Big Tech Prepares to Emerge Stronger from the Pandemic

Huge profits. Mountains of cash. Hundreds of millions of users. Must-have products and services.

It’s no surprise that Alphabet, Amazon, Apple, Facebook and Microsoft can survive a pandemic. Tech stocks overall have roared to new highs in recent days. Netflix has scooped up millions of new subscribers. Zoom has surged to new heights. Many tech companies are flying high.

What may be a little more unexpected is how powerful tech giants will be in a post-pandemic world, and not just because competitors are weaker and promising startups go bust.

The COVID-19 outbreak has supercharged one area of IT that was already thriving: The cloud, a segment where sales soar some 30% year-over-year as businesses and governments buy remote computing horsepower and storage that they tap into via high-speed internet connections.

The sudden rush to work from home after the onset of the outbreak led to a surge of investment in digital tech. “We have seen two years’ worth of digital transformation in two months,” said Microsoft’s CEO Satya Nadella on a company earnings call last month, citing a sudden spike in users of its video meeting and collaboration software, Microsoft Teams, for schools, hospitals and other businesses. Over the longer term, Microsoft sees the current environment as a tailwind for its business.

The pandemic cemented the fact that cloud computing is not optional anymore. It is a fundamental cost of doing business, operating a government, or running a school. “The cloud is integral to business operations and service providers must maintain datacenter and network performance,” says Stephen Minton, a vice president at market research firm IDC who focuses on IT spending.

Keep in mind that the technology industry overall won’t escape the economic crisis. Global spending on information technology could fall this year by 10% or more as companies put tech projects on ice and consumer demand sinks for gadgets, such as smartphones. Even Microsoft and Apple aren’t immune to the global downturn. Business closures hurt demand for Microsoft’s work software, and the financial hardship of millions of consumers lowers demand for iPhones. Meanwhile, Facebook and Alphabet, reliant on advertising, will suffer as advertising budgets dry up.

But once the recovery gains steam, businesses that are hunkering down to conserve cash will dive headfirst into digital projects. That means upgrading ecommerce websites, plowing more money into digital marketing, and upgrading online collaboration software. It also means more businesses and governments will ditch their own datacenters for the ease and flexibility of the cloud, especially Amazon’s AWS cloud system.

The coronavirus has accelerated a digital shift that will be with us for years. “In general, I would say the highest-level opportunity is across everywhere,” said Sundar Pichai, Alphabet’s CEO, when asked about the pandemic at the company’s recent earnings call. “We see businesses thinking deeper about the shift to digital.” Apple’s CEO Tim Cook noted that lockdowns led many people to discover that they could work and learn remotely. “I think we have significant solutions and products for all of those groups,” he said.

Such comments are par for the course during an earnings call, of course. But they are jarring when other large companies underscore future worries and uncertainties of this unprecedented situation. What’s more, I think these tech CEOs might even be underselling how well-positioned they are for the future.

Plenty of other tech companies are selling shovels in a gold rush. Intel and Nvidia are seeing strong sales of computer chips that power datacenters. Wired and wireless carriers are seeing higher demand for faster and better internet service. More computing power and faster connections create more opportunities for digital startups to harness artificial intelligence, superfast 5G and other advances.

After the virus is vanquished, tech giants will seem insurmountable. Lawmakers in Washington will look harder at ways to rein in big tech for abuses of market power and misdeeds related to privacy. Some of those efforts could lead to strong regulations, but it will take years and won’t curb tech profits much.

However, the tech leaders of today aren’t set in stone. I still think there’s plenty of room for disruption. The history of technology is one of seemingly invincible companies being disrupted by upstarts. The old guard fails to react to a major technology shift or makes a disastrous bet. Sometimes the shift is sudden; other times it’s a slow decline. The key is studying the impact of powerful trends and paying close attention to emerging technologies that matter.

That’s not to say it will be easy to take on today’s behemoths. But the seeds of future hit digital products and services are being planted today as tech entrepreneurs survey a new world hammered by a once-in-a-generation pandemic. Right now, coders are working on better videoconferencing software, education tools and much more. There’s still space for the next big social media app or a new must-have piece of consumer hardware. Or even a better way to surf the internet.

Amazing breakthroughs are in the pipeline. That bodes well for America’s technology race with China. More importantly, it bodes well for a promising future.

