FAANG vs the World

In venture, our job is to swing for grand slams because venture returns follow a power law function where your biggest winner is going to provide the majority of your return. Base hits do not add up to a grand slam, even if they let you score a run.

Enough baseball.

In a way, the same observation applies to the public markets. We all know the power of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), but it’s even more apparent when we put it into context with numbers. As of June 6th, those five stocks totaled over $3.25 trillion in market cap. By comparison, the 610 other stocks in the Technology sector total $5.6 trillion in value (excluding any FAANG stock in the Technology sector).

And FAANG dwarfs the unicorn market too — the 65 known US-based unicorns as of the end of May total just about $340 billion in value, a tenth of FAANG. Certainly, some of these unicorns will continue to grow, but is there one we can justifiably argue will be big enough to insert itself into the FAANG conversation? Maybe Uber or Airbnb. Maybe Magic Leap if it delivers on its vision. Maybe some company that figures out artificial general intelligence.

Whatever the next FAANG-type company might be, it has to do something grand. Facebook and Google have transformed information consumption, Apple gives us products to interact with that information, and Amazon lets us have anything we want delivered to our door. They’ve meaningfully changed the world. Perhaps grand slam is too common to describe this occurrence. The FAANG companies are really quadruple doubles. Who plays baseball any more anyway?

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Tech Companies Move into Streaming Live Sports

We hear a lot about the exploding budgets that tech giants are spending on original content as consumers continue to cut the cord. In the last few years, some of the same players have started to add live sports to their platforms. We wanted to dive into some of these deals and compare them with existing TV contracts for NFL, NBA, and eSports. First, let’s establish the players.

Amazon – Amazon owns Twitch, the leading gaming streaming platform. Twitch started out as an exclusive video game streaming platform but has added traditional sports in the past few years. Twitch offers eSports, the NBA G-League, and beginning in 2018, Thursday Night Football.

Oath – Oath is a subsidiary of Verizon Communications. In June 2017, Verizon completed its acquisition of Yahoo and placed it under the Oath umbrella. Oath offers NFL games streamed on Yahoo Sports and go90. Verizon also manages the streaming of games through the NFL app.

Tencent – Tencent, the Chinese tech giant, has a contract with the NBA to stream games in China.

Twitter – Twitter was one of the first tech companies to stream games, winning the first NFL contract for Thursday Night Football in 2016.

YouTube – YouTube has also been competing in the live sports streaming space. They are taking a different approach, first by launching YouTube TV to stream traditional broadcast networks, and second by partnering with networks to simulcast games as opposed to negotiating exclusive rights.

Disney – Disney owns ESPN on the broadcast TV front, as well as BAMTech, a spinoff of the digital arm of the MLB. Disney recently announced ESPN+, a streaming service for live sports shown on its network channels.

Traditional Broadcast Television – FOX, CBS, and NBC offer a broad range of live sports to their viewers. These parties negotiate streaming contracts with the leagues. Lately, these contracts have included some rights to game streaming.

Methodology. In order to figure out what these companies were paying for, we broke out the contract price by year, looked at the number of games the contract included and found or estimated the number of viewers. This gave us a price per viewer per game for each contract. A few notes about the estimated average number of viewers:

  • For TV viewership, we used Nielsen’s average minute audience when available.
  • For streaming viewership, we used average audience numbers. Total impressions is a much higher number, but not accurate for viewership.
  • We tried to be as accurate as possible for the total number of games in a season. For the NBA, this number can change as the playoffs are a best-of-series, and not a set number of games.
  • Some TV contracts include streaming rights. It’s hard to quantify the exact effect that the additional streaming rights have had on contract negotiations.

It’s also important to realize the average viewership numbers aren’t always an accurate representation of each game, nor what the contract is worth.

  • For example, an average of 14.8M NFL fans tune in to a game. According to Nielsen, 36.5M viewers tuned in to the NFC Championship Game in 2017. The NFL TV contract doesn’t break out regular season and playoff games, and it’s easy to understand that airing playoff games is much more valuable.

First, let’s look at TV contracts for the NFL and NBA.

Looking at the above chart, it’s clear how valuable the NFL has become for broadcast television and ESPN in particular. These contracts are in the billions of dollars annually for the ability to broadcast games. Cost per viewer per game differs based on the contract. Despite including post-season games (and the Super Bowl), the contract for FOX, CBS, and NBC appears to be the most cost-effective, despite ringing in at the highest dollar amount.

