The Great Digitization

The enlightened among you will be aware that Vladimir Ilyich Ulyanov did not write I Am The Walrus. Less enigmatic and decidedly more prophetic, what Lenin did say is the following: “There are decades when nothing happens, and there are weeks where decades happen.” Despite being somewhat clichéd, this Lenin one-liner really is the best way to think about the impact of placing the bulk of humanity in a cryogenically frozen state for a few weeks. Many of you will emerge with a sense of new sh*t having come to light, perhaps an epiphany that fundamentally alters your outlook. Like a recognition of how FOMO gets in the way of channelling your inner dude; in other words, doing absolutely f*cking nothing. In which case you could just continue to chill, or torture yourself with the following conundrum posed by Snoopy the dog: “My life has no purpose, no meaning, no direction, and still I’m happy. What am I doing right?”

At a decidedly more prosaic level, we will all experience a dramatic acceleration in the technology trends that have already subtly reshaped our lives for the last two decades. The markets get it. When the market value of the top 4 companies – all technology – in the S&P 500 exceeds that of the bottom 400, you know profound changes are under way in the global economy. “We’ve seen two years’ worth of digital transformation in two months”, said Microsoft CEO Satya Nadella in April, as it’s Azure cloud platform recorded 59% growth in Q1 2020. The divergence between digital and analogue, old world and new world, has never been as stark as it has through The Great Lockdown. Given our penchant for superlatives, and since a Great(er) Depression seems to be off the table, let’s call it The Great Digitization.

It is a truth universally acknowledged that we are all creatures of habit. Yet there is plenty of precedent for how behavioural changes following “shock treatment” tend to stick, the acid test for such stickiness being whether or not these changes made sense anyway. Take India’s controversial experiment with demonetisation in 2016, which led to an explosion in the use of electronic payments – a digital transformation that has substantially endured. Cash transactions in India now account for circa 70% of all payments, down from 95% at the time. In a closer parallel to COVID-19, consider the impact of the SARS outbreak in China in 2002-3, which led Alibaba to transform its B2B business model and launch the Taobao e-commerce platform. There was no looking back – e-commerce in China today accounts for 37% of all retail, compared to 11% in the United States.

Digital commerce is indeed the most obvious beneficiary of the shutdown. US e-commerce sales jumped 49% from March to April, and it wasn’t all Amazon, whose share actually declined from 51% to 40%. A robust e-commerce strategy has rapidly become the sine qua non for a successful retailer; thus Target is thriving while J.C. Penney has filed for bankruptcy. Facebook’s announcement of Facebook Shops added an impressive $30bn to its market value, its e-commerce engine powered by Shopify – whose own shares are up 86% YTD. The next phase – a combination of ubiquitous 5G networks along with relentless developments in virtual reality and AI will create the digital shopping experience of the future. Jeff Bezos and Anna Wintour might seem like an unlikely couple – until you experience progressive iterations of Amazon Fashion’s AI powered StyleSnap. The Pretty Woman remake will feature Vivian uploading a photograph, perhaps a screenshot of her favourite Instagram influencer, describe the occasion, indicate a budget and find the ultimate makeover delivered to her doorstep within the hour. Who needs a snooty salesgirl on Rodeo Drive, that’s so last century…

The digitisation of finance was already well under way, but this is yet another mega trend reinforced by COVID. Last week I paid my caddie using Apple Pay for the first time, and we both instinctively knew we had crossed the payment Rubicon: there would be no turning back. Interesting to watch will be the Japanese fascination with cash – always a puzzle in the context of an otherwise highly digitised society – and how it clashes with an equally compulsive fixation on hygiene. Regardless, physical bank branches seem increasingly anachronistic, and – as with retail – a digital strategy will become a key differentiator among the incumbents. April 2020 saw a 200% surge in new mobile banking registrations, while traffic increased by 85%. Surveys suggest only 40% of people expect to return to physical bank branches once the pandemic passes. The so-called challenger banks should logically be beneficiaries of this trend, but their ability to capitalise on these tailwinds will be a function of how they evolve their business models, as well as their funding and regulatory status. In the investment world, new wave online brokers report record trading volumes and client additions. Robinhood, despite major technical glitches in March, reported 3 million new funded accounts while raising money at a staggering $8.3bn valuation.

