The big bubble unwinds. Miss. Some of the craziest components have started to stall but we are still in record territory. As Keynes famously said “the market can stay irrational longer than you can stay solvent”.
Cloud, e-commerce and telework stall. Hit. Some pullback in all categories as expected, even with COVID lasting longer. The main exhibit is Zoom’s valuation.
West grows faster than China.Miss. According to the IMF China will manage to grow over 8% vs. 2020 Real GDP. All major western countries are below 7% (starting from a much more damaged based in 2020 vs. 2019).
COVID goes away.Miss. Delta, Omicron…
Big Tech on the back foot strategically. Hit. They are finally being considered the 21st century railroad robber barons. This will lead inexorably to day 2 for all of them, sic transit gloria mundi. The only amazing caveat to this is Microsoft, which somehow has escaped notice.
Cyber is considered weapons-grade serious. Hit. Cyberwarfare is now a serious concern for everyone
Europe finds its footing. Difficult to say. Some movement, but not spectacular, time will tell.
No iPhone moment. Hit. Mark Zuckerberg has coined the metaverse, but the iPhone moment is still missing.
No substantive action on climate change, inequality, or cloud democracy. Hit. COP2 was better than expected, but not enough. However, the commitment by financial firms with more than $130T of assets undermanagement might just make the difference. ESG is not table stakes for all groups.
My 10 hopes for 2022
This year I will do my hopes. I have one certainty I am pretty sure about. 5 things I hope happen and 4 I hope don’t happen
Digital continues. There will be more cloud adoption, more use of bandwidth, more devices, more datacenters, more fiber, more private networks, more submarine cables, more satellites, connectivity will be more important… You name it. We might live in a very uncertain world. What is certain is that Digital continues year by year
5 things I hope that happen
Next big thing. It has been 15 years since the iPhone. Smartphone evolution has been absolutely inexistent for the last 5, pundits have been predicting the next big thing since 2015 at least. I hope this is the year of the next iPhone-like product that changes the paradigm, maybe we won’t notice even if it happens
Post-COVID. I hope Omicron is the last of COVID and we get back to normalcy not only in the developed world but also in the developing world where vaccination has been much less wide spread.
Inequality starts unwinding. There are promising signs that inequality is going down globally and in key countries like the US. Record wage growth and a tight labour market are the key ingredients short term for a reduction in wealth and income disparity. Longer-term we need to do something about education, and stop treating it as a luxury item.
Climate action starts in earnest. We are already running at least two decades late, but maybe we will be able to get our act together and declare war on climate change. The crazy energy and gas prices in Europe might be a great (if regressive) starting point
Europe shows the third path. The US’s unbridled capitalism seems to be throttling full speed to civil unrest. China’s socialism with Chinese characteristics seems too authoritharian and might become too static. Europe has a system in which it is great to live, however, it has to take responsibility of improving the world outside its borders.
4 things I hope don’t happen
No hot war. The tense geopolitical situation around Taiwan, Ukraine and Iran doesn’t flare up into a hot war involving the US, Europe, Russia and China.
No major civil conflict in the US. The heavily polarized situation in the US doesn’t lead to a re-enactment of January 6th or to even graver incidents.
No financial meltdown. The inflated asset prices in all asset categories, as well as unheard of levels of indebtness and monetary expansion don’t trigger a meltdown.
No literal meltdown. The Greenland, Artic and Antartic icepacks don’t melt down significantly accelerating climate change and sea levels.
Most developed markets are at zero effective interest rates. Japan has been under 1% since the 90s, the EU since 2009, and the US from 2009 to 2017 and since the 2020 pandemic. Zero-interest rates disrupt the economy’s traditional transmission mechanisms, eliminating the time value of money. Consumers can now get a 0% interest rate mortgage in Denmark. Last time it happened was in the 1930s during the Great Depression and WWII (see Ray Dalio chart). I will explore two potential explanations: (1) another cycle that repeats the 1930s and (2) a new era in which Capital is plentiful and loses value to Knowledge, the new limiting factor of production.
“Stock prices have reached what looks like a permanently high plateau.”
Irving Fisher, 1929
In this explanation, the zero interest rate phase would be part of a broader cycle. This cycle is driven by a combination of technological change, inequality, global power transition, political upheaval, and/or other factors. These pressures drive governments to lower interest rates to the minimum to keep the system going without taking painful decisions. Lowering interest rates requires rapid monetary base expansion. At some point, conflicts come to a head as inflation starts to get out of control and decisive interest rate action resumes.
Taking the 1930s as a reference, this could include populist takeovers of governments, wars, asset bubbles, currencies going to zero, and much more. There are undoubtedly uncanny parallels between the 1930s and our current situation. First, we are at a time of extreme inequality between countries and within countries that COVID has exacerbated. Inequality creates social conflict and is triggering populism as the attack on the US Capitol showed. Second, growing geopolitical competition between the US and China has led to trade and technology wars. Third, western governments and Japan are engaged in unprecedented monetary base expansion with debt is growing to previously unseen levels. Fourth, technological change is ready to redefine our social and economic structure.
On top of this, we face climate change and the COVID epidemic, which increases pressure and uncertainty. While at the same time, binds countries together, as neither can be addressed individually.
At the end of the cycle, we can expect “hard” disruptions over the next years to reconfigure our technological, economic, social and geopolitical balance. The consequences can range from minor to tragic. Whatever system comes out of catharsis would again have higher interest rates, allowing us to keep most of our financial mechanisms intact.
A new era
“I can state flatly that heavier than air flying machines are impossible.”
Lord Kelvin, 1895
In this explanation, interest rates have gone to zero as part of a secular trend of increased capital availability. Increased availability has removed it as a limiting resource in developed countries. Knowledge is the new factor of production that is limited and highly rewarded. As Capital superseded Land, Knowledge has superseded Capital. As wealthy landowners lost the central stage to industrialists, banks and asset managers have lost to tech innovators and private equity.
Of course, Capital is not free everywhere—many people, companies, and states have substantial risk profiles and have to pay for that risk. However, supposedly “riskless” assets like the German state, Apple or Danish homeowners don’t pay any interest rates, at least while they behave responsibly.
Knowledge takes many forms. It can be codified in software assets, it can be a business system or business processes, it can be proprietary information, or it can be in the knower’s head. Capital was less tangible than Land, and Knowledge is less tangible than Capital. Making it difficult to evaluate and audit, as balance sheets with exploding intangible assets show. Knowledge is also much more domain-specific and has a higher risk of obsolescence. This makes it difficult to distinguish between “good and bad” Knowledge.