I’ve greatly enjoyed sharing my analysis of technology for the past five years. We’re ending Kiplinger Alerts, but we’ll continue to write about these issues in our weekly Kiplinger Letter, which you’ll start receiving by e-mail at no charge in lieu of Alerts, each Friday afternoon. (If you’re already a Letter subscriber, you’ll receive a complimentary extension of your subscription.)

Thanks for reading and please feel free to e-mail me about any tech-related topics in the future.

Final Thoughts on a Wild Ride for Oil

It seems that, in the oil market, low prices really do cure low prices. A few weeks ago, when the price of benchmark West Texas Intermediate had climbed from $10 to nearly $20 per barrel, I tentatively predicted that “we may have seen the worst for oil.” Flash forward to today, and WTI is trading at about $34, nearly triple its low point earlier this spring (setting aside the bizarre day when one monthly WTI contract actually closed below $0).

The global coronavirus pandemic hasn’t run its course, and the economic damage it has sparked still has further to go. But there are some basic factors lining up in oil’s favor. U.S. consumption, which cratered in March and April when state governments issued unprecedented stay-at-home orders, has staged a partial recovery. Daily demand, which typically comes in around 21 million barrels, fell to less than 15 million barrels, but has since clawed back to about 16.5 million. As more states relax their public health orders and consumers venture out on the roads, we can expect demand to grind higher (unless a new wave of infections forces the economy to shut down again). Meanwhile, production around the world is dropping. In the U.S., daily output has fallen from a record of 13 million barrels before the crisis to about 11.5 million now. The number of rigs drilling new wells is at a record low. OPEC members, Russia and other producers are taking the difficult steps necessary to curb exports while they wait for demand to come back.

There has been plenty of pain for the industry, even as prices have shot higher. Energy stocks have substantially underperformed the broad market this year. Many companies have had to cut or end their dividends, a further blow to shareholders. The shale industry faces a wave of debt repayments in the coming years after borrowing heavily to drill thousands of wells in places like Texas’s Permian Basin. Oil at $34 per barrel isn’t going to solve any of those problems. (Was it really just 2014 when WTI traded for about $100?)

So where do we go from here? I’ll stick my neck out one more time and guess that despite plenty of short-term ups and downs, oil prices will keep climbing this year, again, barring the dreaded “second wave” of coronavirus infections. Much of the industry is unprofitable at today’s prices. The economy won’t be weak forever. Workers will start heading back to their jobs. Travelers will (eventually) get on airplanes again.

So consumers should expect gasoline prices to keep creeping higher. After bottoming out in late April, the nationwide average price is up about 15 cents. Some states are seeing far steeper rises. (In Wisconsin, the state average fell to about $1.20 per gallon in late April. Today, it’s up to $1.86.) Most folks hitting the road for Memorial Day can expect wallet-friendly fill-ups, but later this summer may be a different story.

The longer run is harder to predict. As we bring Kiplinger Alerts to an end this week, I’ll leave you with a few thoughts about the future of the oil industry.

First, how much has the pandemic changed the way people work and live? I doubt we’re on the cusp of a future where everyone works from home; indeed, most jobs can’t be done remotely. But it seems likely that a sizable number of people who were forced to stay home this spring are going to decide they like working from home, at least part-time. Telecommuting was already on the rise, and this societal work-from-home experiment is demonstrating that millions more people can do it. Employers probably won’t object to the potential rent savings that come with a smaller office. So, I expect a lasting hit to demand from folks who end up working remotely a day or two per week.

Second, how quickly does the electric future arrive? Electric vehicles are still a niche segment, but they’re a growing niche. As I wrote recently, we’re about to see a bevy of electric pickup trucks and SUVs hit the market, partly driven by government mandates and partly driven by falling battery prices, which make EVs more cost-competitive. I believe there’s still a lot of life left in the internal combustion engine, but I also believe EVs will be fairly commonplace before long. How many consumers ultimately decide they prefer plugging in their car overnight instead of stopping at a gas station will go a long way to determining whether global oil demand can continue its decades-long rise. This is a question that must keep oil company executives awake at night.

