The impact of COVID-19 on tech state of play

As we are now a few months into the COVID-19 crisis, the world is slowly embracing the new norms of the current situation. As communication and technology have been central to the responses to this crisis, either through working from home, the rise of e-commerce, streaming and gaming or just plain enhanced communication among people in times of the crisis, it is particularly interesting to look at the impact on the technology sector overall.

Last week featured quarterly results announcements from the large technology firms. In the rest of this post, I will outline some of my key personal takeaways, but for me the big headline is that large technology firms look to be getting stronger through and after the crisis. As Microsoft CEO Satya Nadella said at a recent press event, the world saw two years of digital transformation in just two months. And many big tech firms have benefited from that.

The giants on the rise

Despite the fact that Apple has closed most of its stores around the world at the start of the pandemic and that its manufacturing partners plants in China have been closed or have been working at reduced capacity, Apple has managed to achieve revenue growth to US$58.3 billion in Q1 2020. Key drivers of growth were the new iPhone SE model launch as well as updates of the iPad and MacBook, both of which have been helped by the working from home and online education trends. Strong growth of the services and wearables division of the company (17% and 22.5% respectively) helped offset the decline of iPhone total sales, also taking total services' revenue percentage to nearly a quarter of all the company's sales.

Microsoft has delivered the best tech earnings in Q1 with revenues up 15% to US$35 billion and net income up 22% to US$10 billion. Intelligent cloud services were up 27% to US$12.3 billion and LinkedIn revenues were up 21%. Microsoft is not dependent on advertising; therefore, COVID-19 had a minimal negative impact on its revenues. Microsoft Teams now has 200 million daily meeting participants, with 75 million daily active users, up from 44 million in mid-March (a 70% increase). Xbox Live has 90 million monthly active users, up 50%. 

Alphabet recorded growth of 13% (US$41.2 billion), despite experiencing a slowdown in advertising in March at the peak of the COVID-19 outbreak. YouTube’s revenues grew 33% in the first quarter, while its cloud business recorded a 52% growth rate. April brought back growth in advertising to offset the negative effect of March.

Despite the sharp decline of advertising in the last three weeks of March, April showed signs of stability and Facebook recorded US$17.7 billion in revenues in Q1, up from US$15.1 billion in the previous year. Usage was up, with messaging growing 50%. Facebook also finished the acquisition of 9.99% of Reliance Jio telecom in India (a S$5.7 billion deal) to further strengthen its WhatsApp platform commerce capabilities in India. At this moment, nearly 3 billion people use one of their apps – making Facebook bigger in number of people than any country, continent or religion. In a situation when most of options of classic advertising have either been significantly impacted or even halted altogether (eg, shooting a professional ad), digital advertising on Facebook stayed strong with expectations of further growth. Together with Google, they make 61% of all all digital ad spend today. On the video comms side, Facebook and Instagram live videos were 2x up, while group video call times were 10x up. The past weeks have also seen the introduction of Messenger Rooms, a move by Facebook to tap into some of the success of Zoom.

Amazon achieved all time high sales and sales growth: US$75.5 billion sales and 23.5% yoy sales growth). However, net income fell 30% primarily due to significant investments into safety measures to protect its workforce and customers against COVID-19 (acquired 100 million masks, 31,000 thermometers and 1,000 thermal cameras)and hiring of 175,000 more employees to cope with increasing demand as COVID-19 influenced a massive global shift to e-commerce. Amazon Web Services delivered growth of 32%, providing also US$3.08 billion of operating income and Amazon Media also played a strong part, delivering on both content but also having strong advertising results. In an overall context of continued stay at home/work from home, the position of Amazon for the remainder of the year is very strong from all angles: e-commerce, media and cloud and their investments helped them achieve the unique supply chain position during the COVID pandemic.

The new norms 

I believe there is no other sector in the world economy that was able to deliver such robust Q1 2020 results. Key trends triggered by this crisis – usage of e-commerce, reliance on digital advertising, growth of digital streaming media, work from home solutions – are all creating tailwinds for the remainder of the year for the large technology firms. Their combined markets caps stand at US$ 5.282 trillion, which is more than the GDPs of both Germany and UK, 2.5x the #GDP of Italy or 87x the GDP of Croatia. 

In terms of other TMT companies, and as well as companies in other sectors which are not the large tech giants, key questions are being raised about what they can do. Clearly, the power of large tech is coming from their unprecedented scale, innovation, technologies, talent and financial strength position. However, some of the lessons are to be learned from them and that will help other companies to quickly transform and re-think themselves for the post-COVID-19 world where the new norms are being shaped in terms of how consumers, employees, partners, vendors and regulators are behaving.