Spotify vs. Apple – Toe the line.

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I suspect Spotify will have to cave in. 

  • Spotify is realising to its cost that competing with the owner of a platform is extremely difficult when one is perceived as a threat.
  • The latest disagreement relates to the fact that Apple has rejected an update to Spotify’s app preventing Spotify from upgrading the user experience it offers to its users.
  • Apple claims that the update violates its policy that states that apps must use the Apple billing mechanism for the purchase of subscriptions as Spotify has switched them off.
  • Spotify is now using the app to upgrade or subscribe through its website rather than through the app itself which Apple sees as a violation.
  • While Apple was not in the music streaming business this was not a problem as Spotify would simply add Apple’s cut on top of the subscription price to subscriptions purchased on iOS.
  • However, now that Apple is a competing service, Spotify is 30% more expensive as a result of being forced to use the Apple infrastructure which is clearly a problem when it comes to attracting new users.
  • If Apple allows Spotify to use another payment mechanism it will have to allow everybody to do the same which could materially dent its app store revenues.
  • More importantly, it will make Spotify much more competitive, potentially costing Apple Music subscribers.
  • The weakness of Spotify is that it is not very good at marketing, meaning that it is only existing users who know that it has a superior offering.
  • Put this together with a 30% price premium and one touch subscription to Apple Music and it is not difficult to see why Spotify needs to act.
  • The problem is that there is not much that Spotify can do because it does not own the platform and Apple has already threatened to pull the app from the store entirely.
  • Complaints to regulators cost a fortune and take years neither of which Spotify can afford.
  • This means that Spotify is likely to end up having to toe the line.
  • Spotify’s only, and distant, hope is to create enough negative noise with users such that Apple decides to modify its policy more than it already has when it comes to subscription based services (see here).
  • This is exactly the problem that Amazon has with Google when it is trying to push its ecosystem to its users on Google Android devices (see here).
  • Its app store and its browser have almost certainly been excluded from the Motorola and BLU devices because they compete with Google.
  • This is why competing with platform owners on their home turf is so perilous as they can pull the rug out from underneath one’s feet with very little notice.
  • Google which RFM calculates earns 50% of its mobile advertising revenues from iOS devices also has this problem, albeit to a lesser degree.
  • I am certain that Apple would dearly love to pull the plug on Google but the only the risk of losing large numbers of users to Android keeps it from doing so.
  • Unfortunately for Spotify, not having its services available on iOS would damage Spotify far more than Apple which is why I think that Spotify will end up backing down.
  • This is why many ecosystems prefer to control the software upon which their services are delivered because it enables them to offer their services in the best possible way with minimal interference.
  • This is why every successful ecosystem either directly or indirectly controls the software upon which its services run.
  • It also explains why the Chinese ecosystem are all busily creating their own versions of the Android software and why Facebook is hard at work removing all the dependencies its apps have with Google Play.
  • This is a trend I see continuing.

Amazon – Proper practitioner? pt II.

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An experiment that might finally work. 

  • Following Amazon’s painfully expensive experiment in distributing its ecosystem with a mobile device of its own, it has sensibly decided stick to services with an innovative approach to device subsidisation.
  • Amazon is offering its Prime subscribers a very good deal to get their hands on a brand new Moto G4 or the much cheaper BLU R1 HD.
  • The Moto G4 will retail at $199.99 and the BLU R1 HD at $99.99 but if Prime subscribers elect to have advertising pushed to their lock screens, the price falls to $125 and $50 respectively.
  • This is an innovative approach and one that has already proven to be successful in emerging markets.
  • Advertising pushed to the lock-screen is considered by marketers to be extremely effective as it is the first thing that the user sees more than 100 times per day.
  • Consequently, they are prepared to pay a surprisingly high price for this piece of real estate meaning that the subsidy is likely to be comfortably paid for over the expected life of the phone.
  • Amazon is also using this opportunity to install its ecosystem onto the device, although in this regard it will be playing second fiddle to Google.
  • These devices are Google Mobile Services (GMS) compliant meaning that Google Play and Google’s other mobile services will be installed on the device and they will be set as default.
  • I think that this is why Amazon is pushing this deal to its Prime subscribers.
  • These users will have an awareness of and incentive to use Amazon’s services as they will have already paid for some of the content that is being offered through these apps.
  • Furthermore, as Prime subscribers they will also be heavy users of the shopping service which should work extremely well as it will have been installed and optimised at the factory.
  • Amazon’s media consumption services and its shopping services are on the device but the Amazon App Store and the Silk browser appear to be missing.
  • This comes as no surprise as Silk competes with Chrome and the Amazon App Store is the runaway leader in the race to challenge the dominance of Google Play in developed markets.
  • This is the problem of trying to compete on the platform owned by a competitor but this looks a lot better than losing more than $1bn on a device that no one buys.
  • I have long been of the opinion that the end result of Amazon’s foray into software platforms would be it launching its ecosystem upon the hardware of others.
  • This makes sense because Amazon’s model in hardware has been to sell the device at cost to make money on the content and services that it sells on top.
  • Consequently, making its own devices has never made any real sense other than to ensure that its services were making it into the hands of users.
  • By targeting its existing user base, it is ensuring that its services will be used on mobile which could serve as a beachhead from which to expand its reach to non-Prime users.
  • Amazon’s strategic direction as it relates to the ecosystem is improving.
  • This move in conjunction with the decision to create an ecosystem-only tariff (see here) on Amazon Prime demonstrates that Amazon is finally getting to grips with digital services outside of e-commerce and cloud.
  • Amazon still has a very long way to go as its understanding of the detailed elements of the ecosystem still appears to be rudimentary but this is yet another sign of progress.
  • Unfortunately I still really struggle with seeing any value for investors in Amazon’s shares (see here) as at the end of the day the story in Amazon is about making money from its retail e-commerce operations.
  • Consequently I continue to prefer Samsung, Baidu and Microsoft for the short term and Facebook, Apple and potentially Tencent for the long term.

