publishing businesses to die. But they are exceptions to the rule. For now, we expect more carnage in the publishing sector. Publishing: Cumulative 5 year share price performance
150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Part IV: Telecoms

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Telecom Services: Executive Summary


Here is a summary of our dominant themes for the Telecom Services sector over the next 12 months: Cable and satellite operators Many cable and satellite operators realised several years ago that they would become dumb pipes unless they built integrated ecosystems that packaged in-house content with their distribution platform. But the missing element from most cable ecosystems is software. Industry outsiders have long been scheming to exploit this weakness and invade the pay-TV market by developing internet TV software that is as user friendly as current electronic programming guides (EPGs). So far the main candidates Apple, Google, Microsoft and Sony have failed to impress customers with their set-top boxes. FanTV from Fanhattan is the latest in a line of new entrants. But one day soon an enterprising technology company will crack this last bastion of traditional media. Telecom operators The Internet of Things, mobile payments, Big Data, software defined networks, internet TV and cloud services all present potential new revenue streams for operators as voice, messaging and internet access revenues decline. Strategies differ from operator to operator, but three factors outside their control are likely to influence their earnings prospects significantly. The first is the level of competition: a lack of competition in the US, following a decade of mergers and acquisitions, has helped AT&T and Verizon raise tariffs, especially in the wireless space. The second is politics: Chinas state-controlled operators may soon be given a nod and a wink by the Communist Party to clobber privately owned internet companies like Tencent and Alibaba with higher charges for carrying their traffic. China Mobile is already rumoured to be negotiating a deal with Tencent for its WeChat messaging service. The third is the scope of regulation: telecom operators are the only segment of the internet value chain to be heavily regulated. That has held broadband investment levels down, especially in Europe. There is a growing view all over the world that regulation of the internet needs to be overhauled. Many countries, for example, are eager to ensure US internet companies pay more local taxes. There is a small chance that telecom operators could benefit from such an overhaul.

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Cable & Satellite Operators



Theme
Content-filled walled gardens

Dominant theme: The optimum business model is one that combines in-house content with in-house distribution. But the weakness in these cable and satellite ecosystems is the lack of a common software platform. Outlook: Apple, Google and others are using software to enter these tightly guarded ecosystems. One day they will succeed.
Whats happening?
Many cable and satellite operators realized they would become dumb pipes unless they built integrated ecosystems which packaged in-house content with their distribution platform. The missing bit of most cable ecosystems is software. If sufficiently user-friendly, internet TV software developed by industry outsiders may cause cracks in Cable-TV business models. TV viewers are increasingly dualscreening: interacting with their TV via their PC or mobile device, talking about live TV content on social media, or using their mobile device as a remote control. Telecom operators have found it difficult to sell IPTV to cable customers. By end 2012, Korea Telecom was one of the most successful with 6m IPTV subscribers (almost a quarter of households). But Verizon FiOS TV had just 4.7m; BT Vision just 0.7m and SingTel mio TV just 0.4m.

Our conclusions for the sector


Cable operators will continue to acquire content assets to strengthen their walled gardens. Simultaneously, internet companies like Google are commissioning their own original content. Film and TV companies will benefit. As user preferences shift from broadcasting to narrowcasting, cable operators are adapting their set-top boxes accordingly. Whilst Apple and Google have thus far failed to conquer TV, it is only a matter of time before someone does. Cable and satellite operators are trying to control the second screen by providing subscribers free mobile TV or interactive apps that communicate with their TV. But loss of control of this second screen is a real threat. Leading IPTV players in mature Asian broadband markets like Hong Kong, Korea, Singapore and Taiwan have learned that it is difficult to displace incumbent pay-TV operators without offering a larger content library. Until operators acquire content on a large scale, they are unlikely to pose a significant threat.