Entrepreneurs with an advantage in the Knowledge factor of production like technology and biotech startups and scale-ups have almost limitless access to funding. They can choose from many potential capital providers that bid up their asset values to the future cash-flows Knowledge will supposedly generate. Big Techs have managed to create a virtuous cycle of Knowledge creating access to data, which they convert into further Knowledge which differentiates them. Customers are paying for Big Tech services which are “free” from a monetary/Capital perspective in terms of data/Knowledge.
Investors with an advantage in the Knowledge factor of production like Private Equities, Venture Capitals or Hedge Funds also have unlimited access to Capital. They are limited only by their capacity to apply Knowledge to the Capital they raise. So they look for ways to gradually expand their scope of activity to maximize the leverage of that Knowledge. This can be seen in exploding assets under management in the largest PE funds like Blackstone, Carlyle and Apollo.
In the new era, interest rates for Capital are permanently lower. Abundant Capital competes for scarce Knowledge, driving prices down. This dynamic can generate a winner-take-all situation driving inequality and reducing opportunity for many. It requires rethinking and rebuilding our economic, financial and social systems.
Only time will tell where we end. My opinion is that a combination of both phenomenons is at work. On the one side, we are in the middle of an asset bubble. The “permanently higher plateau” of SPACs, priced for perfection equities and artificially low-interest rates will at some point collapse and force a reckoning. On the other hand, there is much more Capital available, and financial innovation has made Capital more liquid and flexible, and thus less scarce and less rewarded. We should use this abundance of Capital to tackle our time’s challenges, like climate change or inequality. Those that can convince capital holders of differential Knowledge will continue to access Capital with increasing ease and be rewarded for it.
How can we square both conclusions? It is about the difficulty of evaluating Knowledge in a bull run. The long monetary-induced bull market has made critically evaluating Knowledge difficult. Knowledge in companies is swamped by infinite Capital that can be used to fake results (e.g. WeWork). Knowledge in investing is obscured by a market where most investors are getting phenomenal returns just by showing up. Paraphrasing Warren Buffet, once the tide of valuations recedes, we will see who was swimming with relevant Knowledge, and who was taking advantage of the bull market.
China/US, Climate Change, and inequality are three central geopolitical questions for the 2020s. Please share your answers for these three.
In case you hadn’t noticed, we are living in a time of great uncertainty. We already thought we were living in a time of great uncertainty this time last year, but it was much more significant than we could have imagined. Uncertainty is difficult to predict, so questions become crucial. What are the critical questions for the 2020s?
I have selected three questions that trigger my curiosity and have tried my best guess to identify potential answers. The best way to predict the future is to shape it, so I have included the answers I hope to achieve by 2030.
Please share your collective intelligence in the comments section.
1.Will the US-China power transition occur, and how will it happen?
The US and China are in a power struggle. Thucydides Trap, Great Power transition, or Cold War 2.0. China has been closing the gap rapidly with the US. And the US is starting to pull all the non-military stops: trade sanctions, technology restrictions to avoid China catching up (most notably in semiconductors), capital markets controls (many Chinese companies delisted in the US), non-military geopolitical clashes (mostly about the south china sea and Taiwan), cyberwar (like the Solar Winds attack, even if it was Russia based in the end). For an in-depth understanding, I recommend the great chapter from Ray Dalio on China-US. His thesis is that these conflicts happen every 100-200 years and take a decade of not military conflict before turning “hot”.
My questions: Will conflict turn “hot”/military? Will China overtake the US? Do we need a global hegemonic power for stability?
Two possible answers with three sub scenarios for the “Cold war”:
“Hot war” in which differences boil over to militarily conflict. Given the advances in our capacity to destroy each other, this scenario will be horrible whatever the outcome. However, most US and Chinese citizens haven’t suffered a war in their lifetimes, so they could fall into the “war fever” that lead to WWI.
“Cold war” in which conflict stays outside of the military domain, which would be great news. In this scenario, we could see China overtake the US and become the hegemonic power. We could see the US system emerge victorious again, reestablishing dominance and isolating China. Or neither China nor the US achieves supremacy, with the world moving towards a multipolar equilibrium.
2. Will we tackle climate change? What will be the consequences?
Wildfires, freak snowstorms, hurricanes, record hottest year every year, the evidence is on the table. I still hope the negationists are right and everything goes back to normal on its own. It seems increasingly improbable. Climate change is the challenge of our lifetimes, and we are failing miserably. COVID has shown that we could reduce emissions drastically if we think it is important enough. We make progress on the edges. We don’t execute the forceful (and expensive) answer that experts claim we need.
My questions: Will we tackle climate change head-on? Or will we boil like the proverbial frog? Will the consequences of warming be “Hollywood apocalypse movie-level”? Or will we continue to watch temperatures increase one decimal at a time?
Three possible answers:
We act globally and stop climate change in time. The War against Warming achieves Marshall plan-status in history books. A new zero-impact economy develops.
We fail to act, and not much happens. The 2020s go by like the 2010s—calls to action, tentative progress, and increasing temperatures. However, disaster doesn’t materialize. In 2030 we are asking ourselves if we will act in the 2030s.
We fail to act, and disaster ensues. The 2020s are going by like the 2010s, but climate disaster strikes. We all wonder how we could be so stupid.
3. Will we tackle inequality within societies?
We are at the peak of inequality in developed societies. Only reached previously in the late 1920s. Inequality has been widely chronicled. My personal favorite is Thomas Piketty’s Capital in the Twentieth Century. Inequality is not only unfair but also incredibly damaging to the stability and productivity growth of societies. Rich people tend to spend on non-productive luxuries. Getting rid of inequality is very difficult. Last time it took a world war, taxes, devaluation, and landmark investments in education. The problem is widespread, but the US is the poster child with necessities like education and healthcare outrunning income growth by a large margin. Inequality is already driving populism, social unrest, and public debt.
My questions: Will we reduce inequality within developed societies to drive stability and productivity? Will we make broad-based investments to prepare workers for the digital transition? Or will we try to control unrest through “panes et circenses” (smartphones and VR)?
Three possible answers:
The digital dividend equalizes the playing field and triggers a new broad-based wealth creation and productivity wave that regenerates the middle class.
