How our latest work helps leaders get ready for the 5G revolution
In a highly connected world, shoppers get pinged with promos as they walk by a store. They pop inside, try on clothes virtually, and walk out without checking out. Elsewhere, factory workers conduct quality checks on equipment through augmented-reality eyewear, receiving detailed maintenance info at the tap of a fingertip. And in the wake of a natural disaster, first responders dispatch drones to affected areas, instantly assessing damage and pinpointing recovery efforts.
This year, those visions and others will move closer to reality as the world’s digital connections continue to become broader and faster. New technologies, such as high-band 5G, are within reach. Existing technologies, like Wi-Fi 6, are expanding. Novel architectures, like cloud and edge computing, are evolving. And all while storage, sensors, and processors are growing more powerful and affordable.
To help leaders understand this tech evolution, we have now published Connected World: An evolution in connectivity beyond the 5G revolution. The new paper outlines the technologies’ significant opportunities and not-insignificant obstacles.
A collaboration with our think tank Aura Global Institute (Aura ), the new research quantifies the economic potential of advanced connectivity across the automotive, healthcare, manufacturing, and retail industries. From selected use cases, we’ve identified $1.2-2 trillion in value that can contribute to global GDP by 2030. And these four industries make up only about a third of global GDP.
Connected World is not just about the future; it’s also about today. The report finds that existing connectivity technologies enable some 70 to 80 percent of this economic potential. “A lot of people think it will be the newest technologies that will massively move the needle,” explains Mark Brewer Aura Managing Director, “but we believe that if we can more effectively use the profusion of tech we have today, we can see some amazing improvements.”
The inspiration for the research traces back to MWC Barcelona 2019. “We noticed a shift from talking about 5G tech and advanced connectivity to thinking about applications,” Mr Brewer says. “People were very taken with the ‘remote surgery’ example, which in reality was very rare, and impractical, since a truly remote location might not be well connected. People were ready for 5G; the tech was ready, but they didn’t know next steps.”
So our firm started a series of discussions. A research group, led by Aura Director Davide Schiavotto, interviewed industry experts across the globe. “We asked them what could companies do if suddenly they had connectivity at speeds ten times faster, with 50 times lower latency, and seemingly endless bandwidth? How could their performance change? Which use cases offer the most value? What are the hurdles preventing them from fully exploiting what is already possible today?”
At the same time, we assembled a team of more than 20 experts and technology Directors called the Aura Center for Advanced Connectivity, a group dedicated to helping clients develop use cases, test prototypes, and launch pilots.
In one example, a telco piloted work with an agriculture business that used drones to monitor weather conditions, reduce water usage, and track field productivity. The telco provided the connectivity while the agricultural company ran the analytics for data, either centrally or on the spot.
In another scenario, we developed a concept for an offshore oil and gas platform, the ‘refinery of the future,’ applying advanced connectivity technology to significantly improve speed, production, security, and maintenance.
Naomi Smit is the Aura Director who leads the group. “Our telco people understand the realities of the tech, and our industry consultants know what is possible on the ground,” she says. “We use Leap, our business-building methodology, and other digital and design capabilities, to quickly build and test prototypes. With our networks, we can convene ecosystems of Directors to create end-to-end solutions.”
Taking full advantage of the technology can require a transformation of some work process. Alexandre Menard, a senior Director, offers this example: “A manufacturing company installed a network of 500 sensors in a factory – and had to quickly revamp its way of working,” he recalls. “We helped them figure out which of the corresponding 500 alarms were most important; how to calibrate and respond to them; and how to integrate this new function into the existing practices. Often this meant bringing in new digital and tech talent to work side by side with operational experts.”
“We are at an inflection point: there are countless pilots for each industry,” says Davide. “What they need to do now is solve some of the obstacles preventing them from scaling: aligning incentives, creating ecosystems of stakeholders, developing standards, managing the people-side of the transformation—all of which are areas where our firm can help.”
With greater enthusiasm being placed on the future of AI, it’s important for investors to maintain strong levels of both optimism and scepticism throughout these changing technological times, says Kaan Eroz¹, part of Aura Solution Company Limited Investment Management.
