December greetings from Fraser, Colorado (picured), Cedar Rapids, Iowa, and Kansas City, Missouri. We hope the Holidays have been restful and enjoyable for each of you, and that 2025 brings professional and personal growth.
For the first time in a long time (11 consecutive years excluding COVID-2021), Jim will not be attending the Consumer Electronics Show (CES) in Las Vegas (full program agenda here). For those of you attending, we hope you read our take below on the state of the consumer electronics industry and provide on-floor feedback. Our thesis is that with nearly $4 trillion in market capitalization, Apple is in the driver’s seat and everyone else is a passenger (and Apple has a minimal presence at CES). More below.
The last full Brief (here) generated a lot of responses on two fronts: 1) from Cedar Rapids residents, past and present, who share our fondness of the Quaker Oats Christmas tree, and 2) from many comments on the future of the access edge. One of those comments which we did not mention in that Brief was that the access edge is growing because some elements of traditional data centers are shrinking and localized edge processing is the product of continued processing, storage, and other technological improvements. We think that point, plus comments about the vast differences in electricity availability and prices, should be added to the previous Brief’s thesis.
Also, since this is a Holiday week and sometimes the office can be less busy, here are two very recent discussions that we would suggest watching/ listening to as time permits.
- Chris Penrose, former 30+ year AT&T executive and now Global Head Business Development – Telco for Nvidia, on the TelcoDR podcast called Telco in 20 (here). Besides a very interesting application of sovereign AI (artificial intelligence) for Indonesia, he discusses the preliminary results of the Softbank field trial (press release here).
- Bob Yates, who was SVP of M&A for Level(3) Communications from 1999-2011, appears on Dan Caruso’s podcast called The Bear Roars (here) in conjunction with Dan’s upcoming book called Bandwidth: The Untold Story of Ambition, Deception, and Innovation That Shaped the Internet Age and the Dot-Com Boom (preorder here on Amazon). There is a second interview on The Bear Roads that is equally entertaining from Stephanie Copeland of Four Points Capital, a long-time Denver telecom/ tech executive.
Finally, we want to note the passing of two important figures in the cable industry since our last Brief. Dick Parsons, who was head of Time Warner when they merged with AOL and led the company (and many others) through turbulent waters, passed away on December 26th (New York Times obituary is here). This morning, we learned through a Sunday Brief reader that Chuck Dolan, a cable pioneer who started Cablevision and HBO, passed away at age 98 (Wall Street Journal obituary is here). Both were legends, and we will miss their wit and wisdom greatly.
The fortnight that was
This has been a quiet week for both the Fab Five (+$9 billion) and Telco Top Five (+$2 billion). Absent some significant rally or selloff, the Fab Five will gain $3.3-3.4 trillion in market capitalization in 2024, down from the $3.9 billion created in 2023. Over the last six years, the Fab Five have created ~$10 trillion in market value. The Telco Top Five, by contrast, created $100 billion in value over the same period. Said differently, for every dollar created by the Telco Top Five since the beginning of 2019, the Fab Five have created $100.
For the Fab Five, 2024 will be known as the “Peak Year of Fighting the Government.” Nowhere is this more apparent than with Mountain View-based Google/ Alphabet, who is currently facing the prospect of divesting their browser division (Chrome) as well as many other restrictions (Bloomberg article outlining each of those changes here). Despite the looming changes, the stock gained $650 billion in value, slightly more than 2023 ($628 billion).
Alphabet is not the only one facing investigation. Microsoft was just handed a very broad request for information from the FTC (article here); Apple (The Verge’s excellent coverage here), Amazon (partial dismissal of the FTC’s case in late September here) and Meta (Reuters article here on the 2026 trial date that could potentially unwind their acquisition of Instagram here) are all involved in multi-year legal actions.
Many have asked whether the investigation intensity displayed over the last several years will continue in the Trump administration. While the exact answer will not be known for several weeks, the Attorney General nominee, Pam Bondi, does not have the activist streak of the current attorney general or head of the FTC. Our guess is that activism will be diminished, despite Jeff Bezos’ ownership of The Washington Post and the complicity of Meta in suppressing information on both Facebook and Instagram that could have impacted the 2020 election as well as COVID-related matters (each of which Meta CEO Mark Zuckerburg has admitted were poor decisions in a letter to the House Judiciary Committee – see post here). More to come, but we predict a pendulum shift back to the center-right.
Speaking of regulatory activities, AT&T received some very good news last week from the Federal Communications Commission (FCC) as they approved Ma Bell’s plan to replace traditional copper line local phone service with AT&T Phone Advanced, a wireless local phone alternative (Bloomberg article here). While this ruling applies to a handful of homes in Oklahoma, the precedent and blueprint established by an outgoing Democrat-chaired FCC sets the stage for acceleration of copper retirement, a benefit for both AT&T and Verizon’s telco units.
Finally, there was a very intriguing article on Altice in Fierce Network which featured a quote by Nate Edwards (AT&T, Lumen, now Altice) that cable companies could compete against new broadband competitors using mobile (we completely agree) and video. His premise is that the gap between streaming and linear broadcast systems is narrowing, and that bundling broadband, video and mobile could be an effective cudgel to companies such as Frontier (who will have FiOS linear TV offering after their merger with Verizon is approved) and upstart FTTH providers.
While the double-play (broadband + wireless) makes sense (see the last full Brief here on how we think it will impact AT&T), the incorporation of video as a critical bundle component is a real headscratcher. Content creators such as Amazon, Netflix, and Apple are writing big checks. Comcast and Warner Bros. Discovery are also segregating their linear channels as a part of a plan to (potentially, in WBD’s case) spin or sell these units. Linear TV served as the content aggregator for decades, but digital aggregators (including Xumo, the new video platform for Altice) are taking over. We think that Nate’s comments might help Altice with certain segments, and certainly will help reduce the substantial churn Altice has experienced, but linear video is at best a distant third part to what will be a broadband+wireless play.
