LT Weekly: June 28, 2024

The major indices posted another quarter of strong gains, although not quite as strong as last qtr. After two quarters of double-digit growth, with the S&P 500 up +11.2% in Q4 and +10.2% in Q1, the index decelerated to single digits growth in Q2, up +3.9% over the qtr. Nasdaq rallied harder, up +8.3%, but compared to +9.1% in Q1 and +13.6% in Q4. However, high levels of market concentration remain a key theme.

Within the S&P 500, Information Technology was the best-performing sector, up +3.2%, on avg, though down from last qtr’s +7.7%. Utilities (+2.1%) and Communication Services (+0.7%) were the only other sectors that traded up in the qtr. Consumer Staples and Consumer Discretionary were the two worst performing sectors in the S&P 500, down -7.0% and -6.2%, respectively, in Q2 (vs +4.8% and +8.1%, respectively, in Q1).

Internationally, it was a mixed bag across the board. In Europe, DAX was down -1.4% (vs +10.4% in Q1) and CAC was down -8.9% (vs +8.8% in Q2), while Euronext was up +1.1% (vs +12.3% in Q1) and FTSE was up +2.7% (vs +2.8% in Q1). It was a mixed picture in Asia as well, with the Nikkei and SSE Composite down -2.0% (vs +20.6% in Q1) and -2.4% (vs +1.2% in Q1), while the Hang Seng was up +7.1% (vs -3.0% in Q1).

Looking at performance across our LionTree Universe of ~200 stocks in the TMT and Consumer sector with $1bn+ market cap, it was tough going, with just 43% of stocks trading up in the quarter, vs 52% in Q1 and 77% in Q4. More interestingly, almost a third (~32%) of stocks traded down double-digits, which is even higher than last qtr’s 29% and Q4’s ~10%.

Who was the best performer in Q2? It was GameStop, which was up +97% in the quarter driven by a meme rally. It was followed by Chewy, up +71%, and Snap, up +45%, to make up the Top 3 best performers of Q2. 

On the other hand, which stocks fared the worst in Q2? It was Coursera, down -49% in Q2. UiPath and OpenDoor were down -44% and -39%, respectively, to round out the Bottom 3 worst performers of Q2.

The BEST Performing Sub-Sectors in Q2 

• #1 = Video Games: After falling -13%, on avg, in Q1, the sub-sector reversed course and was up +17%, on avg, in Q2
  • GameStop’s +97% gain in the quarter drove most of the sub-sector’s performance; Playtika also posted a double-digit gain (though to a much lesser degree) of +11%, while Take-Two and Ubisoft’s more modest gains of +5% and +5% further propped up the sector
  • The sector’s performance was slightly offset by Nintendo and Roblox’s -2% and -3% drops over the qtr

• #2 = Entertainment Facilities/Theme Parks: The sub-sector saw accelerated growth in the qtr, up +10%, on avg, on top of a +2% average increase in Q1
  • Sub-sector performance was driven by Cedar Fair and Six Flags Entertainment, which were both up +30% and +26%, respectively, in Q2 (note, the two companies are set to merge in early July); Bowlero was also up +6% in the qtr; Vivid Seats was the only exception in qtr, down -4%

• #3 = Semis: The sub-sector was up +9.1%, on avg, in Q2, which was a deceleration from Q1’s avg of +25.8%
  • Not surprisingly, NVIDIA and ARM Holdings were the drivers of the sub-sector’s performance, up +37% and +31% over the qtr, respectively; Broadcom and QUALCOMM also posted double-digit positive performance, up +21% and +18%, respectively
  • That being said, there were some drags in the sub-sector, as GlobalFoundries, Advanced Micro Devices, and Intel were all down -3%, -10% and -30% in the qtr

The WORST Performing Sub-Sectors in Q2 

• #35 (last place) = Last Mile Transport/Delivery: The sector fell -16%, on avg, in Q2, a reversal from +14%, on avg, in Q1
  • Several companies in the sector posted double-digit losses in Q2, including Ocado Group (down -37%), Lyft (-27%), DoorDash (-21%), JustEatTakeaway.com (-18%), Delivery Hero SE (-17%), and Instacart (-14%); Uber was also down -5%
  • Deliveroo was the exception in the sub-sector, up +11%

• #34 = Digital Real Estate: The sub-sector fell one spot further in Q2 (was the third worst-performing sector in Q1, vs second worst-performing in Q2), down -13.1%, on avg, which is a decel from Q1’s -17.4%
  • Companies in the sector continued to have it tough, with OpenDoor down -40% in the qtr, and Zillow down -6%; Compass ended the qtr flat

• #33 = EdTech: The sub-sector saw a greater degree of red in Q2, down -14%, on avg, after falling -13%, on avg, in Q1
  • Sub-sector performance was largely driven by Coursera and Udemy, both of which fell -49% and -21%, respectively, in Q2; Duolingo was also down -5.4%
  • That being said, PowerSchool Holdings and Grand Canyon Education were up +5% and +3%, respectively