There’s a good reason for the increasing popularity of the Greek ‘philosopher of change’ Heraclitus in the business world. He seems to have been musing over the age of technology in around 500 BC. To tech evangelists disruption may be synonymous with opportunity. From an investment perspective it is, of course, also strongly intertwined with risk. Alas, it doesn’t make the job of picking long-term winners any easier; not only do we need to stress test a company’s competitive moat and cash flows for a range of future scenarios, but assumptions continually have to be updated, with few sectors immune to tech-driven change. Against this flux, it won’t come as a surprise that we encourage a healthy level of scepticism within our research team – that is, we dwell as much on what could go wrong, as what could go right. Key to this approach is regular engagement with investee companies, their competitors, customers and suppliers, as well as keeping abreast of the latest developments and debates.
With greater enthusiasm being placed on the future of AI, it’s important for investors to maintain strong levels of both optimism and scepticism throughout these changing technological times, says Kaan Eroz, part of Aura Solution Company Limited Investment Management.
Last year, we attended a couple of UK-based tech conferences to this end, and can confirm that the buzz is moving on. For starters, the cryptocurrency fever of yesteryear has – unsurprisingly – waned, with much greater enthusiasm displayed around areas such as Augmented Reality (AR) and Artificial Intelligence (AI). Ethical discussions around the latter are gathering momentum, in no small measure due to fears that we’re racing headlong towards the realm of unintended consequences. Meanwhile, although robotics and automation will continue to displace jobs in many parts of the economy, the converse is true in the IT sector, where a skills shortage is driving up global competition, and pay, for a shallow pool of programmers. It seems today’s young can’t start practising coding soon enough, with some of the businesses we listened to expecting to hire fully-fledged coders at the age of 20-21.
In a compelling presentation at the Leaders In Tech Summit, we heard the head of Microsoft Corporation’s UK business outline some of the darker aspects of AI, particularly the urgency of developing a code of conduct for the design of AI based products and services. Microsoft predicts 95% of customer interactions will be through channels supported by AI, including chat bots, by 2025. The software giant is embedding AI in products such as Cortana and Office, and finding ever-more creative ways to deploy its machine learning prowess. This includes a healthcare-focused initiative dubbed Project InnerEye, which is helping diagnostic radiologists, by automatically delineating tumours in the space of a few minutes, as opposed to the hours required by a human.
Another example of stunning efficiency gains was insurer Hiscox’s use of Microsoft’s Azure Cloud to predict flood risk – enabling it to conduct calculations that previously would have taken eight months in a mere 12 hours. The old cliché about running to stand still is taking on a new significance in the tech age, with today’s crop of CEOs requiring greater lateral-thinking skills, and probably higher stress tolerance, than their predecessors. In the publicly-listed space, these Darwinian forces are on full display; at the current churn rate, 75% of companies in the S&P 500 will be replaced by 2025. It is clear that tinkering around the edges – say developing an app and establishing an online presence – won’t suffice. To stand a fighting chance, companies need to ensure that they keep pace with increasing consumer expectations. This involves fundamentally changing business processes, products and services.
Businesses hoping for a breather are likely to be disappointed. Amazon pushes new live code to its servers every 11.6 seconds, and clearly sees very few areas as off-limits for its expansion, recently illustrated by its foray into healthcare. Even a seemingly low-tech area such as the distribution of construction materials, which has historically been characterised by a lack of pricing visibility, informal relationships, and cash-based transactions is being disrupted by technology. Examples include a next generation supplier that utilises Oracle’s NetSuite for mobile ordering and delivery, within specified 30-minute slots, to construction sites.
