Digital Economy – COVID-19 Smartphone Impact

Usage increase that will be hard to monetise. 

• There has been a large increase in smartphone usage, but I think that a lot of companies are going to struggle to make real money from the impact of COVID-19.
• App Annie (see here) which measures app download and usage held a webinar yesterday to discuss what it was seeing in terms of smartphone usage during the global lockdown.
• It is important to note that this data is for Android devices only, as I suspect that Apple no longer allows 3^rd parties to collect this sort of data.
• China is the leading indicator for Western markets as the total time spent is similar as are the types of services used.
• As the lockdown spread across China, total time spent increased by 32% from 3.8 hours per day to 5 hours.
• As everyone returns work and school, this number is going to drop materially but there are some areas where the lockdown is likely to have a permanent effect.
• Early data from Italy which was the first to go into a lockdown has already shown a similar increase to China which I think validates it as a leading indicator.

Business segment.

• In the business segment, Zoom has been the clear winner as it is still highly ranked in App Annie’s charts despite competitors’ attacks upon it.
• At one point, Zoom was No. 1 in 144 markets in terms of downloads as opposed to one market during Q4 19.
• This is because Zoom is now also seeing heavy usage of its free tier for personal communication as opposed to just business use.
• I suspect that consumers have flocked to Zoom due to its excellent user experience and best in class performance when it comes to handling multiway video conference calls.
• Houseparty (Epic Games) has also seen a huge jump in downloads especially in Spain and Italy but off a very low base.

Education.

• Unsurprisingly, this has also seen a massive jump with a 90% increase in downloads worldwide with Google Classroom faring particularly well in the UK.
• Duolingo and Class Dojo are also faring very well.
• This is one area that will quickly fall back to baseline once things return to normal.

Health and Fitness.

• Health and Fitness has also seen a big jump which has been directly proportional to the severity of the lockdown.
• This has been mostly centred around free apps but also meditation has seen a very large jump in popularity.
• Again, this is likely to fall back to baseline once the lockdown is lifted, but there is a possibility that the wellness side of this segment may continue to be strong with new users of the newly discovered apps sticking with them.

Streaming.

• Streaming has seen an increase but nearly as much as the other segments as many users were already engaged with services before the lockdown hit.
• Overall a 15% – 20% increase in usage has been observed in France and Italy
• The dark horse here is Disney + which has recently launched in some European markets.
• By App Annie’s measures, Disney+ is already 7^th in terms of consumer spend Worldwide.
• This underlines my view that Disney+ is a real challenger to Netflix given its extensive and popular catalogue as well as its very deep pockets to invest.
• Once one has visibility on the impact of the lockdown on its physical business such as its theme parks, this is a stock to consider for the recovery.

Gaming.

• The gaming segment has also seen a big bounce, but I do not expect this to be as sustainable as some of the other segments in the longer-term.
• Downloads outside of China are up 50% compared to Q4 19 with 1.2bn downloads in a single week.
• Time spent as also increased in line with the overall average of around 30% compared t Q4 2019.
• The initial data indicates that it is mostly casual games that are being downloaded and that there a lot of new gamers trying them out for the first time.
• The fact that many of the reviews for free games are now peppered with complaints about advertising in an indicator of new players as existing players are well aware of the fact that free games rely on advertising to make money.
• New gamers may stay with these games post-lockdown but this segment is going to suffer more than most when people get busy once again.

Take Home Message.

• While there has been a huge jump in usage, this is likely to subside considerably once the lockdown is lifted.
• This is likely to impact the consumer side of Zoom and the gaming segment most of all as face to face meet ups, work and school get in the way of endlessly playing games and watching TV all day.
• I continue to think that monetisation through advertising is going to have a very tough 2020 as advertisers have slashed their digital advertising budgets as no one is buying anything that they do not need.
• Some YouTube creators have already noticed more advertisements in their videos which I think is Google trying to keep revenues flat with volume as the price of advertisements collapses.
• The price collapse is the inevitable result of a fall in spending combined with a large increase in usage which increases the advertising inventory meaningfully.
• Hence, I continue to think that the real beneficiaries of the lockdown are the cloud companies whose business model is geared towards usage and should see a big jump.
• Subscription services like Netflix will only benefit if it adds more subscribers and margins will suffer as existing users watch more which will increase its cloud bill to Amazon.
• Hence, the top picks have to remain Amazon, Microsoft and Alibaba for China.
• The suppliers (picks and shovels) of the cloud should also benefit leading to Intel, Western Digital and Seagate also faring well.
• Despite this, I am concerned that the recovery in the stock market is a false dawn and is ignoring the recession that is coming.
• The economic data is very worrying and is pointing to a huge fall in company earnings which the market appears to be completely ignoring.
• If I am forced to invest, I would have these, but as I don’t have to have anything, I am staying out.