6 years is a long time in the world of Venture Capitalism, and an age in the development of digital trends.
It has been less than 6 years since a Morgan Stanley MD and Digital analyst, Mary Meeker, who had made a name for herself as one of the US’ foremost influential thinkers about emerging technological trends, publishing numerous industry defining reports and books, joined Kleiner Perkins, Caulfield and Byers, and began publishing what has become known as the “Meeker report”.
Meeker was writing about the growing influence of the Internet as far back as 1995, and Internet advertising since ’96. Her KPCB bio reveals that she covered emerging tech giants (e.g. Amazon, Dell, Microsoft, Google, Electronic Arts and others) who have collectively gone on to create 500k jobs, and increased their collective market value by more than $1.5 trillion dollars, at Morgan Stanley before joining KPCB and leading investments into the likes of Soundcloud, Spotify, Twitter, Jawbone and Instacart. She now sits on the board of Square, Lending Club and DocuSign.
The latest Meeker report, or to call it by its official name, the “2016 Internet Trends Report”, was released yesterday, and as befits its legendary status, was immediately seized upon by the world’s tech press, who studied it for clues as where we are headed as an interconnected, digitally savvy, self-aware global community.
Perhaps the theme of this year’s report could be, “consolidation and growing awareness”, plus maybe “almost there” (always bearing in mind that over the half of the world’s population are not connected and live close to, or below the poverty line – mankind’s biggest concern).
There is nothing about the world of tech today too surprising to either the developed or the developing worlds. We have all gotten used to being online, and are generally aware of the possibilities, and limitations, of the digital world. Yes, there is VR, AR, AI but in actual reality we are at least a decade away from seeing the true benefits of these developments.
What preoccupies us today is personalisation, algorithms, video, the sharing and subscription economies, and the impact of social, not just on our personal, but also on our working lives.
The report weighs in at a mighty 213 slides therefore in the interests of brevity let’s examine some of the overriding themes and trends the report uncovers. We encourage anybody to take a look at Tech Crunch’s breakdown of the report (click bait for intellectuals and techies), but below you will find a snapshot of the state of the Internet in 2016, where we are, who we are, and what we can expect to see happening over the next year.
With penetration comes consolidation. The report suggests that nearly half (42%, 3bn users) of the world’s population are now online, but year on year growth is flat at around 9%, from highs of 15% in 2009. If it weren’t for India, where growth is accelerating (40% YOY, 377m users), overall growth would be at 7%.
The number of global smartphone users is nearing critical mass, growing 21% YOY vs 31% in 2014, and global shipments of smartphones are also growing less fast, 21% YOY growth vs 38% on 2014.
Growth is fastest in Asia Pacific, up 23% to 52% of the population. This suggests that most people in the world who can afford a smartphone, have one. The next big challenge, pioneered by Zuckerberg’s controversial Internet.org project, is how to get the remaining 4bn of the world’s population browsing the web on their smartphones. The signs are it won’t happen as quickly.
Today Android dominates smartphone unit’s shipment by operating system, with nearly 80% of the market (iOS has around 16%), but growth in shipments is dwindling at around 5% YOY. iOS (9%) is growing faster than Android (4%) YOY.
As mentioned earlier, finding new internet users is harder than before as developed and developing markets are almost saturated. The biggest obstacles to growth are low incomes, lack of infrastructure, lack of user capability and, intriguingly perhaps, lack of interest / incentivisation. Perhaps nomads and goat herders are more content than we thought.
In Ethiopia, the average smartphone costs around $262 dollars, or 46.7% of Gross National Income. In Nigeria, it’s $307 and 10%, Turkey $522 (the most expensive), 4.8%, and in Germany $422 (second most expensive), 1%. The cheapest is Bangladesh, $123, 11.4%.
Economic and demographic global growth trends
Meeker’s report goes into this in some detail, but since we are interested in discovering Internet trends we’ll skip through this bit quickly.
In 1985, North America, Europe and Japan were responsible for 65% of Global GDP growth. Now it is China and emerging Asia who dominate, claiming two thirds, whilst North America Europe and Japan are responsible for most of the rest.
US 10-year Treasury yields are at historical lows at around 3% (from historical highs of around 15% in 1982). Global debt is higher than ever before and growing faster than GDP to around $208 trillion and 299% of GDP, consisting of household, government, corporate and financial debt in roughly equal proportions.
The world’s population is growing at 1.2% today vs 2.0% in 1970 and global birth rates are down 39% since 1960 to around 20 per thousand people per year. Life expectancy is up 36% from 1960 to around 71 years of age.