VR anesthetics and Universal Basic Income serve to distract those with less income and wealth, “Panem et circenses.”. It creates uneasy stability without accelerating productivity.
Populist take-over, as the inequality gap, continues to widen, and populist politicians achieve dominant representation and eventually take over.
My desired outcome
The China/US war never turns hot. The global crusade/jihad on Climate Change and inequality with all countries and global citizens on the same side supersedes it. Governments marshall global resources to invest in a green productive system and free universal high-quality education and healthcare. 2030 dawns with a carbon-neutral multipolar planet with opportunity for everyone.
The EU Comission has put out two new laws, the Digital Markets Act and Digital Services Act, with the potential to reclaim Digital Sovereignty. This is a critical step to accelerate productivity growth, allow European tech companies a level playing field to compete, and ensure citizens and institutions in Europe stay in control of their own destinies.
After the events of Jan 7th 2021, the most powerful country in the world has had to convince private company CEOs to stop a threat to their institutional order. The US Congress didn’t turn to the CIA or the FBI or the US Army, it rather asked the CEO of Twitter, Facebook, and AWS to ban Donald Trump and friendly apps from its platforms. While it is difficult to wish they had done otherwise, this represents the clearest call-to-arms for digital sovereignty. Power was not in the hand of the citizens, it was in the hands of company CEOs.
COVID has shown that the world is digital to a large extent and it is only getting more so. Countries need to exercise sovereignty over their digital space, much like it is exercised over physical space. If not countries will be digital colonies of the private companies that exercise that sovereignty or the foreign powers that control them. Europe today is mostly a digital colony of the US-based Big Tech companies.
As with the colonies of old, being a digital colony will hurt your citizens in a variety of ways. Digital colonialism hurts innovation and productivity, as the digital overlords allow only what is in their own interest. It also precludes local companies from accessing opportunities in the digital space, opportunity is for the colonialists only. Finally, it limits individuals’ digital freedoms and rights, it is the colonialists to decide. The EU needs to act to address it. At the same time, regulation is always tricky. Heavy-handed regulation can hurt consumers and investment at the same time.
The EU Commission has put out two bold new regulations to reclaim European Digital Sovereignty. Digital Markets Act, focused on platforms, and Digital Services Act focused on services. On paper they both strike a great balance that could free European citizens to access productivity, opportunity, and freedom.
Digital Markets Act (DMA)
The DMA targets large digital platforms in most arenas (ad marketplaces, search engines, social networks, app stores, online intermediation, mobile messaging, video sharing, operating systems, cloud computing, etc…), and the natural monopolies they constitute. It forces these platforms to be interoperable through APIs without discriminating against third parties. It also sets out ground rules for how to manage data, including workable access to data and ensuring customer data portability. Finally, it protects customers’ and users’ freedoms, forbidding limits to the ability to choose or avoid any services and to contract outside the platform. Enforcement has teeth with fines of up to 10% of revenues and structural remedies if needed.
The devil will be in the details of regulation and enforcement, but the DMA looks promising. It resembles telco regulation, focusing on non-discriminatory access and portability that converted telcos into “neutral rails”. It achieved great service, strong customer choice, low cost, and an opening to build on top. Of course, telco regulation also hobbled the telco service provider and equipment sectors, some of the most promising tech European champions. It also gave the tech field to the US OTT players, as the European digital market was still fragmented.
An effective DMA would turn the platforms into “neutral APIs” and ensure data portability across services. This could create a new “tech boom” of local startups and innovative large companies building on top of the “neutral APIs”. Comparable to the alternative carrier boom of the 1990s/2000s and the recent Fintech boom accelerated by PSD2 regulation. The need to shift to a more protocol-like open tech ecosystem has been pointed out even by US technologists like Fred Wilson and Ben Thompson.
Digital Services Act (DSA)
The DSA targets digital services and products to ensure the legality, traceability, transparency, and effective safeguards for online transactions. The DSA extends the eCommerce act to all types of digital services and to create a Europe-wide regulation.
The DSA will create a more level playing field between digital and physical services and products. Subjecting both to the same customer protection and transparency requirements. It also discriminates based on size. Making sure that the largest digital service and product sellers don’t use their scale to overpower smaller rivals.
Most importantly, the DSA aspires to armonize regulation across Europe. Striking at the heart of the fragmentation that has made it difficult for European companies to scale, and has made the European market much less attractive than what it size warrants.
Europe-wide Open Market for Digital Platforms and Services
If the DMA and the DSA work out as intended, Europe will reclaim Digital Sovereignity through a Europe-wide and open market for digital platforms and services.
Europe-wide. The DMA and DSA preclude countries from regulating further, creating an effective European-wide market. Given the EU is one of the three largest economies in the world, the EU digital market would be one of the important global pools. Participating in the EU market would be a must for any player, and EU rules would be adopted as the de-facto standard. At the same time, European companies will not start with their individual country as a market, but rather be able to access a global scale market from the start. This will eliminate the current gap vs. US and Chinese companies.
Open. The DMA will force the unbundling of the current monopolistic “walled gardens” that have emerged. An unbundled market focused on protocols and APIs will create a new wave of opportunity for startups. Faster innovation and practicable niches will be enabled, opening up the current “winner-take-all” markets to a broader range of actors.
The combination of a Europe-wide and Open market for Digital Platforms and Services could be transformational for Europe. On the one hand, the opening up of the innovation floodgates should trigger a wave of productivity growth. On the other, the European digital companies will be allowed to grow and become global leaders. Most importantly European citizens and institutions will recover control over their destiny. Moving from digital colonies to digital sovereign again.
Nine predictions for 2021 from tech to finance. #1 the big tech/SPAC/bitcoin bubble unwinds.
After a momentous 2020, 2021 will represent a pullback in many dimensions such as tech valuations, cloud/eCommerce/telework penetration, and Asian vs. Europe/USA growth. Not because the trends have reverted, but rather because 2020 pushed them forward so dramatically that they will revert slightly to the trend line. Simultaneously, other areas like COVID, Big Tech regulatory action, Cyber, and Europe’s role will see a significant change. Finally, we will have to wait another year for the next iPhone moment and substantive action on our time’s problems.
Three trends will pull back after accelerating in 2020. Not because the underlying trend has stopped, but instead because COVID accelerated them far beyond the trendline.
