Greetings from the Kansas City and Willard, Missouri (dogs at play pictured), as well as Lake Norman/ Charlotte, North Carolina. The caravan of goods and furniture started Friday and continues through June 1, hence the later distribution of this week’s Brief. Our son, Jimmy, starts at Cerner very shortly and will be taking up residence in Westport. After a two-year absence, at last one Patterson returns to the City of Fountains.
Lots of comments from many of you on the acceleration trends, and they ran a very wide gamut. On retail, many of you commented that this is a two-fold story: 1) the weakest are getting weaker (and eventually dying – see Pier 1 liquidation announcement this week) and 2) there will be a pendulum swing back to traditional retail in the late fall/ early winter as there’s more clarity on the timing of a COVID-19 vaccine. We cannot agree with the latter as much as a few of you did, but it will be good to watch.
Another comment from a telecom industry veteran was particularly insightful:
“This retail tension (both commercial real estate and retail) reminds me of 2000-2002 fiber world. It started small, and then, just as you thought it was over – boom – WorldCom, Qwest, and Enron. That may be the case here as well… those who depend on fourth quarter sales may not know the impact until 2021 or even 2022.”
This is not a retail industry newsletter, but the domino effect of additional anchor tenant retail closures could be impactful to the company-owned or authorized retailer wireless stores that are located nearby.
Finally, one of you also sent this article on the impact of the shutdown on theater chains. We think the themes of the article are largely in line with lasts week’s Brief, and, in our opinion, the theater model can change and adapt more quickly than department stores.
As we near the 50th anniversary of the release of the 4004 microprocessor, this week’s Brief takes a retrospective look at the role of Intel in the technology and communications landscape using Michael Malone’s 2014 chronicle The Intel Trinity as a reference point. But first, a look at the markets and our last look at iPhone SE availability.
The week that was
This week marked the first time since the COVID-19 outbreak that the Telco Top 5 outperformed their Fab 5 counterparts. Perhaps that was due to end of month “window dressing” or the general feeling that large cap tech stocks had risen too fast too soon (it could have also been driven by detailed reopening efforts for Comcast’s Universal theme parks and the launch of HBO Max). Regardless, every stock in the Telco Top 5 gained this week (some slight), while most stocks in the Fab 5 were flat or lost a nominal amount of capitalization (Google the sole exception).
This recovery finally got the Telco Top 5 ahead of their pre-COVID 19 levels (as the nearby table shows, the Telco Top 5 had already lost $59 billion in the first two months of 2020). This leaves these five stocks having lost a mere quarter of their value gained in 2019 (driven by companies like Charter knocking on the door of a 100% gain since the beginning of 2019).
The Fab 5, while slipping slightly this week, have still added close to $2.3 trillion in value since the beginning of 2019. June should be an interesting month for the Fab 5 with increased regulatory scrutiny, global COVID-19 recovery, and likely additional M&A announcements driving the news cycle. What will be surprising to many will be the relative immunity of these stocks to the economic aftershocks of COVID-19 and the bevy of product pipeline announcements that will follow throughout 2020.
The first example of this can be seen in the iPhone SE indicators shown next.
Apple iPhone SE availability update
The reopening of retail appears to be having minimal impact on the availability (or lack thereof) of the iPhone SE. Here’s the latest chart:
As a reminder, the T-Mobile and Verizon timelines indicate “ship by” and the AT&T timeline indicates “deliver by” dates. With some small color variances, both T-Mobile and Verizon appear to be fully stocked. AT&T has less inventory, and, given that this has been the case for several weeks, likely indicates that they are seeing greater than expected demand for the iPhone SE (none of the providers are offering BOGOs or other special promotions on the device, opting instead to use promo dollars on the iPhone 11).
