Information Is Power, If Used Intelligently
The world of Connected Lives is booming, driven by the Internet and new digital technologies. It has never been easier to communicate, search for information or let yourself be entertained by the endless digital media offered on-line. Today, there are more than 15 billion mobile devices with on-line capabilities, and more than 1 billion people are connected through social networks such as Facebook and Twitter. The number is expected to continue growing, propelled by an expected surge in, especially, the number of Internet users in emerging markets and by an expected increase in the volume of consumer goods (automobiles, watches, etc.) and industrial devices (robots, machinery, etc.) with artificial intelligence and connected to the Internet.
This expanding network creates volumes of data through interaction. And today you can store these huge data volumes. Facebook stores 500 terabytes of data every day e.g. from the 300 million images uploaded and the 2.7 billion 'Likes' posted every day. According to Wired Magazine, Google's YouTube division alone accumulates 24 petabytes of data every day. IBM claims that 2.5 quintillion bytes of data is generated worldwide every day. A video downloaded from YouTube (e.g. Gangnam Style) takes up 10 MB. So if all data were music videos, this data volume would translate into the equivalent of 250,000,000,000 videos downloaded from YouTube per day. Intel has recently announced projections of what takes place on the Internet during the course of one minute: Among many other things, 204 million e-mails are sent and 1.3 million films are downloaded from YouTube every minute!
The volume of multi-structured data doubles in just 18 months, and we believe that it is essential for strategic investors to follow this social revolution and obvious growth trend.
Data is only valuable from an investment perspective if it is usable. The challenge for large and small companies in this setting lies in collecting, storing, searching, analysing and visualising relevant data. On the other hand, the opportunities for learning to understand customer behaviour and identify trends, optimise production routines and many other things are vast.
Winners in Big Data
There seems to be at least four groups of winners in this setting:
- Software companies that help businesses collect, store and analyse data (e.g. SAP)
- Companies that use data analyses efficiently in their product differentiation (innovation) and sales and cost optimisation (e.g. Nestlé)
- Super data collectors (e.g. Google)
- The world, all of us – by enhancing opportunities for growth, for understanding diseases, preventing crime and a lot more
Big Data is actually not a new concept; it originates from computer science and covers the collection, storing, analysis, processing and interpretation of large volumes of data. In moving from the challenge of juggling absurd volumes of multi-structured and unusable data to the more value-laden concept of 'Big Data' lies the satisfaction of creating applications that can be used on top of existing data structures to capture information for intelligent use.
SAP has the solution: HANA
An obvious place to look for winners is among application software companies. Their applications can help businesses leverage on the exploding volumes of data. Our preferred stock in this sector is SAP, which is currently the third largest largest investment in Carnegie Worldwide. Based in the German city of Walldorf, SAP has successfully sold innovative software solutions to almost 200,000 customers in more than 120 countries. Boasting a global market share of some 26% in Enterprise Resource Planning (ERP) software, SAP is twice as big as the number two competitor. In our search for unique stocks, we often come across companies that either have installed SAP's software solutions or are in the process of doing so and, despite an often troublesome implementation process, SAP customers are generally very positive about the product. This obviously strengthens our confidence in the stock. Carnegie Worldwide has followed SAP for just over 20 years, and we made some very successful investments in SAP in the 1990s when the products were new and growth was strong. In the wake of the financial crisis, we became aware that SAP, which was generally considered somewhat moribund, was working on a number of interesting initiatives and innovations. These innovations are very likely to push SAP back on the growth track and, mind you, not just by generating growth in new product areas but also by driving demand for its core products.
The goal is clearly to double SAP's market potential from around USD 110 billion to USD 230 billion over a span of just a few years and to generate double-digit growth rates. SAP has supported these initiatives by making a series of major acquisitions. Acquisitions like Sybase, Ariba and SuccessFactors are in the process of being integrated and they are intended to secure SAP a leading-edge position in the following new growth areas:
- Cloud (software as a service)
- Mobile (access to SAP systems via mobile devices)
- HANA (In-Memory Computing platform)
Of the three new focus areas, we are particularly intrigued by HANA. This is a truly innovative product capable of making large hard drives superfluous and of increasing the speed of corporate transactional data processing by up to 1,000 times. HANA builds on technology from Samsung Electronics and Intel, with Intel's processors being connected in parallel and working directly together with the processing memory. This makes the computing processes significantly faster, as calculations are not delayed by slow access to data on separate storage media.
