Google – Control freak.

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Google’s move to be an MVNO is all about control.

  • It looks very likely that Google will launch its own branded MVNO during 2015 using the networks of T-Mobile Inc. and Sprint. 
  • This is not good news for either T-Mobile or Sprint despite the share reactions to the news.
  • While they will get more traffic across their networks, they will come closer to being bit pipes leaving all the real value for Google.
  • Google has a habit of launching idiosyncratic projects like floating retail stores, Internet balloons, Space X and the like but this one appears to have a real purpose.
  • The Google ecosystem has two big problems.
    • First. The user experience on Android is not nearly as good as iPhone or even Windows Phone.
    • The major factor behind its problems is the chaotic and random nature of Android where the user has to be his own systems integrator.
    • This is what causes its lower usage and lower loyalty and I believe that this makes it vulnerable to market share loss.
    • Second. Google has no control over the distribution of its mobile services software.
    • Despite being launched for nearly 8 months and available for 3, Lollipop (5.0) is present on less than 0.1% of Google Android devices in the hands of users.
    • By contrast iOS8 is on 71% of all Apple devices and achieved 33% within one week of release.
    • All of the great innovations and improvements that Google has made are currently sitting on the shelf getting old while everyone else copies and improves on them.
  • The only way in which Google can fix these weaknesses is to take control of the software and ensure that its ecosystem into the hands of the users how and when it wants.
  • By creating its own MVNO, it will have a much bigger route to market for its Nexus devices where it has soup to nuts control.
  • It will also be able to create incentives to get users to buy the devices and set tariffs to encourage usage of its ecosystem.
  • This is why I think Google may be taking this route and shareholders of T-Mobile and Sprint should not be rejoicing as it will only accelerate their commoditisation.
  • Google increasingly looks dominant in its segment of the market and is well set up to reap almost all of the benefits of having an ecosystem.
  • It has already bent the handset makers to its will. Now it is the turn of the mobile operators.
  • I continue to like Google alongside Microsoft and Apple as places to be when considering investing in the mobile ecosystem.

Microsoft – The price is right.

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Free upgrade is excellent news for the Microsoft ecosystem.

  • Microsoft’s ambition to become an ecosystem company have crystalised further as upgrades to Windows 10 from 7, 8.1 and Windows Phone will be free.
  • Microsoft gave a deeper preview of Windows 10 at its event yesterday and at the same time launched its own foray into the world of virtual reality with Microsoft HoloLens.
  • With Windows 10, the somewhat geriatric and clunky Internet Explorer will be phased out to be replaced with Project Spartan.
  • This is a new browser based on open standards that puts content front and centre and will have Cortana the digital personal assistant integrated.
  • Internet Explorer will still be available for corporate customers that have legacy systems that require it, but it is Spartan that will be offered as the recommended option.
  • Much of the commentary and demonstrations were focused around the integration of Microsoft’s Digital Life services to make them more intuitive, functional and easy to use.
  • This is precisely what I want to hear because aside from its inability to market its wares effectively, integration is the ecosystem’s biggest challenge.
  • Digital Life services need to share user data in order to make themselves more relevant and easy to use and they also need to know how the user lives his Digital Life in order to be more useful.
  • At the moment, Microsoft’s Digital Life services exist as a series of discrete offerings with a very thin veneer of single sign-on.
  • The way Microsoft discussed functionality gives me hope that it has internalised the problem and is moving to integrate all of its services together.
  • This is a messy, difficult and time consuming task but one that I hope is well underway in the back rooms at Redmond.
  • The HoloLens wowed the press but the big news of the day was without doubt the free upgrade for existing users.
  • I suspect that this, together with Spartan, is all about making the software as consistent as possible across all devices and about making life as easy as possible for developers.
  • By making the software free, Microsoft can guarantee that uptake of its new software and Digital Life services will be excellent.
  • This is especially the case as like Apple, Microsoft controls the distribution of its software.
  • Google does not and is currently looking somewhat foolish as less than 0.1% of Android devices have made the upgrade to Lollipop (5.0) despite the software being available for months.
  • Having much greater software consistency across PCs, tablets, phones, Xbox and other hardware will give developers more devices to target and also improve the performance of Microsoft’s own Digital Life services.
  • HoloLens looks interesting with its focus on augmented reality rather than virtual, but the hardware still makes the user look and feel very silly.
  • Here an unsung part of Microsoft might be able to do something interesting.
  • In my opinion, Microsoft has become one of the leading designers of hardware in the technology industry.
  • The fact that Microsoft designed (in house) the most difficult parts of the Surface Pro 3, the superb Arc mouse, the heart rate sensor on the band and many other designs lead me to believe that Microsoft is a force to be reckoned with in hardware.
  • Hence, I think it entirely possible that this competence could be used to redesign the HoloLens to be something small, light, unobtrusive or even cool.
  • The end result is that this was a good day for Microsoft.
  • It has taken further steps to disengage with its past and is making all of the right moves to ensure that its ecosystem is a contender for both the consumer and the enterprise.
  • If the marketing message can be fixed to explain to users why they should get involved rather than just telling them that it exists then things could quickly change.
  • Consequently, I remain positive on Microsoft’s ambitions which combined with Google and Apple, make up the best way to get involved in the mobile ecosystem. 