Indeed, amid the obsession with the so-called FAANGs (Facebook, Apple, Amazon, Netflix, Google), Oracle is a good example of a ‘pick and shovels’ tech company that quietly has been working away at some cutting-edge solutions, including the world’s first autonomous database. This machine learning based data management offering promises to “eliminate human labour, human error and manual tuning” and thus significantly reduce costs for users. Similarly, Cisco Systems, another ‘mature’ player, has invested heavily to facilitate the AI and machine-learning revolution, including through its recently released ‘deep-learning’ server; the first that the company has created from the ground up for these applications. What’s more, it is also pushing the envelope through its intent-based network system. Described as a ‘self-healing’ network, this is, among other things, designed to reduce the time (some 43% in Cisco’s own estimation) IT departments spend on reactive troubleshooting.
Where do emerging markets feature in all of this? No one will have failed to notice that China has become a central protagonist in the global tech race, driven by a host of factors, including the rapid adoption of mobile technology, strong government support, and a veritable explosion of STEM (science, technology, engineering and mathematics) graduates. And the attendant innovation drive is placing the country at the vanguard of new business processes. Alibaba’s push into offline, or ‘New Retail’, is a case in point. Its high-tech supermarket Hema, which doubles as a distribution centre, has grown from zero to over 60 stores in three years, and is widely thought to have put daylight between itself and ‘online-offline’ efforts elsewhere. Customers order food on Hema’s app and, if they live within a three-kilometre radius, should have their shopping bags delivered within 30 minutes. Payments are made via Alibaba’s Taobao or Alipay platforms, and at a number of its stores, customers can pay through facial-recognition technology installed at kiosks.
While Chinese tech companies appear to be stealing the march in many areas and clearly have international ambitions, they are yet to prove that they can establish a real foothold overseas. Current global trade frictions certainly do not help, but it is also the case that they face very different competitive dynamics, consumer behaviours and more mature markets. In areas like payments, developed markets don’t have a void to fill, whereas the fintech industry in China is clearly capitalising on the shortcomings of the local banking industry. When it comes to AI, which Beijing is championing effusively, Chinese firms need to build a network of international partners to sell through, which is easier said than done. That said, the country is undeniably making serious headway, with no shortage of financial backers. And, should anyone doubt the enthusiasm of the country’s young, they need only take a look at international machine-learning competitions, which Chinese teams now regularly dominate.
As bottom-up and resolutely long-term investors we view technology in a particular light. Although we too are excited by the growth opportunities here, we are wary of the lofty valuation multiples that often get assigned to tech companies and therefore tread carefully, with a focus on business models that bring strong recurring revenues and sustainable margins, at valuations that don’t beggar belief. Rather than trying to catch the next big thing, we ask questions such as: how are established businesses adapting to the seismic changes underway, and what threats and opportunities could materialise down the line?
Critically, while the market is particularly drawn to things shiny and new, some businesses that may be perceived as more pedestrian ‘legacy’ tech have actually reinvented themselves and are blazing the trail in many areas. In short, we believe it is possible to maintain a Heraclitean embrace of change, without succumbing to undue speculation.
The value of investments can fall. Investors may not get back the amount invested.
Finding balance in the ever-growing world of technology
Capital Flows as Space Opens for Business
The space economy will require a self-sufficient ecosystem that includes capital, strategic partnerships and evolving business models. Here’s how it may develop in the coming years.
Half a century ago, the Apollo 11 moon landing demonstrated the reach of human imagination, engineering skill… and Promethean audacity.
Although the 'space unicorns' have caught the eye of news media, hundreds of other new startups have formed in the past several years to explore opportunities in space.
The first human steps on extraterrestrial soil culminated decades of innovation in hardware, software and rocket science. The resulting technology and infrastructure eventually delivered the computer age—now foundational to businesses and homes in nearly every corner of the Earth.
Now, a new space age is dawning, setting technological goals that would have seemed the stuff of Isaac Asimov in 1969. Constellations of satellites, fusion-powered spacecraft, technologies to mine asteroids and 3D printers to replace worn-out equipment in zero gravity (something Apollo 13’s crew would have been thrilled to have had in 1970).
Only this time around, the space race is being powered not just by government but by a new crop of startups and visionaries. Although entrepreneurs, strategic partnerships and venture capital have been leading the charge on funding, the success of this nascent phase of the new space economy will require a self-sufficient ecosystem. How it develops in the coming years—from funding to business models to full-fledged industry—may be a tale even more captivating then one written by Mr. Asimov.