When it comes to streaming rights to NFL games, Verizon, Twitter, and Amazon have all been involved.

Verizon has paid a much higher price per year, as well as per viewer per game, than Twitter or Amazon. They have, however, been able to stream all games during the season on either Yahoo Sports, go90, or NFL Mobile. An interesting change to Verizon’s latest contract is that they are opening up streaming to non-Verizon customers. Previously, you had to be a Verizon customer to have access to the stream on any of the apps. Verizon seems more interested in increasing their viewers for selling advertisement spots than it does in earning market share in the carrier space.

Amazon has taken a similar open stream approach to their Thursday Night NFL deal. Last season, Amazon offered Thursday Night Football to its Prime customers only. Beginning this fall, Amazon will stream the games to not only its Prime customers but to anyone on Twitch as well. This move signals Amazon’s confidence that bringing more people to the Twitch site will boost Twitch’s notoriety. According to Streamlabs, Twitch’s average viewership in Q1 was 953K. This puts Twitch in the same ballpark, and by some measures, ahead, of CNN and MSNBC for daily average audience.

While the NFL remains the contract king for professional sports, the NBA has negotiated contracts with Amazon and Tencent for streaming NBA games. While the NBA, like most major professional sports leagues, offers its out streaming service for fans to watch games, they understand the importance of their content reaching different tech platforms.

In an attempt to boost international exposure, the NBA negotiated a contract with Tencent in 2015 to stream games during the season. Despite China being on the other side of the world, an average of 2M fans tune in to each NBA game. During the 2017 NBA Finals, Tencent saw an average of 12.2M unique viewers per game.

We also wanted to look at the first streaming contracts for the three franchise eSports leagues we wrote about in our franchise economics note. While there is no TV comparison, the cost per viewer per game is on par with TV contracts for traditional sports but lags behind streaming contracts for traditional sports.

Who else might attempt to add live sports to their platforms?

Facebook – Facebook recently announced an agreement with the MLB for exclusive rights to 25 games this season on its platform. Last season, they simulcast some Friday afternoon games. Facebook has big ambitions in the live sports space. Adding live sports would be a great way to increase engagement on the Facebook Watch platform.

Netflix – Reed Hastings has stated before that Netflix won’t do live tv, nor live sports. Today, Netflix is focused on continuing to strengthen its original content. With Amazon, Netflix’s biggest rival today, making a big push into live sports, it will be interesting to see if Netflix breaks away from its tradition of original and on-demand content.

Apple – Apple has made an effort to incorporate live sports streaming onto its Apple TV platform, but to this point, has not negotiated any exclusive rights to stream any games. Apple will likely focus on building out its original content offerings in the near future before it explores negotiating streaming contracts.

What does this mean? It’s clear that tech companies are willing to make large investments in original content, and we expect this to extend into professional sports. This is good news for professional sports leagues, as their product will be able to reach more people. While cord cutting continues, more and more people are able to access the internet each day. As professional sports leagues seek to expand internationally, having partners who can reach these parties will be important.

Traditional network television and cable television giants might be in trouble. Live sports are one of the most compelling reasons for cable television subscriptions. as these products are available at a lower cost and through a more easily accessible platform, cord cutting will further accelerate. This is good news for tech companies, who can increase engagement on their platforms and attempt to reach new users by adding more live streaming content.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Amazon’s Next Massive Market: Healthcare

  • CNBC reported on Friday that Amazon is building a health and wellness team inside its Alexa division to work on making Alexa a better tool for healthcare.
  • Amazon, Berkshire Hathaway, and JP Morgan recently announced plans for a joint healthcare company focused on reducing costs and improving care for their combined 1.2m employees.
  • The $3.3T U.S. healthcare industry is notoriously slow to innovate.
  • We think Amazon will change healthcare on three fronts: 1) Logistics: Help reshape the $453B Pharmacy Benefit Management industry; 2) AI: Alexa will help both patients and providers with everything from in-home care to allowing providers more time with patients instead of paperwork; 3) Cloud: AWS will continue to allow Amazon to partner with the world’s leading patient data networks.

