Breakfast Bytes Blogs

Benedict Evans used to work in Silicon Valley for Andreesen-Horowitz (a16z) but he returned to the UK (he's British). But one thing hasn't changed—he still does a big Powerpoint early in the year about the major internet trends that are driving technology in so many ways. Of course, here in EDA, we're down the end of the tail of that dog, selling the software and IP that creates the SoCs that power the internet that produce all the internet companies that worry the governments and produce all the trends that Ben is talking about.

My posts on his report last year were Benedict Evans 2020: Standing on the Shoulders of Giants and Benedict Evans 2020: Regulating the Giants. If there was a theme last year then it was:

Tech is becoming a regulated industry, but we don’t really know what that will mean.

The 2021 Presentation

Covid Acceleration and the Great Unbundling

So what is the theme this year? As he put it in his newsletter announcing the availability of the presentation:

This year: Covid; the unbundling of retail, ecommerce, advertising and TV; frontier technology; China and the end of the American internet; and the Regulation outlook. And Pan-Am.

One of the things that Covid has done is to compress a lot of development that would have happened over the next decade into a single year. For example, the chart above shows the step-function increase in e-commerce. The red line is the UK and the grey one is the US—yes, e-commerce is bigger in Britain as a percentage of all addressable retail (meaning excluding cars, fuel, bars, and restaurants, which are part of retail but Amazon is not going to bring to your door).

Lockdown forced people to try things for the first time or to use it a lot more. All of us in work-from-home (WFH) use video a lot more, obviously. But it is not just in a work environment. Kids are being educated on Zoom. Grandparents are talking to their grandchildren on Zoom. And so on. The chart above is for the UK, but I'm sure something similar pertains to many other countries. And that is just the growth from February to May, a period of just three months.

The big question is how much business will stay on video when we can travel again. As Ben puts it, "short trips for one meeting with someone you know are dead". We've had a decade in a year, it has broken lots of old habits, and it remains unclear which ones will return and which ones will become the new normal.

There is a famous quote by screenwriter William Goldman that in Hollywood "nobody knows anything". What he meant was that it is impossible to tell in advance what movie is going to turn out to be a hit. Retail and media are like that right now, it is $25T and nobody knows anything. Every part is being unbundled.

The aggregate numbers for e-commerce don't really tell the whole story though. If you look at them you get the chart on the left above. But penetration varies tremendously, as in the chart on the right, going from toys (with a penetration of over 50%—I had no idea since my kids are grown) to eyewear at 10% and food at just a few percent. Ben has another way of looking at it: logistics (not computational logistics this time). What can be delivered as a package/parcel, what can be custom delivered (food, restaurant meals, what cannot be delivered (cars and gasoline—although the main reasons that you can just buy a car and have someone drop it off seem to be regulatory more than the fact that you can't put it in a cardboard package).

The scale of Amazon is surprising. It is now as big as the post office, and bigger than UPS and FedEx put together. A third of all US parcels are delivered by Amazon's own logistic network. It is not all US-based either. Over 40% of Amazon's top third-party sellers are based in China and so effectively using Amazon for delivery direct to the end-customer.

Amazon has a big up-and-coming competitor, too, which, as Ben puts it, "came out of nowhere—well, Canada". That is Shopify (they are based in Toronto). Shopify grew to $120B of product (so not Shopify's own revenue) in 2020. That's from pretty much nothing six years ago. One reason that this is significant is that the notion that "nobody can compete with Amazon" is changing, and brands are ready to go direct. Of course, lockdown has helped this trend by giving a major boost to all e-commerce.

This is all going to have a big effect on the physical world version of retail. Even before current trends, the US was massively over-malled. The high-end malls that make shopping an experience will probably do fine, but all those malls anchored by Sears and JC Penney will not. Amazon is already buying some of them and turning them into warehouses since they come with lots of loading docks already. Epic Games just bought a 1M square foot mall in Cary, NC to be their headquarters. I had no idea that Latin America, China, and Mexico are so under-malled. With the growth of e-commerce, I suspect it will stay that way.

We will probably see many more brands go direct as Nike has. You can't buy a Nike shoe or jacket on Amazon. Nike is now the #1 fashion site. L'Oreal now sells 20% of its product direct to the consumer. Nestlé 12%. Proctor and Gamble 10%. E-commerce changes the value proposition. For an existing brick-and-mortar store, delivery is yet another cost to add to the fixed cost of having stores already. To a brand, it is much cheaper than the typical 50% margin that retail takes. To a new entrant, it has to compare marketing + fulfillment to the marketing + retailer margin.

This is all disrupting advertising, too. Internet advertising, especially Facebook and Google, is crushing all other forms of advertising except TV, which is somewhat holding on for now.

In fact, the term "online advertising" is a bit of a misnomer. There is "search intent" (mostly Google, of course), Amazon intent (people searching for something directly on Amazon), Facebook intent (FB serving you an ad since it knows a lot about your interests). The next five are that little black bar. I'm guessing that "other" grey bar at the end aggregates all those banner ads and the stuff that you never click on that shows up on content sites.

As a result of this, everyone wants to go direct. But most companies are B2B (they are set up to sell to stores, not consumers) and so not all will succeed. It is a huge opportunity. Consumer spending is about $50T, retail today is about $20T, but e-commerce is only just getting onto the scale at about $3T.

Harder problems and tech becoming a regulated industry in a post next week.

The Presentation

You can look at the presentation on Ben's website. By the way, you might think having read this post (and tomorrow's) that you've already seen most of the presentation, so why bother to look at the whole thing. The presentation is 134 slides long, so I've just shown you a little bit of the content.

Or you can see Ben delivering it at the NASDAQ event Tech in 2021.

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