Third, will the oil industry still be able to raise the capital it needs to keep production up? Fracking is an expensive process, and many investors have gotten burned financing it over the past decade. Especially after seeing oil prices plummet to multidecade lows this spring, are Wall Street banks or private equity outfits going to keep lending to oil producers, or buying their shares? Are the small retail investors? For years, they bought shares in big oil companies largely in order to collect the juicy dividends paid out by those firms. But with dividends under pressure, and many companies cutting them to save cash, will oil stocks hold the same appeal? Then again, perhaps the industry can find new ways to slash its production costs and return its balance sheets to good health.

Whatever happens, it’s safe to say that the 2020s will be a pivotal decade for an industry that shaped the 20th Century but is under major pressure in the 21st Century. I’ve certainly enjoyed tackling some of these topics over the past five years, along with the many thought-provoking questions and comments I’ve gotten from readers during that time. Though we’re closing the book on Kiplinger Alerts, I hope you’ll keep in touch and drop me an e-mail about all things energy-related. And we’ll continue to write about these issues in our weekly Kiplinger Letter, which you’ll start receiving by e-mail at no charge in lieu of Alerts, each Friday afternoon. (If you’re already a Letter subscriber, you’ll receive a complimentary extension of your subscription.)

Thanks for reading. It’s been a pleasure.

Green Shoots for the Oil Market

Energy companies are reeling from the historic oil price rout. The Wall Street Journal reports that Exxon Mobil just notched its first quarterly loss in three decades. Venerable Anglo-Dutch producer Royal Dutch Shell just cut its dividend for the first time since 1945. Other dividends paid by the industry are being slashed or frozen, too.

The financial pain isn’t surprising, given that benchmark U.S. crude oil fell from more than $60 per barrel in January to $10 recently (and, very briefly, in a strange quirk of futures markets, below $0). Worldwide energy demand is way down as the coronavirus pandemic curtails travel and trade. Consumers sheltering at home aren’t buying much gas for their cars, and shipping companies don’t need much diesel when there’s scant demand for most of the products they normally transport.

Barring a miracle cure, the economic damage is likely to continue. But if you look closely, you can see signs that the worst of the hit to the oil market may be over.

Gasoline consumption in the U.S., the world’s largest oil market, remains anemic. But data from the Department of Energy show that gas sales have ticked slightly higher for two consecutive weeks now after bottoming out in mid-April. Retail gas prices, which had been dropping steadily every day for weeks on end, actually rose by a penny from yesterday to today, according to AAA. At $1.78 per gallon for regular unleaded, the national average price is still quite cheap. But we may be near the bottom for both fuel demand and prices.

Crude oil prices have responded accordingly. After trading at $10 last week, West Texas Intermediate has rallied to nearly $20. There’s no guarantee prices won’t sink yet again, especially if energy producers run out of storage for their surplus production while demand is so weak. But here, too, there are glimmers of hope for the industry. OPEC’s production cuts are scheduled to take effect starting today. Energy firms in the U.S. continue to shut down drilling rigs, which means there will be fewer new wells coming online in the next several weeks. Other companies are capping existing wells, figuring it’s better to keep the oil in the ground than to sell it at a loss.

Expect extreme volatility in oil prices to continue, given the unprecedented damage to the global economy that the coronavirus is causing. But if commerce and travel can slowly start to emerge from spring hibernation, and if producers keep closing the oil taps, we may have seen the worst for oil.

Negative Prices Come to the Oil Market

Well, now I’ve seen everything. I warned not long ago that the oil market was in for more pain. But I wasn’t expecting to see oil prices actually turn negative, which they did on Monday.

Granted, it was only the May futures contract for West Texas Intermediate that managed to trade below $0. WTI futures for delivery in later months managed to stay in positive territory. As did Brent, the crude benchmark most cited outside of the U.S.

Still, sellers paying borrowers to take their oil is not something we’re supposed to see. After all, it costs money to pump oil out of the ground. And it’s hard to think of a commodity more critical to our modern, industrial society.

But there it was: -$40.32 per barrel at one point in Monday trading. What the heck happened, and what comes next for oil?

Basically, traders drove WTI into negative territory out of fear that there would be no place to store oil scheduled for May delivery in Cushing, Okla., where the contract is physically settled. The coronavirus pandemic has slashed global oil demand by somewhere around 30%, but production remains near its normal level. All that surplus crude needs somewhere to go, and the world’s storage tanks and oceangoing oil tankers are filling up fast. Paying to avoid having to take delivery of unwanted oil briefly made financial sense in some cases.