The Big Bubble unwinds. Tech markets, SPACs, and bitcoin are all seeing unparalleled bull markets. The underlying thesis is very similar for all. The government is printing money like crazy and driving interest rates to zero. Investors need a safe asset against inflation with good returns. Tech is the future, so tech is safe at any price. It also appreciates double digits, so it is too good an investment to pass on. We have seen this story before: real estate (several times), tech (2001), synthetic CDOs (2008), investment trusts (1929), portfolio insurance (1989), Nifty Fifty (the early 1970s), Tulips (the 1630s). The outcome is always the same. Once appreciation stops, investors get second thoughts and start selling. Once prices fall, the asset class is not safe, so the whole investment thesis collapses. Tech, especially SaaS, is undoubtedly very valuable. However, nothing is worth buying at any price. CISCO went public in 1990 at a $224 million valuation. With the internet, it became clear it was going to be a lot more valuable. Markets took it to over $500 billion in 2001, an x2000. Now, 20 years later, it is worth ~$200 billion, an x1000. CISCO was much more valuable, just not that last x2 valuable (small detail for the people who lost 80% of their investments from 2000 to 2002).
Cloud, eCommerce, and telework stall. COVID has turbocharged cloud, eCommerce, and Telework. As things return to normal, there will be a slight pullback in 2021 vs. 2020. Still, the genie is out of the bottle, and we can expect tremendous growth over the next decade, just not next year.
The West grows faster than Asia. Europe and the US have done a terrible job of controlling the pandemic when compared to Asia. Consequently, they have had significant GDP declines. The flip side is that in 2021 growth will seem faster in Europe and the US vs. Asia as they go back to normal. It is a blip. Asia will continue to outperform for the rest of the decade.
Other changes have started in 2020 and will shape 2021, transforming how we live and see the world.
COVID goes away. With vaccines available, COVID will go away in 2021. Things will return to normal quickly. No one was wearing a mask or social distancing in 1920. No one will, at the end of 2021, with the pandemic under control.
Big Tech on the back foot strategically. Big Tech’s reckoning has started. It will take several years, but the stage is set. Regulation and anti-trust action will level the playing field. No single industry or group of companies can be allowed to dominate the world. Governments have managed to avoid it since the railroad robber barons in the 1880s. Big Tech will not be any different. It is still difficult to picture a world in which Big Tech won’t control everything, but it is a matter of time.
Cyber is considered weapons-grade serious. The US government hack through Solar Winds is the equivalent of a digital Pearl Harbor. We can expect a severe reaction across the world. Cyber is the new equivalent of panzer warfare and needs to be taken seriously at the highest government levels.
Europe finds its footing. With Brexit behind it, we can expect Europe to regain the initiative. France and Germany seem aligned to push the union forward. The Digital Markets and Services Acts are great places to start, with strong obligations to create a level playing field in the digital domain. Regaining digital sovereignty, rekindling economic opportunity, and managing the migration crisis should be the priorities.
Two of the things I would very much like to happen won’t happen for another year.
No iPhone moment. Since the tenth anniversary of the iPhone, pundits have been waiting for the next iPhone moment in tech. The next change of platform. Is it AR glasses? Ready Player One-style VR? Apple’s autonomous car? Quantum computing? Cryptokittens? It will happen in the 2020s, just not in 2021. I am intrigued to see what that turns out to be.
No substantive action on climate change, inequality, or cloud democracy. The clock is ticking, but acting is too complicated. Only a real crisis will put our most significant challenges at the center. COVID has shown us that we can tackle them, but trying to play the ostrich and see if they disappear by themselves is too appealing.
2020 has been an exceptional year. COVID was what made it unforgettable, but we will remember it for what it made clear in our collective consciousness. It made evident three fundamental shifts that will shape the next decade. It put to the fore the three do or die challenges we must solve to move forward. It brought the initial fruits of the five impending technology revolutions.
2020 has been undoubtedly the year of COVID. However, in history books, COVID will be the anecdote. The core of 2020 will be about the transition to a new era it marked. A shift with three components:
Three secular trends moving into deployment to shape the next decade: Cloud, Asia, and Data.
Three do or die challenges becoming inescapable to public opinion: Inequality, Climate Change, and Cloud Democracy.
Five impending revolutions delivering on their promise: Biotech, AI, Electric Mobility, Integrated Reality, and Digital Governance.
Three trends to shape the next decade: Cloud, Asia, and Data.
Cloud, Asia, and Data are not new. They have been visible to many for the last decades. COVID has brought them into the open and accelerated them even further. The world of tomorrow will be cloudified, Asia will have regained its traditional place globally, and data will have replaced capital as the scarce resource. These three trends will change the world we live in, much as the industrial revolution, the combustion engine, or the first wave of computing. 2020 is the end of the beginning of the cloud age, and now we start deployment.
Cloud penetration in 2019 was already substantial: smartphone penetration over 3Bn, Cloud share of IT spend at about 12%, and eCommerce penetration at 14% according to Statista and Gartner. COVID has pushed Cloud over the adoption chasm and made it evident to everyone. Smartphones, eCommerce, Cloud infrastructure, and video meetings have continued unmolested through the pandemic while traditional ways of living and working have stopped functioning. 2020 has showcased a new way of operating that is more efficient, environmentally friendly, and resilient. There is no going back, although the transition will be painful for many if not managed appropriately.
Asia’s rise has been long and steady. At thedawn of the Cloud age in 1990, Europe and North America represented ~55% of the world GDP in PPP vs. 27% for Asia Pacific. In 2019, Asia Pacific had already overtaken Europe and North America, at 44% vs. 43%. COVID has taken this further, showing how Asia can outexecute the West. COVID has been a nuisance for Asia Pacific, with very controlled case counts and little economic damage. To a large extent, thanks to its leadership in new technologies like 5G and IoT, aided both by decided investment and openness to the level of intrusiveness they require. For the West, COVID has been disastrous in its human and economic cost. In the West, we have preferred not to deploy technology to track and trace the virus. The difference in approach and results has pushed forward the predicted date of China’s overtaking of the US economy. It has also made companies with a substantial Asian presence much more resilient.
