I asked one of my favorite money managers about what investing themes he is allocating capital to in 2015. Here is what he said:
The theme for 2015-2020 is winner-take-all in multiple verticals.
Who cares about the #3 player to twitter etc.
Network effects and scale are key, we own category dominators, #1's only.
His premise is strikingly simple and common sense; own category dominators. And I think he is right. The theme for the next five years can essentially be boiled down to one operating model: platforms.
It's the killer model in a connected world, the new-school version of Warren Buffett's favorite wide-moat model, the toll bridge [e.g., an insurance company, which charges monthly fee's for liability protection]. In a Web 2.0 world, think Amazon, Facebook, Google, Twitter.
These are platform models. It costs little, if anything, to register new users and the platform gets more powerful from network effects as more users sign up. Facebook doesn't even try to monetize its "platforms" [Instagram, Messenger, WhatsApp] until they have 1 billion users. There is considerable value in a huge user base -- all of whom are potential customers for advertisers and merchants.
There is a new platform I'm thinking about today. It is not owned by any one firm, but it is a technical standard and open-source.
It is 4G LTE and Voice over LTE (VoLTE, aka HD Voice).
How is that a platform, you ask? In my view, the network effect of VoLTE will become more powerful as the market for it develops. VoLTE is only available for VoLTE enabled devices, and VoLTE is only useful if users on each end of the phone call are VoLTE enabled. It becomes more powerful as more VoLTE enabled devices are owned by subscribers, at which point, it makes sense for carriers to roll out VoLTE services. Furthermore, operators must compete with OTT communication apps like WhatsApp, Skype, Viber and Messenger. To avoid further ARPU compression, operators need to fight back and offer something better: rich communication services and HD Voice to avoid becoming "dumb pipes" for data and losing valuable voice and SMS revenue.
The market for VoLTE quite small now. Today, Rogers launched its VoLTE service on one device, the LG G3. This limited rollout is likely to work out any technical issues before a wider rollout on more popular devices, like the iPhone 6 and 6+.
The Rogers announcement is important. Rogers enjoys 35% wireless market share in Canada with 9.5 million subscribers. The other operators now will be prompted to launch VoLTE so as to not lose subscribers to Rogers. Innovation on a new telco standard, all IP-networks and VoLTE, should drive continued adoption of the technology. It's a network effect of sorts. In my opinion, service providers in the telco space are set to enjoy the benefits of a wave of new technology adoption. For that reason, I think it's time to get long telco service providers with 4G LTE / VoLTE exposure.
Disclosure: I'm long RSYS and RDCM, both of whom stand to benefit from continued adoption of 4G LTE and VoLTE technologies.