What puzzles us, however, is the lack of availability at Best Buy, where the backorder situation is little changed:
Availability Status iPhone SE Color/ Storage Options
SOLD OUT – May 2 Red 128GB; Red 256GB; Black 128GB; Black 256GB
SOLD OUT – May 10 White 64GB; Black 64GB; all colors – 128GB; White, Red – 256 GB
SOLD OUT – May 24 White 64GB; Red 128GB; all colors – 256GB
SOLD OUT – May 31 Black 64GB; Red 128 GB; all colors – 256 GB
This is especially confusing given the (mostly) plentiful stock at nearby Apple stores. We assume this to be a short-term phenomenon and not an indication of an Apple/ Best Buy spat. Bottom line: The iPhone SE is shaping up to be a very decent volume generator for Apple, but, at half of the Average Selling Price (ASP) of the iPhone 11, volume will be needed to continue to grow total revenues and margins. Perhaps the most interesting figure in Apple’s next earnings announcement will be to see how many newly purchased iPhone SEs used the Apple installment payment plan as opposed to one of the Big 3 wireless carriers.
This will be our last update on iPhone SE availability.
The Intel Trinity
One of the best books written on any technology company in the last decade is Michael Malone’s The Intel Trinity, a detailed chronicle of how Bob Noyce, Gordon Moore, and Andy Grove started and led Intel through some very turbulent times. (Nearby picture of (from left) Grove, Noyce, and Moore is courtesy of the Intel Free Press).
We are surprised how often Intel is forgotten in discussions of Silicon Valley titans. Google, Apple and Facebook tend to dominate today’s discussions of Valley leaders. But Intel is no slouch, with more than $266 billion in equity market capitalization (and only about $20 billion in net debt) – more equity market value than IBM and AMD combined. While there were certainly many companies (networking, software, and services) that “made” the Internet, no other engineering-led company managed to develop into a global leader to the extent that Intel did.
Malone’s work tells how it all got started. Bob Noyes, the first CEO of Intel, hailed from the Midwest, a son of a minister who grew up very poor and loved science (and girls). Gordon Moore was the son of a California sheriff and very focused on pleasing his parents. Andy Grove survived the occupations of both the Nazis and the Russians for over twenty years before escaping Hungary to come to the United States. No silver spoons here – all were scrappy engineers who lived for the thrill of discovery.
Each of the “Trinity” managed Intel differently (Malone also briefly describes the two succeeding Intel CEOs, Craig Barrett and Paul Otellini), and none of them served as Intel CEO longer than Andy Grove (25 years). The microprocessor industry has one special uniqueness – the use of secondary sources – one of the vestiges of the early, embryonic days of the industry. Basically, every new Intel microprocessor developed through the 80386 had a secondary supplier in Advanced Micro Devices (AMD) who would pay Intel a license fee but frequently sell their chips at a lower yield than Intel did. The closest business analogy would be having a leading pharmaceutical company introduce the generic version of a flagship drug at the same time. This IBM requirement kept the pressure on Intel to continuously deliver upgraded chipsets (later on a common platform) and thereby fulfill Moore’s Law.
Intel also learned in its two decades of existence how to produce tens of millions of microprocessors with quality. Malone spells out the catalyst in Chapter 27:
“… A young middle manager at Hewlett-Packard named Ed Hayes was preparing a speech he was to give at an industry conference in Boston and would repeat a few weeks later in Silicon Valley. His theme was component quality, and, armed with test results from HP’s data products (computer) division, he knew he had shocking data on his presentation slides. But the lanky, red-haired, soft-spoken Hayes had no idea that he was about to drop a bombshell that would redirect the semiconductor industry, set off a global trade war, and ultimately restructure not just the chip business but the global economy.
“The audience, mostly U.S. semiconductor industry managers, bored and waiting for cocktail hour, listened restlessly but politely to the beginning of Hayes’s talk. After all, HP was a major customer for most of them. Then with a single slide, Hayes dropped the bomb. It offered a comparison between the acceptance rates by HP of chips delivered by US semiconductor makers versus Japanese makers. That’s when the muttering and outbursts of disbelief began, both in Boston and in Santa Clara. What Hayes showed them was a simple pair of graphs. The first compared the quality— that is, the number of working chips per shipment by vendor— of semiconductor orders delivered to Hewlett-Packard for use in its instruments, calculators and computers. The results were shocking. The US and Japanese vendors clustered in two groups on opposite ends of the graph, with the number of good Japanese chips above 90 percent, while American chips were down in the 60s and 70s. The second slide only drove the blade in deeper. Not only were the Japanese delivering far higher-quality chips than their American counterparts, but they were also delivering them twice as quickly (Malone, Chap 27, pp. 282-283).”