Conclusion, as a species, our growth is slowing. As Internet users, after massive growth, 35mm to 3 billion in 20 years, we are slowing down.
This is one trend that is not slowing down – far from it, and in fact it should be growing faster than it is, says Meeker.
In the US, online advertising growth is accelerating, growing 20% YOY vs 16% in 2014. The market is worth $60bn, $40bn on desktop and $20bn on mobile.
Google (18%) and Facebook (59%) are driving the growth, whilst advertisers, the report says, are wasting their money on TV, radio and print advertising. Overall time spent on print vs ad spend is 4% vs 16%, on radio 13% vs 10%, and TV, 36% vs 39%, whereas the trend is reversed for internet (22% vs 23%) and mobile (12% vs 25%).
Google generated $75bn of revenues through digital advertising in 2015 at a market value of $508bn, but not everybody gets online advertising right. 81% of user’s mute pesky video ads, 62% find forced pre-roll brand advertising irritating and 93% of users would consider using ad blockers. 220m desktop users are using ad blockers (up 16% YOY) and 420mm on mobile (up 94% YOY), the majority of them in Asia.
Video advertising has the potential to be extremely effective, as evidenced by Snapchat whose recent video campaign for Spotify was twice as effective as through normal mobile channels, and a campaign for the Furious music festival in Miami which saw proportional 3x more Snapchatter’s sign up to the event as non Snapchatters. Indeed, Snapchat is one of the report’s biggest winners overall. Kudos to Evan Spiegel et al.
Marketing to different generations
4 generations dominate brand marketing campaigns. “Silent” (grew up during Great Depression, fought Second World War, raised nuclear families, characterised as “savers”), “Baby Boomers” (grew up with TV, cars, Civil Rights and women’s liberation, workaholics, question authority, characterised as “buy now, pay later”), “Generation X” (grew up during time of political / social upheaval, entrepreneurial and self-reliant, technologically savvy, characterised as “cautious and conservative”), and finally “Millennials” (grew up with Internet, mobile computing, globalisation, open-minded, optimistic and tolerant, characterised as “earn to spend”).
In the US since 1925, each new media channel has grown faster than the last, through radio, TV, and internet, which has simply exploded in recent years ($60bn revenues vs TV, $20bn).
Where the “silent” generation had stores, and “Generation X” had malls, “Millennials” have ecommerce. Millennials, who form the largest section of the US’ population (27%), are expected to spend more as they grow older in line with spending by age trends, to around $60-70k, but watch out for “Generation Z” (0-16 years old), there’s 60 million of them in the US.
Ecommerce today represents 10% of all retail sales, up from 2% a decade ago = $340bn. Thanks to technology, the demarcations between brands, products and retailers are becoming increasingly blurred; retail = technology + media + distribution – in no particular order. Physical retailers (e.g. Neiman Marcus) are going online, and online retailers (e.g. Warby Parker) are becoming physical stores.
Thanks to connected devices, we all know when to upgrade and replace products – because the products themselves tell us.
Hyper targeted marketing is driving growth for retailers thanks to Facebook / Twitter / Instagram / Google who know all about who we are and what we like to spend our money on.
Personalisation, asking us what we want to see and showing us is fast replacing search and discover and is helping brands grow to $100mm+ annual sales faster than ever before. What took Nike 14 years, took Lululemon 9 years, took UnderArmour 8 years, and it’s all thanks to online, targeted marketing, personalisation, and the speed at which new products can gain traction amongst millennial users.
Videos, Imaging & Messaging
In the US Facebook reaches nearly 100% of the population who spend nearly 1,200 minutes per month on the site. The next best are Snapchat (38%, 380), Instagram (70%, 375) and Tumblr (25%, 190). Whilst millennials communicate with text and can handle 2 visual screens at once, “Generation Z” communicate visually and can handle 5.
Video evolution is accelerating, from TV to on-demand (Netflix) to semi-live (Snapchat stories) to real-live (Periscope, Meerkat, Facebook Live). Between Q2 ’15 and Q3 ’15 Facebook user shared videos grew from 6bn to 8bn per day, whilst between Q4 ’15 and Q1 ’16 Snapchat user shared videos increased from 7bn to 10bn.
No wonder Facebook were so keen to acquire Snapchat, who look set to become their biggest rival for the eyes and ears of millennials and Generation Z.