It was an exciting week in the e-commerce industry, as Amazon annc’d the dates of its tenth annual Prime Day with an original song, “It’s Prime Day”, by Megan Thee Stallion (link). Along with offering Prime members exclusive access to “millions of great deals” and bringing back invite-only sales, Prime Day 2024 will also see select influencers begin releasing deals on various products on Amazon’s marketplace beginning on July 8. That said, Amazon won’t be the only major retailer hosting a large sales event in July, as news of Prime Day was followed closely by announcements from Walmart and Target that each is separately planning its own “biggest sale of the season” during the month. Like Amazon, both Walmart and Target will provide exclusive benefits for members of their premium subscription offerings. However, with all of the concurrent summer sales events and the fact that consumers have likely come to expect that these will occur on annual basis, it is questionable how effective they will be in driving incremental sales…

There were also a few other impactful e-comm updates and developments this week outside of the upcoming summer sales events. Data published by Route revealed that TikTok Shop’s growth actually accelerated after the Biden administration signed a divest-or-ban law in April. Furthermore, Route’s findings suggest that TikTok Shop has been taking a bite out of Amazon’s e-commerce market share in the US. That said, this trend may not continue for long as Amazon reportedly plans on creating a discount section on its website that will ship products from Chinese warehouses directly to customers overseas to better compete against the likes of TikTok Shop and Temu. Also, Target, which this week announced a partnership with Shopify to expand its third-party marketplace, could be more of a threat to Amazon on the domestic front moving forward.

See below for more on this week’s key updates from the e-commerce space

• Amazon is planning to host Prime Day 2024 from July 16-17 (link/link): The tenth Prime Day event starts at 12:01 PDT on July 16 and runs through July 17, providing Prime members w/ exclusive access to “millions of great deals”
  • Prime Day will be available to customers in 23 countries: Including the US, UK, Canada, Spain, Australia, Germany, Mexico, Japan, the Netherlands, Saudi Arabia, and Turkey, among others (India will get its own Prime Day later this summer)
  • New deals will drop as often as every five minutes during select periods during the event: This will incentivize Prime members to “come back and shop often”
    • There will also be deals on digital goods & svs: Such as five free months of Amazon Music Unlimited, up to 50% off select movies and shows to rent or own, and discounts on Prime Video Channels, such as Starz and Crunchyroll, as well as grocery delivery svs
  • Certain influencers will begin dropping deals on various products starting on July 8: Participating influencers include Jess Sims, Alyssa McKay, Monet McMichael, Jared McCain, Millie Bobby Brown, Meredith Duxbury, and Alix Earle
  • Amazon is bringing back invite-only deals: After requesting an invitation, members that are selected will be notified via email during Prime Day w/ instructions on how to purchase the item at the exclusive deal price
    • The Co highlighted some of the top invite-only deals for Prime members: Including up to -40% off Sony Wireless Headphones and up to -30% off Peloton products
  • Other stats underscored the magnitude of Amazon customers’ savings: Over the last yr, Amazon customers saved nearly $24bn from deals and coupons, w/ Prime members enjoying the vast majority of those savings, including $2.5bn+ during Prime Day 2023

• Other major retailers also annc’d big sales events slated for July this week
  • “Walmart Deals” will be the Co’s “largest savings event ever” (link): The event starts Monday, July 8th at 5 pm EST and runs through Thursday, July 11th at 11:59 pm EST; All customers will have the oppty to shop “thousands of deals on popular items”, though Walmart+ members will get a five-hour head start
  • Target is hosting “its biggest sale of the season” during Target Circle Week (link): From 2 am CST on July 7 through the end of July 13, Target will offer more deals for members of Target Circle, the Co’s free-to-join loyalty program, including deep discounts and personalized Target Circle bonuses

-> Google has also been looking to capitalize on the incr’d shopping activity around Prime Day by launching new shopping features and expanding existing shopping features in its search engine; In addition to rolling out a special deals section to highlight discounted items across the Web, the Co has expanded its price comparison tools, including a feature that will show shoppers special pricing that a retailer might be offering members of their rewards or loyalty programs; Google’s aim is to make it “fiscally irresponsible” for people to start their online shopping anywhere else behinds Google’s website (link)