Leaders
BSkyB, Comcast

Laggards

Software

Apple, Google, Microsoft, Sony, Samsung, Fanhattan

Most cable operators

Dual screening

Amazon, Apple, Facebook, Google, Netflix, Zeebox, Fanhattan BT, PCCW, Chunghwa Telecom, SingTel, Korea Telecom, Verizon

Most cable operators

IPTV

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Outlook Many cable and satellite operators realised several years ago that they would become dumb pipes unless they built integrated ecosystems that packaged in-house content with their distribution platform. But the missing element from most cable ecosystems is software. Industry outsiders are looking to exploit this weakness and invade the pay-TV market by developing internet TV software that is as user friendly as current electronic programming guides (EPGs). Technology companies like Apple and Google are further down the line in terms of developing TV operating systems. But the missing element of their internet ecosystems is content, especially live TV content. Both industries can help each other fill in the gaps in their business model, but neither is likely to let the other into their domain. For cable and satellite operators, the best strategy appears to be to acquire technology platforms built by start-ups like Fanhattan and stream their content to connected TVs via web-based apps. Comcast and BskyB are investing in such technologies. The cable and satellite operators have a hell of a fight ahead of them, but they are more prepared than the telecom operators ever were and some of them might even win. Cable & satellite operators: Cumulative 5 year share price performance
200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Telecom Operators

Theme
Internet of Things

Dominant theme: The Internet of Things, mobile payments, Big Data, software defined networks, internet TV and cloud services all present potential new revenue streams for operators as voice, messaging and internet access revenues decline. Outlook: As long as operators sit on the regulated side of the internet, they are unlikely to substantially increase profits.
Whats happening?
More and more objects are being connected to the internet from heating systems to engine parts to enable them to be controlled centrally and managed more efficiently. A geopolitical fault line is developing that pits emerging markets against the USA. Outside the US, the internet is becoming more regulated. But this means different things in different countries. In the West, the big regulatory issues are net neutrality, price capping and data privacy. In developing markets, it tends to mean political censorship of the internet. Operators failed to profit from the first round of the mobile internet. Many see mobile payments as their second chance to ride the mobile commerce wave. SDNs transfer the intelligence currently held in a network equipment box to a software layer, enabling the network to be centrally controlled.

Our conclusions for the sector


Operators have an opportunity not just to make money from carrying machine-to-machine (M2M) traffic but by creating a set of cloudbased enterprise software services and data centers built around the Internet of Things. In Europe and the US operators are lobbying regulators to relax net neutrality rules on the grounds that they hold back broadband investment. In China, state-controlled operators are attempting to bully privately owned internet companies to pay more for the traffic they send through their pipes. In Korea, operators want broadcasting rules relaxed to allow operators to compete. Operators are grouping together regionally (e.g. ISIS in the US and Weve in the UK). But they are competing with more nimble technology companies and will probably lose. SDNs allow operators to manage networks more efficiently and offer new services. But operators risk losing control of their network to industry outsiders.

Leaders
NTT, KT, China Mobile, KPN, Telefonica

Laggards

Regulation

Situation fluid: Regulators all over the world are debating net neutrality, data privacy, internet censorship

Mobile payments

Apple, Alibaba, eBay, Google, Square, Tencent Too early to say

Most telecom operators

Software defined networks (SDNs)

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Outlook Voice and messaging revenues have peaked for many operators. Indeed, instant messaging apps like WhatsApp which now has 250m users is destroying operators messaging revenues faster than anyone expected only a year ago. Internet access services are becoming less profitable because data traffic is rising at a rate of 100% per annum prompting higher capex, but competition and regulatory controls make it difficult for operators to raise prices in line with higher investment costs. If operators do not find new revenue streams soon, their profitability levels will decline rapidly, especially in mobile. Operator strategies on how to combat this decline differ: BT is trying to move into the TV market with its live sports channels. AT&T, Verizon, PCCW and many others are doing the same. SK Telecom has been the most active operator in the world in selling OTT services such as mobile TV and online games over its advanced LTE network. Telefonica, Verizon and China Telecom are moving into cloud services. China Mobile is investing in a platform supporting the Internet of Things but is also using its political clout to force internet companies like Tencent (whose WeChat service generates a lot of network traffic) to pay more. North American telecom operators: Cumulative 5 year share price performance
60% 2008 40% 20% 0% 20% 40% 60% 80% 100% AT&T CenturyLink Clearwire FrontierComms Level3 RogersComms SprintNextel Telus USCellular Verizon Windstream
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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

