Technology, Media & Telecommunications (TMT) - Red Book Industry Specific

Which companies do you expect to benefit the most from the increased adoption of 5G?

In the US, the companies that stand to benefit will be the leading wireless networks such as AT&T, T-Mobile, and Verizon, especially when you consider their collective market share in the wireless carrier space. Many semiconductor companies are also expected to benefit, such as Qualcomm, Broadcom, and Qorvo. Qualcomm recently announced a new portfolio of 5G infrastructure semiconductor platforms, Broadcom is a leading vendor of chips for 5G smartphones, and Qorvo is a supplier at the forefront of radio frequency (RF) solutions.

What metrics would you use to measure user engagement?

In the context of media companies, user engagement is the level of involvement a customer has with a particular product, such as a website, application, or online platform. Higher user engagement rates imply users derive value from the product (leading to continued usage). This is of high importance for media companies because user engagement leads to customer retention and more recurring revenue. User Engagement KPIs Daily Active Users (DAU) and Monthly Active Users (MAU) Active Subscriber Count Time Spent In-App Per Day or Week Pageviews/Website Hits Churn Rate (Retention %) Conversion Rate (Free Paid Plan)

There are two distinct groups in enterprise collaboration software, platform vendors and specialist players. Could you tell me how they differ?

1. Platform Vendors: Platform vendors have an existing portfolio of software products, an established brand name, and a trusted customer base. For example, Microsoft is a trusted brand with established security infrastructures and a loyal customer following - therefore, their strategic focus is integrating Teams into Office 365 and onboarding existing customers. 2. Specialist Players: Specialist players are new entrant, high-growth companies with one service offering (e.g., Zoom). While platform vendors can afford to offer free option plans over the long-term, specialist players must urgently acquire new customers and monetize them. For specialist players, the acquisition of new customers is the focus - whereas platform vendors can leverage their existing user base that's already familiar with using their products and have gained their trust.

Tell me about the pricing models used in the OTT industry.

1. Subscription Video on Demand ("SVOD"): The SVOD pricing model provides video-on-demand services that enable users to access an entire library of videos for a recurring fee under a subscription (most commonly a month). Once the user has paid the fee, they can watch unlimited content on any device using internet access. The most mainstream examples of SVOD include Netflix, Hulu, and HBO. At present day, SVOD is the most common type of VOD offered by media companies. 2. Transactional Video on Demand ("TVOD"): Under TVOD pricing, users purchase content on a pay-per-view basis. Rather than unlimited access under SVOD, the users are charged per video or video package rather than the entire catalog. Examples of TVOD would be Google Play, Amazon Prime Video, and iTunes. 3. Ad-Based Video on Demand ("AVOD"): AVOD refers to video content that's available for free to consumers. Here, the revenue brought in is through ad revenue rather than directly from the consumers. An example would be Hulu, which offers SVOD plans in addition to a free AVOD plan.

What is 5G, and what benefits will it provide?

5G is the next-generation network that's much faster (at full capacity) than 4G that it has the promise of dramatically accelerating the development of smart cities, autonomous vehicles, drone technology, virtual reality, public transportations, and manufacturing, agriculture, health care, and many other industries. The 5G communication system claims to provide 100 gigabits per second, which would be 100x faster than the speed of 4G communication. This coincides with the reduced latency and clearance of bandwidth issues associated with emerging new technologies (which 4G struggled to handle). The nationwide deployment of 5G has come at a slower pace than advertised. Today, many users with 5G devices are actually on a slower form of 5G because many carriers are rolling out different tiers of 5G (i.e., technically no mobile devices are on "5G" as of the current date). While the major US carriers have been racing to launch 5G this year, successful implementation in some form or another has only been in select regions and has been inconsistent. For those in less developed cities, the step-up from LTE (e.g., the download speeds) has been marginal, and many users have been left disappointed by the barely noticeable change. The shift towards 5G could take up to several years as this is the natural process of technology deployment, especially given its potential implications on society. However, 5G will be well worth the wait since it'll be the catalyst of what takes IoT to new levels and allows applications such as robotics, industrial automation, and autonomous vehicles to become a reality.

For a company with a product meant for high frequency in usage, what is one way to assess user engagement?

A popular metric for measuring the level of user engagement ("stickiness") is the ratio between daily active users (DAU) and monthly active users (MAU). The DAU/MAU ratio, expressed as a percentage, is the proportion of monthly active users that engage with an application in a single day. DAU: MAU = (Daily Active Users / Monthly Active Users) ×100 For example, if the company's app has 500 DAU and 1,000 MAU, then the DAU/MAU ratio is 50%. This can be interpreted as the average user engaging with the app roughly 15 days in a 30 day month. According to Sequoia, the standard DAU/MAU is between 10% and 20%, but certain apps such as WhatsApp can easily top 50%. Note, this metric would only be useful for products with daily use (e.g., social media, messaging platforms, mobile applications). It wouldn't be useful for products that don't require daily use. For example, this metric would be useful for companies such as Facebook, Twitter, and Snapchat, but not applicable for Airbnb, Uber, and Lyft.