Normality has since returned to the market, with June WTI futures trading near $17 per barrel: Still cheap, but at least above $0. (It’s hard to believe that, as recently as January, WTI was at $63. The current price is lower than what was seen at any time during the Great Recession of 2008-09.)

Can prices go lower still? I think so.

Think of the current oil market as a race between producers trying to curb output, and the remaining oil storage facilities, which are getting close to full. Can producers cut fast enough to avoid having literally no place for surplus crude to go?

OPEC and its allies have agreed to cut their combined exports by nearly 10 million barrels of oil per day starting in May. In normal times, that would be a massive decrease. But world oil demand, normally close to 100 million barrels per day, is probably closer to 70 million now because of the hit to global travel and economic activity. So even OPEC’s cuts leave plenty of extra oil. Meanwhile, U.S. output has started to fall, but so far, only by a small amount. Bigger cuts somewhere, by someone, are needed to keep crude stockpiles from growing further and potentially spilling over.

Oil demand should start to recover once the worst of the public health crisis is past. But how soon will that be? Soon enough to start soaking up all those extra barrels of oil? And even as energy companies shut down drilling rigs or cap existing wells, can supply fall fast enough to match anemic demand?

It’s an open question. But the fact that it even has to be asked means that oil markets will stay extremely volatile. If production continues to vastly exceed demand for another couple of weeks, the glut will get considerably worse. And traders will find themselves in the same position they were in this week: Nervous about owning the rights to a commodity they can’t sell or store. Prices may not go negative again, but don’t be surprised if they flirt with $10 per barrel before the worst is over.

Perversely, weak demand and low prices today could lead to a price spike at some point later, when world oil demand recovers. Capped wells can be difficult to restart. New wells that would have been drilled and meeting future oil demand aren’t getting drilled now. OPEC may be reluctant to quickly resume normal exports as prices rise.

Basically, the only constant you can count on in this oil market is rapid change.

Cable TV Struggling in a World Without Sports

The coronavirus crisis is accelerating the already gradual demise of the cable industry.

A lack of live sports is fueling the industry’s nosedive. Sports programming is one of the top reasons Americans subscribe to cable. But with professional and college sports indefinitely sidelined, customers are reevaluating the value of their cable subscriptions. Continue reading “Cable TV Struggling in a World Without Sports”

Can OPEC, Russia Deliver?

All eyes in the oil market are on OPEC and Russia as we wait to see whether they can agree on huge production cuts in response to plummeting global oil demand. The outcome of that meeting, and whether the concerned parties actually stick to their production quotas, will determine whether oil prices keep rallying or sink back toward their recent lows.

As a quick refresher of just how deep a bear market crude oil has fallen into: West Texas Intermediate traded as high as $63 per barrel in January and then dropped all the way to $20 in late March. That was the cheapest WTI had been in about 18 years. But crude has since rallied to about $24 on hopes that the world’s major oil exporters will slash their output.

One thing is for sure: Oil prices can’t rise without enormous production cuts, because global energy demand has fallen off a cliff since the coronavirus pandemic hampered travel around the world. In its latest weekly report, the Department of Energy reported that the U.S. consumed only about half as much gasoline as it normally does. Ditto for jet fuel. (Diesel consumption remained strong: A reassuring sign that food and other critical freight is still being shipped around the country by truck and train.)

The global economy consumes roughly 100 million barrels of oil each day. Or it did, before COVID-19 struck. Now, estimates of global demand are dropping fast. OPEC’s secretary-general said that “the supply and demand fundamentals are horrifying.”

Reports from the ongoing negotiations indicate that OPEC, Russia and other oil exporters are closing in on hefty cuts, totaling millions of barrels per day. Agreeing to such a drastic cut and then actually sticking to it will be a challenge for countries whose budgets depend heavily – in some cases, almost exclusively – on pumping and selling oil. If they can do it, don’t be surprised if WTI continues its recent rally. But don’t expect prices to return to “normal” anytime soon. The gaping hole in global demand is just too big for that.

And if OPEC and its allies fail to deliver on agreed cuts, look out below. The world is running out of places to store excess crude during a time of extremely weak demand. If the flood of excess production continues, you’ll soon hear talk about oil prices in single digits.

