Lady Gaga, Mark Zuckerberg and Paris Hilton; we’ll stop right there, otherwise this would become an extremely long list. This trio is among the most famous representatives of the Millennial generation. Millennials are usually defined as those born between 1981 and 2002. In America there are 92 m Millennials, which according to the Census Bureau, makes this the largest section of the population.
Over the coming years, as more Millennials reach adulthood and enter the jobs market they will reshape society. On the early evidence Millennials might not be quite as selfish and self obsessed as the Baby Boomers who brought us Rock & Roll and birth control. In a reaction to their parents Millennials are said to be more respectful of rules and more interested in community. By contrast Baby Boomers were more into psychoanalysis and frivolous consumption. Nonetheless, Millennials are proving to be a revolutionary force.
On average Baby Boomers are said to spend 7hrs a week reading work related emails. By contrast, Millennials spend just four hours, according to Accenture, the management consultancy. Millennials prefer to spend their time texting and communicating on social networks. No surprise then that Millennials are the most connected generation in history: eight out of ten of them sleep with a cell phone glowing by their bed. You might not be able to reach your doctor when you need him, but the odds are you can phone a Millennial. Be careful about lending them your car though; two-thirds of Millennials admit that they text while driving. The average Millennial is really quite manic when it comes to staying in touch.
The long march of Baby Boomers through the workforce changed the way business was done. Baby Boomers killed the mainframe computer and replaced them with personal computers and then the internet. Just as rock music rewired our ears, the internet and GSM rewired society. Now Millennials are quickly taking the internet to the next level and making it borderless.
Consider the following numbers, which come from the CTIA, a non profit wireless industry organization. The CTIA estimates that in the US alone there were 257 m data capable devices in circulation at the end of 2009, compared to 228 m in 2008. Included in this number will be digital cameras, music players, personal computers, games consoles and the like. If a device is data enabled there is a likelihood that it can connect to a network. This is what is happening now.
World wide, Cisco and Forrester estimate that in 2007 there were more than 500 m devices that were connected to a wireless network. The iPhone was launched in August 2007 so most of the devices connected would have been Blackberries, a tiny number of smartphone and personal computers with a WiFi or 3G data card. This equates to about 1/10th of a device for each person in the world. By the end of this year the estimate rises to 35 billion devices, or about 5 per person. This number will include mobile phones with some kind of data connection, computers, printers and a growing number of sensors and other pieces of invisible electronics that are connected wirelessly. At the same time, using several different industry estimates, there are likely to be around 265,000 different mobile applications in use worldwide.
These numbers are already striking but if the current trend continues it is expected that by 2013 there will be one trillion wirelessly connected devices. This equates to 140 devices for each person on the planet! By that time there is likely to be more than 600 m smartphone in operation and even with the extraordinary rise in tablet computers, such as the iPad, it takes quite a leap of imagination to get anywhere near 1 trillion devices. However, lets begin by considering the following - what might a typical American college student now take away to college? At least one smartphone, an MP3 player, such as the Apple iTouch, a lap top computer, a digital camera, digital video recorder, E-reader, a digital television and two games consoles, one handheld the other fixed. Over the coming years most of these devices will come with a WiFi Direct chip that will enable them to connect directly with each other, without a wireless hotspot. Likewise, over the coming years the number of sensors that are WiFi enabled will rise exponentially. The world’s electricity grids are steadily being rebuilt using networked digital electronics and the same stead march towards the networking of sensors is taking place in oil, water and gas pipelines. Automobiles, medical nstruments, road sensors, numerous monitors, sensors and meters within households and offices are now also being connected to the internet.
AT&T’s (T) last set of quarterly results allow us to glimpse the future. In the second quarter AT&T saw 100,000 new data enabled devices, such as e-readers and a variety of monitoring systems, connected to its network. The estimates for connected devices is mind boggling and may prove to be too high. However, when we look at the growth of data enabled devices they usually exceed forecasts. The sudden rise of the smartphone and tablet computers have taken most analysts and forecasters by surprise.
In our connected age new technologies and behavior spread more rapidly than before. Facebook is a powerful demonstration of this trend. The service was launched on Harvard University campus in 2004 and was opened to the general population in 2006. The site now claims to have 500 m registered users and recently overtook Google as the US site with the most internet traffic. A network gives a device power and in the modern world power resides in community and the ability to access applications and content. Today we live in a world where the private and public space through which individuals move is immersed in radio waves: we are always connected. There is now a small industry dedicated to examining and speculating on how all this connectivity might be reshaping human brains and behavior.