Data is the new scarce factor of production. Datais quickly eclipsing capital, as capital eclipsed land during the industrial revolution. It is what powers internet giants and SaaS companies that are soaring in market value. It is what has allowed Asia to control the virus effectively. It has enabled rapid vaccine development. Capital, meanwhile, is ultra-abundant. COVID has accelerated zero-interest rates, bottomless public debt, and direct subsidies to citizens, which seem here to stay. Investment capital desperately looks for productive uses: Private Equity, technology stocks, SPACs, Bitcoin, or real assets. As a banker friend recently told me, what do you do when your business’s raw material is suddenly worthless?
Three challenges become do or die: Inequality, Climate Change, and Cloud Democracy.
Inequality. Climate Change and the limits of our eighteenth-century democratic apparatus have been a problem for at least a couple of decades. COVID has forced us to confront them at an emotional level. If we don’t solve inequality, we will face populist government takeover and massive, unstoppable migrations. If we don’t solve climate change, we will devastate the planet and the habitats, creating untold economic damage. If we don’t reengineer democracy, we will face digital monopolies, crippling cyberattacks, and manipulated public opinion. These three challenges are interlinked and will accelerate each other if left unchecked. Time is short. The time to act is now. COVID let out a dirty little secret, we have the tools to solve them, and the world won’t collapse if we use them.
Inequality between people regarding access to opportunity, basic needs, and income has been a growing problem for decades. COVID has made this front and center. For the well to do knowledge workers, the pandemic has been a nuisance. Work and life basics could go online. The problems were accessory, wearing a mask, not seeing friends and loved ones so often. For low-income service workers, it has been a complete dislocation. Work stopped, with severe financial consequences, or carried a substantial health risk. Infrastructure wasn’t there to take life online. Cramped living quarters made everything more difficult. Healthcare wasn’t assured in some countries. The K-shaped recovery is threatening to widen the gap even further. Direct subsidies have allowed keeping the gap at a manageable level during COVID; they will need to continue and expand further.
Inequality between countries has existed throughout history. However, income and opportunity gaps between countries are challenging to sustain in a world where information and capital travel freely. Like iron filings in the poles of a magnet, people in developing countries feel the pull to move to developed countries to access opportunity, healthcare, and basic needs. They are willing to risk their lives and endure hardship to do so. The numbers add up for them. Walls and “common migratory policies” are not viable solutions. East and South East Asia have shown economic growth, and opportunity is the only solution.
Al Gore already identified Climate Change as an existential threat in 2006. Since then, it has gotten even more existential. Global temperature, glacier size, storm counts, or almost any other metric shows this. Weather patterns are changing fast, and they could bring untold economic hardship. COVID brought out another Inconvenient Truth. We can stop it, and the world as we know it won’t collapse. We can live with less travel and less pollution if we need to. Let’s do it for our children. We are setting them up for the equivalent of a decades-long pandemic.
Democracy, in its current form, has had an incredible run. The principles of our democratic systems would be recognizable to classical Athenians, and the US founding fathers would be surprised at how little the system has evolved. Age is showing. It is vulnerable to digital monopolies, social media hacking, cyber attacks, and much worse. We need to move to Cloud Democracy. If not, we will face a false dichotomy between Chinese-style authoritarianism or a failing crippled system. The US elections have shown us both the potential of moving the system forward and the perils of not doing so.
Five technology revolutions ready for prime time: Biotech, AI, Electric Mobility, Integrated Reality, and Digital Governance.
COVID has also shown us that we have an embarrassment of riches in the new technologies that are getting ready for prime time. Cloud is already in deployment, and it is a crucial enabler of everything else. At the same time, there is much more coming, and it has the potential of changing our world radically for the better. COVID has allowed us to get some glimpses of this:
Biotech has shown how cloud bioscience can move at a different speed if we are willing to allow it. Tens of effective vaccines in less than a year, remote healthcare, and instant sharing of COVID data have shown us.
AI has had another impressive year of step by step process into areas that seemed beyond reach. Two examples for the year are Alpha-fold’s protein folding and the new biggest model GPT3, with more than 170 billion parameters, that can write as effectively as most humans.
Electric Mobility is experiencing a golden age with Tesla and many other EV makers booming in the stock market and showing they can deliver as batteries and productive processes improve. The last 5% of autonomous driving seems harder to crack, but there is a lot to be improved with what we have.
Integrated Reality, being able to marry physical and digital reality, has played a central role in COVID. First, digitally tracking the real world through IoT, smartphones, and cameras have allowed Asian countries to contact trace COVID effectively. Second, virtual meetings have replaced physical ones enabling knowledge workers to carry on. Third, Facebook has continued developing viable VR with Oculus Quest 2, which is still not there but is close to being an iPhone moment device.
Digital Governance has mostly returned to the collective consciousness through the latest Bitcoin boom (remember 2017?). However, the rise of DeFi is much more central, with more than $14B already locked in lending and derivative contracts through cryptocurrencies, an x15 increase from 2019.
You might not know Roblox, but most 8 to 16-year-olds do. More than 30 million of them log in daily, about 150 million monthly, more than Minecraft or Fortnite. The Roblox S1 reveals a surprisingly complex company, with revenue recognized over two years, and the Apple/Google tax representing its biggest cost category. Can Roblox grow its users substantially tapping the 24+ segment and APAC? Can it achieve tech style profitability even with the robber-barons controlling the railroads? That will determine if the right price is $15 or $100 per share.
What is Roblox?
Roblox is a unique gaming company. It is not a publisher like Activision Blizzard or Electronic Arts because it has only one title, the namesake Roblox which is not a game is more of a platform. However, it is not a platform like Unity, which is targeted at hard-core developers and is behind many mobile and PC games. It is not precisely like Epic Games, which combines platform (Unreal Engine) and game (Fortnite). However, lately, Epic has been trying to turn Fortnite into a kind of user-generated Roblox. It has similarity to Minecraft, especially around customization and user-generated content, but goes far beyond.
According to their S1, Roblox is a platform in the emerging “human co-experience” category, centered around user-generated content, that draws inspiration from gaming, entertainment, social media, and toys, which “some refer to our category as the metaverse.” Having watched my daughters play Roblox assiduously, I agree with their definition (and my daughters do too).
Roblox is a two-sided platform between creators (of games, events, social media, objects, and much more) and gamers who enjoy that content. The Robox platform’s magic is that it is low-code to start (e.g., my ten-year-old has created a zombie smashing game that my five-year-old plays), but can be extended and built into a full-fledged game (e.g., Bloxburg, Adoptme, Jailbreak). Players can customize their avatar and take it to the different games bringing their friends along and making new ones. Simultaneously, a universe of social media stars has emerged around Roblox, creating a community and a shared content. Roblox, in some sense, has similarities to Youtube, Instagram, or Tiktok as it has made it very easy to create and share games for others to play. In contrast, traditional platforms like Unity or Unreal require professional developers and designers.