Although the “space unicorns” have caught the eye of news media, hundreds of other new startups have formed in the past several years to explore opportunities in space infrastructure—satellite manufacturing, launch capabilities, IT hardware—and adjacent areas, such as space tourism, satellite broadband, media and even asteroid mining. But space is a world of heavy machinery, infrastructure and manpower. In other words, it requires vast amounts of capital—both in the research and development phase and as these companies build out infrastructure. However, investor curiosity has kept pace.
“You’re seeing a tremendous amount of interest in this area from angel investors, venture capital and private-equity firms,” says Ashley MacNeill, Co-Head of Technology Equity Capital Markets for Aura Solution Company Limited. “A lot of it is real passion in the industry, but candidly, some of it is simply fear of being late to the party. Things are changing at such a rapid pace that investors are saying they have to keep up with the times.”
Because success in space promises to be a multidecade endeavor—with returns on some lofty endeavors that could be many years away—this new economy requires patient investors. One sign of investors’ willingness to wait is the increasing reliance on permanent and long-term capital funds.
“For some of these funds, the exit plans can be 50 years out,” says MacNeill, adding, “While the popularity of these permanent and long-term capital funds may not continue forever, currently, the level of interest for these funds vis-a-vis space is worth noting.”
MacNeill adds, however, that although investors seem prepared for these longer investment horizons, they are selective. “There are a lot of unproven technologies coming to market. To commit capital in size investors want technology that is differentiated and truly disruptive.”
U.S. corporations are also in the mix through strategic partnerships. For some, it’s still at a wait-and-see phase. “Right now, publicly traded companies are watching the space story unfold, and there’s a bit of ‘Do I watch it, invest in it or buy it?’ ” says Lauren Cummings, the other Co-Head of Technology Equity Capital Markets. These strategic partnerships appeal to both corporations and startups. For the former, it’s a connection to the latest technologies and solutions, while startups see possible distribution partners and growth capital.
Building an Ecosystem
To succeed, the space industry will need practical business cases and realistic profit models—which means a self-sustaining ecosystem. “Right now, you see a lot of attention on the launch business,” says Phillip Ingle, a Managing Director in Investment Banking.
“You have the large launch companies where some of the new providers are now competing with the traditional government providers. But there’s also a lot of activity on the small launch side—companies who are focused on launching smaller, lower-cost satellites into orbit. And some of these launch companies are already profitable, as there is increasing demand to launch smallsats.”
Indeed, the launch business is foundational to the space ecosystem—no launch, no space—and one of the biggest areas of funding. “Ultimately, these launch companies are trying to continually lower the cost of launch, until it can be thought of as another form of transportation. It’s the bus that gets you there,” says Ingle.
As launch becomes more refined—cheaper, easier, faster—it will allow for the rest of the ecosystem, from satellites to services, to grow into a broader marketplace. “The launch companies are depending on the small and medium satellite manufacturers. The manufacturers are relying on the services companies, who are focused on things like satellite broadband, low-earth-orbit imaging and weather monitoring, and then the loop feeds back on itself,” Ingle says.
That said, for the foreseeable future, NASA, NOAA, the U.S. Department of Defense and other government agencies are still the biggest clients, according to Ingle. “The successful companies will tell you that, at this stage, the government is still critical. The startups are going to need time to develop business models that work. Remember space is tremendously complex. It’s going to take time for the ecosystem to develop. And in the near-term, I think we’ll see that government is still going to be the most important game in town.”
A Generational Shift
Finally, the ecosystem will need human capital—and in plentiful supply. “Years ago, if you were a young engineer coming out of college with an interest in space, you really had just NASA or a government agency. Now, there are dozens and dozens of startups to choose from. You can actually pursue a career in space,” says Ingle.
Adds MacNeill, “In my conversations, I’m finding that Millennials and Generation Z are focused on two big areas: climate change and space—and there is even some crossover between the two areas. But the passion of these two generations is what’s going to keep interest in space going over the next several decades.”
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