2009

2010

2011

2012

2013

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European telecom operators: Cumulative 5 year share price performance


200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

Asian telecom operators: Cumulative 5 year share price performance


200% 150% 100% 50% 0% 50% 100% 2008 2009 2010 2011 2012 2013

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 this sector from 1 January 2008 to the periods ending 31 December 2008, 2009, 2010, 2011, 2012 and 30 June 2013.

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Appendix 1: M&A trends


Summary of recent mergers and acquisitions deals in the sector. This gives us an idea of which sectors and themes are hot. Global Mergers and Acquisitions in Technology, Media and Telecoms: Two year transaction history
StratasysacquiresMakerBot(3Dprinting) GannettacquiresBelo(TVbroadcasting) GoogleacquiresWaze(Crowdsourcedtrafficnavigationsoftware) Salesforce.comacquiresExactTarget(Cloudmarketingsoftware) SprintacquiresClearwire(Telecomoperators) CiscoacquiresJouleX(Energymanagemnetsoftwarefordatacentres) SoftbankacquiresSprintNextel(Telecomoperators) IBMacquiresSoftlayer(Webhostingandcloudinfrastructure) BainCapitalandGoldenGateCapitalacquiresBMCSoftware(Software YahooacquiresTumblr(Shortformbloggingwithpictures) IntelacquiresStonesoftOyj(internetsecuritynetworkfirewall) BaiduacquiresPPS(internetvideoprovider) CiscoacquiresUbiquisys(smallcells) EricssonacquiresMicrosoft'sMediaroomIPTVbusiness(IPTV) AmazonacquiresGoodreads(Bookreviewsite) LibertyGlobalacquiresVirginMedia(Cableoperators) GoogleacquiresChannelIntelligence(ecommercetracking) IBMacquiresStarAnalytics(Softwareanalytics) OracleacquiresAcmePacket(Sessionbordercontrol) CiscoacquiresIntucell(Softwaredefinednetworks) BelkinacquiresLinksys(Networkinggear) ArrisacquiresMotoHome(TVsettopboxes) NielsonacquiresArbitron(Digitalratings) AdtranacquiresNokiaSiemensBroadbandAccessbusiness(Telecom WindstreamacquiresPaetec(Telecomoperators) OracleacquiresEloqua(Cloudmarketingplatform) 0
Source: Company data, CM Research

Q2 2013

Q1 2013

Q4 2012

10 15 20 Acquisitionprice(US$bn)

25

30

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Global Mergers and Acquisitions in Technology, Media and Telecoms: Two year transaction history (cont.)
RedPrairieacquiresJDASoftware(Applicationsoftware(supplychain PricelineacquiresKayak(Onlinetravel) CiscoacquiresCaridien(Networktrafficmanagementsoftware) CiscoacquiresMeraki(Cloudnetworking) VerintSystemsacquiresComverseTech(cybersecurity) IBMacquiresKenexa(HRsoftware) CarlyleacquiresGettyImages(Distributorofstockphotosandvideos) AT&TacquiresNextWave(wirelessspectrum) ZayoacquiresAbovenet(Telecomoperators) ConsolidatedCommsacquiresSurewest(Telecomoperators) CiscoacquiresCloupia(Datacentresoftware) OracleacquiresInvolver(Socialmediamarketing) CicsoacquiresNDS(Videoandcontentdeliverysolutions) GoogleacquiresFrommers(travelguides) OracleacquiresXsigo(datacentrenetworkingvirutalisation) GoogleacquiresWildfire(socialmediaadsolutionsprovider) AppleacquiresAuthentec(FingerprintID,mobilepayments) VmwareacquiresNicira(Networkefficiency) DentsuacquiresAegis(Advertising) SonyacquiresGaikai(Cloudgaming) OracleacquiresCollectiveIntellect(Cloudbasedsocialintelligence) MicrosoftacquiresYammer(Socialmedia) LamResearchacquiresNovellus(Semiconductorequipmentmaker) AgilentTechacquiresDakoDenmark(Lifesciencediagnosticstools) Salesforce.comacquiresBuddyMedia(socialmedia) DellacquiresQuestSoftware(Softwaremanagement) FacebookacquiresKarma(Socialmediaapp) OracleacquiresVitrue(Socialmarketingplatform) 0
Source: Company data, CM Research

