Mary Meeker's Internet Trends tells us growth is slowing -- here are the biggest opportunities

After another long-awaited year, Mary Meeker's 2016 Internet Trends report is finally here. I had the privilege of working at Kleiner Perkins and continue to be in awe of the thoughtful and detailed research that Mary, Alex Tran and her team create.  Since last year, many of the internet trends remain the same (internet growth decelerating, China’s increasing viability as an internet leader), some of my predictions have come true (Large(st) US company (Apple) investing in Chinese powerhouse (Didi), increased cross border M&A / partnership consolidation (Didi+Lyft)) and many things have changed (global economy, private technology funding environment, mobile growth outlook).

As it always does, Mary’s report sparks provoking questions and helps crystallize what the future of technology might hold.  Below summarizes some of my key takeaways and questions.  

The Low Hanging Fruit for Internet & Mobile Has Disappeared & The Big Players are Best Positioned to Grow Their Share.

Mary Meeker has been the #1 internet [mobile] cheerleader for the better of two decades.  When evaluating internet opportunities she is able to see upside that perhaps only founders of those businesses can comprehend.  She would always encourage me to “dream the dream.”  So, when Mary concludes section 1 with “New Internet Users = Continue to be Harder to Garner” and section 2 with “Easy Growth [is] Behind Us” + “Creates Rising Risks,” I immediately hear sirens going off (slides 13, 37, 40)*.  If the bull of all internet bulls is cautiously optimistic, I am scared, but should I be?

In short, to a large degree yes, many of the fundamentals are challenged. 

It seems as though the consumer technology cycle is at a fragile moment where consumers, investors and companies are yearning for the next distribution shift to drive future growth.  The “easy” growth that Mary describes comes when there are tectonic platform shifts (ie. desktop to mobile) creating a brand new pie that is growing off the back of new users, more time spent per user and the movement of advertising spend to match the explosive growth in time spent. 

Internet saturation is nearly complete (at least in developed countries) and mobile saturation is happening faster than with other platform cycles. 

Mobile feels to be won, the platform is mature enough from a scale, distribution and idea standpoint.  

The big guys will continue to own more and more of a slow growing pie, leaving little opportunity for up and comers.  The data supports this argument, the top 4 mobile first companies all raised their series A’s over 3 years ago, when mobile was still in its pie expanding phase Instagram (Feb. 2011) /  Uber (Feb. 2011) / WhatsApp (April 2011) / Snapchat (Feb. 2013).

So, compound poor fundamentals around aging platforms, the nascence of potential next-generation platforms and “Global Economic Growth = Slowing (17),” and you might begin to wonder how US internet [mobile] companies will find continued growth?  However, there are rays of sunshine that pierce through the darkness:

a) Bet on The Big Guys: If you believe that the big will get bigger, align your upside with the biggest players who own distribution and are positioned to gain share (Facebook, Google, Amazon, Uber, Snapchat, Netflix). The advantages of scale are paramount 1) Network effect lock in 2) Operating leverage 3) R&D resources / investment 4) Captive audience to test new opportunities 5) Balance sheet for acquisitions. On average, three apps account for 80% of a mobile users’ usage (109), in other words, there are very few mobile companies that truly matter.  If you don’t believe that the “big guys” are winning, just open your phone and look at the top downloaded iOS apps over the last 24 hours #1) Snapchat / 3 of top 6 = FB properties / 2 of top 6 = Google Properties.  Mary nails this point at the end of her report, “Internet Leaders = Getting Bigger…Staying Aggressive” (186). 

b) Mobile Video: Although mobile growth is starting to decelerate, mobile video growth is accelerating led by… the big guys: Snapchat (now more video views than FB), Facebook Core, Instagram (Faceook), Netflix, Youtube (Google). Mobile is also the only platform with an optimistic time spent vs. ad spend operating mix, creating a potential $22B of pie expansion (45).

c) Increasing Ad ARPU: Annualized Revenue Per User (ARPU) continues to grow ~30-50% for Facebook and Twitter driven by more time spent on mobile (although decelerating) and higher return on investment or effectiveness of mobile ad units. Ad ARPU expansion should continue to drive growth in the short term (help fill some of the mobile ad gap described above), and also translate into benefits for other players that are in the earlier stages of monetization, like Snapchat.

d) New Platform Shift: See point 2 directly below.

What is the Next Tectonic Platform Shift?

As mobile growth slows, the biggest (and potentially most important) question to ask is what will be the next mobile, the next tectonic platform shift that creates a brand new rapidly expanding pie?  Despite the reports detail, I was surprised to see that in mid-2016 Internet Trends did not have a single mention of Virtual Reality (VR) or drones.  However early or unlikely (many would argue it is very likely), VR offers the most promising future opportunity in all of digital media.

Whether VR or something else, at some point there will be a new media delivery platform that gains widespread adoption.  In thinking about the shift from Internet to Mobile, two themes for the winners stood out 1) Some Big Players were able to do two things a) port their previous generation core offering onto the new platform (Facebook / Google) b) Make compelling acquisitions 2) The New Emerging Winners were not usually first, there are precursor companies with very similar businesses that pave the way before them (see chart below). 

The most encouraging state of the US Internet is that because “easy growth” is over, our best companies are being forced to rapidly create a new pie.  This is different when compared to China, which added 93M smartphone users in 2015 (still sub 50% smartphone penetration) vs. US added 30M (80% penetration).  We can already see obvious evidence of our best companies spending billions of dollars to establish leadership positions in these emerging next generation platforms (see chart below).  As Mary points out with autonomous vehicles (147), the US has a lot of the right DNA and ingredients to spearhead the next technological revolutions, perhaps more so than any other country. 

Does The E-Commerce Emperor Have No Clothes On?

Mary has been tracking the growth of U.S. e-commerce spend from the early days of Amazon to $340B today.  In describing the retail intertwine of technology, media and distribution I realized that outside of Amazon and Ebay, Facebook and Google = E-Commerce.  It is next to impossible to think of a stand-alone billion dollar e-commerce brand that was not built off of the backs of Google and Facebook advertising.  The e-commerce emperor should run to Amazon to grab a robe, because s/he has been caught with no clothes on.  Facebook (including Instagram) is hyper aware of their strategic positioning as the always on shopping mall for the 21st century and will focus on ways to continue to capture value as it creates new brands.  I have tremendous respect for the many products, brands, retailers and direct to consumer businesses that have been built on Facebook and Google, but the catch is Facebook and Google marketing do not scale forever.  It is Facebook and Google that create the rapid expansion to $100M of annual sales (70), but it is that very dependency that has made it difficult for brands to transition into long-term multi-channel businesses with repeat direct consumers.  Until these transitions are proven in the long term, (there is a lot of evidence that crossing the chasm is possible, e.g. Warby Parker, Stance and Casper), the next generation of “e-commerce” will still remain a question in the eyes of strategic acquirers and public market investors.

The most obvious takeaway from Mary’s report is uncertainty.  We are at a point in time when growth drivers are hard to see, a platform shift feels necessary, but it is unclear what is next, the global economic picture is ugly, exits options are limited with an overpopulation of Unicorns and public market farmers who won’t open their gates to the stable.  It is often during periods high uncertainty that the greatest opportunities arise.  Uncertainty can drive a fearful overreaction that leads to pockets of opportunities for the next great entrepreneur to start gobbling up what feels to be an ever expanding pie.  I am optimistic that with patience, focus and persistence the state of the internet will do what is has done for the past 20 years, continue to surprise us and surpass even our wildest dreams.

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Max Motschwiller is a General Partner at Meritech Capital https://www.meritechcapital.com/