HP – The eggs have landed.

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HP loses more face over Autonomy.

  • The end of the criminal investigation into HP’s allegations of fraud at Autonomy leaves the management of HP with egg all over its face.
  • The UK Serious Fraud Office (SFO) has declined to proceed with fraud charges against the former executives of Autonomy stating that there is not enough evidence to be confident of a conviction.
  • The US investigation will continue but I am almost certain that it too, will decline to proceed to formal charges.
  • This is because, while HP is a US based company, Autonomy was listed in the UK and consequently that it is the jurisdiction where any crimes are most likely to have been committed.
  • Consequently, it seems even less likely that there will be enough evidence for the FBI to press formal charges.
  • It increasingly looks like the original conclusion that I drew over two years ago (see here) will finally be proved correct.
  • Ever since HP purchased Autonomy for $11bn, and less than 12 months later wrote of $5.5bn of that value, it has been clear that HP failed to do its due diligence properly.
  • Autonomy was a listed company, and the market was well aware that one needed to tread very carefully when looking at Autonomy’s published figures.
  • Furthermore, it appears that HP was made aware of many of the contested issues prior to the closing of the deal (see here) but chose do nothing.
  • Consequently it is increasingly clear that while Autonomy’s accounting practices could be seen as aggressive, they remained within the rules.
  • It comes as no surprise to me that the SFO has declined to prosecute and I am sure that the FBI will do the same.
  • This will leave HPQ’s management with little option but to admit that it failed to fulfil its obligations to shareholders when carrying out its due diligence.
  • I would not be surprised to see the filing of a class action lawsuit against HP.
  • This is unfortunate as HP has done a reasonable job in cutting costs and getting the ship back onto an even keel.
  • However, the company remains without any real strategy for its long-term future and the split into Hewlett-Packard Enterprise and HP Inc. solves nothing.
  • I continue to think that HP will continue to drift along allowing most of the technology industry to pass it by. 

Xiaomi – Circumnavigation.

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Xiaomi must have exclusive services to succeed.

