Is Microsoft becoming the new Vodafone?
America’s biggest tech firms – Microsoft, Amazon, Meta, Google – have thrown the kitchen sink at becoming leaders in AI. They have forked out whatever is necessary to get to the front of the race.
The four firms spent a combined $16bn on capex in the first quarter of 2020. Fast-forward to the third quarter of this year, and that has more than quadrupled to $72bn.
Those firms have seen dramatic share price growth over the past five years, but it has not kept pace with the growth in capital spend.
Which reminded me of Vodafone. At its peak, at the height of the dot-com bubble, the British telco was worth hundreds of billions as it spent bucketloads on infrastructure to keep pace with demand for internet services.
But over time, the company’s value waned while the quarter-on-quarter increases in capex never stopped: obsolete infrastructure had to be replaced and so it had to spend cash just to stand still.
So, is Microsoft becoming the new Vodafone? It’s a stretch of a comparison, I admit. As the old saying goes, though, history does not repeat itself, but it does rhyme.
London-listed Polar Capital Technology Trust says it is all-in on AI, but at the same time, is underweight the Mag 7 technology companies. The company says non-Mag 7 businesses stand to gain more from the AI boom, and that they “prefer to own companies that are recipients of AI capex” rather than those that are deploying it.
In its results on Wednesday the firm said “many commentators appear to be conflating Big Tech with AI which we believe is, at best, an oversimplification and, at worst, misleading.”
I asked Polar partner Ben Rogoff what he meant by this, and whether he saw any parallels between the big telcos of the 90s and the Mag 7 of today.
“I was there at the TNT bubble, there aren’t many that were,” Rogoff says.
“It was a really exciting technology breakthrough and the telcos went for it.
“They wanted to be more than dumb pipes – they wanted to build value-added services on top of this incredible burgeoning internet traffic that was doubling every 100 days.
“But unfortunately for them, they ended up as dumb pipes. And all the value was derived by Google and Apple and Microsoft.”
So in the new tech cycle, are Microsoft and co becoming the new dumb pipes? Rogoff is reluctant to agree, but he does see patterns from the height of the dotcom investment era.
“History demonstrates to me as a long-term tech investor that what new cycles ultimately do is challenge the value of the incumbency – and that’s what we believe is now beginning to play out in markets,” he says.
“Companies that have been able to roll up a price increase and then pass it on because you’re a sort of pseudo monopoly…may struggle to do that at a time when there’s a quite profound technological change.”