The convergence of broadband wireless, Internet accessibility, smartphones and all the services that get wrapped around them is dramatically changing the way consumers interact with businesses and vice versa. Known as the “mobile Internet,” this fourth major technology wave is creating opportunities for investors.
Over the last 40 years, information technology has gone through waves of innovation, with each period building off the advancements of the previous one. In the 1980s, IBM dominated the mainframe computer wave. In the 1990s, Microsoft promised to put a computer in every home, giving rise to the personal computer wave. The prevalence of PCs subsequently provided the infrastructure for the third wave, the Internet, which spurred companies to develop websites and e-commerce businesses during the early 2000s.
The ecosystem that developed around the Internet led to the fourth and current wave, the mobile Internet. Rather than wait for their computers to boot up, people could immediately connect to the Internet through their smartphones. High-speed networks, Apple's iPhone and the Internet came together to allow people to communicate with each other online in easy and entertaining ways.
As investors, we think about what it means to live in a world where we are always connected. Which companies would benefit the most from the fact that smartphones now account for close to 70% of mobile phones in the developed world?
ADVERTISING
As more people use their smartphones to communicate with each other and with businesses, mobile advertisers are likely to benefit from this shift in consumer behavior. Companies such as Facebook (FB) and Google (GOOG) are deriving more of their revenue from mobile advertising. In fact, mobile ads now represent more than 60% of Facebook's ad revenue, according to the company's latest quarterly results.
Meanwhile, the proliferation of mobile apps and programs will benefit companies such as ARM Holdings (ARMH), which designs microprocessors for mobile devices that are in approximately 95% of mobile phones. As ARM continues to develop more power-efficient processing technology for smartphones and tablets and as people use more data-intensive applications on their phones, the company will have a competitive advantage since one of the biggest gating factors is battery life. Even traditional companies such as a payments processor like MasterCard (MA) will benefit from mobile payment solutions and more credit card transactions. As people use their mobile phones to pay for purchases, those transactions are typically tied to a credit card.
THE ADOPTION CURVE
When markets change, consumers' adoption of new technology typically accelerates once the enabling technology hits 20% to 25% penetration in the market. From there, adoption rates tend to accelerate to 50% to 60% penetration in about half the time it took to hit the first 25%, according to J.P. Morgan research. After that, the market matures and growth is harder to find.
For example, broadband penetration in U.S. households was roughly 25% in 2003 and in the second half of 2004, Google shares were trading at about $85. As more households gained broadband Internet access — penetration increased to about 55% by 2007 — people sharply increased their Internet searches. As a result, Google's stock price more than quadrupled by 2007, according to FactSet.
Apple (AAPL) experienced a similar adoption curve when penetration of smartphones went from about 25% in late 2009 to about 60% penetration in 2012, according to J.P. Morgan research. And today, there is a similar ramp-up in advertising spending with Facebook as more companies — many of which were skeptical about mobile advertising just a year ago — now consider it a necessity to advertise on Facebook.
Going forward, mobile technologies will evolve further into the “Internet of Things” as an unprecedented number of devices are expected to be connected to the Internet. Embedded technologies, for example, will enable keyless locking or alert drivers about available parking spots as they enter garages.
Each technological innovation brings larger and more pervasive changes, especially ones that result in behavioral changes. Today, given that it is difficult to pry smartphones out of peoples' hands, the mobile Internet wave is an example of a truly enabling technology that is causing a paradigm shift in consumer behavior.
Greg Luttrel is portfolio manager for the JPMorgan Dynamic Growth Fund.