Could you name an example of virtualized distribution?

An example of virtualized distribution would be cloud-based gaming. Often referred to as "gaming-as-a-service," cloud gaming offers gaming through remote servers and streams them directly to a user's device. Cloud gaming is a form of virtualized distribution instead of dependence on hardware (e.g., traditional disks). When it was initially released to the public and used by consumers, it was compared to Netflix due to its similarities in the consumer experience.

Can you give me an example of a company benefiting from operating leverage?

An example would be a telecom business that has finished building out its network infrastructure. Initially, the business will incur substantial upfront capex to enable connectivity and network capabilities (e.g., equipment purchases, construction, security implementations). But once the network has been built out and operations are running, each new customer acquisition comes at a low incremental cost, as the cost of adding one customer to an existing network is inexpensive. Most of the expenses incurred are mostly maintenance-related later on. The initial investment will eventually be earned back and what remains is a high margin business with recurring revenue.

When might having high operating leverage not benefit a company?

Companies with high operating leverage have the potential to earn more profits on each incremental sale as the business scales. The caveat being, if sales and customer volume turn out lower than anticipated, the company can end up in financial ruin, given the initial investment spent and fixed cost structure. This means companies with high operating leverage have more business risk (i.e., higher risk of insufficient profitability) because the break-even point has been moved higher. If sales were to decrease, a business with a variable cost structure could easily reduce costs, but a company with a fixed cost structure has very limited flexibility.

Why has Apple shifted its focus from hardware to software?

Computing hardware sales peaked in 2011 and have seen a contraction in growth every year since, and it has become increasingly challenging for Apple to provide an incentive for customers to upgrade to newer models. Since hardware products are periodic one-time purchases, rather than recurring revenue sources, Apple has shifted its focus to building out its software and related services. Software-based services have a larger total addressable market (TAM) and lead to higher customer retention rates (i.e., product "stickiness"), thus Apple has shifted its focus on strengthening its online service offerings and further integrating the Apple ecosystem (e.g., iOS App Store, iCloud, iTunes, Apple Music, Macs). Once a customer enters this ecosystem, it becomes more difficult to leave. Many of Apple's products are intentionally not compatible with other competitors' products (e.g., cannot download Apple apps on a Windows laptop; only the web-based versions are available).

Tell me about the trend of livestreaming.

Consumers are increasingly following live video streaming apps to interact with friends, family, and other users. The popularity of live streaming first became mainstream in South Korea, but there has been a surge in popularity as many consumers enjoy watching content as it's happening in real-time and interacting with the content creator. The amount of livestreamed content and speed of adoption shows a clear desire for live content worldwide. Examples of companies capitalizing on this trend are Facebook Live, Periscope, and Twitch.

What are a few notable trends going on in the TMT industry right now?

Convergence of Business Models: More companies are increasingly stepping outside into different segments either organically or through M&A. For instance, Google has countless subscription-based services, such as YouTube Music and Google Play Pass, as well as new ventures into communication services through Google Voice, home devices through Google Home, streaming through Chromecast, and fitness through its acquisition of Fitbit. Facebook has also been active by entering social commerce through Facebook Shops, music and video content creation through Creator Studio, and livestreaming through Facebook Pages and Facebook Watch Party. While this should come as no surprise for FAANG companies, this trend includes companies in low-growth segments as well, such as AT&T, which has continued its efforts to establish itself in streaming through AT&T TV, DIRECTV, U-Verse, and WatchTV. ViacomCBS is also planning to release its new streaming service Paramount+ in 2021. Scale-Oriented M&A: There have been many mergers of equals in recent years such as the merger between CBS/Viacom, Time Warner/AT&T, and T-Mobile/Sprint, which were all significant industry-changing mergers that raised regulatory concerns. Growth opportunities have run out in these areas, thus the pursuit of market leadership through consolidation of these low-growth industries has become more common due to the benefits from cost synergies, operating leverage, and diversification. "Streaming Wars": 2020 was a transformative year for the streaming video industry, as COVID-19 accelerated the adoption of video streaming with consumers streaming unprecedented amounts of video content through providers such as Netflix and Hulu. The competition has intensified as of late as more companies are increasingly moving into the streaming market, with some of the most notable entra

What is the difference between a cyclical and secular trend?

Cyclical: A cyclical trend will less predictable in terms of timing than seasonality and can result in more severe implications on the financial performance of a company. Cyclical trends can be near impossible to time. An example would be the semiconductor industry, which is largely driven by GDP growth and spending trends by enterprises. Secular: A secular trend is a long-lasting, often permanent change in an industry because it's related to new technology developments or changing consumer behaviors. An example would be the rise of Netflix and how it benefited from the secular trend of over-the-top ("OTT") content. Most secular trends are here to stay and these shifts are often gradual with plenty of time for companies to make adjustments, but many still ignore ongoing trends until their products/services become obsolete (Blockbuster in this example)

What is demand-aggregation and could you name some companies capitalizing on this trend?

