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Koch Making The Same Bet As Microsoft On The Wireless Boom In Emerging Markets

October 10, 2013

By Mark P. Mills

Koch Industries and Microsoft are corporate names that don’t normally appear in the same headline or sentence. But while the companies are in different markets both have recently made the same bet. And it’s a bet relevant to a vast number of businesses.

The bet? There are billions more people in emerging economies than there are in the 'West', and all of them want and will soon be able to buy smart phones. Microsoft made a bet on the customer hardware and Koch on the infrastructure.

The $80 billion in sales Microsoft [MSFT:NASDAQ] announced in early September that it would spend $7 billion to buy Nokia. And within the same week, the $115 billion in sales Koch Industries announced it would also spend $7 billion in an acquisition of the heretofore obscure Chicago-based Molex with its 36,000 global employees. Everyone knows what Nokia manufactures. Molex makes the electrical connectors, switches and antennas that are used in all kinds of information and communications hardware everywhere.

A lot of analysts were puzzled and some downright derisive about Microsoft’s Nokia buy. Microsoft’s investors appeared to share the sentiment, with its stock value sinking 6 percent on the news, a $15 billion hit on market value. (The share price has since recovered.) And while (private) Koch’s purchase garnered much less attention, analysts that did notice were puzzled too: UBS reportedly observed that the "motivation of the [Molex] acquisition is unclear to us at this juncture."

We can illustrate what provided motivations for both Koch and Microsoft with three core trends that portend unprecedented growth in demand for wireless (smart)phones and collaterally, the hardware in the global infrastructure. All the trends point towards the fact that the world is on track for a build-out of the wireless Internet at a scale that dwarfs the build-out of the wired Internet that took place at the end of the 20th century.

The first trend: Everyone wants a smartphone, and soon will be able to afford one.

It’s a basic maxim: make cheaper something that people want, and a lot more will be purchased. Smartphones have been getting cheaper at an astonishing pace. And smartphones are a whole lot more useful and appealing than conventional "handsets."

This year marks the 20th anniversary of first smart smartphone, IBM’s Simon, which cost as much as a second-hand car in Mumbai. Today a $200 Galaxy Y has far more functionality, speed and convenience at a fraction of the size and weight than either a 1983 Simon, or even a 2003 PC. Now the sub-$100 smartphone is at hand and prices will keep shrinking.

While the world today remains dominated by plain old cell phones, in the foreseeable future the basic mobile handset will look as antiquated as a rotary dial landline.

And today Nokia has just over a 50% share of the world’s traditional handset market. Given that market position, Microsoft/Nokia are clearly well positioned to migrate customers to smartphones where, not incidentally, there is an ever-growing need for more software. Obviously, market dominance is no guarantee of success consider Blackberry’s 60% smartphone market share in 2010 but it’s a great place to start.

A second macro trend: smart phone shipments are growing explosively, and the epicenter of growth is moving to emerging markets.

September data from IDC puts smartphone shipments growing at 40% year over year to more than one billion by year-end 2013. More than half those will sell into emerging markets.

As The Indian Express wrote last month: "a foothold in emerging economies is one of the many reasons why Microsoft is acquiring Nokia." Of course it remains to be seen how effectively Microsoft and Nokia merge and then compete against the likes of Samsung and Apple. (With the iPhone "C" series Apple has staked out its first step into low-cost markets although at the high-end of the "low.")

And the third trend: billions more computers (smartphones) connected wirelessly to the Internet require a massive expansion of the wireless and wired information communications technology (ICT) infrastructure.

In early 2013, the world crossed a Rubicon. The total number of wireless broadband connections to the Internet (smartphones and tablets) surpassed one billion computers hard-wired to the Web. It took just six years from the first iPhone in 2007 to this year for the wireless Web to reach one billion broadband connections. It took 20 years from the first Mac in 1984 to 2005 to go from nearly zero to one billion devices wired to the Web. And the pace and market for the former has only just begun.

Annual capital spending on the hardware of the global information-communications infrastructure for both the wireless and still vital wired Web now approaches the global capital spent annually by the oil and gas industry. Koch is already a player in the hydrocarbon-producing infrastructure. Now, via Molex, they are a player in the hardware of the electricity-using infrastructure.

But unlike other infrastructure domains, the ICT ecosystem is unique with its continual and radical decline in cost per unit of performance ($ per GB). This widely known characteristic of consumer ICT devices is also a feature of hardware in the infrastructure. This leads to an obvious implication for businesses like Molex.

If, as cost per unit of equipment declines, there is still rising total spending, then (arithmetically) the growth in physical units shipped is far faster than the overall capital spending suggests. And inside all the ICT equipment we find the ancillary but essential non-semiconductor hardware like that made by Molex dragged along the rapid demand growth curve. (Note that in 2010 with no fanfare Carlyle Group made a similar market move spending $4 billion to acquire North Carolina CommScope, a major supplier of the hardware for fiber optic networks.)

There will be fierce competition to supply everything associated with connecting the next billion people to the Internet. Big companies like Koch and Microsoft make $7 billion bets on big macro trends. But thousands of smaller new and yet-to-be-launched companies will be propelled by the same macros.

And equally clear, citizens in those markets will benefit from all that competition. The International Telecommunications Union has mapped out see below the powerful linkage between economic growth and broadband penetration.

Remember the one-laptop-per-child initiative spawned at MIT in 2005? That consortium’s goal was to target the creation and distribution of a minimally-performing $100 laptop precisely because of the economic and social benefits of connecting students, and people in general, to the Internet. Smartphones are doing that job without a "consortium," sooner, faster, better and more ubiquitously.

Doubtless Koch and Microsoft-Nokia are also betting on the virtuous circle of wealth-generation that broadband connectivity creates in emerging markets. Wealthier citizens will buy ever more attractive ICT devices good for Microsoft. And Koch with their long bets in oil, is counting on a lot more driving and flying by all those wealthier citizens too.

Koch and Microsoft may be strange semantic bedfellows, but they are linked to the same virtuous macro of global broadband and economic growth.

Original Source:



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