• TikTok Shop has cont’d to grow rapidly, despite the potential looming US ban (link): New data from Route shows that the orders placed on TikTok Shop grew +13% m/m from April to May – almost double the Co’s +7% avg monthly gain in orders since the beginning of 2024
  • The accel in order growth comes despite a slowdown in go-to-mkt efforts: After initially covering the costs of steep discounts to incentivize customers to buy and larger brands to join, TikTok eased off those subsidies and began taking a larger cut of merchants’ sales in Apr
  • TikTok Shop had already been on a hot start in 2024…: In Q1, the Co’s customers were even higher than in Q4:23, which benefited from seasonally elevated holiday shopping activity
    • … After ending 2023 on a high note in the US: Per TikTok, the Co closed 2023 w/ 500k+ Shop sellers in the US; Entering 2024, TikTok Shop was targeting to grow its US biz tenfold to ~$17.5bn in sales
  • TikTok has been hiring hundreds of employees to its US operations: Even after the Biden administration signed a divest-or-ban law in Apr, ByteDance has poured resources into tightening its grip on the US
    • TikTok Shop has been taking share from Amazon: From Q4:23 to Q1:24, Route’s data shows that the Co’s mix of orders from Amazon shifted from 65% to 61% over the period, w/ total orders from Amazon growing +1% (vs an avg of +7% for TikTok Shop)

-> In response to growing competition from overseas competitors such as TikTok Shop and Temu, Amazon reportedly plans to launch a section on its website that will ship cheap items from warehouses in China directly to overseas consumers, per The Information; The new mktplace will offer unbranded fashion, home goods, and daily necessities, w/ orders taking an avg of 9-11 days to be delivered to customers; Amazon reportedly told Chinese sellers that it would begin signing up sellers in the summer and begin accepting inventory in the fall (link)

–> PDD shares fell -4.6% in response to news that Amazon is planning a discount section, ending the week down -7.6%; YTD, PDD stock is trading down -9.1%

• Target and Shopify annc’d a partnership that will significantly expand Target’s third-party mktplace (link): Shopify sellers can now apply to join Target Plus, Target’s 3P mktplace where merchants can sell and manage orders; This will provide them access to millions of Target shoppers
  • This is Shopify’s first collab w/ a major retailer: The initial group of Shopify sellers to have products featured at Target include True Classic and Caden Lane, among others
  • Target Plus currently has a fraction of the scale that its competitors possess: Before the Shopify partnership, Target Plus counted ~1,200 sellers compared to Amazon’s nearly 2mn sellers and Walmart’s ~135,000

-> Shopify also broadened access to its AI-powered tools this week, making them available to more users; Customers can now use Shopify’s editing tool on their smartphones to enhance images used in promotional materials, including emails; The feature was previously restricted to only editing product images online; Shopify also expanded access to Sidekick, its chatbot that helps merchants w/ queries, including insights on customer behavior, that was in testing since last year w/ 2,000+ users (link)

There was a consistent stream of streaming updates this week across the gamut, as the tug of war between streamers increasing prices and consumers spending less on streaming continued. On the consumer side, new research out from Park Associates found that US SVoD spending has dropped -30% since 2021 as consumers have been reducing the number of paying services that they subscribe to and moving down to ad-based tiers. That was a particularly interesting data point considering some reports out this week and that Netflix is considering launching a free ad-supported plan in select markets across Europe and Asia.

Also on the Netflix front, Dish became the latest pay-TV provider to bundle in the service in an attempt to slow the cord-cutting bleeding, announcing a new deal that offers a $6.99/mo credit towards a Netflix plan (Netflix’s Standard w/ Ads costs $6.99/mo). Also on the bundling front, Verizon expanded its “myPlan” streaming perks to home internet customers with the launch of “myHome.”

On the pricing front, Paramount annc’d plans to raise prices for its streaming plans, just about a year after the last price hike. On the other hand, Spotify brought down the entry price for ad free music. After raising prices across all its subscription plans just a couple of weeks ago, the Co annc’d its new “Basic” streaming plan in the US, which is a music-only, no audiobook offering. It marks the return of a $10.99/mo tier which is a lower price point than the $11.99/mo Premium Individual tier that was previously the cheapest option.

See below for the drilldown on all the above…

US SVoD Spend Has Dropped, per Park Associates (link/link)

• There has been a -30% drop in spending for streaming SVoD services since 2021, with the avg US internet household spending ~$63/mo, down from $90/mo in 2021
  • “Consumers are spending less, but rather than go without, many are using ad-based alternatives to save on costs”

• Households are stacking fewer streaming svs
  • The overall avg # of streaming video svs subscriptions per household has dropped below 5
  • In Q1:24, 20% of US internet households report paying for 9+ svs, down from 29% in Q3:23

• 48% of US internet households cancelled a streaming video service in the past 12 months

Other Key Updates Out This Week On Streaming Price Hikes, Bundles, And More…

• Paramount Global to raise prices for its streaming plans (link/link)
  • Paramount+ Essential will increase by $2 to $7.99/mo
    • BUT the price increase will only impact new subscribers starting Aug 20: Current users of the plan will continue to pay $5.99/mo
  • Paramount+ with SHOWTIME will increase by $1 to $12.99/mo
    • This price increase will impact all users: Will go into effect Aug. 20th for new users and Sept. 20th for existing customers
    • The new price is still below that of the ad-free versions of Netflix, Disney+ and WBD’s Max
  • Pricing of annual subscription plans for both tiers will remain UNCHANGED: Paramount+ With Showtime is $119.99/year; Paramount+ Essential is $59.99/year
  • Legacy Paramount+ Limited Commercial plan will also see price increase by $1 to $7.99/mo
    • While the plan has been discontinued, Paramount continues to offer it to subscribers with an active account who signed up while it was still available