Demand-aggregation companies have business models built around establishing themselves as the middlemen between businesses and consumers. The two most well-known companies that enable this type of feature would be Groupon and Yelp. Groupon is known for providing discount coupons to consumers and connecting them with retailers/restaurants, whereas Yelp is known for its crowd-sourced reviews on businesses of all sizes. Another example would be Apple News+, which aggregates the news from various news outlets and blogs for the customer to create their personalized, curated news platform.

Despite its low margins, why do you suppose Spotify offers so many discount pricing models on its offerings?

Despite its often-cited struggles with profitability, Spotify offers a wide variety of discounted plans such as a very popular student plan and partnerships with Hulu, Showtime, Starbucks, and more. While this may decrease revenue in the short-term, this strategy is based on the focus on customer retention and the belief that this metric, for the time being, is more important than ARPU. These discounted plans may cut into their ability to make more revenue, but its impact on finding loyal customers has been positive. The churn rate for Spotify has been on the higher end, but over time this will decrease as the retained customers become a reliable base to sell other products and services (e.g., podcasts, audiobooks). For Spotify to become more profitable, its primary competitive advantage is its customer count and network. Thus, this metric must be prioritized to provide an incentive for artists of all sorts to partner with their platform and not have all the leverage when negotiating contract terms (i.e., the artist would be missing out if their music or content is not on the Spotify platform).

Disney owns Disney+, Hulu, and ESPN+. Why does Disney not just bundle them in one offering?

Disney actually offers this bundled plan, but many users choose to opt for individual offerings. From an initial glance, it might appear odd that Disney has three different streaming services. But the controlling stake in Hulu brought immediate synergistic benefits to Disney. Right away, Disney+ became a part of the "streaming wars" conversation before their offering became more developed. Hulu was long considered the primary competitor of Netflix, and now it became Hulu and Disney+ in an instant. For ESPN+, sports differ from streaming TV shows and movies because real-time, live events are the preferred consumption method by consumers (i.e., the traditional TV model). Thus, ESPN and Disney could develop an affiliate fee business model and offer a pay-per-view or pay-for-access type pricing for this arrangement. And given how sporting events have natural breaks in between, this creates an opportunity for commercials (and thus greater ad revenue).

For pricing, why does Disney undercut its competitors?

Disney+ is viewed as the main competitor of Netflix for the foreseeable future, but interestingly, the service cost was priced at only $6.99 per month, vs. Netflix's basic plan of $8.99. However, Netflix's more popular plans are its standard and premium plans, which were increased to $13.99 and $17.99 per month in 2020. There are a few reasons Disney has the flexibility to take this aggressive strategy: First, unlike Netflix, whose revenue generation and business model is entirely based on subscription sign-ups, Disney is essentially a diversified conglomerate with enough funds to take on this type of customer acquisition strategy. While Disney+ is likely to see an increase in price later on to become a more profitable division (in ~2024, according to the management), its current focus is to steal market share from Netflix. By strategically undercutting Netflix and providing its own original content pulled from Netflix, Disney has a significant advantage. Next, Disney+ is not a priority for Disney. The larger, overarching focus of Disney is its core businesses (e.g., Disney Theme Parks, Disney Studios, Disney Original Content). By controlling the distribution of its own content by going D2C, Disney can strengthen its relationships with its customers and create a network effect where each offering builds upon each other - for customers and families, in particular, this creates a fully integrated, cross-platform user experience not just in terms of online media but in-person visits. Rather than dispersing its content through various channels, Disney has now become a one-stop-shop for its content, especially given the lucrative opportunities in video streaming on the horizon.

What will the implications of Apple's IDFA changes in iOS 14 have on advertising companies?

During its annual Worldwide Developers Conference (WWDC), Apple announced that following the release of iOS 14, developers and publishers will be required to receive permission from users before using the Identification for Advertisers (IDFA), which is Apple's proprietary mobile ad ID used for ad tracking and measurement. Apple has effectively restricted one of the important elements of in-app mobile advertising. The result is that developers must now explicitly ask users to gather their data and track them across mobile apps and websites accessed on the iPhone/iPad. While originally the feature was slated for release in fall 2020, Apple delayed the privacy feature change to early 2021 to provide developers with sufficient time to adjust. This privacy feature is one of the most aggressive policy changes a tech giant has made in recent years, and what Apple users should expect to see is a prompt requesting their IDFA - as one would expect, most users are expected to select the decline option. Advertising companies such as Facebook have publicly announced this change has the potential to impact its ad revenue negatively going forward

What are economies of scale and could you give me an example?