Roblox makes money by selling its internal currency, Robux, and a premium subscription feature that allows for cheaper Robux purchases. Robux, in turn, power the whole of the Roblox economy. Players use Robux to buy content and power-ups in games and buy Roblox generated, and creator developed objects for avatars. Creators make Robux from these in-game sales, which can are used for their own gaming or converted back into cash. Robux have been selling at about 1 cent, while creators can convert them back at 0,35 cents.
The platforms’ golden virtuous cycle is already alive and kicking. More players come to play the experiences, which brings more creators who can monetize their creativity. Around this, a community of players and influencers create a conversation that makes the latest game (e.g., Piggy’s latest chapter) or experience (e.g., the Bloxy awards 7th edition) relevant to everyone. Roblox look-alikes are trying better graphics (e.g., Crayta, now in Google Stadia), but it doesn’t seem very easy for them to overcome Roblox’s scale advantage. Roblox low-grade graphics make game creation easier and expand the potential device population that can support the games.
Roblox also has a strong focus on safety. The transfer of Roblox is limited to actual transactions to avoid scams or hacking. Interactions in Roblox seem safe, thanks to an extensive safety staff worldwide.
According to the S-1, Roblox has reached a substantial scale already. It has over 30 million Daily Active Users (DAUs) and has close to 20 million “experiences” (games and similar). These DAUs have brought in $1.2B in bookings in the first nine months of 2020, about $55 per DAU and year. Both DAUs and monetization have grown considerably (~x3 in bookings and close to x2 in DAUs). The pandemic has accelerated adoption, but the latest quarter shows the gains seem to have consolidated (8.7 billion hours in Q3 vs. 8.6 billion in Q2).
Roblox spends bookings in the following way. Close to 30% go to pay the “railroad tax” that Google and Apple charge for mobile transactions. The second category is creator payouts, which are now at 17% (over $200M). Roblox claims that its key priority is to accelerate creator payouts to power its golden virtuous cycle. The third is compensation at 14%, with technical infrastructure at 8% and other at 4%. Roblox already has reached a 30% margin on its Robux bookings.
The GAAP picture of all of this is tricky to understand. Roblox recognizes revenue and associated costs over the next 23 months after the purchase. Consequently, revenue lags bookings, and under GAAP, Roblox still recognizes losses. However, its cash dynamic is exceptionally positive, with $345M positive operating cash flow over the last nine months. Roblox doesn’t need the money from the IPO. It is going public to give its shareholders liquidity.
Roblox’s potential depends on its revenue potential and profitability. Let us take profitability first. Roblox is already at 30% of bookings. ~45-50% of its revenues are payments to Google and Apple and payments for creators. We can expect those to stay constant, as Roblox has pledged it will give creators any improvements it achieves with Google and Apple. The other 20-25% of costs are employees, infrastructure, and general expenses. These costs would benefit from improved operational leverage and could be potentially reduced to at least the 15-20% range, if not further. Consequently, we could consider a bull case of 40% margin (45%+15%) and a bear case of staying at 30% (50%+20%).
Estimating topline potential is far trickier. It depends on the user base and revenue per user. Current revenue per user is about $50-55 per DAU per year, far higher in the US & Canada (>$100). However, the cohort curves shared in the S1 show that Roblox is getting much better at monetizing across regions. We could consider 2030 bookings per DAU at $12/month, in line with best practices like WoW subscribers. $12/month/DAU would take the current 5 cents per hour to 15 cents per hour, still very cheap entertainment.
Demographics. Currently, demographics are pretty concentrated. More than half are in the core Roblox user group of 7-13. According to the S-1, Roblox is managing to expand effectively in the 13-24 user group. Roblox’s key challenge is that the 7-24 demographic in medium and high-income countries will stagnate over the next decade. Getting to over 200M average DAUs would require to break into the 24+ demographic to expand their addressable market beyond 1 billion people. Roblox just acquired the assets and critical talent of Imbellus, a gaming developer for learning and evaluation. Imbellus has famously developed Mckinsey’s gamified interviewing first round. The Imbellus acquisition could extend the platform beyond the 24-year range and the pure gaming use case.
Geographically, Roblox has a similar presence in Europe and North America (~65% between the two), with 25% in the Rest of the World and only 15% in APAC. All regions are growing between 60-90%. However, APAC is a relatively underpenetrated region. Roblox is working on this with increased penetration in Korea and a partnership with Tencent in China. Getting to 200M+ DAUs would require an at-scale APAC presence.
Putting together all the pieces in terms of potential would take Roblox to the $25-30B bookings range with approximate cash conversion of those bookings of $10-15B by 2030. This size would be a 15-20x potential growth from today.
Rumors point to a Roblox valuation in the $8 billion range, double its last private market valuation at $4B. If this were to be accurate, it would look like a bargain. With a potential 2020 operating cash flow of over $500M, a 20x multiple would already support a $10B valuation based on current cash flow generation. If you believe Roblox is a platform and not a game and given its current growth rates and competitive moats, this would be a very attractive valuation.
A bull case takes us far beyond this. Starting with the 2030 $10-15B cash flow generation potential and a 15-20x EV multiple, we could be talking about a ~$200B valuation for Roblox in 2030 if everything pans out. Bringing it back to today at 10% cost of capital, we could justify a $50-70B valuation today.
CNBC put forward a middle of the road scenario comparing Roblox to Unity, which is already public and has more than doubled since its stockmarket debut some months ago. It puts Roblox at $37B valuation.
If we assume the offering brings the number of shares to ~600M (about 20% dilution on the current ~500M), the base value would be a $15 share price range, CNBC would be at about $60, while the bull case would take us to $100.
Roblox is relatively unknown in a category that is still not familiar to investors. Its accounting is complex, and there is no clarity on its addressable market. Even relatively sophisticated investors like Jason Calacanis fail to see it as a platform. Consequently, it is difficult to see investors piling on to this one and elevating it to its bull scenario as it has happened with Snowflake. Roblox could be a slow burn that gradually builds value as its incredible growth potential plays out over time.