This single event, coupled with a changing of the CEO (Bob Noyce handed the baton to Gordon Moore in 1979), focused Intel on delivering highly sophisticated chips at scale and with quality. With Moore at the helm, and Grove as President cracking the whip (as well as Craig Barrett as the administrator of quality programs), the company placed low defect rates at the center of their values (previously, it was technology innovation, which is frequently at odds with mass-produced quality). Intel hit their quality stride just as IBM was introducing their personal computer, and, thanks to anti-trust concerns, decided to outsource their microprocessor production to Intel.
The Santa Clara giant responded with high quality chipsets at scale. This development, united with compatible platforms (software written for the 286 chipset could also be used on the 386), made it easier to grow. Combined with their drive to fulfill Moore’s Law, it made Intel a critical technology supplier to the present day.
On top of superior engineering, Intel launched an aggressive marketing campaign in 1991. Malone describes the process in chapter 49 (Carter is Dennis Carter, then Vice President of Intel’s Corporate Marketing Group):
“Now, in 1991, Intel was preparing to ship the replacement of the 386, and like that chip before it, the 486 was suffering pushback from those who didn’t see the necessity of upgrading to it. Worse, at the end of 1990, AMD had finally managed to build its own clone, and in the words of the Microprocessor Report, “The most valuable monopoly in the history of the semiconductor business is about to end.” Within two years, AMD, with its cheaper and more powerful alternative, had captured more than 50 percent of the 386 market. Intel had to make the 486 work, or the consequences would be dire.
“Carter hadn’t forgotten the lesson of the Red X campaign, and now he set about crafting an even cleverer and more sophisticated version, one that might even make the Intel microprocessor CPU inside a computer more important than anything on the outside, including the computer manufacturer’s logo. He searched for an ad agency that could understand what he wanted—and found it in the unlikeliest of places, Salt Lake City and the firm of Dahlin Smith White Advertising. Carter told the agency, “This is what we want to be. We want to make the processor more prominent in the computer. It’s really important. It’s invisible. People don’t know about it. They don’t know us. How do we do this?”
Thus was born Intel Inside, one of the most successful branding campaigns in business history. When it began, Intel was still largely known only within the electronics industry or perhaps as the company once run by Bob Noyce. By the turn of the century nine years later, thanks to Intel Inside, surveys found that Intel was the second-best-known industrial brand (after Coca-Cola) in the world. That isn’t just a success; that is a historic achievement, one not likely to be repeated for generations (pp. 424, 425)
Intel launched not only the 486 chipset but also the Intel Inside campaign on the backside of the 1991-1992 recession, nearly four years prior to the multi-billion brand efforts of the dot.com era. One of the key themes of Malone’s book is that Intel saw industry downturns as opportunities to prepare for the impending upturn. This was a real strategy, not a coincidence, and something today’s tech industry will likely duplicate as we recover from our current economic hardships.
Intel is a true anomaly in American business with a hardware-engineering-quality-
Next year will be the 50th anniversary of the launch of the Intel 4004, the first microprocessor. We have come a long way since then, and Malone’s work reminds us of the co-dependency between processing power and software capabilities. If you need to be reminded of the importance of technology entrepreneurship, this is an excellent summer read (and, at 500 pages, it might take most of the summer to consume).
Next week, we will dive into second quarter expectations created by telecommunications executives during various virtual investor conferences over the past three weeks. We will also begin to answer the question “What does health care technology acceleration mean to telecom?” Please keep the comments and suggestions coming, and, if you have time, check out the new and improved website here.
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Stay safe and keep your social distance!
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