Economies of scale occur when the per-unit costs of production decrease as output increases. These cost savings from greater scale will result in higher margins. The cost per unit decreases as more output units are produced because the costs are being spread over the increased number of goods. An example of a company benefiting from economies of scale would be Apple. Because Apple sells millions of iPhones each quarter, it can commit to component purchases at a massive scale with significant negotiating leverage that results in volume discounts (and a lower average cost per unit).

"Edge AI" is a common buzzword when discussing artificial intelligence. What does it involve?

Edge AI is a combination of edge computing and AI. Using too many devices and traffic on a single network can often clog the network and slow down the speed. To ease these issues of latency and bandwidth that hamper performance, machine learning algorithms can be run on a local server (or device) with edge computing capacity as opposed to remote servers and data centers - this is known as "Edge AI." To further explain, the algorithms are processed locally on a hardware device requiring no connection to a remote server. The chip uses data generated from within the device and then processes it to give immediate, real-time insights with no delay from network congestion. Edge AI's main advantage is that Edge AI-enabled devices can process data faster and be more responsive relative to centralized IoT devices, leading to better customer experiences.

How were Microsoft Teams able to capture market share away from Zoom?

MS Teams took significant market share away from Zoom with relative ease because Microsoft had an existing customer base. Microsoft was not necessarily better at acquiring new customers than Zoom or more innovative; instead, it had existing long-term customer relationships, and it was a more convenient change from the perspective of consumers. Many of whom were already users of Office.

What is enterprise collaboration software?

Enterprise collaboration software provides teams with tools to share information, coordinate activities, manage projects, and communicate. The collaboration market consists of many submarkets - for instance, employee communication applications (real-time chat, video-conferencing), file sharing and content collaboration, and project management. The global workplace collaboration software market is expected to exceed ~$18 billion within the next few years as the adoption of integrated collaboration and communication software increases. Amid the recent global coronavirus crisis, collaboration software applications have become an increasingly integral part of how businesses' workflow is organized and carried out. As enterprises were forced to function remotely, executives deployed new collaboration tools company-wide to connect physically distant teams. Zoom (ZM) is considered a primary beneficiary of the coronavirus outbreak, as many employers and schools were left with no other option but to use remote video-conferencing software.

Many investors initially dismissed Roku following their IPO. Why has the company far exceeded initial expectations to date?

Following their IPO, many investors had a negative outlook on Roku, given the ongoing shift away from hardware. Competitors such as Apple with its cult-following were expected to steal Roku's customers with ease. But to the surprise of many, Roku is one of the market leaders in 2020 for connected TV platforms and has outperformed expectations. Despite still using hardware (e.g., the stick users plugged into the TV), Roku made several strategic moves that enabled them to have a leading position. Roku partnered with television manufacturers to make Roku OS come built-in the TV right out of the box. Despite having an arguably outdated design, its simple interface, ease-of-use, and affordability created a niche. Next, Roku established partnerships with Netflix, Hulu, and Disney+ to allow its users to stream any of the top media apps from their TV. This level of independence from not trying to get customers to use a certain app over another (i.e., from Amazon, Google, Apple) is a key reason it has become the choice of consumers - all Roku concerns itself with is providing an easy, affordable way for customers to stream content from their homes.

Which multiples are most commonly used to value modern media companies?

For high-growth media companies, operational KPI-based multiples are very common due to many of them being unprofitable or barely profitable. Traditional cash flow based metrics fail to capture the true value of many of these companies. By virtue of many of these companies having the objective of acquiring new customers, large losses will inevitably be incurred. Therefore, it would be unreasonable to assess a growth-oriented company based on profitability-based cash flow metrics. EV/Revenue is often looked at, but it may not be the ideal multiple to look at if user growth is currently being prioritized over monetization. Instead, user count, growth in new customers, and the churn rate are the key value drivers used to assess performance. And multiples such as EV/MAU, EV/DAU, and EV/Monthly Subscriber Count may provide a better indication of the company's value.

What did Apple announce in 2020 that will negatively impact Intel?

In 2020, Apple's CEO Tim Cook officially announced Apple would part ways with Intel and confirmed the company would begin its transition towards using its own custom-built ARM processors in its laptops and desktops (i.e., to proprietary ARM-based processors developed in-house). Apple stated its "Apple Silicon" chips would allow for better, more powerful Macs, and its own chips would bring a new level of performance speed while being more energy-efficient. Apple claims the chip's advanced power management capabilities would enable maximized performance paired with industry-leading battery life. The first Mac with Apple Silicon will be released at the end of 2020, and Apple expects the split with Intel to take approximately two years.

What major licensing deal did Spotify complete in 2020?