      

• Netflix reportedly considering launching a free ad-supported plan in select markets (link)
• • The markets being considered are in Asia and Europe where other TV networks also have free plans
    • There are no plans to offer a free svs in the US
  • Talks are still in the VERY early stages
  • The Co has experimented with a free plan in the past (link): Back in 2021, Netflix launched a free plan in Kenya, in which viewers could watch a selection of Netflix content ad-free on Android mobile phones; If viewers enjoyed the content, they could upgrade to a paid plan to watch the full catalog on a TV or laptop
    • But it discontinued the plan last year
  • A new free ad-supported plan could potentially help address one of the Co’s biggest challenges – creating more ad inventory: Per an ad exec cited by Bloomberg, “They’ve been slow to scale” and “there is not a clamoring for them” given that Netflix is at best the ninth or tenth biggest player in online video advertising, and has been trying to charge as much as twice as the competition

• Dish bundles Netflix for free with a new 2-yr offer (link)
  • The Co will include Netflix’s Standard plan with Ads w/ a Dish TV subscription for no addtl cost for 2 years: The plan regularly costs $6.99/mo in the US and requires new or existing customers to lock in to a 24-month commitment, with early termination fees if they cancel before the term expires
    • Dish TV customers can also choose to upgrade to the $15.49/mo Netflix Standard (no ads) or the $22.99/mo Netflix Premium plans, while receiving the $6.99 monthly credit

-> Other pay-TV operators have also been leaning into streaming bundles…Charter includes Disney+, ESPN+ and Paramount+ for many Spectrum TV users; Last month, Comcast launched StreamSaver, a package that includes NBCU’s Peacock Premium (w/ ads), Netflix Basic (w/ ads) and Apple TV+ for a discounted price of $15/mo  

• Verizon extends its bundled “myPlan” streaming perks to home internet customers with launch of myHome (link/link/link)
  • Had previously been available only to those who subscribe to Verizon’s postpaid wireless Internet svs
  • “A one-stop shop for internet, entertainment, and connected home offerings”: The new “myHome” feature will allow customers of Fios-branded wireline internet, as well as Verizon 5G Internet fixed-wireless-access users (67mn subscribers in all) the option of instantly adding various bundled streaming perks for $10/mo per perk with no contract obligations
    • MyHome currently supports Netflix & Max (with ads), Disney Bundle (including Disney+, Hulu, and ESPN+), YouTube Premium, and Walmart+ membership with an included Paramount+ subscription; Apple One and Apple Music Family are coming later this summer
  • How does it work? Customers can choose from Fios, 5G Home, or LTE Home internet, then decide if they want add-ons, like streaming services or bundles, a connected home product, and a live TV option

• Spotify launches a new “Basic” streaming plan in the US (link/link/link/link)
  • How does Basic differ from Premium? Music-only, no audiobooks: Priced at $10.99/mo, the plan provides the same ad-free music listening perks as on the $11.99/mo Premium Individual tier, but w/o the 15 monthly hours of audiobook listening that’s included w/ Premium; The plan is only available for individual subscribers (not to couples or families)
    • Brings back a $10.99/mo tier: Last year, Spotify bumped up the cost of Premium from $9.99/mo (the price the svs launched at in the US more than a decade ago) to $10.99/mo; Now, the Premium tier costs $11.99/mo, a dollar more than the new Basic tier
      • The Co had already launched a similar offering in the UK at the beginning of June (link)
    • How does it compare to competition? Creates a music-only offering that’s the same price as the $10.99/mo plans for Apple Music and Tidal
    • Spotify already offers an audiobooks-only plan in the US that is priced at $9.99/mo and includes 15 hours of audiobook listening time, plus ad-supported music
  • Comes just weeks after Spotify raised prices for all of its subscription plans: Increased Premium Individual plans by +$1 to $11.99/mo, the duo plan rising by +$2 to $16.99/mo, and the family plan rose by +$3 to $19.99/mo

-> On May 16, the US-based Mechanical Licensing Collective sued Spotify for allegedly underpaying royalties to songwriters and publishers as a result of it reclassifying its Premium services as bundles; The new $10.99/mo tier will pay the existing, higher level of mechanicals, but listeners will need to actively choose to switch to it if they were automatically put on the $11.99/mo plan

The European Commission published preliminary views that found both Apple and Microsoft to be in non-compliance with antitrust laws, paving the way for rulings that could potentially assess fines of up to 10% of each company’s annual global revenues. However, regulators hope that an ongoing dialogue will bring Apple and Microsoft’s business practices in adherence with the rules, as the two have already made moves to address the issues.