LINE – Number trouble.

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I can’t get close to the IPO valuation.

  • LINE has filed to go public in July but the valuation that is being asked seems to leave very little on the table for those coming in at the IPO.
  • LINE intends to offer 40.25m new shares (including green-shoe of 5.25m) raising $1.19bn at the mid-price of $29.50 per share.
  • This will bring the fully diluted share count to 235m implying a market capitalisation at the IPO price of $6.93bn.
  • In 2015A LINE reported revenues / EBIT of $1.08bn / $17bn giving 2015A EV/Sales of 6.1x and 2015A EV/EBIT of 390x.
  • This means that LINE has to show substantial revenue growth and a huge improvement in EBIT just to hold its IPO price and this is where I have concerns.
  • LINE has 61m users in Japan which generate $1.17 per user per month in revenue and 157m elsewhere which generate just $0.17 per user per month.
  • LINE has done an excellent job in Japan at monetising its users through the sales of stickers and games where ARPU in the last 12 months has grown by 21%.
  • The problem with Japan is that the scope for real growth is limited going forward meaning that the story has to be focused on what is happening outside of Japan.
  • 1 user in Japan is worth 10 overseas which means that to see fast growth, it needs to massively step up user growth or work out ways of squeezing more revenues from the users it already has.
  • When it comes to ARPU, LINE is doing exceptionally well with Q1 16A ARPU growing around 20% YoY in both Japan and overseas.
  • This is what is underpinning revenue growth of 21% YoY in Q1 16A as user numbers have grown very slowly in the last 12 months.
  • EBIT has also developed nicely during Q1 16A coming in at $47m (15.5%) but this has mostly been driven by marketing which has more than halved in Q1 16A to $21m compared to $42m in Q1 15A.
  • When a company such as LINE reaches scale, OPEX usually flattens off or grows much more slowly than revenues allowing growing scale to benefit the bottom line.
  • This is not what has happened with LINE.
  • The fact that marketing has been slashed by 50% YoY leads me to worry that OPEX has been cut in order to flatter the figures for the IPO.
  • Furthermore, it is looking for growth in countries where WhatsApp and Messenger are strong and where BlackBerry is still trying to compete.
  • Hence, I suspect that LINE will have raise marketing again in order to expand its position outside of Japan.
  • Even if LINE can grow fast with less marketing, justifying the valuation of $6.93bn looks challenging.
  • Facebook is expected to grow around 40% this year and is trading on a 2016E EV / EBIT of 19.8x.
  • If I apply this to LINE and assume that it generates $250m in EBIT this year, I can still only arrive at a valuation of $4.9bn.
  • Given LINE is growing more slowly than Facebook, is smaller with a higher risk profile I see no reason why LINE should trade at a premium to Facebook.
  • This implies that there is at least 25% downside in LINE as I have been as generous as I can when I consider the outlook for 2016E.
  • Facebook looks like better value and I would prefer Baidu or Tencent over LINE as they offer much more upside, faster growth and trade at a much lower valuation.
  • I am steering clear of this one.

Huawei – Rivers of blood. Pt II.

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Huawei’s software has a better chance in China.  