In May 2020, Spotify shocked the podcasting market after announcing that Joe Rogan, the host of the Joe Rogan Experience, had agreed to an exclusive $100 million licensing deal. The Joe Rogan Experience is widely considered as being one of the most popular podcasts in the US, with each episode receiving millions of views. Spotify CEO Daniel Ek has stated that he had realized that podcasts and audiobooks would be the future of Spotify, rather than music alone. These acquisitions and partnerships accelerate the path for Spotify to become the leading audio platform. The gradual change in strategy could be seen in the acquisition of podcast networks Gimlet Media, Anchor, and The Ringer, but the acquisition of JRE was by far the highest-profile strategic move by Spotify to establish itself in the podcast market.

How have the acquisitions of Time Warner and DirectTV by AT&T performed to date?

In the past five years, AT&T has spent billions to position itself well for the streaming wars. Its M&A spending spree began with its acquisition of DirecTV in 2015 in a $49 billion deal, which appeared to be a well-planned, strategic acquisition when media companies were benefiting from a surge in online video consumption from consumers. Then the hugely controversial merger with Time Warner took place in 2018. Since then, AT&T's streaming ambitions have appeared overzealous, and it currently owns many seemingly redundant streaming brands such as HBO Go, HBO Now, AT&T Now, AT&T TV, AT&T WatchTV, AT&T U-verse, and DirecTV. By the end of the fiscal year 2019, AT&T carried more than $150 billion in debt on its balance sheet - which flowed down to its customers through increased pricing. In its FY 2019 annual report, AT&T not only lost traditional TV service customers but internet video platform users. Initially, AT&T had expected to benefit from the influx of new subscribers acquired from DirecTV and use this leverage in negotiations with programmers. Then, by merging with Time Warner and the acquisition of HBO, AT&T would have access to original programming and be the most well-rounded premium service offering in both quality and quantity. While the original grand vision was to create a media conglomerate; instead, it saddled AT&T with massive debt, higher pricing plans than its competitors, and a lagging market position despite all their spending. The questionable M&A strategy of AT&T gave them a seat at the table for the streaming wars and made them a more modern, diversified company, but it came with such significant expenses that to this day - it's not yet clear whether those acquisitions were the right decisions (or if they were all necessary).

What is net neutrality?

Net neutrality is the idea that internet service providers (ISPs) should treat all online data equally, without preference towards certain users or restricting access content or discrimination towards others - hence, the name "neutral." If net neutrality were not to exist, ISPs could place restrictions on the kinds of access to content on the Internet (i.e., hinder downloads, uploads, application usage). Also, the ISPs could intentionally slow down or speed up the internet based on where the access is based (or the owner).

What are some examples of barriers to entry that can help protect a company's profit margins?

Network Effects: Network effects are the incremental benefits from more users joining a platform and once a platform has attained critical mass in users (i.e., reached the inflection point of product adoption), it becomes very difficult to take market share away. Economies of Scale: Improved cost structures from the increased scale can be a barrier to entry that deters competitors, as the existing incumbents have a clear advantage in profitability and thus have more cash flows to reinvest into the business. Since the unit costs of a product decline as the volume increases, new entrants would come in with a significant cost disadvantage right away. Proprietary Technology: By having a differentiated offering that nobody else has, competition would be non-existent (or minimal), especially if there are patents involved. High Capex Requirements: Capital requirements related to infrastructure, machinery, and R&D to get a business started can deter new entrants. Switching Costs: Unless the new entrant has a significantly better product/service than the current offerings, switching costs can serve as a barrier (i.e., the switching costs outweigh the benefits). Regulatory Hurdles: The government and regulatory requirements can serve as barriers to entry, especially in highly regulated areas such as healthcare. These requirements to receive approval to enter a market can deter new entrants but benefit existing incumbents.

Tell me about an ongoing trend in the news industry.

Nowadays, many writers, including reporters and journalists, are increasingly starting their independent online newsletters. These writers are creating mini-news platforms through an online email newsletter. With distrust of the media at an all-time high, a growing number of writers and readers have been gravitating towards newsletter platforms such as Substack. By doing so, creators have full autonomy over not only the pricing but their content. Also, rather than generating revenue through advertisements, these writers are paid through subscription plans that many of their readers pay each month. This trend of newsletter platforms is the decentralization of the news, which has increasingly become governed and censored by publishers. Other examples include the continued digitalization of news to more mobile, news aggregation services (e.g., Reddit, Apple News), Twitter as a news platform, and daily/weekly curation newsletters.

What do over-the-top services refer to and can you name a few examples of "OTT" providers?

Over-the-top ("OTT") is the delivery of film and television content through the Internet, bypassing traditional cable and satellite TV services. Examples of OTT providers include Netflix, Hulu, and Amazon Prime Video. The trend of OTT is being driven by cord-cutters and trimmers, which refers to consumers increasingly cutting off their cable connections to switch to a lower cost subscription-based OTT provider. Simply put, digital transformation has re-defined the media industry and traditional business models are being replaced by consumer-oriented experiences. Many consumers nowadays don't see the benefit of having access to programs they don't watch and desire the customization that OTT enables them to have.