  • Xiaomi is following in the footsteps of its rivals in building an ecosystem via purchasing small shareholdings but this is not enough.
  • Most recently, Xiaomi has purchased 2.98% of productivity software company Kingsoft for $68m.
  • This is in addition to a $205m purchase of a 1.98% stake in home appliance maker Midea and participation in the most recent fund raising of wearables maker Misfit.
  • Kingsoft is a producer of freemium software that competes against Microsoft Office and Google Docs.
  • Kingsoft also has a web browser called Leibao and a position in Internet security (Cheetah Mobile).
  • When I look at Xiaomi’s position, it is clear it has embarked on a trip around the Digital Life Pie.
  • RFM research shows that Xiaomi’s services currently covers just 17% of the activities that users do on their smartphones.
  • In order to have a successful ecosystem and to be able to command premium pricing (and hence margin), it needs to expand this offering.
  • Users need to identify with Xiaomi as the place where they want to live their digital lives in order for Xiaomi to earn a premium return on hardware in a similar vein to Apple.
  • This is why Xiaomi (and many of the other Chinese players) are actively engaging in M&A which is unlikely to stop until it has solid coverage of the pie.
  • Xiaomi is also looking at making its ecosystem available on many different form factors and devices explaining its interest in Misfit and Midea.
  • Kingsoft provides Xiaomi the opportunity to cover the Enterprise Digital Life pie and to compete against Microsoft and Google’s offerings.
  • This is all well and good but in order to make this work, Xiaomi needs to offer exclusive services.
  • Kingsoft is also part owned by Tencent, which I believe will be one of Xiaomi’s fiercest rivals in the coming years.
  • Hence, anything that Kingsoft delivers to Xiaomi will also be available to Tencent meaning that there will not be a sustainable competitive edge for Xiaomi should Kingsoft become important in mobile.
  • This is where Xiaomi’s biggest weakness lies.
  • Its main rivals, Tencent Alibaba and Baidu are all much bigger and much stronger meaning that they can out bid and out-invest Xiaomi is almost anything.
  • This is why it will be very difficult for Xiaomi to develop a thriving ecosystem in its home market unless it creates its own services from scratch.
  • This will take huge investment which will keep margins under pressure in the medium term even if the strategy is wildly successful.
  • This is why I think Xiaomi is a real stretch at $45bn and why Lenovo’s IPO will offer its investors much better value at 5% of the valuation (see here).

 

 

BlackBerry – Roller-coaster.

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There is no reason why Samsung would want BlackBerry.

  • BlackBerry has had a wild couple of days as rumours surfaced that Samsung was willing to buy BlackBerry for around $7.5bn or $14.4 per share.
  • This is what was responsible for a 29% rally in the share price only to be almost all given back today after both Samsung and BlackBerry denied the rumours.
  • They were categorical in their statements in saying that no discussions relating to an acquisition of BlackBerry by Samsung had taken place.
  • In this case the swings have been particularly wild because of the very high level of short interest that exists in the stock.
  • Currently, Bloomberg estimates that there are short positions (sold the stock without owing it) that are equivalent to 26% of the number of shares in issue.
  • To close these positions, 26% of the shares in existence would need to be purchased explaining the panic buying when there was a possibility that holders of short positions would incur nearly a 50% loss.
  • This also explains the degree of scepticism in the market with regards to the possibility that BlackBerry can make a profitable recovery.
  • The emphatic denials on both sides confirms my opinion that there is no reason why Samsung would want to buy it.
  • The opinion that Samsung would want to buy BlackBerry for its patents is a non-starter for two reasons:
    • First. BlackBerry’s patents are not actually worth that much. RFM has previously estimated that the portfolio could be worth around $1bn which has been independently corroborated by industry practitioners.
    • Second: If Samsung was desperate for patents it could have purchased Mototola Mobility from Google for a third of the price or taken advantage of the ongoing disintegration of Rockstar (see here).
  • Consequently, I can see no reason why Samsung would want to buy BlackBerry as:
    • There is no synergy in terms of platforms or costs.
    • Samsung already has an enterprise offering through KNOX and could take customers from BlackBerry organically, obviating the need to buy them.
    • Samsung itself is trying to right size its ship for the likelihood of much lower margins going forward and is in no position to take this on, even if it could find a good reason to.
  • Samsung has managed to hold its handset business steadier than I thought during Q4 but remains very far from a recovery.
  • This combined with my concerns around the long term outlook for BlackBerry leads me to steer clear of both of them for now.

 

 

 

Samsung Tizen – Ducks and Chickens.

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Duck in danger becomes chicken and egg.