Separately, there were also some other updates related to other ongoing antitrust cases against Apple and Google.

See below for more details.

• The EU found Apple to be in breach of the Digital Markets Act (DMA) (link): In preliminary findings, the European Commission said it believes that Apple’s rules of engagement do not comply w/ the DMA, “as they prevent app devs from freely steering consumers to alternative channels for offers and content”
  • The EU flagged three separate issues w/ Apple’s policies:
    • Apple’s matchmaking fees to app devs goes “beyond what is strictly necessary”: Refers to Apple including fees charged to app developers for every purchase made within seven days of linking out to the commercial app
    • Apple makes it difficult for customers to find pricing info: Given that the Co requires devs to “link out” to a webpage where customers could then find contract details
    • The EU also opened a separate non-compliance procedure against Apple’s “core technology fee”: This relates to a $0.50 charge that Apple demands every time a developer’s app is installed on a phone
  • Apple has 12 months to comply or face fines of up to 10% of its global revs: However, the EU hopes that ongoing dialogue will lead to compliance rather than fines; Apple can also appeal the Commission’s preliminary findings
  • Apple has already made a number of changes to comply w/ DMA: The Co responded to the EU by saying, “We are confident our plan complies w/ the law, and estimate more than 99% of developers would pay the same or less in fees to Apple under the new biz terms we created”

• The EU charged Microsoft w/ antitrust violations related to its bundling of Teams w/ Office 365 (link): The European Commission’s preliminary view is that Microsoft’s bundling of Teams w/ its productivity suite provided Teams w/ an advantage by not giving customers a choice whether they would get access to the software
  • Some background on the investigation: The EU opened a formal investigation into Microsoft last yr after Slack, which is owned by Salesforce, filed a complaint; A second complaint was also filed by German videoconferencing Co Alfaview
    • Microsoft’s prior changes last yr weren’t enough to address competition concerns: These first were rolled out in Europe and then worldwide
      • The Co now offers a lower-priced version of its productivity suites that doesn’t include Teams
      • New, large biz customers now need to purchase the svs separately, while existing ones can choose whether they want to continue to have the products packaged together or not
    • The EU also highlighted concerns about the extent to which rival collab tools can integrate w/ Microsoft products: The commission noted that this “conduct may have prevented Teams’ rivals from competing, and in turn innovating”
    • Microsoft could receive a fine amounting to 10% of its global revs: Though the Co will have a chance to argue its case and can propose potential remedies to address regulators’ concerns and avoid a fine

• There were also some updates in some other ongoing antitrust cases against Big Tech Cos:
  • A US District Judge ruled that Google CEO Sundar Pichai and co-founder Sergey Brin cannot avoid being deposed in antitrust case (link): The case concerns a lawsuit brought by Texas and other states accusing Alphabet of unlawfully monopolizing critical parts of the display ads mkt
    • Nature of the questions: The plaintiffs want to ask Brin about the 2008 acquisition of DoubleClick, and they want to ask Pichai about an ad mkt deal w/ Facebook in 2018
    • Logistics: The trial is scheduled for March 2025; Brin’s deposition will be limited to 2.5 hrs and Pichai’s deposition will be capped at 4 hrs
  • The UK’s CMA released a progress update regarding its investigation of mobile browsers and cloud gaming (link): For next steps, the CMA will hold hearings w/ Apple and Google in July before publishing a provisional decision in Oct; Reponses to the working papers can be submitted until July 22

Big Tech’s rapid push into AI over the past couple of years has created some new fault lines within the space, bringing some players into more direct competition but also potentially fostering new alliances between those once considered rivals. Speaking to the former dynamic, Amazon has reportedly been working on developing a new chatbot to rival OpenAI’s ChatGPT. Codenamed Metis, Amazon’s chatbot will be powered by the company’s most powerful AI model, Olympus, and it may one day have the ability to draw from information beyond just the data it was trained on for its answers – a feature that would significantly differentiate it from other AI models. For its part, OpenAI announced the acquisitions of two startups as part of a strategy to improve its suite of enterprise offerings.

On the other side of the coin, earlier in the week Apple and Meta also reportedly (by the WSJ) held discussions regarding a potential AI partnership, however, a subsequent article by Bloomberg indicated that these talks ended months ago over Apple’s concerns with Meta’s privacy policies.

The debate surrounding just how impactful generative AI will be on creative industries also continued to swirl back-and-forth this week. The major record labels, including Sony, UMG, and WMG, filed lawsuits that accused both Suno and Udio of using their music catalogs without permission to train AI models. Given that damages could amount to nearly $350mn, the lawsuits could have a material impact on Suno and Udio’s nascent businesses. In a related vein, OpenAI CTO Mira Murati also warned that “some creative jobs will go away” but added that “maybe they shouldn’t have been there in the first place”.

More details are below.