How did TikTok become such a popular app in an industry that's considered as being near a monopoly in terms of competition?

Owned by ByteDance, TikTok is a video-sharing social networking application that allows its users to make and share short ~15-second clips. At first glance, the platform doesn't come across as noteworthy, given how similar it sounds to the features of Snapchat, Instagram Stories, and Facebook Stories. But the reason TikTok achieved such rapid adoption was because of its focus on user-generated content. More specifically, just about any person could go "viral" and garner millions of views on this app. Compare this to a platform such as YouTube, where the front page is filled with content created by well-known people (often sponsored partners). A similar application, Vine, was one of the first short-form video sharing applications to gain mainstream adoption and was acquired by Twitter. However, Vine was eventually shut down, which many attribute to its biased algorithm in which endorsed content was disproportionally promoted on the app (making the content repetitive as the same branded creators would be shown and often recycled in the feed). Given how TikTok's main appeal appears to be the aspect of users discovering new content by unknown people, it seems unlikely TikTok will make the same mistake as Vine, especially given how the company has stated its mission is to enable everyone to be a creator and share their creative expression through their videos. While this question won't appear in an interview, it's useful to understand the niche of the leading technology companies within an industry. Likewise: How has Snapchat performed well to this date despite many believing Instagram Stories (practically a copy-cat of Snapchat's features) would kill the app's usage?

Tell me about a few of the ongoing trends in the enterprise collaboration software industry.

Platform Vendors vs. Specialist Players: As the market matures, collaboration solutions that offer a suite of offerings under a unified platform will have a key competitive advantage. Third-Party Application Integrations: To compete with larger established vendors, specialized single-application companies must include more third-party application integration within the collaboration ecosystem to increase end-user satisfaction. Upcoming Consolidation Phase: The market remains highly fragmented with a low barrier to entry, making it ripe for M&A activity (e.g., productivity apps, note-taking apps, time management apps, employee tracking, and scheduling apps). Thus, more enterprise software providers will include social software and collaboration into their product mix. Shift Towards Remote Work: Before COVID, approximately ~70% of the global workforce worked remotely at least once a week. In 2020, remote work became completely normalized in our society, and many large corporations have stated they intend to continue working remotely for the foreseeable future. Security → Customer Trust: Privacy and security concerns will be a major topic of discussion in the future - earlier in 2020, Zoom came under scrutiny after major security flaws and platform deficiencies were uncovered. Thus, Zoom rolled out more encryption offerings and acquired Keybase to strengthen its security and regain users' trust.

Would you consider B2B software to be non-cyclical?

Robert F. Smith of Vista Equity Partners once stated that "Software contracts are better than first-lien debt. You realize a company will not pay the interest payment on their first-lien until after they pay their software maintenance or subscription fee. We get paid our money first." Today, many B2B software applications have become essential, embedded parts of companies - meaning, the removal of a software product from a business would leave its operations unable to continue functioning. Also, most software arrangements are structured as long-term contracts and include high switching costs. For these reasons, B2B software would be considered non-cyclical and resistant to downturns.

What is the FCC agency and what is its role as a regulatory agency?

The Federal Communications Commission ("FCC") regulates all interstate and international radio, television, wire, satellite, and cable communications in the US. The agency consists of a five-member panel appointed by the President of the US and confirmed by the Senate. The FCC aims to protect consumers from unfair increases in prices or be forced to accept lower quality services and prevent companies from becoming monopolies to where others cannot join the market from the barriers being too high.

What is the "varied access" pricing model?

The varied access pricing model provides different content access levels to subscribers (i.e., different subscription plans based on their preferences). For example, Netflix offers its users options to sign up for a single, one-screen plan or a family plan option with additional features such as higher resolution.

Tell me about the controversial T-Mobile and Sprint merger that brought up concerns of a monopoly and how it ended up being approved.

The T-Mobile and Sprint merger was finally approved and completed in 2020, after the initial deal announcement in 2018 and delays related to regulatory scrutiny. The merger was controversial as it effectively brought down the number of major cell phone carriers in the US down from four to three. As part of the agreement for the acquisition to be completed, T-Mobile agreed not to raise prices for three years. Thus, T-Mobile and Sprint users cannot see any price increases until 2023. One reason the Justice Department agreed to the T-Mobile and Spring merger was because of DISH Network's involvement. To secure the Justice Department's approval, the two carriers agreed to divest certain assets to DISH, most notably its prepaid subsidiaries (e.g., Boost Mobile), spectrum licenses, and many of Sprint's retail stores. DISH would become a viable 4th wireless carrier, allowing for healthy competition to be maintained.

Which valuation metrics are common to see for traditional telecom companies?