  • Samsung has at last launched a handset based on Tizen’s software.
  • The device is called the Z1, has been launched in India and will cost just over $90.
  • It was 5 months ago that Samsung delayed its handset yet again citing the need to “enhance the ecosystem”  (see Tizen – Duck in danger).
  • What it actually meant was “give us time to strip it down to be as low cost as possible” to fit it into a pricing category where users only care about price.
  • With no ecosystem on Tizen, the only way to sell a device is using price.
  • At $90, the Z1 is significantly cheaper than Xiaomi’s entry level Redmi product which can be had for $130 but then its specifications are somewhat underwhelming.
  • The Z1 features 4” screen, 1.2Ghz dual core processor, VGA/ 3.1MP front and rear cameras, 768MB RAM and 4GB internal storage.
  • In contrast Microsoft’s Lumia 435 (also launched today) features a 4” screen, 1.2Ghz dual core processor, VGA/2MP front and rear cameras, 1GB RAM and 8GB internal storage.
  • Critically the Lumia 435 is 23% cheaper than the Z1 and for once is able to boast that it has more apps available.
  • Furthermore, Microsoft offers a fairly complete and robust ecosystem which knocks the socks of Tizen which has nothing.
  • Despite this, I suspect that the real competition for the Z1 is going to be from the low end devices from the likes of Micromax, Spice, Karbonn and so on.
  • Indian consumers are not very wealthy but they do already seem to have internalised what Android is and often demand it as a prerequisite at the point of sale.
  • Against this the Z1 has no answer and will have to be sold on the back of Samsung’s brand and its marketing dollar.
  • By having a handset running Tizen, Samsung is beginning to spread Tizen across many of its devices which could be the beginnings of proper cross device strategy.
  • This is badly needed to support flagging handset profitability where its Android devices are now commoditised and pretty much controlled by Google.
  • That being said, to make this work Samsung needs to deliver fun and easy to use Digital Life services on Tizen devices.
  • If there are none of these services then there is little point in any of these devices talking to each other as there will be nothing to say.
  • So once again the fundamental limitation of Tizen is exposed: it has no Digital Life services from which to create an ecosystem.
  • Failure to create one will lead to Tizen competing against Android purely on hardware.
  • Because Tizen will always be much lower in terms of volume, there is no way it will be able to match prices and still be a viable proposition for the vendor.
  • This is the difficult chicken and egg situation where Tizen finds itself.
  • Without some volume there will be no Digital Life services and without Digital Life services there will be no real volume.
  • Hence, I remain pretty cautious on the outlook for Tizen but it is now certain than Samsung is far more committed to Tizen than it seemed 6 months ago.

 

Lenovo – Cash Call

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Lenovo offers far more value than Xiaomi.

  • Following the acquisition of Motorola Mobility from Google, it looks very much as if Lenovo has realised that to get a thriving handset business one needs vast investment.
  • Lenovo has announced that is considering a public listing of its mobile device business at some point in the future.
  • Lenovo plans to make this business more than just handsets by expanding into smart home and other types of connected devices.
  • The aim here is to have this financed by money from the public markets not just from Lenovo.
  • I think that the reality is a little more straight forward
  • In order to develop its mobile device business, significant investment is needed and Lenovo simply does not have the money.  
  • Following the acquisition from Motorola and the server business from IBM, Lenovo has spent almost its entire war chest and there is very little left for further investment.
  • The PC business is faring reasonably well but it continues to exist on wafer thin margins meaning that there is no real cash cow from which to source investment into something new.
  • Consequently, funds need to come from outside in order to invest in the consolidation and development of the mobile device business.
  • The valuation of the business is expected to be a couple of billion dollars at IPO which comes as a great surprise.
  • Lenovo (including Motorola) shipped 25.2m units in Q3 14A and 28.1m units in Q4 14E.
  • This is somewhat ahead of Xiaomi on 18.0m and 17.4m respectively.
  • This represents smartphone share of 7.8% and 7.9% respectively giving Lenovo 3rd position in the global smartphone market.
  • Upon these devices it was probably slightly loss making with the losses of Motorola Mobility added in for those quarters.
  • Xiaomi ships fewer devices than Lenovo, has only slightly higher margins but somehow commands a valuation more than 20x that of Lenovo.
  • To me this is more a reflection of how crazy the $45bn valuation of Xiaomi is rather than Lenovo selling itself short.
  • Xiaomi has the potential to reap big rewards from developing its own ecosystem but at $45bn a huge amount of success in this regard is already being priced in leaving very little upside.
  • Furthermore in the Chinese market Xiaomi will have to contend with the ambitions of Tencent, Alibaba and Baidu all of whom are working on their own ecosystems and have far more money to invest.
  • With a valuation of a couple of billion and a solid strategy to develop a wider range of devices even commodity margins could lead to significant upside for investors.
  • I would regard an IPO of this business at the discussed valuation as extremely interesting and worthy of further investigation. 

