The 3 biggest tech trends that will play out in 2017
1. Get ready for a VR platform war in 2017, and don’t rule out Sony
If you look back at the past year, 2016 was when VR moved out of the hands of developers and into the eager hands of consumers. Oculus shipped the Rift, HTC and Valve launched the Vive, and Sony dropped its own VR rig for the PS4.
The table is now set for a good old-fashioned platform war.
The question, of course, is who’s going to win? Silicon Valley’s conventional take has been to put Sony in the back of the VR pack, but Sony has some clear advantages vs. Oculus and Vive, including the following:
50+ million PS4s already distributed worldwide. Sony charges $399 for its headset. If you’re already a PS4 owner, that’s an incremental cost to get into VR. Oculus and Vive headsets both cost a few hundred more, and you’ll probably need an expensive new computer on top of it all. If you happen to own a PS4, the answer to which VR rig you should buy is simple.
Ease of use. The PS4 may be the most intuitive high-end system on the market. The Oculus and Vive have to play nice with third-party hardware and operating systems. Because it owns the console, Sony has tighter hardware and software integration, which gives it a clear out-of-the-box advantage in ease of use.
Demonstrated marketing firepower. During the PS4 launch, Sony spent $59M in 5 months on advertising, selling 7 million units over the same period. You have heard of the PS4, and so has practically everyone else. Oculus and Vive are creating their brands from scratch.
Baked-in distribution. In Q2–2016, PlayStation revealed it has nearly 21M “Plus” subscribers with credit cards on file, and 60M total monthly active users. These numbers are quite a bit smaller than Vive’s more than 125M users of its Steam Service, or Oculus’ parent Facebook has over 1B daily active users. But, only a fraction of the latter two’s users have dedicated hardware capable of running VR experiences. This criterion is at worst a draw for Sony.
Established game studio relationships. PlayStation already has 64% market share for console gaming, which means that if you’re a AAA game studio you have to work with Sony. The Vive has plenty of indie developer love stemming from its parent company Valve’s relationship, but Oculus is starting from scratch.
Oculus and Vive are compelling offerings, no doubt. These are still the earliest days for the VR market. More than one platform is likely to succeed at scale, as we have seen with iOS/Android, PlayStation/Xbox, and Windows/Mac. 2017 will be the first year that the VR platforms can duke it out for a leadership position. Time will tell who the winners will be, but if I were a game developer, I certainly wouldn’t rule out Sony.
2. Pay TV will go Over The Top, and old media won’t respond fast enough
TV executives aren’t dumb. They understand that “over the top” (OTT) programming is changing their industry. But many of them believe (mistakenly) that simply dropping their own on-demand app into the OTT marketplace will enable them to hold onto the bulk of market.
It won’t, and in 2017 it will become clear why.
There are several key trends working against the traditional TV business model. Pay TV penetration has been in an accelerating decline since 2010. Overall television viewership isn’t much better. Only senior citizens are tuning into TV more today than they did five years ago.
The bulk of the profits in the TV business goes to those networks in the 10B+ monthly minute bracket (e.g. Fox, NBCU, Time Warner, Viacom). The rest fight for scraps. Retaining that massive audience is essential to extracting oligopoly rents.
OTT is creating new distribution channels for content, however, and with it new media brands. The distribution rights these networks so fastly protect are no longer valuable when social channels over the internet are a more efficient way to reach customers. At best, these networks will package their own content for distribution via apps and bundles, but that won’t stand out in the sea of other apps competing for a consumer’s brain space in a free and open market. Old media is already losing this fight, and its competitive position will only worsen in 2017.
Combine these effects, and you are going to start to see the network effects that have bolstered the TV networks unravel. The beginning of the end is 2017. Simultaneously, we will witness the rise of a new set of TV power players who are internet native. These range from social networks like Facebook and Snapchat (we’re an investor), to aggregators like Neflix, Amazon, Twitch and the like, to internet native networks like Cheddar (we’re an investor there too), Mic (ditto), and Hype (ditto squared).
3. Old-line consumer companies will pay up for billion-dollar tech startups
Historically, most technology acquisitions have a technology buyer. Old-line consumer businesses – the ones who make fizzy water, automobiles, dishwashers, etc. – are increasingly interested in playing the game as well. 2016 saw the beginnings of this trend with Walmart’s acquisition of Jet.com for $3.3B, Unilever’s acquisition of Dollar Shave Club for $1B, and General Motors’ acquisition of Cruise for $1B.
In 2017, you’re going to see many more. A few quarters ago, the largest 31 consumer companies had more than $133B of cash on their balance sheets, with a median of over $2B. Nine of these – Coca Cola (KO), Procter & Gamble (PG), Pepsi (PEP), Walmart (WMT), UPS (UPS), Costco (COST), Disney (DIS), and 21st Century Fox (FOXA) – had more than double that. Their median growth rate was just above the rate of inflation and was roughly 1/7th that of the “five tech horsemen”: Facebook (FB), Alphabet (GOOGL), Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL). Nearly all the growth in the consumer market seems to be driven by software.
If you are facing slow growth and the prospect of disruption by some upstart, buying your way into the future doesn’t seem like a crazy idea. Deals like this are hard to pull off at the P/E multiples of old-line businesses. That said, given the cash balances and motivations of these companies, we will absolutely see more of these deals in 2017.