• Amazon is reportedly developing an AI chatbot to compete directly w/ ChatGPT (link): Per Business Insider, the chatbot is codenamed Metis (the Greek god of wisdom) but hasn’t officially been named; Like most other chatbots, Metis would be browser-based and provide basic text- and image-based answers in a conversational style
  • Metis is powered by Amazon’s AI model Olympus: W/ 2tn+ parameters, Olympus is more powerful than the Co’s publicly available Titan LLM
  • A distinguishing factor – Metis could eventually leverage data beyond what it was trained on: By utilizing retrieval-augmented generation (RAG), Metis might be able to offer current information, such as sports scores or stock prices
    • Metis will also provide links to source the answers it provides: Enabling users to decide whether to trust the info on their own accord
  • Timing: A new chatbot could reportedly launch in Sept 2024

-> On a separate but relate note, Reuters reported that Amazon is working to replace what it refers to internally as “Classic Alexa,” the current free version, w/ an AI-powered one; Sources indicate that Amazon also plans to add another tier that uses more powerful AI software for more complicated queries and prompts, charging either a $5/mo or $10/mo subscription fee to use the more advanced version (link)

• Apple and Meta reportedly discussed an AI partnership… but these talks fell through (link/link): Per sources cited by the WSJ, Apple and Meta discussed integrating its genAI model into Apple Intelligence back in March; However, a separate Bloomberg report indicated talks ceased due to Apple’s concerns w/ Meta’s privacy policies
  • Apple is seeking to offer a wide variety of AI models b/c users prefer different models for different tasks: This was per Apple’s senior VP of software engineering Adam Federighi at WWDC; This approach also prevents Apple from becoming overly reliant on OpenAI
    • It’s unclear what the financial windfall would be for AI Cos: Although AI Cos will obtain access to massive distribution through an Apple partnership, some are skeptical that many users will upgrade to the premium versions of AI models when the free ones are readily available
    • Though a longtime Apple analyst estimates some could earn billions: He anticipates ChatGPT’s usage will double w/ the Apple partnership, but OpenAI’s infrastructure costs will increase +30-40%; Ultimately, 10-20% of Apple users are expected to become premium subscribers to AI models

• OpenAI has been on a spending spree lately, w/ two new acquisitions this week: Both deals point to OpenAI’s expanding ambitions in the enterprise space
  • OpenAI purchased Rockset, a database analytics Co, in a deal worth hundreds of millions (link/link): The Cos didn’t disclose the size of the deal but a source indicated OpenAI used hundreds of millions of dollars’ worth of shares to buy Rockset
    • Background on Rockset: Rockset builds real-time search and analytics databases, enabling users, developers, as well as enterprises to better leverage their own data and access real-time info as they use AI products and build more intelligent applications
    • Rockset could help enable OpenAI’s models to provide faster and more accurate responses: Given that Rockset’s expertise in real-time data processing and vector search will enhance OpenAI’s ability to quickly access and analyze vast amounts of info
  • OpenAI also acquired enterprise video collaboration platform Multi (link): A source indicated that the deal is technically an “acqui-hire” and that most of Multi’s 5-person team will join OpenAI; Multi will shut down after July 24
    • Multi is designed to enable remote teams to work together via video chats: Multi is a Zoom-based platform that offers features like the ability to collab across screen shares from up to 10 people, offering customizable shortcuts and automatic deep links for code, designs, and documents

Meanwhile, Creative Industries Have Been Grappling W/ The Downstream Implications Of The AI Push…

• The major record labels all filed lawsuits accusing both Suno and Udio of mass copyright infringement (link): In federal lawsuits, Sony, UMG, and WMG alleged Suno and Udio copied music without permission to teach their systems to create music that will “directly compete with, cheapen, and ultimately drown out” human artists’ work
  • The labels complained that Suno and Udio users have been able to recreate elements of popular songs…: Including The Temptations’ “My Girl,” Mariah Carey’s “All I Want for Christmas Is You” and James Brown’s “I Got You (I Feel Good)”
    • … As well as create vocals that are “indistinguishable” from famous musicians: Such as Michael Jackson, Bruce Springsteen, and ABBA
  • The combined damages could amount to nearly $350mn: The labels requested statutory damages of up to $150,000 per song that Suno and Udio allegedly copied; They accused Suno of copying 662 songs and Udio of copying 1,670
  • Suno’s response – “Our tech is transformative”: Suno CEO Mike Shulman explained that the Co’s tech is “designed to generate completely new outputs, not to memorize and regurgitate pre-existing content”

• “Some creative jobs will go away,” per OpenAI CTO Mira Murati (link): Speaking in an interview, Murati added, “But maybe they shouldn’t have been there in the first place”
  • “Using [AI] as a tool for education, creativity, will expand our intelligence and creativity and imagination”: Murati noted, “The first step is to… help people understand what these systems are capable of, what they can do, integrate them in their workflows, and then start predicting and forecasting the impact”
  • Though Murati couldn’t define just how impactful AI will be: ““I’m not an economist, but I certainly anticipate that a lot of jobs will change”…“Some jobs will be lost, some jobs will be gained”
    • The jobs most likely to be impacted are ones that are “strictly repetitive”: These are ones that are not “advancing further” creativity or problem-solving