Enterprise Ecosystem – Pole position

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Office 365 is reaping the rewards of change.

  • Microsoft’s change in attitude towards Office software is starting to reap real rewards.
  • Only 12 months ago, in order to use Office a user had to have Microsoft Windows as its operating system.
  • On iOS and Android, third party applications were available where a user could read Office documents but the experience was so bad that converting the file to Google or something else was a preferable option.
  • The management change at Microsoft has brought in a completely new attitude towards its strategy and how to sell its products.
  • The Windows everywhere mantra has gone to be replaced with a strategy designed to persuade users rather than force them. 
  • To that end Office apps were made available on iOS and users can now read and edit documents without paying Microsoft a cent.
  • This is does not mean that the PC is losing its relevance but it does mean that users are increasingly doing certain tasks on more than one device.
  • Furthermore, its cloud offering, Office 365, puts all of these apps together into a complete enterprise ecosystem and makes it available on any device that the user owns.
  • Office for Android is still in the works but I expect it to be launched during 2015.
  • This is why cloud platform providers are seeing Office 365 rapidly rising in the ranks of installed applications and why I think Flurry saw productivity as the second fastest growing category on mobile in terms of usage over the last few months.  
  • Not only is Office 365 rising in terms of installs but it is used more frequently than anything else (Okta.com).
  • I believe that this will lead to decline in the usage of alternative offerings such as Google Docs, iWork and so on.
  • These alternatives were created as alternatives to Office but now that pricing is far more reasonable and the causal user can get access for free their appeal is starting to wane.
  • Consequently, I suspect that Office 365 will continue to gain traction over the short and medium term.
  • Salesforce still remains the number one cloud application used by companies but Office 365 is quickly catching up.
  • There is still a very long way to go as less than 33% of companies have migrated their IT into the cloud (Gartner) but Microsoft already has its ducks in a row and is in pole position.
  • Microsoft remains the only company with a comprehensive offering for both the consumer and the enterprise ecosystem.
  • Consequently, if it can find a way to marry the two in a single experience that is both fun and easy to use, it will have achieved a very strong competitive edge.
  • Microsoft remains one of my favourite ways to have exposure to the increasing importance that the ecosystem will play in the generation of revenues and profits in the technology industry. 

 

 

Google – The missing Lollipop

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Android Lollipop is still nowhere to be found.