Using HANA, a major food manufacturer like Nestlé is now able to track global sales of Nescafé in real time, for instance launching a global sales campaign. Such calculations would usually take three hours, but with HANA they only take a few seconds. This provides Nestlé with a wide array of new possibilities for tracking and optimising sales down to specific product codes and points of sale. Nestlé is an example of a company that understands how to leverage technology and extract intelligent information from its data volumes.
Super data collectors such as Google, Facebook and Twitter are gradually developing into data monopolies. The more users there are to drive a positive network effect, the better their products get. They and a few others have succeeded in achieving dominant positions, but we rarely hear about the many losers that never achieved critical mass. We have met with and analysed loads of small companies, but often their business model is so new and unrefined that we deemed the risk too great. However, every once in a while, we come across large and well-established companies which, despite their size, are able to leverage opportunities in the overall theme that we call Connected Lives and create great value. One example is Carnegie Worldwide's investment in Samsung Electronics, which has septupled its market capitalisation over the last ten years or so and now holds a global leadership position in the manufacture of computer chips and mobile phones.
The extensive use of social media and Google is proof that incredibly many people all over the world benefit greatly from using these medias, but this comes at a cost: Individuals pass the right to use data to the super collectors. One might claim that super data collectors are not doing enough to educate and inform their users about their lack of ownership of their 'own' data. Take Hugo Campos, who has a pacemaker, as an example: In his appearance on TED Talks, Hugo Campos vented his frustration that the manufacturer of his pacemaker regularly collects data about his health condition, all the while Hugo himself is unable to access such data.
As such data become more useful, the debate about ownership will flare up further, resulting in a higher degree of self-determination as to how much data an individual will want to pass on for use by the data collector. Another consequence could be that the data collector provides individuals with access to their own data. This implies a long-term risk factor with respect to how far data collectors can go and how much value they can 'wring' from the data volumes.
There is a drawback to any type of socially revolutionary technology: Evgeny Morozov, internet researcher at Stanford University, is a vociferous critic of technological euphoria and he expresses his views in the book 'To Save Everything, Click Here: The Folly of Technological Solutionism'. He warns about getting too carried away and about the increasingly narrow-minded perception of the world that individual people get because search algorithms feed us information tailored exactly to our search queries. The more we use the Internet, the more narcissistic we become.
It is important to know the tool you're using. And so far man is smarter than the tool. There is no doubt that the Internet can be abused by both government and commercial interests. But the opportunities outweigh the threats. The possibilities are enormous in the fields of disease control, crime prevention and process efficiencies for the private and public sectors. The threats should be minimised through educating people and through intelligent global legislative intervention and initiatives.
We are currently at a very interesting point in the history of capitalism. As described in the book 'Standing on the Sun' by Christopher Meyer, capitalism is by no means dead but rather a misunderstood concept – much like a chameleon adapting to new surroundings. Capitalism is an adapting set of fundamental rules that change with the surrounding environment. Capitalism has a centre, a heart, and this heart beats where the most wealth is created. Today, the heart of capitalism beats the strongest in emerging markets, led by China, and in the Internet economy, spearheaded by a number of US corporations. Wealth is increasing faster today than it did before, because it is easier to trade across borders and because the new technologies make it easier to transfer knowledge across the globe thanks to Connected Lives. Indeed, never have so many people watched so many videos of cute kittens on YouTube. Nothing wrong with that, but a potential for job creation, corporate sector growth and revitalising capitalism could lie in Big Data – in putting the data volumes and the inherent knowledge to intelligent use. We will be following Big Data to better understand the world and to understand the opportunities and threats facing current and potential future stocks in our equity portfolios.
Portfolio holdings information is based on total assets at month end for the stated period and are subject to change. The percentages shown are based on closing prices and may be unaudited. The information provided should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed will remain in a client's portfolio at the time this report is received or that securities sold have not been repurchased. It should not be assumed that any holdings will prove to be profitable, or that the investment recommendations made in the future will be profitable or will equal the performance of the securities presented in any list.
Information provided reflects the Sub-Advisor's or Manager's views as of a particular time. Such views are subject to change at any point and the Sub- Advisor or Manager shall not be obligated to provide any notice. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. While the Sub-Advisor and Manager have used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. No guarantee of investment performance is being provided and no inference to the contrary should be made. There is a risk of loss from an investment in securities.
Bo Knudsen is managing director and portfolio manager and Lars Wincentsen is portfolio manager.at Carnegie Asset Management