So far we have surveyed how demographics and technological innovation are combining to create a society that is networked. We have also seen that the number of devices linked to networks is rising exponentially. From 2009 to 2013 Cisco believe that wireless network traffic will increase more than 30 fold, compared to just over a four fold increase in fixed network traffic over the same period.
Due to this the number of mobile broadband subscribers is expected to rise to 2.7 bn. This is the number of subscribers who are expected to be using the high speed data variety of 3G known as HSPA. By that time another 100 m are also expected to be using LTE, which is a mobile technology specifically designed for high speed wireless broadband in dense urban areas. Within five years, close to 40% of the world’s population could be using wireless data over mobile networks. Yet, despite the improvements in wireless technology there is still a gap of ten years separating what a fixed line network can offer compared to what is available on a mobile network. Two of the most successful ways to invest in technology is to find bottlenecks and also to invest where the pace of innovation is the greatest. Wireless lives up to both of these rules.
Let me explain. In the fixed line world, which is where the personal computer industry resides - bandwidth is not a constraint and neither is memory size, or power consumption. Another constraint that is lacking in the fixed wire world is human bandwidth. When someone is sat at a desktop they are able to concentrate better on the task at hand, even if that is a user manual.If power and memory are not a problem, and nor is human bandwidth, then electronic and software design can be loser. Microsoft (MSFT) is free to write bloated software and Intel (INTC) is able to pack millions of transistors onto a piece of silicon without needing to worry too much about power consumption.
None of this works in the wireless world. Yet a growing number of wireless consumers will expect to receive the same services and applications over their mobile networks as they do on a fixed wire network. However, there is less bandwidth, less power and less memory than the fixed world can offer. This represents a barrier to entry and goes a long way to explaining the problems that PC centric companies, such as Microsoft and Intel, face when attempting to move into the wireless domain. By contrast, the constraints of the wireless domain represent the moat around ARM’s business. Arm's devices were designed from the beginning with wireless in mind. As we saw earlier, with the number of electronic devices rising exponentially this puts ARM in a position that closely resembles that of Intel’s in the PC domain. Thanks to Moore’s Law each year Intel has been able to add more value to its microprocessors at the expense of other parts of the PC value chain. ARM is following the same progression; like Intel it has added graphics to its microprocessor cores. Over time other functions will follow. This is why Arm attracts takeover speculation.
The constraint in the speed of mobile networks explains why mobile operators can charge more for data delivery compared to an operator in the fixed world. Today, mobile voice and SMS represents about $800 bn globally. Data will eventually take most of this and also add new revenue. It will also increase margin. A study by Nokia/Siemens illustrated that the cost of carrying data over a mobile network drops sharply as the penetration of these services though-out the population increases. Furthermore, each new generation of mobile data, such as the move from GPRS to HSPA and then the move to LTE sees the cost of carrying this data also fall sharply.
As for the rest of tech, the age we are living in might be similar to the 1980s. From 1980 to 1990 tech as a per centage of total US stock market capitalisation barely changed. Yet, in those years many of the greatest investments of the 20 th century either went public or were launched. Microsoft, Sun, Cisco, Compaq, Dell (DELL)... the list is a long one. While personal computers and baby boomers were on the rise, the previous generation of technology companies, such as Burroughs, Sperry Univac, Control Data, DEC and IBM were being eaten alive. The same is happening today. If you look at a ten year chart of either Intel or Microsoft nothing much has happened. Intel might be a giant but in ARM it has met its David.
Investing in tech is like surfing, you have to catch the right wave. So instead of Intel and Microsoft look at stocks like Arm (ARMH), Broadcom (BRCM), Atheros (ATHR), Marvel and pay close attention to any company that gives you exposure to wireless connectivity. Likewise, instead of buying a PC company buy something that either makes smartphones or tablet computers. Look at what Best Buy said the other week - tablet computers are cannibalising laptop sales.
Another, safer way to prosper from the surge in wireless data is to look at companies like American Tower (AMT) and Crown Castle (CCI). These stocks own mobile base stations and are both generating free cash flow yields of more than 15%. No surprise then that they are proving increasingly popular with hedge funds over the last year.
Disclosure: Long APPL