CES preview—AI helps but does not remake the consumer electronics industry
There will be a lot of discussion at the upcoming Consumer Electronics Show about how artificial intelligence will remake the industry. “Combine a superior mass market large language model (LLM) with decent hardware specs and the industry structure will fundamentally change” is the popular thought.
While we agree that AI will be a powerful force and drive handset upgrades as it becomes an indispensable part of society, it does not upend the current consumer electronics structure which is dominated by Apple. As we said in our opening comments, the Cupertino giant, with nearly $4 trillion in market capitalization, has the most to lose if AI proves to be revolutionary, and they have the balance sheet and market share to ensure that any advancements benefit the iPhone business model.
While we have not discussed this in a while, here are three things we think has made Apple successful since the launch of the Macintosh in 1984:
- Being as tightly integrated (closed) as possible. From the beginning of the company, software integration into hardware has been tightly controlled. While many reasons are cited (including security, efficiency, user experience and cost), the result is the same: Apple views their product as a combination of hardware and software. We don’t think that foundation will crumble because of a wave of AI apps.
- Developing products that can be easily marketed. Apple turned computing into something that was “cool” in the 1980s and reinvented the music industry in 2000s with the launch of iTunes and the iPod. The phrase “A thousand songs in your pocket” still stands as one of the most powerful product tag lines in consumer electronics history. The iPhone turned Apple into a global aspirational brand and forced Apple to work with hundreds of wireless carriers operating a myriad of networks across dozens of spectrum bands. They removed network compatibility as a barrier to purchase – no small feat.
- They were not _________. In the early days, that blank was filled by Microsoft (queue the Mac vs PC ads). As their market leadership has grown, overtly direct comparisons to specific companies (and even the Android operating system) have faded into the background. We see T-Mobile’s “Challenger to Champion” mantra as an attempt to follow Apple’s transition.
There are many more factors to Apple’s success that we do not have time to discuss in this column, some of which are directly attributable to Tim Cook. But the three mentioned above, combined with the characteristics of successful large language models, lead us to believe that Apple is best positioned from a product perspective to take advantage of AI’s benefits. Here’s why:
- Apple singularly has the capability to introduce localized AI models that are materially more responsive and personalized than any other company. We do not have the exact statistic but can make an educated guess that at least a quarter of the stated capacity of an iPhone 16 goes unutilized during the life of an average iPhone user. What could Apple do with 30-60-90-120 GB of local memory? A lot. Consider that the entire Oxford English dictionary consumes just under 600 MB of capacity. And, because of their tight integration of iOS and the iPhone hardware, localized AI will be efficient and responsive.
- Apple, through Siri, has already been trained to respond to questions in 22 languages (and growing). The iPhone, per this recent Bloomberg interview with CEO Tim Cook, introduced the company to hundreds of millions of new users across the globe. Siri, now slightly more than a decade old, has been improving its syntax and dialect. It may not be as good as some other assistants, but it is the most ubiquitous. With increased AI usage, Siri’s voice recognition will improve faster than others. We started to see some of the improvements to Siri in the latest iOS release (Voice Control deep dive from Ability Net here). Warts and all, Apple would rather have a trained assistant than start from scratch.
- Apple has a loyal and large developer community. We think this is the most critical element for the consumer marketplace. Local processing (with help for more complex queries from OpenAI and other LLMs), along with a global addressable market improves the economic opportunity for developers. As a result, Apple Intelligence becomes a leading LLM nearly overnight.
Apple’s challenge is not from AI itself, but from the embedded base of connecting devices that do not have similar processing capabilities. TVs are getting cheaper but not smarter – the intelligence is coming from peripheral devices like Xumo, Apple TV, Fire, Roku, and others (and each of these platforms has very different development roadmaps). What if the peripheral were embedded in a new, smarter display? We can’t help but think that Cupertino has been thinking a lot about display consistency, and a complete rethinking of how we view content is too big of an opportunity for Apple to ignore.
Recent reports would also suggest that Apple is seriously considering a competitor to Amazon’s Ring and Google’s Nest franchises. Just before the Christmas Holiday, Mark Gurman of Bloomberg reported that Apple is considering a six-inch display that would integrate facial recognition (presumably through one’s Apple ID) into smart locks. This sounds small but would firmly tie iOS to the home. One could easily see an integration of Apple CarPlay to garage door opening or paying for event parking. While it may not be a significant line of business, a smart door further cements the value of Apple to its embedded base.
Bottom line: CES continues to evolve as technology advances. Apple lacks some critical elements of the in-home electronics experience (e.g., PlayStation or Xbox equivalent; home appliances like LG and Samsung), but the company influences the consumer electronics industry more than any other. Unlike other hardware companies which focus on producing today’s technology cheaper, Apple creates differentiation through software integration. This fusion creates a high barrier to entry and provides a very strong argument for continued market capitalization acceleration. Rather than creating a highly disruptive and disintermediating environment, AI actually makes Apple’s leadership stronger.
That’s it for this week. We will dig into earnings drivers in our next full Brief (January 12). Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list (or they can sign up directly through the website).
Finally – go Davidson College Basketball and Kansas City Chiefs!
Important disclosure: The opinions expressed in The Sunday Brief are those of Jim Patterson and Patterson Advisory Group, LLC, and do not reflect those of CellSite Solutions, LLC, or Fort Point Capital.