At a town hall on Tuesday, Paramount’s trio of co-CEOs provided an update for the Co’s 20,000+ employees on where things stand with plans they laid out at their June 4^th annual shareholder meeting, including cutting more than $500mn in costs annually through layoffs and other cost-reduction measures, pursuing a joint venture to gain streaming scale for Paramount+, and potentially selling some assets to strengthen the balance sheet. The town hall meeting had originally been set for June 5 but the co-CEOs rescheduled it for June 25, citing “ongoing speculation regarding potential M&A.” On June 11, Shari Redstone, Paramount Global’s controlling shareholder, ended negotiations with David Ellison’s Skydance Media about a prospective merger. (link)

See below for the key updates from the meeting. (link/link/link)

• On M&A chatter – “We’d like to take a moment to acknowledge the challenges of all the M&A speculation surrounding our company. We know what a difficult and disruptive period it has been. And while we cannot say that the noise will disappear, we are here today to lay out a go-forward plan that can set us up for success no matter what path the company chooses to go down”

• Commentary on layoffs were sparce: Execs did not discuss timing of when mass layoffs might hit across the company or how large the cutbacks will be; They were asked if they had a timeline for job cuts, but didn’t provide one
• Have already begun to transform the cost base of the company, with work “well underway across corporate functions” like legal and corporate marketing / Modernizing the organization “so we can move faster — and be more nimble”
  • “To be clear, $500mn in cost savings is just the beginning” and that they expect to provide more details on the Q2:24 earnings call in August

• Have definite plans to unload “certain Paramount owned assets” and have “already hired bankers to assist us in this process – and we’ll use the proceeds to help pay down debt and strengthen our balance sheet”
  • “A 61% decline in profits is simply unacceptable…we need to act now to reverse this trend”

• On Paramount+ international expansion: “We are advancing talks with potential partners that will significantly transform the scale and economics of the service making it profitable and driving long term value. This approach could also serve as a model for the US”

There were also a few connectivity-related updates that we wanted to flag this week. For starters, Ookla published its quarterly report on 5G network performance and revealed that T-Mobile boasted the highest 5G median download speeds in Q1, while Verizon possessed the fastest 5G median upload speeds, continuing a trend from Q4:23. Sequentially, the most incremental change in the report was a sizable improvement in T-Mobile’s 5G NPS scores, which Ookla attributed to the company’s deployment of additional mid-band spectrum.

Elsewhere across the telco space, Verizon rebranded its logo, opting for a warmer, more “approachable” color for its “V”-branding. The company also announced a new home internet bundle that simplifies the purchasing experience for customers and could potentially attract more customers to Verizon’s FWA and fiber services. That said, the FWA market could be in for a slowdown in net adds moving forward, at least according to New Street Research, which estimated that the incumbent telcos ended Q1 w/ ~half the total FWA subscribers that their networks have the capacity to accommodate. Separately, AT&T faced a setback in its efforts to wind down its legacy copper network this week, as the California Public Utilities Commission ruled that the company’s status as a “carrier of last resort” means that it must maintain its copper plant in the state, despite it being lightly used and expensive to upkeep. See below for more details on all of the above:

Ookla Released Its Qtrly Update On 5G Median Upload/Download Speeds This Week (link)

• T-Mobile continues to possess the fastest 5G median download speeds: This data was as of March 31, 2024
  • T-Mobile: 14 Mbps
  • Verizon: 67 Mbps
  • AT&T: 36 Mbps

• T-Mobile has also experienced a strong uplift in NPS scores: The Co’s sizable increase in NPS score in March was correlated w/ its deployment of addt’l mid-band spectrum

• Verizon continues to boast the fastest upload speeds: That said, upload speeds among all three incumbent telcos have remained fairly stagnant over the last couple yrs, remaining between 10-20 Mbps (see below)
  • The relative importance of upload speeds & latency performance is expected to grow: As 5G download performance begins to exhibit diminishing marginal returns, and increasing importance is given to improving the experience of latency-sensitive use cases such as video calling, mobile gaming, and augmented reality

There Were Also Some Other Interesting Updates Within The Telco Space This Week…

• Verizon rebranded its logo and annc’d a new home internet package (link): The Co’s new “V”-branding is still in red, but now contains warmer yellow hues meant to help consumers connect w/ the brand more intimately; Verizon’s previous logo was “very elegant” but “a bit cold”, per Verizon’s Chief Revenue Officer Frank Boulben
  • New advertising around the brand refresh is intended to make Verizon’s brand more “approachable”: The Co wants to consumers to become more “emotionally connected” w/ its brand and view it as “the remote control of [their lives]”
  • Verizon’s myHome bundle will make things simpler for customers: W/ myHome, customers will receive svs completely over fiber or 5G, depending on their address; The package also allows them to select from various streaming svs for a fee that is guaranteed for four yrs

