I’m often asked how we invest in our MANTRA themes. The themes of rising mass affluence, new technology, economic and corporate restructuring, and aging populations are always present in our portfolio because they are always shaping the world economy and creating growth streams within it. We try to find these trends as they emerge. One important growth stream in the new technology theme is something we call the Data Deluge.
We didn’t invent the term. I took it from The Economist, which used it in a cover story to describe the dramatic rise in the amount of data being generated, transmitted, downloaded and stored around the world.
According to Cisco, a technology networking company, the annual global internet traffic of information alone will surpass a zettabyte of data—the equivalent in storage of 250 billion DVDs—by 2016, and is projected to grow at a compound average growth rate of 23% from 2014 to 2019.1
Six years ago, when I read the Economist article, we had already owned some of the companies that were benefitting from the Data Deluge and we have been investing in that growth stream ever since. We have identified bottlenecks in the data transmission and usage chain and found companies active in those areas. One such company is BT Group, which supplies fixed line, mobile telecommunication and internet access services in the United Kingdom. Our thesis was that its revenues and profits would rise on the back of the growing volume of data transmitted over its network. Further, we believed BT would be able to increase prices on that higher volume.
In our opinion, the Office of Communications, the U.K. telecommunications regulator, would allow BT to increase prices and earn a higher return so it could make the necessary capital investment to expand its network, given that increased capacity was necessary to handle the rapidly rising amount of data. Our theses proved to be correct, and BT Group has been – and continues to be – a good investment for us.
Japan’s Leading Internet Provider
We recently invested in another company, Nippon Telegraph and Telephone Corp in Japan, that we think could benefit from the same trends. NTT is the leading provider of voice and internet services in Japan.
However, it offers these services through separate subsidiaries and divisions, with the result that customers have had to buy them piecemeal. NTT is now changing its strategy and plans to offer bundled fixed and mobile voice and data, internet connectivity, and cable entertainment. While 95% of Japan’s 52 million households have access to broadband internet, only 50% subscribe to it.
NTT has 72%, the lion’s share, of those subscribers, but it would like to see that market grow. To encourage that, NTT will begin selling wholesale fiber access to downstream operators who will focus on customer acquisition and servicing. This move is aimed at helping the company to accomplish several big objectives, including signing up 1.55 million fiber-optic service subscribers, cutting costs, and using those savings to spend on cash rewards and other incentives for customers.
One final aspect of interest for us is NTT’s international business: it is the largest data center owner in the world. The fees NTT earns for “cloud”-related services are becoming a significant portion of its earnings.
Evaluating the Risks
There are risks to our thesis, and this may not turn out to be a good investment. NTT may execute its strategy poorly. Regulators in Japan may decide to control the wholesale price that NTT can charge for access to its broadband network. NTT’s main competitor, KDDI, has a broadband network and is planning to open it to the wholesale market as well.
If that happens, the two firms could also enter an irrational price war. There are always risks, and it’s our job to assess them. In our opinion, these risks are reflected in NTT’s current share price, while the probability of its success is not, and we are confident the outlook for success is good. As the world economy restructures, successful companies restructure themselves in response. We have found several that are adapting successfully to the Data Deluge and profiting from it. NTT may be one of those but, if not, we are confident we can find others.
1 The source of this information is a publication by Cisco titled “The Zettabyte Era: Trends and Analysis,” from May 2015. Projections may not be achieved.
The mention of specific companies does not constitute a recommendation by any particular fund or by OppenheimerFunds, Inc.
These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the open of business on the publication date, and are subject to change based on subsequent developments.