Source: CNN Money

Dr. Alexa. Today’s news around Amazon’s new Alexa healthcare team got us thinking about Amazon’s prospects for breaking into healthcare.  Companies across the entire healthcare industry are quickly discovering that AI will be used in everything from operations to enhancing quality of life for patients. Imagine the safety, information, connectivity, and entertainment that an Alexa near every hospital bed could offer patients.

Amazon’s Medical History. Amazon’s first foray into healthcare came with a 2014 deal with Cardinal Health leveraging Amazon’s e-commerce capabilities to sell medical supplies to hospitals and clinics. Amazon announced another major move into healthcare when they, JPMorgan Chase, and Berkshire Hathaway outlined plans to start a company that would provide and manage healthcare for the three companies’ combined 1.2m employees, focusing particularly on reducing costs. Separately, Amazon announced that they have put their plans to become a pharmaceutical wholesaler on hold (for now). The company found it difficult to bring major hospitals on board due to their reluctance to deviate from the purchasing process they’ve grown used to. 

Amazon’s Next Moves. We believe Amazon will have a major impact on the $3.3T U.S. healthcare industry by leveraging three core competencies: Logistics, AI, and cloud infrastructure to transform delivery of care, population health management, and healthcare software services.

  1. Logistics: Logistical expertise will most directly impact the highly concentrated Pharmacy Benefit Management (PBM) sector. Rising drug prices and rising drug demand has driven considerable backlash recently among American consumers. We feel this could be a golden ticket for disruption to a cost-conscious, logistics expert like Amazon.
  2. AI: Alexa’s artificial intelligence could significantly reduce the amount of busywork for doctors and accelerate the adoption of in-home telehealth. From checklists to note taking to logging patient symptoms, Alexa could streamline many healthcare operational functions by eliminating menial tasks and allowing providers to spend more time with patients. In the home, patient rooms, and at senior living facilities, Alexa could do everything from reminding patients to take their medicine, to helping manage care for diabetics, to helping patients notify staff if they’ve fallen.
  3. Cloud: Amazon’s $5.4B AWS business is poised to provide incumbent electronic health record systems with the storage, analytics, and population health management tools needed to provide a full stack of services around patient data. Evidence of this came as Cerner, one of the world’s largest health technology companies, partnered with AWS to utilize the platform’s data analytics strengths to provide more real-time care coordination amongst providers. Cerner also looks forward to leveraging Amazon’s AI to take a more proactive approach to cross-sector population health and wellness, and we anticipate they will be one of many healthcare firms in the future using AWS in similar capacities.

Whole Foods + Healthcare. The acquisition of Whole Foods gives Amazon another unique product and product delivery method, although we can’t call it a core competency yet. Food as medicine will be an important part of healthcare’s future and, as a leading grocer, Amazon is well-positioned here. Whole Foods locations also provide Amazon with the physical presence, and the brand recognition in health and wellness, to potentially address the need for more convenient healthcare clinics.

Bottom line. Amazon’s aspiration to be “Earth’s most customer-centric company” provides it with seemingly unlimited growth potential (and uncanny ability to find success in new markets). While they may be king when it comes to e-commerce, their entry into the healthcare market will likely prove to be one of their toughest tests to date. They face an extremely complex and concentrated industry and the regulatory quagmire that comes with it. Amazon has its work cut out in convincing the healthcare system that it belongs at the table, but it’s made sensible first steps and we’ve learned not to bet against them.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

XPONENTIAL 2018 – The State of The Drone Industry

Last week, we attended the AUVSI XPONENTIAL trade show in Denver, the largest global gathering of unmanned systems providers, robotic software developers, and industry experts. We spent time with 15 executives from some of the leading commercial drone companies and thought leaders in the space and, as we did last year, asked them a set of six questions to better understand the trends driving (and holding back) the commercial drone industry.

Similar to last year, the executives we surveyed believed regulatory policies remain the biggest headwind holding back the industry while challenges related to sense-and-avoid and battery endurance are the biggest technical challenges. In addition, the industry is still in need of an Unmanned Traffic Management (UTM) system to unlock the true potential of drones, but the timeline to commercial integration remains uncertain. While we left the conference believing it will likely take longer for the drone market to reach its full potential as we work through these headwinds, we came away incrementally more upbeat about the long-term market opportunity for drones: The drone market will be a multi-billion dollar industry opportunity that benefits both early-stage start-ups as well as multi-billion dollar tech companies.