The Snapchat Trifecta of communications + video + platform (personal stories, pro curation and “Discover”; Discover gets 70mm views per month, 6-7 mins per Snapchatter), is perfect for brands; witness campaigns such as “Love at first bite”, (9mm views) for KFC and “Join the fight”, (227mm views) for World AIDS Day, and lenses and filters (Taco Bell, 224mm views, Gatorade, 165mm and Iron Man on Facebook, 8mm views) are also popular and effective ways to spread brand messages, whilst the now legendary “Candace Payne in a Chewbacca mask”, which mentioned Kohr’s twice, garnered 153mm views and led to the Kohr’s app becoming the most downloaded on the App Store. Powerful stuff.
Whilst live sports streaming is expected to be huge and comes with all sorts of branding devices and opportunities, image sharing remains hugely popular; Facebook and its family of apps e.g. Instagram achieved 2.0 billion shares in 2015 whilst Snapchat achieved 1.5bn – nobody else was at the races. 55% of Pinterest users say they use images for shopping purposes, 12% of Facebook users say the same, and 3% of Snapchatters. OfferUp, an image Peer to Peer photo sharing marketplace, has grown faster than eBay did in the first 8 years of its lifetime. Houze, which allows users to virtually place products in their homes, has grown to 4mm users in 4 years.
Messaging is changing, but not the platforms people use; of the three largest, WhatsApp has 1bn monthly users, Facebook 0.9bn and WeChat 0.7bn. From old school to new school emojis, the Facebook Gif keyboard and Snapchat lenses, communication has gone beyond simple text and become significantly more emotive and fun to use.
Businesses are also moving into the space, lured by messaging threads’ ability to recall and record information – banking, delivery and transport services have all become commonplace on services like WeChat and Kakao Talk. Hyatt, for example, which began offering a messaging service on Facebook in November 2015 has seen a 20-fold increase in the number of messages it receives.
WeChat has more than 10 million business accounts with engagement of more than 80%, whilst Facebook has 50mm small business pages, with 80% actively used and more than 1bn messages exchanged between them and active private users.
Conversational commerce is ramping up with consumers able to move from browsing their favourite apps to making a purchase and arranging shipping in just a few swipes and taps.
Web chats and social media are the most popular method for businesses to communicate with Generation Z, and 3rd and 4th choice respectively for millennials, with telephone and SMS more popular for them and all the other generations (but these are the least popular communication channels for Generation Z).
Messaging apps want to become user’s second home screens; globally, the average smartphone user has 33 apps installed on their phones, using 12 daily, with just 3 accounting for 80% of their usage (4 hours per day) namely Facebook, Chrome and WhatsApp.
Voice Activated Services
The Meeker report describes voice as “a new paradigm in Human Computer interaction”. The report looks at the history of human interactions with computers, all the way from punch cards to touch and camera, and suggests that voice ought to be the most efficient form of computing input, because it’s fast, easy, personalised and keyboard free. Accuracy and latency are the two key metrics here; the step from a voice recognition accuracy of 95% (what we have now) to 99% (what we will have soon) is a game changer, experts say, and will completely transform our usage habits as our phones will understand us almost perfectly and we won’t have to wait 10 seconds for a response as we do now.
Improvements in voice recognition technology have increased the popularity of such services; 65% of smartphones users are using voice activated assistants in the US, up from 30% in 2013, with the main reason given for the increase being better technology (35% said this).
Google voice-activated search queries are up 35x since 2008 and 7x since 2010, whilst Baidu speech recognition usage by API calls are up 4x since Q2 2014, and text-to-speech usage up 26x. It’s even harder to type into a smartphone input screen in Chinese as it is in English.
20% of search queries on Android in the US are now conducted by voice, and 25% on the Bing task bar. In five years’ time it’s estimated that 50% of all queries will be conducted either using images or speech.
Voice recognition services are used most often at home or in the car, and third party developers are creating more voice activated services than ever before. In May this year Amazon’s Alexa “skills kit” developers had created 950 different applications, including apps for Dominos, Fitbit, Uber and Spotify, vs just 14 in September last year. The ultimate goal of Alexa is to remove friction for making purchases through the site – it’s 3x easier to make a purchase using voice than tapping your way through an app. Expect to see more and more wireless microphones in the home.
5% of Amazon USA users own an Amazon Echo device and 4mm people have bought one, including 1mm in the last quarter alone.
Is it a car – or is it a computer?
Now that you can summon your Tesla from your wristwatch, and there is a clearly defined path from no automation to fully automated autonomous cars, with safety concerns all taken into account, the USA could become the global hub of auto-industry again as it was in the 1930s-1950s, the Meeker report suggests.