What Businesses Need to Know About Emergency Loan Options

Small-business owners will be able to get loans under the stimulus bill this week. President Trump signed on March 27 the Coronavirus Aid, Relief, and Economic Security Act. The legislation provides a stimulus package worth approximately $2 trillion. The CARES Act expanded certain loan programs administered by the Small Business Admin. It also created a new SBA program to help small-business owners affected by the coronavirus outbreak. The loan programs all have different purposes so small businesses will have to compare what option works best for them.

The bill established a new $349 billion program to help smalls keep their workforce on the payroll. The Paycheck Protection Program will provide capital to small businesses without collateral requirements, personal guarantees or SBA fees. All loan payments will be deferred for six months but will accrue interest during this period. The SBA will forgive the portion of the loan that is used to cover the first eight weeks of payroll costs, rent, utilities and mortgage interest. Businesses must keep their workforce largely intact during that period to qualify for loan forgiveness. No more than 25% of the forgiven amount can be used for non-payroll costs. Loans can be for an amount 2.5 times the borrower’s average monthly payroll costs for a maximum of $10 million. The interest rate will be fixed at 1% (You can find more information about the program here. The loan application form for borrowers can be found here).

Many small businesses will likely qualify for Payroll Protection loans. Businesses and other employers must have been in operation on February 15, 2020, to qualify. Small businesses, nonprofits, self-employed individuals and veterans organizations with 500 or fewer workers can apply for the loans under the new program.  Some businesses with fewer than 1,500 employees in certain industries may qualify, too (click here to see more information about the SBA’s size standards). Businesses that have pending or existing SBA disaster assistance loans can still receive funding through the Paycheck Protection Program as long as the loans aren’t used for the same thing. A single business can only apply for one loan under the program, but owners with multiple business entities can apply for each of them separately. Small business owners can begin applying for PP loans on April 3. Independent contractors and people who are self-employed can begin applying on April 10.

Some lenders will have to become certified by the SBA before they can participate in the PP program. Because the anticipated response is greater than anything ever experienced by the SBA, the agency will allow lenders that don’t currently participate in any of its loan programs to process and service these loans. Federally insured banks, credit unions, farm banks and a broad range of nonbanks can participate in the Paycheck Protection Program, but they must be certified by the SBA first. The loans will come with a 100% guarantee from the SBA. The agency will speed up the certification process. Lenders have the authority to approve loans on the spot so folks can get their money on the same day. Lenders will be compensated by processing fees paid by Uncle Sam. (You will likely have to open an account at the bank where you applied for the loan if you don’t already have an account there.)

For businesses that need a quick infusion of capital to cover expenses right now, a disaster loan and an emergency grant could help. The CARES Act broadened the existing Economic Injury Disaster Loans program maintained by the SBA. The CARES Act significantly expanded the disaster loan eligibility and can provide emergency cash advances that may qualify for forgiveness if used for paid leave, payroll maintenance, meeting higher supply chain costs and other qualified expenses. Those applying for a disaster loan can also receive a cash grant of up to $10,000 within three days of applying for the loan. There are restrictions on businesses that receive the loans. Small businesses must apply for the loans directly with the SBA. See  https://disasterloan.sba.gov/ela/

For those needing help to keep up with payments on your current SBA loan, the agency’s Small Business Debt Relief program could help. The program provides immediate relief to small businesses with non-disaster SBA loans, such as the SBA’s 7(a) and 504 loans, and microloans. Under the program, the SBA will cover all loan payments on existing loans, including principal, interest and fees, for six months.

How a Pandemic Will Change the Tech Industry

Though it’s still early days for the coronavirus crisis, it’s already clear that the outbreak will spark major changes in the technology industry. Here are a collection of some significant tech shifts that bear watching.

DIGITIZATION

Even more of daily life will take place online as businesses and consumers increasingly adopt online banking, video conferencing, remote education, video calls, ecommerce and more. Folks who have avoided online services will shed their skepticism as the virus underscores how crucial the web is during disruptions of in-person interactions. Many of the last internet holdouts will cave and get service. And those who are already digitally savvy will double down on their online habits.

