Clifford Chance

In the midst of increased robotic dexterity and the race to make lab-grown steak, in 2019 the TMT industry has seen the emergence of new trends, which have given rise to fresh opportunities and have reshaped the way TMT deals are structured. From 5G technologies to data analytics applications in eSports, below are 5 key trends we've identified this year.

Increased demand for digital infrastructure and data processing

Over the past year we have seen an increased appetite for investment in digital and data processing infrastructure, driven by a rise in demand for data analytics, cloud based computing, artificial intelligence (AI) and the internet of things. In past years we experienced a shift from physical data storage to cloud-based storage solutions, and witnessed a greater appetite for investment in cloud services that integrate AI - with Clifford Chance advising on deals such as Permira's acquisition of Cisco's SPVSS business and Carrefour's strategic cooperation with Google in developing new distribution models and user purchase experiences for French customers.

By contrast, in 2019, we are seeing a greater focus on extracting valuable data from these processes and integrating and applying that data through the use of cloud-based AI and data analytics. Following recent developments in data privacy laws and the increased availability of big data, cleansing data for accuracy and relevance, and implementing governance controls over access to data sets, has become a matter of priority.

Following on from this push for data processing capabilities and efficiencies, we expect that the coming year will bring new opportunities for clients to invest in technologies such as 5G and edge computing. These technologies will likely increase widespread automation and reduce response times even at low-bandwidths.

However, this is not to say that a slow down in the development of cloud computing should be expected. On the contrary - the high energy and data intensive nature of these developments will likely call for continued investment in cloud capabilities and infrastructure, to support the energy and space requirements of new technologies. We are already seeing examples of this, with Alibaba Cloud's investment in two additional data centres in the UK, as the demand for 5G technologies rises in the region.

Convergence of the media sector

Digital distribution channels of media on demand, such as Netflix and Spotify, have been transforming the media sector and leading to historic consolidations in the media industry such as Disney's integration with Fox and AT&T's integration with Time Warner. Disruptive technologies such as these are increasing data consumption and intensifying competition for tech giants such as Amazon and Apple. This has resulted in significant investments and strategic partnerships between traditional broadcasters, in an effort to diversify their product base. ITV and the BBC have announced the launch of a subscription streaming service – BritBox - to offset declining TV consumption and lower advertising revenues. ITV's net investment in this streaming service is anticipated to be £25m this year and £40m next year.

The expectation is that the increased data traffic on the network, which will result from the implementation of such new technologies, will require significant investments to increase storage capacity and network efficiencies - making cloud based computing and 5G capabilities key components in the future development of these technologies.

Digital media channels such as Netflix are not only disrupting media institutions, but are also reshaping TV production financing models. Netflix is signing increasingly longer term deals and staggering payments over a longer term; which has required (i) producers to take out longer term loans to finance their shows, and (ii) financial institutions to become exposed to increased risks.

5G Technologies

The growth in consumer demand for data has been exponential and, with this, there are increased expectations for instant responsiveness and increased connectivity. This has resulted in a surge in investments surrounding 5G technologies, not only to support the traffic capacities and network efficiencies that would benefit everyday users, but also to support the evolution of emerging technologies such as machine-to-machine communication and the internet of things.

The applications of such technologies range from autonomous cars to virtual reality applications in healthcare. However, despite a strong push for developing 5G technologies in Europe, 5G deployments are expected to occur at a slower pace in Europe than in other markets. This will likely allow for a more manageable investment period and fewer leverage concerns for European tech players in the medium-short term.

The capital expenditure that is required for developing 5G technologies is high, partly due to network density requirements. Through the Horizon 2020 Programme, the European Commission has already earmarked EUR 700 million worth of public funding for this activity, and expects the industry in Europe alone to invest more than EUR 3 billion in such projects.

Given the increased levels of investment that are required for the deployment of 5G technologies, new financial models are emerging and are being explored by large telecoms players who are at the forefront of 5G technology developments. In the run to establish themselves in the space of 5G technology, these businesses are experimenting with both new and established solutions to progress their 5G capabilities. These include:   

• Forming strategic alliances and consolidations – such as Ericsson and Swisscom, who have switched on the first large-scale commercial 5G network as strategic partners in Europe;
• Continued investments in network upgrades – by way of example, BT is expected to increase the number of its fibre lines to bring its full-fibre target to 15m homes;
• Divestment of non-core assets to free up capital for investments – such as Vodafone's sale of its cable broadband network to Telefonica Deutschland; and
• Investment by infrastructure funds – the expectation is that infrastructure funds will increasingly bid for vertically integrated operators, but also for individual asset types. Such investments will enable them to act as aggregators.

Online gaming ("eSports")

In recent years, there has been exponential growth in the eSports industry. In the month of August 2018 alone, Epic Games hosted 78.3 million players of the game "Fortnite", with 28.5 million hours of the online game being watched by viewers on streaming platform "Twitch". As TV viewership declines, traditional broadcasters are becoming more inclined to partner with gaming platforms in an effort to offer eSporting events as part of their programming.

In 2018, Disney, ESPN and ABC invested in a multi-year licence to broadcast Overwatch, a popular online game with approximately 40 million players. However, the potential of eSports is not limited to online viewership – in 2014, forty-thousand people watched the world championship of the game "League of Legends" at a venue in South Korea. This attracted investments and sponsorships from traditional sports stakeholders in merchandise, ticketing and venue rental, as well as agent services to support participants.

Similarly, during the 2018 "Overwatch" League, VIP passes gave users various live-streaming benefits - including access to the "Overwatch League Command Center", a second screen with alternative views of the game, backstage camera views, cameras following the player's point of view, and more detailed analytics. Giving viewers the ability to directly engage with the participants through social media platforms, and to have an immersive live experience during each game, limits the scope for traditional broadcasters to penetrate this market and further entrenches the position of digital media service providers.

In parallel to this, the data analytics potential of online gaming could have wide-ranging consequences across several industries – not least of all, advertising. Gaming platforms are now better able to understand both players and viewers, to accurately track gaming and spending patterns and, consequently, to allow industry players to adjust advertising rates and needs. We already started seeing indications of this in 2018, when SAP partnered with Team Liquid, a successful eSports team, to enhance the team's gaming by using competition analytics.

Going forward, data analytics will not only promote enhanced, customised user experiences, it also has the potential to deliver insights into the future of online gaming. Over the course of 2019, increased investments in eSports supporting services and a surge in alliances between data services providers and online gaming platforms are to be expected.

US-China Tech War: Increased investment by Chinese TMT players in Europe

As China withdraws from the US market, increased investment by Chinese entities in Europe has the potential of kickstarting the European tech industry and encouraging surges in strategic alliances and M&A activity in the region. Last year, in addition to Alibaba Cloud's investment in European data centres, Huawei announced a five-year commitment to spend 3 billion pounds in Britain – this has made Europe Huawei's biggest market outside of China.

In much the same vein, earlier this year, Tencent's WeChat Pay and BHV Marais announced a collaboration to assist European businesses in engaging with Chinese tourists. The impact of this could be significant, considering that an estimated 2.3 million Chinese tourists visited France in 2018 and that WeChat Pay already has 800 million monthly active users. Such investments indicate an increased commitment by Chinese players to Europe, which has the potential of generating substantial support for technological advancements in the region.