  • Despite being launched over 7 months ago, with availability for the last 4 months, Lollipop devices are still not appearing in the wild.
  • Google’s own developer website revealed that in early January Kit-Kat (4.4) and Jelly Bean (4.3) were present on 85% of all devices visiting Google Play.
  • However only 39% of these devices were using the latest version (Kit-Kat) and less than 0.1% of them were running Lollipop (5.0).
  • In contrast within one week of general availability of iOS8, 33% of all iOS devices had made the upgrade.
  • That figure stands at 70.4% as of today (Jan 11th 2015). (mixpanel.com)
  • This is deeply troubling for Google as Lollipop represents a huge upgrade to the user experience with a new UI and 5,000 new APIs for developers.
  • It also represents a big step forward for Google in terms of its strategy to make the Android user experience much more fun and easy to use.
  • As it stands today, ease of use is the single biggest failing of Android and because Google’s ecosystem (GMS) runs on Android, it too is hobbled with the same problems.
  • This puts the Google ecosystem at risk of losing market share if other offerings can offer an easier and more enjoyable experience.
  • Hence the Microsoft ecosystem represents a threat to Google as it has a pretty good offering of Digital Life services and its experience is certainly easier and less frustrating to use.
  • Furthermore, I believe that loyalty to the Android experience is low meaning that there is a willingness to switch should something more enticing be offered at a similar price.
  • This is why Google must take more control over the Android user experience outside of its own ecosystem.
  • Lollipop is supposed to be a first step in that direction, but its glacial progress into the hands of users is worrying.
  • The main reason for this is that Google does not control when the majority of Android devices are upgraded to Lollipop or when the Lollipop devices are launched.
  • I continue to believe that as time passes, Google will take more and more control of the Android software including how and when it is updated on devices that are already in the hands of users.
  • This is very bad news for the Android device makers as Google is pushing them more and more towards being nothing more than commoditised hardware makers.
  • This will make it very difficult for them to earn anything more than 2-4% EBIT margins unless they have huge market share.
  • These are long term problems for Google that it has some time to fix as in the meantime its revenues from Android are continuing to grow strongly.
  • Hence, Google is still in pole position to be the only real winner in Android but will have to work hard to hang onto Android’s current dominant market share.
  • Google remains the only place to look at when looking for exposure to the ecosystems that exist on the Android OS. 

CES Day 3 – Huawei – Eggs and Bacon

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Huawei now has the eggs but can it bring home the bacon?

  • One of the most interesting developments at CES was the emergence of understanding by Huawei that it needs an ecosystem to make money.
  • Huawei and Stanford University spin-out, Omlet, have announced a collaboration to create an open social ecosystem on Huawei devices.
  • Omlet is a social platform where the users are at the centre rather than advertisers.
  • This means that users have complete control over their data and their privacy should never be compromised.
  • Huawei and Omlet are starting off with social networking, with an emphasis on sharing photos and themes, but if it is successful, I am sure it will spread to the other parts of Digital Life.
  • It looks like Huawei will be installing the Omlet platform at the factory which should ensure better performance and greater stickiness but it brings it into conflict with Google.
  • These devices will not be compliant with Google’s standards which allow handset makers to offer Google Play and access to over a million different apps and services.
  • In developed markets, this is considered to be crucial to the Android offering and gives Google enormous leverage when ensuring that its ecosystem is front and centre on the smartphone.
  • This could be a significant hindrance to take up of the Omlet ecosystem as users will have to be content with one of the other, inferior, app stores.
  • Huawei is also developing its Hilink offering to allow it to integrate the different devices that it makes.
  • The idea here is to encourage users that own on Huawei device to buy another one in order to benefit from the enhanced functionality that owning more than one device can offer.
  • At the moment Hilink is little more than an app. that allows the user to manage his different Huawei devices and the reviews are full of complaints with regard to how this app. gobbles battery life.
  • I suspect that this is due to excessive use of the WiFi radio and shows that Huawei still has a lot to learn when it comes to writing efficient radio software.
  • The good news is that Huawei appears to be taking on board an understanding of how important the ecosystem is to its long term profitability.
  • RFM forecasts that Huawei saw strong growth in smartphone unit shipments to 69.5m units in 2014A (5.4% share) but doubts that it made more than 3% EBIT margins.
  • This is because it is competing on hardware specification like every other Android maker and has nothing with which to make users desire and pay up for its devices.
  • An ecosystem through Digital Life services and cross device integration is what is needed to create user stickiness and better profitability.
  • Succeeding here is all about understanding its users and writing fun and easy to use services so that users will want to live their Digital Lives with Huawei.
  • This is fiendishly difficult and although Huawei is beginning to understand what it needs to do, its execution remains very wide of the mark.
  • I see nothing yet that separates Huawei from its peers but it has taken the first step towards doing what is needed to secure long term growth and profitability.
  • For 2015E, I continue to think that Apple, Google and Microsoft will be the ones to reap the most reward from the ecosystem.