Consumers will upgrade internet speeds and even consider backup plans, such as a Wi-Fi hotspot from a cellular carrier. Many people working from home with children in the house are experiencing bogged-down speeds. The answer will be a faster plan and new wireless equipment from internet providers such as Comcast, Verizon, AT&T and Charter. Continue reading “How a Pandemic Will Change the Tech Industry”

Congress Hard at Work Amid Coronavirus Shutdowns

It is eerily quiet today on Capitol Hill. With each passing day there are fewer and fewer reporters and staffers present. Press galleries that typically are overflowing with reporters by 10 am are almost vacant. I’d say only 5% to 10% of the normal number of reporters are here.

Senate Republicans and the administration are busy crafting the “phase three” coronavirus bill. While phases one and two focused primarily (though not exclusively) on health care matters, the third bill will focus on economic stimulus. What that will look like is tough to say. Senate Republicans are taking the lead on this one, as opposed to phase two, which House Dems and Treasury Secretary Steve Mnuchin crafted. Senate Majority Leader Mitch McConnell (R-KY) has shut out Democrats during this process, saying that is the most efficient way to get a bill done. That may end up biting him later, as Senate Minority Leader Chuck Schumer (D-NY) definitely has some ideas on what he wants included. Continue reading “Congress Hard at Work Amid Coronavirus Shutdowns”

Internet Networks Are Being Tested By a Surge of Traffic

A massive work-from-home experiment is now underway because of the threat of the coronavirus.

“Traffic towards video conferencing, streaming services and news, e-commerce websites has surged,” says Louis Poinsignon of Cloudflare, a San Francisco-based web infrastructure company, in a March 17 blog post. “We’ve seen growth in traffic from residential broadband networks, and a slowing of traffic from businesses and universities.”

That includes my new work-from-home routine, which is like that of many other Americans. Yesterday I joined a video conference, made an internet phone call, watched online video, surfed the web and sent scores of emails and other messages. My wife also used our network to do an array of similar tasks.

Travel bans, restrictions on public gatherings, business closures and quarantines are keeping more and more people at their homes 24/7. That means more video streaming, gaming and social media posting during all hours of the day. After Italy’s lockdown, the country saw its daily traffic soar 20% to 40%, according to Cloudflare.

The prolonged surge of web traffic around the clock is perhaps unprecedented for home broadband networks, which usually see traffic spike during evening hours when folks get home from work and scroll through Instagram or stream Netflix.

Internet providers are assuring customers that their networks can handle the higher-than-usual demands. Verizon recently said in a statement that they “stand ready for increases in data traffic” and highlighted an increase in network investment this year. T-Mobile got special approval from the Federal Communications Commission to tap additional airwaves to boost wireless capacity, though that bandwidth only works on newer smartphones. Other providers have issued similar notes of confidence.

Wireless and wired networks should be fine under the new traffic demands, says Roger Entner, the founder and lead analyst of Recon Analytics. “The networks are designed around busy hours at night” or whenever people are watching Netflix, Entner says. During the day, that capacity is still there. “Video is really the driver for data consumption” and video services can be downgraded in quality if there’s congestion. Plus, a lot of at-home office work doesn’t require streaming HD or 4K video.

The challenge could come with videoconferencing software or other online tools, says Entner. “The bottleneck comes together on Zoom or WebEx.” The root cause is not the internet providers themselves, but rather how the different online tools have set up their content delivery systems. But even then, it might only mean a video meeting sees downgraded video quality. Or perhaps workers have to switch to audio, which uses a sliver of the bandwidth that HD video does.

Expect some major online tools to roll out small changes to keep services running smoothly. Microsoft 365, the online suite of tools that includes email, spreadsheets and video meetings, told users it may change video resolution; the frequency with which it checks that a user is there; and how quickly it shows another party is typing a message. The update is to “accommodate new growth and demand during unprecedented times.” That minimizes some background data usage that Microsoft doesn’t absolutely need, says Entner.

The critical importance of consumer internet and cellular service at this time puts a magnifying glass on any hiccups in service. Expect regulators and lawmakers to watch service reliability and resilience closely. Telemedicine and 911 are especially critical.

“The Internet was built to cope with an ever changing environment,” Cloudflare’s Poinsignon notes. “In fact, it was literally created, tested, debugged and designed to deal with changing load patterns.”

To monitor your internet speeds, visit Speedtest.net or Fast.com. You’ll find out your download and upload speeds, plus the latency.