Covid 19 coronavirus: The companies likely to emerge stronger after pandemic

COMMENT:

During the course of a few short weeks, Covid-19 has ravaged the world economy and brought the longest period of economic expansion in history to a dramatic halt.

In a time of crisis credit is throttled, cash reserves and healthy balance sheets become the number one priority. Run out of the oil that greases the wheels and the business machinery seizes up. Governments are acutely aware of this and have pumped trillions of dollars into the financial system to keep these wheels turning, in some cases as much as an entire year of their country's GDP. Despite these unprecedented measures, millions of businesses around the world will not survive the impact of Covid-19.

Most global technology firms simply don't have this liquidity problem. In the past 10 to 15 years they have amassed huge cash reserves from highly profitable business models.

Microsoft, Alphabet (Google's parent company) and Apple each have over US$100 billion in cash reserves; Facebook and Amazon are not far behind with US$50 billion in the bank.

Company

While other businesses have chosen to return the money to investors via share buybacks, these firms have kept it in reserve for a rainy day. While they could never have predicted Covid-19, they are now uniquely positioned to weather the storm, coming out the other side with less competition and even stronger than they were before.

So, it's safe to say that there won't be any big losers in global tech. But who stands to win the most? It's early days yet but we are starting to see some frontrunners emerge from these seismic shifts.

Explosion in remote working

In the space of a few short weeks, the world has had a crash course in working from home; this has given a huge boon to companies that support remote working in a productive way.

Zoom, Microsoft Teams, WeChat Work have all seen astronomical growth in their subscribers. Zoom is currently worth more than General Motors and the entire US Airline industry respectively. According to Microsoft, the number of users on Teams had grown over 40 per cent last week to more than 44 million daily users. There are now almost a billion million meeting and call minutes on Teams every day.

People must use these technologies as they have no choice right now, but they may represent a much broader shift in the way the world does business. In future, people will spend more time working from home, undertake less business travel and run more conferences and meetings remotely.

Cloud nine

Amazon is sitting very pretty right now. Both of its main businesses, Amazon e-commerce and Amazon Web Services (AWS) stand to make enormous gains from the Covid-19 crisis. Just last week, it announced it was hiring huge numbers of warehouse workers to meet unprecedented demand. They've been gradually eating into retailers' businesses for years, but consumers now unable or reluctant to go into shops are ordering online. It's a step change that's unlikely to be reversed. News of poor working conditions or walkouts won't break their stride.

• Covid19.govt.nz: The Government's official Covid-19 advisory website

Companies were already switching out their data centres to rent computing space from Microsoft, Amazon and Google. That shift is likely to speed up as millions of employees are forced to work remotely, putting further strain on corporate IT systems. AWS was already a highly profitable outfit before all this; 30 per cent profit margins and accelerating growth rates means it's now at least a half a trillion-dollar company.

Advertising win for tech

Advertising revenue, central to the fortunes of both Google and Facebook, tends to suffer during economic downturns. On the flipside, they have seen some huge growth in audiences. Mark Zuckerberg, Facebook's chief executive, said traffic for video calling, messaging and Facebook Live had exploded as people try to relieve the boredom of lockdown. YouTube and Netflix have even had to reduce streaming quality to preserve bandwidth.

WARC predicts up to 20 per cent decline in ad spending in 2020, something local news and entertainment media rivals may not be able to survive despite seeing similar growth in audiences. When demand does come back, businesses like Google and Facebook will profit from their even greater scale in a less competitive marketplace.

Entertainment goes direct to consumer

Hollywood resisted the online trend pioneered by Netflix of streaming movies in the late 1990s. The big studios still insisted that they put out their big releases into movie theatres, but that has changed completely in recent weeks.

Universal and Disney are now set to take their releases direct to consumer via online streaming services first. The cinema industry may never recover, and linear TV audiences may further decline.

How will local media and technology businesses fare in all of this?

Many local media companies have immediate and existential challenges. They have much weaker balance sheets and minimal cash reserves. They will need to rely on strong local relationships, Government life support and their agility to survive the next couple of months. For some, like Bauer, sadly it's already too late. There will be many more before this is all over.

For those that make it through, capitalising on the accelerating shift to digital will be crucial. After Covid-19, more consumers than ever will expect retail, entertainment and services to be a seamless, digital-first experience. Significant investment in technology infrastructure will be required and they will need to capture and use their consumer data effectively. It will be a challenge to do this profitably in a market the size of New Zealand.

What does the future hold?

It's highly likely that we'll see other business models emerge that exploit these shifts. The world will need more resilient supply chains. We'll be nimbler in the way we work.

Governments will play a greater role in society again and consumer behaviours will be driven by new tensions and need-states.

Crises drive step changes in innovation. With their gigantic bank balances and global user base, the tech firms are poised to do so at a scale and at a pace we've not seen before.

- Richard Pook is GM Platforms, Partners & Operations at Dentsu Aegis Network