CIBC Tech & Innovation Market Update – December 2023

In the long-standing debate over which music streaming app is superior, Google appears to have chosen its favourite. Testimony in the Epic vs. Google trial revealed that Spotify secured a sweetheart deal with Google for in-app purchases, paying 0% in commission when users elect to use Spotify’s payment system, and just 4% if users choose Google Play Billing. That’s a steep discount compared to the 15% fee Google charges other apps under its User Choice Billing program. During the trial, Google’s head of partnerships claimed the reasoning for the deal was due to Spotify’s unprecedented popularity, stating “if we don’t have Spotify working properly, people will not buy Android phones.” The debate around in-app payments continues in the Epic trial.

Sam Altman, CEO and co-founder of OpenAI, was abruptly fired in late November. Following the board’s removal of Mr. Altman as OpenAI’s CEO, we’ve seen him get hired by Microsoft as head of the company’s new AI team and 700 OpenAI employees threaten to resign from OpenAI to join Microsoft unless Mr. Altman is reinstated (and the board resigns), and within a week, Mr. Altman had returned as OpenAI’s CEO with a new initial board. The updates over the dismissal had placed a spotlight on the ongoing debate about how commercial competition is shaping the development of AI technology, and provided a chance to revisit the discussion about how AI can be deployed ethically and safely.

Recent research from Gartner suggested that worldwide end-user public cloud spending is forecast to grow 20.4% Y/Y in 2024, totalling $678.8 billion. Given the scale generative AI requires, companies looking to add GenAI services will likely look to the public cloud to support these services, driving the growth. However, data is beginning to reveal that the interest in AI is significantly higher than the current rate of adoption. Over the course of 2023, we’ve seen the AI frenzy place pressure on tech companies as well as non-tech companies to show results from AI and GenAI solutions, driving higher investment in cloud infrastructure. However, it may be years before we see true profits from GenAI, as its unknown ROI is a key barrier to adoption, especially amid a weaker macro economy.

President Biden signed the US’s first AI Executive Order (E.O.), designed to place safeguards around the use and development of AI. The E.O. covers eight key priorities, including safety and security, consumer protection and privacy, equity and civil rights, as well as innovation and competition. The E.O. is the broadest attempt to date by the Biden Administration to regulate AI while also attempting to solidify the US as a leader in AI innovation. Despite the extensive list of actions, Congress will still need to act on many of them, and almost every federal department or agency has a role in carrying out one or more of the E.O.’s eight priorities. With some actions items expected to be completed in under one year, the ways in which the E.O. will shape the AI landscape in the US will become evident in the near future.

Q3 results from the US software companies we track have been solid, with 85% of software names we track beating revenue and EPS estimates. However, share price reactions varied based on company-specific factors, with Google shares down ~9.5% despite a Q3 revenue and EPS beat as investors focused on weaker-than-expected cloud growth. This quarter, revenue increased 13% Y/Y on average for the companies we track while EBITDA increased 38% Y/Y on average, driven by cost-cutting initiatives. Despite the solid Q3, the Street revised its F2023 revenue and EBITDA estimates downwards by an average of 9% and 13%, respectively, after some Q4 guides came in below expectations.

Prominent Toronto-based tech company Q4 agreed to a buyout late November by Silicon Valley-based Sumeru Equity Partners for $257 million. Q4 joins a growing number of Canadian tech companies that listed IPOs during the pandemic and subsequently accepted buyouts which includes MindBeacon Holdings Inc., Dialogue Health Technologies and BBTV Holdings Inc.

Within five days after Open AI CEO Sam Altman was ousted by its board for not being “consistently candid in his communications with the board”, he had been offered a job by Microsoft to run a new AI research lab, 90% of OpenAI’s employees signed a petition for his reinstatement as CEO, new board members were assigned and he was finally reinstated as CEO. The celebration that followed Tuesday featured chicken fingers, champagne, and boba tea – a nod to the delivery orders that occurred during tense company talks on Sunday.

Mike Wessinger is the newly appointed co-Chair of PointClickCare, one of Canada’s largest private software companies. He provides his thoughts on the challenges within the Canadian tech sector and the nation’s current funding environment. While there are challenges, Wessinger points to Canada’s incredible talent pool and liberal immigration policies that positions Canada strongly in tech markets.

With the proliferation of remote work, people have a greater choice of where they work as opposed to being limited by the distance of their daily commute. Areas surrounding major business hubs such as Toronto, New York and London are seeing influxes of population growth. This trend will influence companies location strategies moving forward.