Technologically it is ahead of the game (Amazon, Apple, Google driverless cars, Tesla) and is also the birthplace of ride-sharing (Uber, Lyft), but it lacks support from the government, whereas The Chinese automotive industry has its own government right behind it, and ride-sharing is taking off in China in big way.
More than 1 billion people have taken a ride in an Uber, because it’s quick, cheap, safe, and means they can drink alcohol. Didi Kuaidi (world’s largest mobility platform, in 400 Chinese cities, $4.4bn raised) vs Uber (opens in a new city every 5 days, targeting China, just raised $3.5bn from Saudi Arabian government, nearly $20bn raised overall) is a battle royale in the making. China has 70% of the global on-demand transportation market with more than 4bn trips per year (out of 6.6bn globally).
Going forward, manufacturers will make less and sell less new cars. Car ownership costs are high, and 50% of millennials in Asia-Pacific are willing to car-pool; 20% in the US. The average household in the US has 2.2 cars, which they use less than 4% of the time. Expect to ride to work in a self-driving car with your fellow commuters facing backwards whilst charging your phone and using voice activated commands, possibly within the next decade or so.
China is changing – it’s becoming more middle class. Service industries account for 50% of its GDP, and 87% of its GDP growth. Urban disposable per capita continues to grow towards the $5,000-dollar mark, at a rate of around 7.5% YOY.
There are 668 million internet users in China, growing at a rate of 7% YOY with penetration of approximately 49%. User spend 71% of their time on either Baidu, Tencent or Alibaba – and spend around 200 minutes per day on their mobiles.
Chinese advertisers spend more on internet advertising than they do on television, around 42% of total ad spending vs 30% on TV. The two biggest retailers in China are both ecommerce sites, Alibaba ($135bn) and JD.com ($55bn). In the US, Amazon, the biggest ecommerce retailer, comes 5th with $85bn. 31% of WeChat users make purchases through WeChat. C-Trip is a one-stop-shop app for travellers with a mid-boggling array of services. China is the world’s biggest outbound tourism spender ($165bn).
The average WeChat user in China makes more than 50 payments per month using WeChat, more than a debit card in the US (25). 8bn virtual “red envelopes” were sent on Dec 31st, 2015. Ant Financial, another payments app, is valued at $60bn.
The world’s biggest internet companies are getting bigger and “staying aggressive”, the Meeker report says. From Apple ($547bn market value) to Didi Kuaidi ($25bn market value) the world’s largest internet companies hold massive amounts of cash. Apple holds nearly 3 times more ($233bn) than nearest rival Alphabet ($79bn).
Now corporates, however, are buying more tech companies – total acquisitions in 2015 stood at $28bn vs just $11bn in 2012. Global technology Public and Private Financing volumes remain solid ($96bn in 2015, $107bn in 2014) but nowhere near the scale of the dotcom boom ($157bn). There are “pockets of overvaluation”, the report concludes, but these are matched by pockets of undervalued companies. You should think of company valuations as the present value of future cash flows, it advises.
Data As A Platform
The compound annual growth rate of global data is 50% since 2010, but data infrastructure costs are falling fast. There are nearly 10 billion petabytes of data in today’s digital universe, and storage costs per GB of data have fallen from $0.2 dollars to $0.05.
Almost every product generates data today, from cars, to apps, to drones, to fitness bands. The next big thing will be how we use the data to improve people’s daily lives, the so-called Internet of Things.
Salesforce is a big winner in the world of data because it can analyse sales patterns and make recommendations. Mapping, and cloud data monitoring services such as Datadog are also beneficiaries of Big Data and its useful application. Data privacy and security remains a big, global concern. 45% of people are more worried about it than they were last year, and 74% have limited their online activity because of concerns.
Phew, are you still with us? There is an enormous amount to take in and this represents as brief a summary as possible. We urge you to take a look at the full report as it is full of graphs and charts and comparisons etc. etc.
Some notable subjects have been largely left out of the report. Drones, wearables, and B2B SAAS for example, and the report’s focus is tilted towards the US and China – the motor industry in the US, China’s growth, the state of digital advertising and user engagement in both countries – but this is to be expected as it is, after all, produced by a San Francisco based VC firm who clearly want to look at the trends they are most likely to be affected by or want to invest in. Still it’s another example of how well VC firms in the Valley do things, and the level of detail they go into – no wonder they don’t shy away from making big bets – by and large, it works.
Look out for SnapChat becoming a serious global player, and a lot happening in transport and mobility over the next year. Marvel at the phenomenal power and influence of the internet, and if you work in a European VC firm, encourage and cajole your bosses to try and produce a report of similar calibre!