Q4 2012

Q3 2012

Q2 2012

2 3 4 Acquisitionprice(US$bn)

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Global Mergers and Acquisitions in Technology, Media and Telecoms: Two year transaction history (cont.)
LinkedInacquiresSlideshare(Socialmedia) SAPacquiresAriba(ecommerce(enterprisesoftwareforprocurement)) StratasysacquiresObjet(3Dprinting) FacebookacquiresInstagram(Photosharingservice) WesternDigitalacquiresVivitiTech(formerlyHitachiGlobalStorage Zayoacquires360networks(Telecomoperators) YouKuacquiresTudou(onlinevideosite) OracleacquiresTaleo(HRsoftware) SingTelacquiresamobee(providerofmobileadvertisingservicesto 3DSystemsacquiresZCorp(3Dprinting) AT&TacquiresSpectrumfromQualcomm(mobilespectrum) AppleacquiresAnobitTechnologies(Flashmemorymaker) SeagateacquiresSamsungElectronicsHardDisk(Harddiskdrives) VerizonacquiresAWSspectrumfromComcast,TimeWarnerCableand SAPacquiresSuccessFactors(OnlineHRsoftware) BlinkxacquiresPrimeVisibilityMedia(Digitaladvertising) HuaweiacquiresHuaweiSymantecJV(50%)(Cybersecuritysoftware) OracleacquiresRightNow(Cloudcomputing) PermiraacquiresGenesys(Callcentreservices) SKTelecomsacquiresHynix(21%)(Chipmanufacturing) BroadcomacquiresNetlogic(Wirelesschips) IBMacquiresAlgorithmics(Riskmanagementsoftwareforbanks) HPacquiresAutonomy(Searchengine) GoogleacquiresMotorolaMobility(Technologypatents) Apple,RIM,MicrosoftacquiresNortelNetworks(Technologypatents) TeradataacquiresAsterData(Dataanalysissoftware) VodafoneacquiresVodafoneEssar(33%)(telecomconsolidation) HTCacquiresS3Graphics(Mobilephonepatents) eBayacquiresZong(Mobilepayments) 0
Source: Company data, CM Research

Q2 2012

Q1 2012

Q4 2011

6 8 10 Acquisitionprice(US$bn)

12

14

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Appendix 2: About CM Research


We provide global thematic research in the Technology, Media and Telecoms (TMT) sectors. Our focus is on disruptive technologies. How will they unfold? Which industries will be impacted? Who will be the ultimate winners and losers?

Our clients:
Asset managers Family offices Industry executives Consultancy houses Governments Technology, Media & Telecoms

Our research approach:

Search for emerging technology trends Spot global investment themes Screen for local companies affected

Strategy

Thematic Research

Our research product:


Global TMT Trend Forecast (annual) In-depth thematic research (fortnightly) Technology briefings Analyst access Bespoke research Forward thinking

Our recent themes:


3D printing, App revolution, Chinese Internet, Big Data, Chinese Internet, Cloud Computing, Cyber Security, Digital Media, HTML5, LTE, Mobile Internet, Mobile Payments, Net Neutrality, Regulation, Robotics, Smartphones, Social networks, Video Games

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Appendix 3: Recent Publications


