The Sunday Brief

Connecting technology, telecommunications, and the internet

Value Creation – Long-term charts, Fab Five vs. Telco Top Five (Oct 6)

by | Oct 7, 2023 | TSB

October came in like a lion for the Fab Five, with the five-pack bundle up $318 billion over the last week. Each stock gained this week, with Apple leading the pack (+$98 billion). As we have discussed in previous posts, interest rate changes don’t have significant direct impacts on the Fab Five, although one of you mentioned in September that with 5% short-term rates abounding, perhaps the “below the line” interest and other income might show year-over-year improvement given the Fab Five’s large marketable securities portfolio.

Earning a few extra bucks from increased Treasury yields is not in the mind of Google this week as their trial continued (full coverage by The Verge is here). One unsealed court document that attracted attention this week (link to Ars Technica article here), written by a Finance executive, stated that “Google is as addictive as cigarettes or other illicit drugs.”

Every business category has a component that earns disproportionately high margins. In the telecom industry, it’s High-Speed Internet and, a few decades ago, switched voice access. Both require significant investments prior to the cash harvest, however, and, while we do not have all the details of Google’s history, think that search has an investment cycle that precedes the cash flows.

This thesis was supported by Satya Nadella, Microsoft’s CEO, whose testimony was the most informative of the week (The Verge article here). From the article:

For Nadella, becoming Apple’s default search engine wouldn’t be about the money, at least not directly. “We needed to be less greedy and more competitive,” he explained. A sudden increase in distribution, he said, would give Bing an increase in what Nadella called “query flow,” which essentially just means more people would do more searches. More incoming searches means more data the Bing team can use to improve the search engine and more reasons for advertisers to come to the platform. An improved search engine gets used more, which means more data, and round and round it goes. This is the virtuous cycle of search engines, and Nadella believes Bing could use that cycle to quickly catch up to Google’s quality. Or, if you’re Bing — the losing party that can’t get the queries, the data, the advertisers, or the users — “it’s a vicious cycle.”

This cycle stands to be repeated as Artificial Intelligence grows. It is a stunning admission that the Bellevue giant couldn’t win the businesses of the Cupertino giant because of the Mountain View bully. Something to think about as you enjoy the weekend.

File is below. Apple iPhone 15 Pro and Pro Max availability charts will be out tomorrow. Go Chiefs!

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