CONTRIBUTORS
Mahesh Ramakrishnan
Escape Velocity
Christopher Jensen
Head of Research,
Franklin Templeton Digital Assets
Professor Jorge Tamayo
Harvard Business School
Preview
The story of David vs. Goliath resonates deeply, epitomizing a recurring motif in human history: the unexpected triumph of smaller, innovative forces over formidable giants. This narrative is strikingly relevant in the history of corporate strategy, where the winds of creative economic disruption have consistently overturned established regimes and reshaped the competitive terrain.
In cloud services, we are potentially witnessing the emergence of another pivotal confrontation.
The cloud services industry boasts a small number of extremely powerful scale economies, as Telecom Giants (AT&T, T-Mobile) and Web2 incumbents (Amazon, Microsoft) have created infrastructure monopolies, taking advantage of a historically low cost of capital and robust government subsidies. These oligopolies can use their infrastructure advantages to king-make companies in areas of emerging technology, the strength of which was exemplified by Microsoft’s investment in OpenAI, a generational technological asset. In a break from traditional investments and mergers, OpenAI accepted $10 billion of compute credits and infrastructure support from Microsoft in return for 49% of the company, an unprecedented deal both in terms of size and structure.1
How does one even begin to compete?
Network economies offer a potential solution, as they derive a strategic advantage from decentralized collaboration as opposed to centralized scale. Crypto-powered infrastructure is exemplified by projects such as Filecoin that can generate the necessary network effects to credibly compete with incumbents by turning people and small businesses into infrastructure suppliers.
Should Filecoin’s model scale to provide useful storage coverage, it may represent a capitalist example of how returning the means of production to workers can create massive economic value.
Read the full paper, to learn more.
Endnote:
-
Hamilton, B. (2023, November 15). The Clever Crafting of Microsoft’s Open AI Deal. Medium.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.