Cyber-security: Evidence from the insurance industry indicates that the cyber-security sector could be the most undervalued sector in the global technology space. Robotics: 2012 was a pivotal year for the robot industry. As the market for industrial robots began to flat line, growth in the market for service robots is on course to take off. Our report looks at who's who in robotics, how this industry will develop and how investors should play this theme. 3D printing: The 3D printing technology cycle will change how we design, manufacture and repair virtually everything we use today from medical devices to aircraft parts. It could be as disruptive to the manufacturing sector as the internet was to retailing. This report looks at who's who in 3D printing and who's impacted. Indian IT Services: Since 2004, India's IT services sector has been growing at a compound annual growth rate of 22%. This year that growth is expected to slow to 11%. Most analysts think this is a temporary blip. We believe a series of emerging trends make it something more worrying. Indian IT services are overvalued. Apples valuation: We look at why Apple shares have declined 35% since their peak and why we believe they are a Buy again. Top 10 Tech Predictions for 2013: This report sets out ten predictions in the world of technology, media and telecoms for 2013, together with their investment implications. Internet regulation: A geopolitical fault line is forming that will pit emerging markets like Russia and China against the USA. The catalyst is a dispute over the regulation of the internet. Will the balance of power in the internet sector shift from US internet companies to national telecom operators? Tips from a Forensic Accountant: In the wake of the HP/Autonomy accounting scandal, how do investors protect themselves from the risk of accounting fraud? We provide a forensic accountant's ten-point checklist on what to look for. UK tech stocks to watch: Four UK technology companies that may be going places. Chinese social media: How will China's booming social media sector - including heavyweights such as Tencent, Sina, Renren and Baidu - perform if the incoming political regime clamps down on censorship? Big Data beginners' guide: Ten things investors need to know about Big Data as an investment theme. Smartphone sector trends: We identify 10 emerging trends in the smartphone sector and devise a scorecard system to rank the major players. Facebook overvalued: Why Facebook is too expensive? The Cloud: How will the shift from the PC generation to the Cloud generation impact the major players in the global technology sector? Big Data: How will Big Data impact the major players in the global technology, media and telecom sectors? Mobile Payments: Mobile payments will take off soon, but investors should be careful which technology platform they invest in. Internet advertising: Google is undervalued and Baidu is overvalued. Future of Wireless (Vol. II): A mobile bandwidth shortage is coming. This will change the pricing equilibrium dynamics of the internet, forcing regulators to intervene. LTE, spectrum auctions, software defined networks and new internet pricing models are all potential solutions. Future of Wireless (Vol. I): The mobile internet is at a watershed. Several technology cycles are now unravelling simultaneously.

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About CM Research
CM Research is an independent research provider with a blue chip list of institutional clients. We analyse emerging trends in the technology, media and telecom sectors and develop them into global investment themes, highlighting the winners and losers. At a time when many of our competitors have had their reputations mired by conflicts of interest, we fiercely guard our independence. Our business model is based on independence, exclusivity and experience. CM Research is a member of the European Association of Independent Research Providers (EuroIRP). CM Research is authorised and regulated by the Financial Conduct Authority.

Contact CM Research
Cyrus Mewawalla cyrus@researchcm.com www.researchcm.com 22 Upper Grosvenor Street, London W1K 7PE, UK +44 20 3393 3866

Important Disclosures This document is issued by CM Research (CMR) solely for our clients. This document may not be reproduced, redistributed or passed to any other person in whole or in part for any purpose without our written consent. This document is provided for information purposes only and should not be regarded as an offer, solicitation, invitation, inducement or recommendation relating to the subscription, purchase or sale of any security or other financial instrument. This document does not constitute, and should not be interpreted as, investment advice. It is accordingly recommended that you should seek independent advice from a suitably qualified professional advisor before taking any decisions in relation to the investments detailed herein. All expressions of opinions and estimates constitute a judgement and, unless otherwise stated, are those of the author and the research department of CMR only, and are subject to change without notice. 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