• The telco incumbents have enough network capacity for 16mn FWA subscribers, per new estimates (link): New Street Research applied T-Mobile’s FWA growth framework (the Co aims for 7-8mn FWA subs) to the other top 3 US wireless operators to arrive at the figure; Total FWA adoption ended Q1 at 7.8mn, per Parks Associates
  • A breakdown of each telco’s estimated FWA capacity:
    • T-Mobile: 7-8mn subs
    • Verizon: 4-5mn subs
    • AT&T: 3-4mn subs
    • Dish: 1mn subs
  • FWA net adds are predicted to slow sharply over the next couple of yrs: New Street analysts “expect net adds for T-Mobile and Verizon to slow as gross adds flatten and disconnects continue to grow with the base”; Net adds are projected to slow further in 2025 or 2026, w/ both reaching capacity thresholds
  • Carriers could increase network capacity to accommodate 19mn FWA subs, but this is unlikely: Given that “a significant change in network technology or spectrum availability would be required to increase capacity by more under the current model; neither is likely in the next five years”

• California ruled that AT&T can’t shut down portions of its copper DSL network in the state (link): The California Public Utilities Commission (CPUC) argued that AT&T’s status as a “carrier of last resort” in the state obligates the Co to maintain its aging copper network, despite its relatively light use and high maintenance costs
  • AT&T’s plans to shutter its copper network are an integral part of its cost savings initiative: Analysts estimate the Co serves ~60mn customer locations w/ copper and that after efforts to turn off the aging network end, at least 15mn AT&T copper locations won’t be offered a fiber replacement
  • Other states have been making similar moves: Regulators in Utah recently moved against CenturyLink’s request to shutter its own copper network in the state, for example

• DoorDash reportedly discussed a takeover of Deliveroo, but no deal was reached (link): Sources indicate DoorDash approached Deliveroo, but talks ended after disagreement on valuation; There are currently no ongoing talks, according to people familiar w/ the matter
  • However, there could more cross-border M&A in the delivery space soon: Following the publication of the Reuters report, Jeffries analysts wrote that the valuation gap between US and European food delivery Cos could be a catalyst for cross-border M&A this yr
  • Amazon is Deliveroo’s largest shareholder w/ a 13.32% stake: DST Global is the second-largest shareholder w/ 7.54%, followed by Deliveroo CEO Will Shu w/ a 6.46% holding, per LSEG data

-> DoorDash shares were down -0.9% in reaction to the news and closed the week down -4.5%; Delieroo shares rose +1.2% following the report and finished the week up +1.8%

• Tencent’s Dungeon & Fighter (DnF) Mobile earned $270mn in the first month of its China release, per Sensor Tower (link): Since launching on May 21, DnF Mobile has held the top positions for the iOS charts in all categories, a “very impressive start”, per Sensor Tower’s senior director of Asia-Pacific mkting
  • DnF Mobile crossed the US$100mn mark just 10 days after launching: The title contributed to a +12% rise in Tencent’s mobile gaming rev in May
  • The game is also outperforming Tencent’s long-time blockbusters: DnF Mobile’s 11-day sales run in May surpassed the combined revs of Honour of Kings and Peacekeeper Elite over the same time period
  • DnF Mobile has benefited from a pre-established gamer base: The game has attracted attention from Chinese gamers who were fans of the multiplayer “beat ‘em up”, action role-playing PC game that initially debuted in mainland China in 2008
    • BUT there have been some setbacks w/ the release: Last week, Tencent pulled DnF mobile from Android app stores run by Chinese smartphone Cos, including Huawei, Oppo, and Vivo due to disagreements over rev sharing; However, this isn’t expected to affect the games’ sales

• The 2024 Paris Olympics will be narrated by an AI-version of Al Michaels (link): NBCU execs annc’d that a customized, daily highlight reel for the Olympics will be available to Peacock subs; The reel will feature the voice of Al Michaels, the 79-yr-old American broadcaster that first covered the Olympics decades ago
  • Peacock’s program has been trained from Michaels’s NBC clips: Michaels joined NBC in 2006 and was the longtime announcer for “Sunday Night Football”; Michaels approved the use of his voice after being persuaded by a demonstration of the tech
  • AI will be used to create customized collections of highlights for viewers: After subscribers select the Olympic events that interest them most, Peacock’s AI machines will get to work compiling the most notable moments in a customized package narrated by Michaels’ voice
  • If this is successful, AI could be leveraged in other ways on the Peacock platform: Including possibly Andy Cohen AI recaps for Bravo shows, per Kelly Campbell, the president of Peacock; Ultimately, Campbell “want[s] to do this for every sporting event and show… on Peacock”