The category of traditional telecom companies would include mobile telecom service providers, convergent telecom service providers, cable operators, and data centers/infrastructure providers. The traditional telecom industry is capital-intensive with high fixed costs, which are typically financed using debt as these companies operate in a highly concentrated, mature industry with minimal cyclicality. Because of the large amount of debt in their capital structure, telecom companies will incur substantial debt-related expenses. In addition, high amounts of depreciation will be recognized each year given their large fixed asset base. Another notable consideration is the tax incentives from the government provided for research & development (R&D), especially as the US attempts to build out its 5G infrastructure. For the reasons stated above, accrual-based earnings are volatile year-over-year (YoY), making equity value based multiples like P/E less useful. Instead, the most commonly used valuation multiple is EV/EBITDA, but often EBITDA is on a run-rate basis or normalized over several years to account for inconsistencies. EV/(EBITDA - Capex) is also common to see, as many consider it a better approximation of operating free cash flow given the capital intensive nature of the telecom industry and the need to adjust for capex. Telecom would be an example of an industry where trailing (LTM) and forward (NTM) multiples would be truly necessary to fully understand the valuation trends. Unique to telecom companies, other multiples include EV/Data Centers, EV/Net PP&E, EV/Route Miles, EV/Fiber Miles, and EV/Access Lines in Service, EV/Broadband Subscribers, and EV/Broadcast Revenue. As a side note, considering how diversified many of the traditional telecom companies have become, it may be necessary to perform a sum-of-the-parts

In the context of technology applications, what does product bundling mean and could you provide an example?

The concept of product bundling is taking complementary products that frequently get purchased together and selling them as a whole. There is typically a direct complementary relationship between the products such as Adobe's Creative Cloud offerings (Photoshop, Illustrator, and After Effects), whereas with others, there's a broad, indirect link. An example would be an Amazon Prime membership and Amazon Prime Video, in which a customer having both doesn't add more value to each other (other than the savings from the discount).

Many enterprises are expected to test private 5G deployments. What are the implications?

The increased deployment of private 5G networks by enterprises means more next-generation wireless 5G radio antennas and transmission resources will be dedicated to a specific enterprise (and become independent of cellular networks). In effect, private 5G networks will bring bandwidth to areas that carriers have neglected or locations with greater security requirements. In theory, these private networks should be more secure as the enterprise (the network operator) will set up and monitor its security policies instead of relying on a 3rd party, and it would enable data to be stored locally on the nearby premises of the facility.

What are network effects and can you provide some examples?

The network effect is a phenomenon whereby the value of a product or service offering increases with each incremental user and increased adoption. Network effects compound once critical mass is attained, meaning past this inflection point, new customers' acquisition experiences a domino effect where less effort and monetary investments are required. Facebook is an excellent example of the network effect, as its advertising revenue took off once its user base grew and customer engagement increased. By virtue of being the largest, fasting growing social media platform, Facebook obtained a durable moat in the advertising market, which led to an influx of advertisers wanting to place ads on Facebook's platform (driving up ad revenue) and new opportunities for different products and services to be introduced. Another example would be Google's search engine, which provides more accurate results as more users use the platform. Here, the network effects led to more advertising revenue and a more effective product as more usage of the product by users increased the product's value for all users. This explains why Google has dominated the search engine market with a near ~87% market share.

What impact did the success of Fortnite have on business models in the gaming industry?

The online video game Fortnite was unique in that it had a "free-to-play" business model, yet it generated well over $2 billion in revenue across all platforms and became one of the most successful games that brought mainstream attention to Esports. Rather than selling its game for an upfront fee, Epic Games (the publisher of Fortnite) made the game free to download - betting on its ability to monetize content through offering optional in-game purchases of different costumes, skins, Battle Passes, and V-Bucks. By offering the game for free, Fortnite amassed a cult-like following in a very short duration because of the minimal friction for a user to play with their peers. And this popularity and customer acquisitions led to opportunities for sponsorships, ad revenue, and live competitions. In effect, the success of Fortnite made video game incumbents realize the revenue potential besides the initial purchase (e.g., Esports, advertising, in-app purchases, priced unlocks).

What effect does having high operating leverage have on the scalability of a business?

The operating leverage represents the proportion of a company's cost structure that consists of fixed costs, as opposed to variable costs. Thus, companies with a higher proportion of fixed costs in their costs structure have greater operating leverage High Operating Leverage: If the company has high operating leverage, each additional dollar of revenue can be brought in at higher profits once the fixed operating costs are paid. Thus, each marginal unit is sold at a lesser cost, creating the potential for greater profitability since fixed costs such as rent and utilities remain the same regardless of output. Low Operating Leverage: If a company has high variable costs, each additional dollar of revenue may generate less profit as costs proportionally increase alongside increased revenue (i.e., the variable costs offset the additional revenue). If revenue were to increase, these costs would rise in tandem (or vice versa).

Why is the semiconductor industry known for being cyclical?