Below is additional color on the responses to our six survey questions:

What’s the biggest limitation holding back the industry? Almost identical to the responses we heard at least year’s conference, the majority of drone executives highlighted regulation as the primary industry headwind. While favorable drone regulation has been introduced over the past few years, the industry needs more clarity on beyond-visual-line-of-sight (BVLOS) flights, as well as flights over populated areas. Product understanding, technological hurdles, such as battery life, and lack of understanding around aircraft certification requirements were also common answers.

What U.S. government regulation is holding back the commercial drone industry the most? The key regulation holding back the industry is around beyond-visual-line-of-sight (BVLOS) flights, which was indicated by seven executives. This compares to five in last year’s survey (also 15 participants). Pushback on Section 336, which limits the FAA from regulating hobbyists, was also identified as a piece of legislation causing the industry headaches.

When will flights beyond visual line of sight be broadly allowed with US government oversight? Almost everyone agrees that BVLOS flights will not be made commonly permissible in the next year or two. On average, most experts think the industry will see broad BLVOS allowance in 2020, which was in-line with last year’s result. That said, there is some early progress on BLVOS flight. PrecisionHawk announced the first Beyond Visual Line of Sight (BVLOS)-enabled drone platform at the conference. After 3 years of research, the company was able to develop an FAA-approved drone system to operate BVLOS. While the industry still has a ways to go for broad BVLOS flight deployment, this announcement marks a major step forward.

When will a UTM system go live in the US? An Unmanned Traffic Management system is critical to allowing routine BVLOS flight applications and key to enabling the true potential of drones. NASA, Amazon, Google, and a handful of start-ups are leading the initiative to build various UTM systems. We asked when the executives in our survey expect a UTM system to be commercially available in the US, and unfortunately, most were pessimistic about this occurring in the next 12 months. The majority expect UTM to be integrated between 2020 and 2022. However, once again we heard several people indicate they are unsure, and implementation is largely in the FAAs hands. For a deep dive into UTM, see our research note here.

What is the biggest technical challenge you need to solve? While drone tech has advanced significantly over the last 12 months, industry leaders identified several areas that need improvement. Those specifically identified were remote identification, sense-and-avoid in GPS denied environments, battery endurance, real-time data processing, and command-and-control communication links. The executives in the survey went on to highlight that many of these technologies also need to be certified to be used in advanced applications.

What is the biggest untapped market or use case for drones? The drone market is still far from being mature, and most executives still see the largest market opportunities in traditional industries such as agriculture, utility inspection, and security. However, once BVLOS flights are allowed regularly, drone delivery and air taxis are also seen as large market opportunities, although don’t expect to see either of those use cases broadly deployed in the next several years.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Lights Out: Amazon Flexes Its Profit Muscle

  • Amazon reported Mar-18 results highlighted by profitability that was 2x analyst expectations.
  • Recall that from time to time Amazon will flex its gross margins to remind investors of the model’s leverage potential. Going forward we expect margins to dip lower as the company continues its aggressive investment pace into fulfillment, lower AWS pricing, and content.
  • Retail growth of 22% y/y was consistent with growth over the past two years. More room to go given the company added ~15m Prime members in 2017, which will drive spending in 2018. Prime members spend 3-4x more on Amazon than non-Prime users.
  • AWS growth accelerated for the second straight quarter to 49% y/y, compared to 45% y/y in Dec-17 and 43% y/y in Sep-17. Cloud is still a nascent market and AWS is a killer platform that should yield favorable growth going forward.
  • The company also announced a 20% increase in the price of a Prime membership. This should yield about $2B per year in incremental revenue that will most likely be reinvested in the business, and occasionally allow the company to flex its profit margin muscle once again.

The $50B automated retail opportunity. In 2016 there were 3.5 million cashiers in the U.S., according to the Department of Labor, with an average salary of $13,574, according to Data USA. That makes for a nearly $50 billion opportunity in cashierless retail that Amazon is well positioned to attack. Of those 3.5 million cashiers, 323,000 are convenience store or gas station employees, or 9% of the cashier workforce. The automated retail space is getting more and more crowded, but the Go store suggests that Amazon has the pole position.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.