Weekly Reads - March 20, 2023
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Microsoft’s Activision acquisition is pivotal to the company breaking up the current app store duopoly giving the company a fighting chance to take market share in a tough industry.
The real reason behind the Activision acquisition has been revealed with Microsoft planning to launch a new app store for games on iPhones and Android as soon as next year if its $75 billion acquisition of Activision Blizzard is cleared by regulators. New rules are requiring Apple and Google to open up their mobile platforms to new app stores by 2024. Microsoft is taking advantage of this change by leveraging the popularity of Activision owned mobile apps (Candy Crush, Diablo Immortal, and Call of Duty Mobile) to attract users to its new app store. Even Xbox head Phil Spencer has agreed that the Activision acquisition was to help the company fill the hole they had in mobile gaming. For the last few months most headlines around the deal were about the console side of the business with a focus on keeping Call of Duty on all gaming platforms. Microsoft has promised to keep Call of Duty on all platforms and has made many concessions to keep this deal alive. It’s clear the real value behind the acquisition is centered on the mobile side with the additions of top mobile titles that could help a new app store gain traction much faster. With most mobile users conditioned to use one app store it will be difficult to change this habit even with more app stores being available to users. Having exclusive IP such as Candy Crush with millions of active users could be the catalyst to break these habits giving Microsoft a chance to create a competitive alternative to Apple and Google.
Drone technology is changing how wars are being fought which could have long-term ramifications on defense spending in the U.S.
The war in Ukraine brought a pivotal change on how wars are being fought with the introduction of drone warfare. Drones are now being used in the battlefield to not only assist ground troops but for targeted attacks on opposing armies. Military drones have existed for years, but now the battlefield is seeing the introduction of mass market drones which are being used for military operations. These mass market drones were not built for military use, but they are equipped with top level technology making them viable for battlefield use. One of these drones is the TB2 which is designed by a Turkish company and uses parts from U.S. and foreign companies like Trimble, Garmin, and Viasat. The TB2 only costs $5 million vs $28 million for U.S. made Reaper drone making it a much cheaper alternative for smaller countries. There are even cheaper drones being used by China, Russia, and Iran that can cost less than $20,000 that are considered hobbyist products. With drone military usage increasing and manufacturing cost decreasing there could be a dramatic change in defense spending coming in the upcoming decade. We could see defense spending reprioritized to focus on these cheaper highly effective tools instead of expensive missiles or other military projects. With defense budgets rising in the U.S. and around the globe drones could be seen as an effective way to reduce spending while maintaining military strength.
The largest restaurant brands continue to maintain their competitive moat with dominant consumer mind share allowing to them extract higher royalty rates and reinvest in new projects that reinforce consumer loyalty.
With new restaurant concepts starting up every year targeting younger demographics it is fair to wonder whether the competitive moats of legacy brands such as McDonalds and Starbucks remain sustainable moving forward. According to a independent brand valuation study run by consultancy Brand Finance, Starbucks and McDonalds remain the two most valuable restaurant brands ranking #1 and #2 respectively. These rankings were based on factors such as brand strength, market share, and royalty rates. Starbucks continues to be #1 ranked restaurant brand for six years straight with the study citing the company’s success in operating during COVID, focusing on menu items in emerging food trends, and plans to reinvest over $450 million into their existing U.S. stores. McDonald’s ranked #2 with the study citing a weaker value proposition due to price hikes on popular menu items. McDonald’s has always relied on low-price products so these price hikes may squeeze lower income consumers potentially acting as a headwind to growth. Unsurprisingly the rest of the top 10 restaurant brands were large restaurants brands like Domino’s, KFC, Subway, Burger King, and Tim Hortons. Despite headlines about changes in consumer food preferences and healthier eating the legacy restaurant brands continue to dominate both market share and mind share.