The semiconductor industry highly depends on the economic conditions (i.e., usually follows GDP growth rate), as IT spending fluctuates heavily based on how the economy is doing. Besides being tied to enterprises' spending trends, it depends on new device purchases such as smartphones and laptops by consumers, which are very cyclical and decrease substantially during downturns. Another aspect is how the industry's products have short life-cycles and can become obsolete quickly once better new developments occur, even from minor incremental improvements. Hence, the industry is known for inventory build-up and write-downs of inventory.

Where do the opportunities for monetization in the Esports industry lie?

There are four general monetization strategies for the Esports industry: merchandising, sponsorships, media rights, and gate revenues. But most industry revenue comes from advertising, which is a direct function of audience count and engagement hours, rather than just viewership. Therefore, advertisers see a large market opportunity in Esports, as these streams often have some of the highest levels of engagement, and there's a level of trust between an Esports athlete and his/her fans that's rare to find these days. Esports athletes (especially those that stream on video platforms) often stream for hours daily and interact with fans, thus creating a sense of community. However, Esports is often considered difficult to monetize as the Esports audience is heavily skewed towards the younger demographic, who have less discretionary spending power.

The term "latency" often comes up when discussing 5G. What does it mean?

To enable connectivity between devices, large amounts of data are being exchanged online. A delay in transmitting data is referred to as latency and can hinder the user experience. Thus, reduced network latency when transmitting data packages prevents irritation and frustration from users (i.e., comparable to being stuck in road traffic). Latency is directly related to a network's bandwidth, which is a network's maximum data transfer rate over a certain period. While the two are not interchangeable terms, they're closely interlinked.

What are the most common types of business models in the telecom and media industry?

Traditional Equipment Sales/Wireless Services: The first category comprises the traditional range of telecommunications equipment, networking products, and wireless services (e.g., Wi-Fi plans, cable television). As the oldest segment in TMT, recent revenue growth has been very low because this type of revenue is related to one-time equipment sales and then monthly plans, making revenue growth a function of geographic expansion (which has begun to stall). However, companies in this space tend to benefit from high operating leverage, barriers to entry, and lack of competition; hence, the anti-trust concerns. The incumbents are few and include companies such as AT&T, Verizon, and T-Mobile. Subscription-Based Streaming: The next category would include companies such as Netflix, Hulu, Spotify, in which business models are built around new customer acquisitions, minimizing churn, and increasing pricing by offering more value than their competitors. For companies in this segment, user count growth is the priority and many have no clear pathway towards becoming profitable without first achieving significant scale. Streaming has quickly become one of the most competitive spaces across all industries as traditional industries such as cable television and radio have been completely disrupted and new developments appear (e.g., cloud gaming, Esports) Advertising: This category would include companies such as Facebook, Twitter, and Google, which are companies that focus primarily on metrics such as MAU and DAU. Given their reliance on advertising, user engagement a key measure when assessing these companies' recent performance. While industry growth has been very strong for years now, particularly for the leading companies, the greatest hurdle looking ahead appears to be increased efforts by regulatory bodies to restrict user data

What are the five types of virtualization?

Virtualization refers to running multiple operating systems on a single system simultaneously, resulting in reduced IT expenses and increased efficiency for businesses. 1. Desktop Virtualization: Desktop virtualization is when a desktop operating system can run as a virtual machine on a physical server with other virtual desktops. 2. Application Virtualization: Application virtualization packages several applications into a single application, which is then separated from the operating system to run in a "sandbox." 3. Server Virtualization: Server virtualization enables many virtual machines to run on one physical server, which leads to more efficient utilization of the physical server. 4. Storage Virtualization: Storage virtualization is physical storage being grouped to have a single storage device in a virtual format. 5. Network Virtualization: Network virtualization combines hardware appliances and software to enable management from a single external virtual network (i.e., aggregate various physical networks into one network).

Name a weakness in Spotify's business model that explains its lack of profitability.

While Spotify's fixed costs (e.g., SG&A and R&D) are in line with its comparables, Spotify's problem is its marginal costs. These marginal costs are mostly related to the royalty fees it pays to record labels, songwriters, and publishers. In contrast to Netflix, Spotify has close to no original content, although they're negotiating new deals for lower rates and their mass adoption of subscribers provides an incentive for record labels to partner with Spotify to expand their reach. Spotify's value proposition to its customers completely depends on record labels - who ultimately control the rates charged. To add insult to injury, competitors such as Apple offered free trials that lasted up to 3+ months. Similar to the Disney/Netflix relationship, Apple's revenue comes from diversified sources, unlike Spotify.

What is pricing power and how would you measure it?

While there's no exact formulaic method to calculate a company's pricing power, a useful question to ask is: "If the company raised prices by ~25%, what would the impact on customer retention be?" It's a positive sign if customer retention remains relatively stable after raising prices. If a company has pricing power, it can raise prices and not see a substantial customer churn increase. The amount of pricing power a company is determined by how essential a product is to the users, how unique the value it provides, and the availability of (or lack of) other alternatives in the market.