An amazing reality of the world we live in is how fast technology changes – and how much consumer behavior changes as a result. Faster, simpler, and more efficient is what today’s convenience-seeking consumer wants, and a prime example of this is the exponential rise of on-demand consumption. Think about the seismic shift towards on-demand models for just about anything including shopping, watching, listening, reading, and ride hailing.
This has largely been possible because of the disruption unleashed by the advent of the smartphone. Think back to 10 years ago when the smartphone first appeared, and how incredibly fast the traditional mobile phone market leaders such as Nokia and Motorola almost vanished. When Apple brought out the iPhone and Samsung a little later offered Android-based smartphones, these products were simply better than anything else available, and consumers very quickly switched to the new offerings. Today, there are approximately 5 billion mobile phone users, accounting for 66% global penetration.1 In the U.S., adults average nearly 6.5 hours a day on digital media, over half that time on a mobile device.2 That number grows when looking at emerging markets like China. The ubiquity of smartphones is leading to rapidly expanding economies of scale for dominant, innovative companies in areas like e-commerce, digital advertising, payments, and streaming.
Leaders in growing e-commerce and digital advertising markets
Source: eMarketer, Statista
Leading online giants like Amazon in the U.S. and Alibaba and Tencent in China continue to drive true innovations by creating products and services that consumers want, when and where they want them. Consider Amazon, which started out as an e-commerce platform but later began to offer web services and then “Prime” features such as free shipping and video-on-demand. Vendors can now activate online advertising to move up on the list of search results with sponsored ads. Amazon has used this to generate billions of dollars in ad revenues in recent years at almost zero cost, as all it has to do is make minor adjustments to its website.
Considering the 3.5 billion social media users representing 45% of the world’s population, it’s no wonder that digital advertising has seen such demand and rapid growth.3 In 2018, digital advertising accounted for 40% of the total global advertising spend, with Google and Facebook comprising 60% of the U.S. share. In 2019, the digital advertising share is expected to grow to 50%, with five companies amassing 68% of the revenues.4
Tencent was a first mover on the Chinese market for mobile phone games, on which users can play anytime and anywhere. It built up a broad base of game players into its own social network, through which it generates additional income from advertising. Tencent then started allowing users to buy online games (and thus spend even more money). But since Chinese banks are not exactly known for their user-friendliness and reach with their retail customers, Tencent simply created its own system of payments based on smartphones and QR codes. It has recently become a big player in digital payments, which now generate 15 to 18% of the company’s total revenues. With Tencent’s payment app, WeChat Pay, users can now pay for many online and offline transactions, helping to drive China towards becoming the first cashless country.
Online media consumption has grown enormously over the past few years, thanks to the pioneering efforts of Netflix, which has transformed how, where, and when we consume entertainment. Evolving from just another DVD rental service into a powerful creator of original content, the company now offers a burgeoning lineup of local language content targeting home markets around the world. Fees paid by the company’s 130 million subscribers fund the creation of more content, which increases the company’s value to viewers, which drives additional subscriber growth―a virtuous cycle and the ultimate network effect. Traditional local media companies and cable/satellite distribution businesses have been caught off-guard by the disruptive appeal of Netflix and other streaming incumbents. In fact, 39 million Americans are expected to “cut the cord” this year.5
These are just a few examples of companies driving true innovation and taking a leading role in transitioning consumer behavior towards an irreversible on-demand consumption model. But the real question for investors is: Can these companies continue to innovate, find new sources of income, and provide compelling investment opportunities – or will they fall under the next wave of disruptive newcomers? If the latter, who will those companies be and how sustainable will their growth be? These are the questions that Jennison’s growth managers seek to answer through their fundamental equity research.
Read about other compelling secular themes that the Jennison Global Equity team sees driving growth in Finding Market Leaders in the NEXT Economy.
1 Source: Statista as of December 2018
2 Source: Kleiner Perkins: "Internet Trends 2018”
3 Source: Statista as of April 2019
4 Source: Adobe, Statista
5 Source: e-Marketer, Statista
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