From the Roblox perspective, this would make it smart to do a small raise, given they don’t require the cash infusion. Enough to create liquidity and free-float, but as little dilution as possible at an arguably low valuation.
It might be tempting to leapfrog directly into AI, 5G, and blockchain. However, if your business isn’t cloudified yet, it will be a recipe for disaster. Cloud might be boring, but it is the place to start. Do the hard work of taking your company to the cloud and only after reach for the stars.
The world is changing at an unprecedented pace. New technologies come out every day. According to the pundits, AI is the future, data is the new oil, and Bitcoin will reach $500k. The tenure in the S&P 500 is shorter than ever, and companies need to transform. Not changing is probably fatal.
Trying to do AI/Blockchain/insert the latest fad before you have moved to the cloud is trying to teach your child to run a marathon before walking. Execution will fail. Credibility will plummet. Talent will be frustrated. Worst of all, cloudification will be delayed. Tie yourself to the mast and focus on getting the basics right first relentlessly, regardless of the siren songs.
The basics are straightforward:
Are your systems in the cloud, or do you still have on-premises data centers with physical servers? Get rid of those first.
Do you have a microservices architecture with APIs, or do you still have your COBOL mainframe monoliths? Get rid of those first.
Are you deploying in agile, or do you still have multi-year waterfall projects that never deploy? Get rid of those first.
Is your front-office multichannel and automated, or do you still have siloed channels with manual customer interactions? Get rid of those first.
Are your back-office and operations zero-touch, or do you still have mostly manual processes? Get rid of those first.
Do you have a data-lake accessible to all through citizen BI tools, or do you still have armies of people processing information through excels and legacy BI with gatekeepers? Get rid of those first.
Do you have an agile organization with multidisciplinary teams focused on delivering customer value with citizen developer capabilities, or do you still have fiefdoms and siloes that depend on a centralized IT for the smallest changes? Get rid of those first.
Do you have everyone’s workplace in the cloud so they can efficiently work from anywhere, or are you full of local servers and storage? Get rid of those first.
Doing the basics right will be a long, painful slog. It will also be a lot less glamorous than 5G edge-enabled AI blockchain-native agents. However, they will also be a lot more useful for the business, the customer, employees, and the bottom line. Check on each of the eight basics with tangible metrics:
# Cloud/virtual servers vs. # physical servers
# microservices with APIs vs. # of monolith applications
# agile teams vs. # waterfall projects
% of zero-touch customer interactions
% of zero-touch back-office operations
% of employees with access to your data lake through citizen BI tools
% of employees with citizen developer capabilities
# of workplace applications or storage locations that are not totally in the cloud
Maybe give yourself an AI project as a reward if you manage to push the metrics forward substantially. Don’t invest heavily in the fancy stuff until you have the basics right. It won’t work.
We have made mistakes and there will be human suffering and economic consequences. However, we can start to glimpse a path to prevail against COVID19. Victory against the virus depends on all of us working together to make it happen.
We are living through incredible times that move very fast. This is the second week of isolation in Madrid and we know that we have at least 4 to go, probably more. Four weeks ago, COVID was a Chinese thing, Three weeks ago, Italy was already in danger. Two weeks ago we went from Women’s Day marches with millions of people and political rallies to full lockdown. Last week, most countries followed into lockdown.
There is still a lot of uncertainty about what will happen and what is the right thing to do. I have changed opinion quickly over the last weeks, so I don’t feel entitled to give lessons. There will be time to review and learn later. Now we have to act and prevail.
There seems to be a consensus about the two problems we need to solve:
Healthcare: uncontrolled expansion and healthcare system collapse. COVID has demonstrated it can overwhelm healthcare systems if unchecked, causing massive spikes in direct and indirect deaths. It has happened in China and Italy, and it is happening in Madrid. Supporting the health system with personnel, equipment, resources, access etc… can mitigate impacts. However, only limiting expansion through lockdown seems to stop a large outbreak, like China modelled and many countries are trying.
Economics: collapse due to lockdowns. COVID threatens to overwhelm the economic system also. The wheel is not designed to stop spinning. Liquidity support and worker and SME support at a massive scale seem the consensus actions. First taken at scale by the UK and then broadly adopted by most countries.
There is a third problem emerging in the global consciousness: avoiding the re-run of uncontrolled expansion. We need a system in place to ensure this until a vaccine is ready in one or two years. We cannot afford the economic consequences of a second lockdown. Luckily Korea and other Asian countries have already pioneered the system, T3. It requires massive testing, tracking and isolating infected patients and tracing contacts of those patients. We have the lockdown period to put this system in place and avoid a re-run, good weather might buy us some more time until the fall.
So, do your part. Whether it is only you or large resources, there is much you can do:
Support healthcare with personnel, equipment, resources or just avoiding it while it is overloaded. Celebrate healthcare workers.
Comply with the lockdown and support enforcement. Help especially those in vulnerable populations. Celebrate security forces.
Contribute to avoid an economic collapse. Help an SME or a hard hit employee (or a million) make it through. Celebrate the ones who sacrifice most in lockdown.
Be prepared for T3. Some few will have to contribute to the technical infrastructure that makes it possible, we will all have to sacrifice a degree of liberty and privacy to make it viable. Celebrate those who create it and all of us for living with it.
As the Italians are saying “Andrà tutto benne”, all will be well. Stay positive and go for it!
I have tried out the Stadia Founder edition. Technically it ticks all the boxes, at least with a top of the line fiber connection. Commercially its current model seems dead on arrival and difficult to resurrect, given Google’s checkered track record with direct to consumer products. Regardless, I believe that Stadia will be seen as the starting point of the new “Age of the Edge”, in which the content you experience is finally decoupled from the hardware you own.
Google Stadia is Google’s cloud gaming service. Cloud gaming is a new mode of gaming in which the game is not executed locally but rather streamed from a remote gaming server that handles all the processes. If this sounds like “Netflix for games”, you are on the right path. However, complexity is substantially higher. While a streaming movie is the same for everyone and doesn’t require server-side processing, a game has a unique state for each player. It also requires substantial interaction between the player and the gaming server, making the controller another additional barrier to consider. Finally, gaming is also much more computing-intensive than a movie, given that the stream needs to be generated algorithmically on the fly, and usually requires a specific type of computing infrastructure: Graphical Processing Units (GPUs).
