Weekly Stocktake

Much like Disney in the media industry, traditional motor vehicle companies are also encountering comparable challenges to pivot their businesses from ICE (internal combustion engine) to EVs (electric vehicles). As technologies advance, they open doors for the creation of new products through more cost-effective methods. Established businesses must adapt their strategies or risk losing market share or even facing extinction.

Toyota, VW, and Mercedes have traditionally focused on producing ICE vehicles. However, they now find themselves at a juncture where EVs are gaining traction. This shift is driven by improvements in battery range, reduced charge times, and more affordable production costs. Nevertheless, EVs are still in the early stages of capturing market share. In 2021, only 8.6% of new cars sold worldwide were EVs. The transition from ICE to EVs in the new car sales market is on an upward trajectory. These established car manufacturers must continue to service and innovate in the ICE segment while also striving to carve out a share in the growing EV market. Striking this balance can be a challenging task, especially when resources and attention are stretched in both directions.

American Tesla and Chinese BYD are exclusively dedicated to the Electric Vehicle (EV) market. Their primary goal is to secure the largest possible share of the EV market and enhance its appeal to consumers. They achieve this by refining their expertise in producing more affordable vehicles and establishing charging station infrastructure in pivotal markets to make the charging process more convenient for their customers.

The impact of emerging technologies extends beyond the realm of Electric Vehicle (EV) and Internal Combustion Engine (ICE) companies. It ripples through various industries that depend on the demand for these vehicles. EVs presently demand less maintenance, and when needed, it’s typically handled by electricians rather than traditional mechanics. They also rely more heavily on semiconductors due to their electric components, lithium for their batteries, and software for safety and autonomous driving. The shift from ICE to EV will create opportunities for businesses to thrive and capitalize on this trend.

As new technologies emerge, they provide opportunities for new ways of working, new products and services, or even cheaper ways to produce and deliver goods and services. This poses a challenge for incumbent businesses that need to pivot their businesses or face losing market share or even extinction.

These incumbent businesses must strike a delicate balance between tending to their current client base, as these clients typically contribute the most to the company’s cash flow. Simultaneously, they must innovate and leverage evolving technologies and consumer demands to safeguard against potential disruption from new market entrants. Despite their relative youth and small or no market share, new entrants hold an advantage over established companies; they can focus their resources and attention on the new product or service or a cheaper way to produce and deliver goods and services.

Disney has witnessed a decline in the value of their traditional linear TV assets recently due to the rise of streaming. Despite this, these assets continue to generate profits for Disney. Consumers now prefer on-demand content with flexible cancellation terms. In late 2019, Disney launched its streaming service to compete with streaming giants like Netflix and Amazon Prime. Initially relying on their extensive catalog, Disney soon realized that creating fresh content was essential to attract more subscribers and turn their streaming service profitable. Consequently, Disney has invested heavily in producing new content. However, some of their shows, like Marvel’s Secret Invasion, haven’t performed as well as anticipated, despite a substantial budget of around $200 million. This could be attributed to various factors, including consumers feeling the pinch of rising inflation or potentially experiencing fatigue from the constant influx of superhero movies and shows. Disney’s share price ended Friday at $81.25, roughly the same as what it was at the beginning of 2014.

The streaming revolution, pioneered by Netflix, has revolutionized numerous facets of the film and television industry. This encompasses changes in viewer habits, metrics for gauging show success, remuneration structures for industry professionals, and the financing models for shows.

Previously, a film’s triumph was gauged by its box office revenue, but now, success hinges on the inflow of new subscribers to a streaming platform. This can prove challenging to quantify, as subscribers may join for several different shows. Additionally, production expenses for films and TV shows have skyrocketed. The heightened demand for content from production companies has led to escalating costs. This has elevated the risk of platforms struggling to gain sufficient subscribers to offset these substantial expenses.

The streaming battle is fierce, and it’s far from over. Platforms are actively exploring strategies to carve out their unique niches and establish sustainable cash flows. Companies are not only vying against each other but also contending for consumers’ screen time, facing competition from giants like YouTube (owned by Alphabet) and gaming companies like Sony. Fortunes can shift swiftly if companies fail to produce content that resonates with viewers, as demonstrated by Disney’s recent experience.

Amazon is held in the Lunar BCI Worldwide Flexible Fund. It is also held by Lunar Capital’s offshore portfolio clients.