Virtual healthcare will also become an integral part of our new normal, yet another case of a mega trend turbo charged by COVID. China has led the way in this regard, with Ping An Good Doctor boasting an impressive 300mm users, including a 30% bump over the Lunar New Year period at the height of the pandemic. While the Chinese government has actively encouraged tele-health, approving coverage via public insurance last summer, it took COVID to get the US government to expand Medicare to cover telemedicine, and for State governments to mandate private insurers cover online doctor visits. Ever hear of Teladoc Heath? It is the US market leader, with 43mm subscribers, and its share price is up 2.1X for the year. Meanwhile competitor Amwell, which provides “a single comprehensive platform to support all telehealth needs” announced a $194mm fund raise in an attempt to keep pace with demand, it’s CEO reporting that the “past two months have accelerated telehealth by more than two years“. Venture funding for tele-health is already up 2.2x in Q1 2020 relative to Q1 2019. As an example, start-up Bright.MD’s SmartExam software platform “acts like a virtual physician’s assistant, automating 90% of a video visit, and reducing average visit time from 20 minutes to under 90 seconds.” Will anyone miss a depressing doctor’s waiting room, filling in forms while surrounded by sickly coughing patients? In fact, if telemedicine lives up to its promise of extending the reach of medical care, and leads to safer and more efficient digital delivery mechanisms for timely health care, we may yet have an entirely unexpected outcome – an overall decline in excess mortality in a digitised post-COVID world.

Next, let’s talk about the simultaneous digitisation of the workplace and of leisure, or the creation of the so called Stay-At-Home economy. The inimitable Jack Dorsey led the way, declaring that all Twitter employees could work from home “forever”. Zuckerberg announced that Facebook will embrace remote work, with the expectation that over time 50% of its workforce would work remotely. While one could debate the merits of personal interaction, particularly when it comes to leadership, new hire integration, creativity and teamwork, what is undeniable is the explosion in demand for bandwidth generally and enabling technologies like video conferencing applications. My own view is that as cool as Zoom (up 290% YTD) and Slack (up 61% YTD) might seem, there is very little Microsoft or Google could not replicate, and with security concerns paramount, enterprise CTOs will gravitate toward the perceived safety of big tech. Robotic Process Automation (RPA) – software that automates repetitive tasks – and robotics generally should logically experience a massive lift in a post COVID world, though I suspect the pressure to minimise disruptive job losses will mitigate this in the near term.

As for leisure, live sports was the sole raison d’être for linear TV. Not surprisingly therefore, 1.8mm pay-TV subscribers cancelled service in Q1 2020, up 70% from the same period last year. Meanwhile, Netflix added 15.8mm new customers, while Disney + added 5mm in April alone. COVID has turned cord-cutting from a slow trickle to a torrent. Even when the NFL, Premier League or the IPL get going, it’s simply a matter of picking your preferred streaming bundle to allow you to watch anything anywhere – soon with a VR overlay in a 5G world. In other entertainment trends, Twitch – the leading streaming platform for gamers – grew its audience by a third in April, and as for working out, a $99 annual subscription to Beachbody On Demand streamed to my iPad has permanently supplanted my $250 monthly Equinox membership.

And finally, if you want provocation, you might want to listen to NYU’s Scott Galloway discuss the future of higher education in the United States. According to Prof Galloway, schools charging $50K/year have value propositions that have been exposed and “rendered untenable overnight” by the pandemic. A US Ivy League education minus “the university experience” would be “like Sea World without killer whales”: the stamp is worth something, but “nobody pays $50K/year for Zoom classes”. Galloway sees a world with 50% online classes, as universities, devoid of the cash cow that is an international student body, embark on a radical restructuring with deployment of technology at its core, eventually resulting in a dramatic increase in enrolment, potentially even reverting college to the utopian vison of being a “public good”. Partnerships with big tech are likely a fundamental part of this digital restructuring, as higher education becomes one of the few alternatives available to Amazon and Google to generate scalable growth. Galloway unleashed – this is a guy who called the demise of WeWork and Amazon’s Whole Foods acquisition – always gets my attention. As Anderson Cooper says at the end of his interview with Scott (https://youtu.be/P3i4uMc2X0k), “this is the most interesting 5-minutes I’ve had in a long time.”

Among the more ridiculous notions promoted through the lockdown is #AloneTogether, as if SARS-CoV-2 was a benign moonbeam promoting kumbaya on earth. Is David Geffen isolating on his $400mm superyatch “alone together” with a family of 8 confined to a tiny apartment in a Bronx project? Is an athletic 25-year old as vulnerable as an obese 55-year old? Is a debt laden casino operator in the same boat (not David’s, any boat) as Microsoft? The answer to all is of course a resounding “no f*cking way”. On the contrary, this virus is Darwinian in the extreme, and while the many cultural, societal and geopolitical implications will unfold over time, here’s the one thing we can say with relative certainty.

Your digital future has finally arrived.

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