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Tom Slater, joint manager of Scottish Mortgage Investment Trust, on tomorrow’s opportunities.'
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Reflecting on his future-gazing session in Seattle with Jeff Bezos, Tom Slater considers the fast-growing Cloud business Amazon Web Services.
In the eyes of Jeff Bezos, the likely impact of ‘the Cloud’ is still not fully understood. He sees it as a fundamental change in computing that will play out over decades.
Why does he think this? Because Information Technology (IT) is becoming a central and strategic activity for many businesses outside the traditional IT industry, and it facilitates many of the products and services mentioned previously in this series. The digital assistant Alexa, Amazon Prime Video, as well as other media names in the portfolio such as Netflix and Spotify all exist because of the Cloud. Advances in computing power, twinned with development of faster telecommunication networks, foster new business models that were not possible as recently as a decade ago.
Going back to the early days of computing, large mainframe computers sat in enormous, room-sized metal cabinets, and anchored local networks with end user terminals. As Moore’s Law progressed, computers became cheaper and more powerful, but most importantly physically smaller. This heralded the era of personal computing, with machines appearing in enterprises, homes and ultimately pockets and palms.
With the advent of the Cloud, we are at another critical juncture, where computing workloads are moving away from the enterprise and the home, back to a centralised structure. This is a profound change that should be thought of as the digital transformation of an enterprise.
Amazon Web Services (AWS) is the current market leader in the Cloud computing market and although now a household name, it came from humble beginnings. In 2000, Amazon was still a young ecommerce company struggling to achieve scale. The company had to make substantial investments in its internal systems to cope with this growth which conveniently laid the foundations for what would eventually become AWS.
Mr Bezos’s preference for spending most of his time “living in the future” has already been mentioned. AWS is a prime example of the benefits of such prescience. An ecommerce start-up like Amazon should not have been able to challenge the traditional IT giants at data storage, but on-premise storage giants like Oracle and SAP failed to find ways to adapt their business model to embrace Cloud. Amazon’s nimbleness, adaptability and future-thinking has resulted in AWS, yet another exemplary Amazon business.
AWS now leads the global Cloud market with around 35 per cent share, more than its next four competitors, Microsoft, Google, IBM and Alibaba, combined. The business is only 10 per cent of Amazon’s sales but it accounts for over 50 per cent of operating income and is growing at a faster rate than the company as a whole. The transition to the Cloud is still in its infancy, with recent market analysis suggesting the global Cloud market could rise six-fold by 2025 to $1.25 trillion from over c.$200 billion at present. Broadly, there is scope for any of the tens of millions of enterprises around the world to leverage the benefits of Cloud, so the opportunity is suitably gigantic.
In our meeting, Bezos got most enthusiastic about databases. He thinks that the advantages of a Cloud-based system are big enough for corporates to consider switching. At the very least it seems unlikely that any startup today would tie themselves to the legacy Oracle ecosystems that many enterprises still use. Amazon’s Cloud database, Aurora, has been a long time in the making but in Bezos’ view, the long learning time only goes to show how vast the prospects are. Aurora provides the security and reliability of commercial databases at one-tenth the cost. The attractions are obvious.
As in many other facets of internet and technology, the Cloud world is increasingly polarised between US and Chinese spheres of influence. In fact, the very idea of Cloud infrastructure is different in the Chinese context. Alibaba’s Cloud business is doubling each year and focuses on providing basic tools to the small and medium-sized business sector to which it has never previously had access. Chinese enterprises have historically built their own software whilst SMEs have used manual processes that exploit the abundance of cheap labour or used pirated productivity tools. All of this means that the business software sector has not yet established itself. Alibaba is changing this with affordable connected tools and is clearly channelling a big pool of pent-up demand.
No matter where a business is based, the attractions of the Cloud are apparent. The likely cost savings are appealing but the value from the business intelligence it creates is even more significant. With 5G networks soon to be rolled out globally, and the explosion in data continuing, enterprises are looking for insights that can benefit their decision-making. This is where Artificial Intelligence (AI) comes into play as it excels when making predictions from large datasets and ultimately, the Cloud is how many companies are going to make use of AI.
Streaming companies such as Netflix and Spotify that host their platforms in the Cloud use AI tools to recommend films and songs that they hope are to our tastes. Amazon’s product recommendations on their website are generated using machine learning algorithms hosted on AWS.
There is potential that as these gradually improve, it may become more economical and profitable for Amazon to send products before the user has requested them. Their taking out a patent for ‘anticipatory shipping’ shows they are serious. This is only possible due to the Cloud, the intersection of deeper datasets and more powerful AI tools. Our holdings in Amazon, Alphabet and Alibaba should all benefit as this transition continues.
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Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
A Key Information Document and more information about Scottish Mortgage Investment Trust is available by visiting www.scottishmortgageit.com
Tom graduated BSc in Computer Science with Mathematics from the University of Edinburgh in 2000. He joined Baillie Gifford the same year and worked in the Developed Asia and UK Equity teams before joining the Long Term Global Growth Team at the start of 2009. Tom became a Partner in the firm in 2012. Tom was appointed Joint Manager of Scottish Mortgage Investment Trust in January 2015 having served as Deputy Manager for the previous five years. In 2015 Tom was appointed Head of the US Equities Team and is a decision maker on Long Term Global Growth portfolios. Tom’s investment interest is focused on high growth companies both in listed equity markets and as an investor in private companies.