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Unique Research - Accelerating the Digital Transformation

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In 1998, I had the great fortune of meeting James T. Martin, a world-renowned systems scientist, prolific author, and founder of several technology-focused companies. Though I only spent a few hours speaking with him at his lovely home in Bermuda, I can still recall our conversations, particularly those discussing the future of telecommunications. In my opinion, he was an incredibly thoughtful futurist. I was not alone in this assessment as he was ranked 4th in Computerworld’s 25th Anniversary Issue of those individuals that have most influenced the world of computer science. Sadly, Mr. Martin died in 2013 at the age of 79. In 2017, I finally purchased The Wired Society, the book that put him on the map, which was published in 1977. It was a fascinating view of how computers would impact our lives. Below is one of my favorite passages:

“The communication channels provide excellent medical facilities, some computerized and some via videophones and large television screens. Remote diagnostic studios are used, employing powerful television lenses and many medical instruments. With the help of a nurse in the studio, a distant doctor or specialist can examine a patient as though he or she were in the doctor’s office.”

Sound familiar. In this pandemic-driven world, the term “telemedicine” has finally become an accepted…and in some cases preferred…reality. This got us thinking about the entire landscape of digital transformation. Thankfully, we have two experts to lean on for greater understanding regarding the speed and implications of this movement. They are Marcelo Lima (Heller House) and Nels Wangensteen (MayTech Global), managers in our Alpha Ring strategy. Below are key highlights from Todd Peters, Chair of our Investment Committee, conversations with both individuals conducted on April 16th, April 17th, July 27th, and August 3rd.

What has been the impact of Covid-19 on the adoption of digital transformation?

The pandemic has undoubtedly accelerated in-place trends: this is a recurring theme echoed by nearly all our companies. “Digital transformation”—codewords used by corporations that mean “we need to finally move our business processes off-premises and into the cloud or our competitors will bury us”—has been brought forward by a few years. E-commerce penetration as a percentage of retail sales has gone up from around 15 percent to 30 percent. This normalization of remote work—where previously social conventions would dictate lengthy and expensive business travel, hotel stays and closing dinners—is to a large degree here to stay. So is the convenience of shopping from your mobile phone while sitting on the couch or walking the dog.

- Marcelo Lima (Heller House)

How should we attempt to understand these changes?

It is helpful to think about the human needs and wants that will not change, when faced with unprecedented challenges and unpredictable events. In these uncertain times, people have an increased necessity for their needs to be filled safely, efficiently, and affordably. It is through this lens that we try to determine how circumstances impact our companies. Our goal is to own companies whose business models allow them to use change to improve their competitive position.

- Nels Wangensteen (MayTech Global)

Why have some of the major technology companies performed so well during the pandemic?

We have long believed that many of our companies would prove to be surprisingly defensive in an economic downturn. The reason for this is that many of these companies help their customers do and find things better, faster, and cheaper. During a crisis such as we are living through, this accelerates adoption of many on-line services and widens the digital divide. All of us to some degree are experiencing this shift everyday as we have stopped going out and are doing more and more online. This shift in behavior ranges from how we shop, to how we entertain ourselves and even to how we are accessing healthcare.

- Nels Wangensteen (MayTech Global)

One big confounder during this COVID-19 pandemic is why some businesses are doing so well while tens of millions of people are unemployed. The answer is simple: while consumer spending overall is down, and down a lot for travel, entertainment, and restaurants (still off by fifty percent as of late June), spending online is up by fifty percent. Spending on collaboration software for remote work is also up. So, while there is less consumer spending, much of that remaining money is being channeled through online channels, which results in an acceleration.

- Marcelo Lima (Heller House)

Could you provide an example that details this accelerated shift to online?

Amazon experienced huge spikes in Amazon Web Services usage from videoconferencing, gaming, remote learning, and entertainment customers. In retail, the company faced such overwhelming demand, it had to hire an additional 175,000 employees and expand grocery delivery capacity by more than 60 percent. It even had to temporarily change its shopping app to reduce customer purchases. One line from the earnings call summarized it well: “The challenge is really on everything besides the top line.”

- Marcelo Lima (Heller House)

Moving beyond E-commerce, what is the current viewpoint on telemedicine?

Crises, such as the pandemic, can become tipping points in accelerating adoption. For example, in telemedicine, the need to get medical care without risking a visit to the doctor or hospital has driven massive adoption of online healthcare delivery. We believe those that initially tried online health care for safety reasons will continue to use it for convenience, cost savings and the quality of the experience. According to some analysts, adoption has been accelerated by about three years in just a few months.

- Nels Wangensteen (MayTech Global)

Concluding Thoughts?

We have called many of our software businesses “infrastructure assets of the digital age”. These are of course superior to physical infrastructure in many ways: higher margin, scalable to the entire planet, and capable of generating high returns on invested capital.

- Marcelo Lima (Heller House)

Research, data, and our experience lead us to believe that much of the increase in adoption of these services is likely to persist once the crisis passes. They become the norm.

- Nels Wangensteen (MayTech Global)

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