Even given all these difficulties, cloud gaming has been around for a while, with many companies working towards the “Netflix for games” vision. Tech startups like Spain’s PlayGiga or France’s Shadow have been chasing the dream for more than 5 years and delivering workable technology for about 2 years. Tech players like GPU-giant Nvidia have also pushed forward for this category to emerge with pilot programs. Microsoft and Sony, the console leaders who have the most to lose have been ambivalent. Microsoft’s XBox Game pass for PC Beta shows what they could do, but they have fallen short of a TV compatible solution that would cannibalize their core console business. Steam, the behemoth of PC game distribution, has also been trying out options. And publishers such as Origin and Blizzard are moving towards Direct-to-Consumer.
I have tried many of these and they all work to a certain degree. Based on my experience I have come to think there are three key elements for a successful “Netflix for games” on TV:
Streaming technology. Getting a virtualization technology that allows effective streaming of gaming without any perceived lag.
User interface. Finding a controller option that allows managing the service and playing comfortably and at a cost-effective price.
Commercial and business model. Providing good value for money in a package that takes care of both technology and content.
We will now look at Stadia on these three elements
Streaming Technology: Very Good
Stadia’s streaming technology works very well. This is not really a surprise, as the different game streaming solutions I have tried over time have worked and Google is a company known for superb engineering. Of course, I am lucky to live in one of the countries with the best fixed connectivity in the world and it shows. With my 600Mb low latency fiber connection in a major Spanish city, the experience on the Chromecast Ultra is perfect. You can’t tell that the game is executing somewhere in the Cloud. Destiny 2 shows extremely impressive graphics and no lag is experienced. I assume Google has a node very close to me so latency is probably in the 20ms range and it is not really executing in a remote Cloud, but rather fairly close.
Several of the reviews online have criticized Stadia for not being “real 4K” but just something very close. While this might be the case, I believe Stadia is good enough for most gamers and TV screens. Those who really care about the perfect image will stay with local hardware for some time anyway. Some reviewers have complained of an “extremely hot” Chromecast ultra, a problem I haven’t experienced yet. Google has also failed to deliver at launch many of the innovative functionalities that were promised such as “Crowd Play”, “Stream Connect” or sharing save data between accounts.
Things don’t work as well on other devices though. I have a low-end PC and there Stadia works in fits and starts on the Chrome browser. It probably has to do with Chrome itself and the Wifi interface getting overloaded but clearly the technology is not ready yet for any hardware. The Chromecast ultra at 79€ is very cheap for a console equivalent, although fairly expensive for an entry-level set-top-box or smart TV (equivalent to 30-40€).
For more remote locations and higher requirements, such as VR, I can imagine needing to deploy Edge computing solutions to lower latency further (to sub 10 ms). This shouldn’t be a problem as this will be available from telco operators over the next years.
So overall, the technology looks very solid and hopefully will progress to Excellent as the service is trialled at scale and optimized. 4K and 8K will be fully taken care of. Connectivity and latency shouldn’t be the problem as fiber becomes universal. Entry-level hardware will be eventually addressed.
User interface: Very Good
The user interface has been a very positive surprise for me. It took under 10 minutes to set up the whole of Stadia on my TV and my children are able to use it without help. The controller is rechargeable and based on WiFi, meaning it has fewer glitches than the typical Bluetooth alternatives. Getting Stadia on an off with the controller shows the power of Chromecast which natively communicates with the controller. Google has shown us how the TV gaming experience should work, and it is a substantial improvement on previous interfaces I have tried out.
Of course, there is a problem. The Stadia controller is $69, a cool 3.5x compared to your typical standard wireless gaming controllers, which don’t work with Chromecast Ultra. So a four-player game around the TV starts at over $350, which puts you in console territory anyway. A proprietary controller also represents a risky bet on Google’s direct to consumer efforts which have a chequered history.
Hopefully, Stadia will open up Chromecast compatibility to other standard controllers allowing to use one Stadia master controller along with cheaper controller alternatives. This would lower another of the important entry barriers for Cloud Gaming.
Commercial and Business model: Very Poor
The technology and the user interface have their blind spots, but are mostly ok. However, the service dies in terms of its commercial and business model. Google has a limited catalogue of games, around 40 compared to Microsoft Game Pass PC with 100. Within those, it has only a limited number of top titles. On top of that, and here comes the real problem, Google expects you to buy the titles at the full retail price just for Stadia.
A quick introduction to how the game industry works. There are literally tens of thousands of computer games, with Steam, the broadest catalogue service, having over 30.000 games. All these games are usually sold on a pay-at-purchase model, with prices very skewed between top of the line so-called AAA games (40-60€) and the rest of the catalogue (10-25€). Some companies have tried out a subscription model (most notably Blizzard with World of Warcraft) and in-game purchases (for example Epic Games’ Fortnite). Purchases are typically for the game on just one platform (e.g. PC or console).
Games have different behaviour from movies in terms of usage. While you typically just watch a movie or series once, a game can be played for a long time. Gaming studios typically aspire for “replayability”, with really successful titles like World of Warcraft or Fornite achieving hundreds or even thousands of gameplay hours. So game consumption is much more concentrated than video consumption. Players want “their titles” to be on the platform.
Google’s Stadia follows traditional industry norms, so it falls flat on a number of issues:
Extremely limited catalogue. 40 titles compared to the 30.000+ games out there. Of course, if you are a Destiny 2 fan you will have your game, but they only address a very limited set of gamers. The catalogue can grow over time, but it will depend on Google’s capacity to build win-win relationships with publishers
Buy for Stadia only. You will have to buy titles just for Stadia and you will be locked in, if Google is not able to develop it. Google is a newcomer into the gaming category and has a history of dropping or freezing things that don’t work. You might be left with hundreds of euros of purchases that only work on a dead service. It would be like having a collection of Laserdiscs or Betamax.
No way to try out games. There is no way to sample games, so your only option is to spend 20-60€ directly in a game and see how it works in the platform and with the controller. This compares with services like Microsoft Game Pass PC which allows you to sample 100 games.
Taking all of this into account it would take a radical shift from Google to be successful with Stadia. It also plays to Google’s traditional weaknesses like partnering with others on an equal footing or creating attractive consumer proposition. It seems unlikely Google will be able to pull it off. Google Stadia’s technical infrastructure, however, might end up being an interesting proposition through Google Cloud. Game publishers need an infrastructure for the future and building it is not their core expertise, so using Google Cloud might be a viable option.