  • Huawei is making the right initial moves in order to maximise its chances of becoming No. 1 in smartphones but I suspect its software has better chance at home rather than overseas.
  • Huawei has stated that intends to become No. 1 in smartphones and to achieve this lofty goal, it appears to be developing both software and services.
  • This is exactly what Huawei needs to do in order to minimise its margin damage in the coming war with Samsung (see here), but its users will have to be prepared to pay something for its software for the strategy to work.
  • I see three areas of development:
    • First: user experience.
    • Huawei’s efforts are being led a new hire (Apple, 10 year veteran) and the aim is to lift the user experience on Huawei phones above other Android makers and thereby achieve differentiation.
    • The user experience in developed markets is already reasonably well defined but RFM research finds that in China, almost everyone struggles as 90% of users have low quality stock Android.
    • Only Xiaomi, has developed a unique user experience but unfortunately, this has done nothing to help its poor profitability.
    • Hence, I think that Huawei will have to do something very special to achieve a price premium for its products which is unlikely to last long as cool ideas will quickly be copied.
    • Second: proprietary operating system
    • I think that Huawei is also building a complete alternative to Android where it would have full control of both hardware and software.
    • This would give it the freedom to fully optimise the software to run with its silicon (HiSilicon) as well as to develop its own suite of services without having to put Google as default.
    • The problem is that outside of China and Africa, the Google ecosystem dominates Android to the point where it is almost impossible to sell an Android device without Google Play on it.
    • Google uses this demand for Google Play to require that handset makers put its services front and centre on their devices as well as precluding them from making devices based on other versions of Android.
    • Hence, while this status quo exists, the Huawei version of Android is very unlikely to see the light of day outside of China.
    • However, it is China where I see the greatest potential, as RFM research (see here) finds that all of the Chinese ecosystems except Xiaomi are struggling with a second rate user experience.
    • Third: services.
    • This is the Holy Grail because if Huawei can develop a suite of Digital Life services that millions of users love, it will be able to charge a significant premium for its devices.
    • Unfortunately, this is by far the most difficult to do as one has to both build great services and then convince the users to use them.
    • Furthermore, in both China and overseas there are bigger and stronger companies that are already dominating in the services space.
  • I find it encouraging that Huawei has understood and committed to differentiating is software as this represents its best chance of fulfilling its strategy without a substantial bloodletting for all Android handset makers.
  • I think that China represents Huawei’s best chance as it is in China where the most improvement in the user experience is needed and the this is Huawei’s home market.
  • I also see the possibility of a tie up with Baidu, Tencent or even China Mobile as possibilities as these companies have very nascent, if any, verticalisation strategies for their services.
  • Samsung’s best defence here is to get as close as it can to Google and ensure that it is Samsung devices that run the Google ecosystem to its best advantage.
  • In China Samsung has already been reduced to a low share and does not stand a realistic chance of a comeback.
  • I think that Samsung still has the upper hand as it has much better profitability than Huawei in handsets, much greater volume and an in house supply of cutting edge components to rely on.
  • Hence, I continue to prefer Samsung, Baidu and Microsoft over Google, Alibaba, Twitter and Amazon in the short term.
  • In the long term Facebook, Tencent and Apple look very interesting but they still have some real hurdles to overcome.

Facebook & HTC – Collateral Damage. Pt II.

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Oculus is back on the HTC Vive, but it won’t save HTC.

  • Oculus Rift apps are once again running on the HTC Vive but I do not think that this will save the Vive or HTC as the road for its VR hardware is pointing to commoditisation.
  • A firmware update for the Oculus Rift prevented its apps from running on the Vive which to me made no sense as Facebook is not pursuing a hardware monetisation strategy when it comes to VR.
  • I think that, for Facebook, VR is about entering a new Digital Life segment (gaming) as well as being present just in case its core social networking functions become very relevant on this form factor.
  • Monetisation from understanding the data is the main point of this strategy with perhaps the sale of content and games being a nice extra.
  • Hence, as Facebook does not intend to make a high margin from selling Oculus Rift hardware, it makes sense to incentivise the spread of the platform as widely as possible.
  • From Facebook’s perspective, HTC is not the competition.
  • Steam, Microsoft, Google, Meta Vision, Atheer Labs and Magic Leap are, as these are the platform owners.
  • Consequently, the more devices that Facebook can get running Oculus, the better chance it will have at emerging as the dominant force in VR.
  • This is why I believe that HTC was simply collateral damage from a software update which has now been rectified.
  • However, I do not think that this will save HTC’s long lost profitability for two reasons:
    • First: I am concerned that the demand for VR units has been substantially over-estimated in the short-term.
    • Many of the usability issues with VR have yet to be overcome and I think that completely closing one-self from the real world will make most users very uncomfortable.
    • Hence, I only see it being relevant for a niche of console gamers and hard core movie fans for some time to come.
    • Second: RFM research indicates that HTC does not own the IP behind its Vive VR system.
    • Furthermore, I believe that the deal that it has signed with Steam is non-exclusive meaning that anyone can make the same product.
    • Hence, none of the games or the user experience will be exclusive to HTC, meaning that it could easily fall victim to the same commoditisation that has destroyed its Android handset business.
  • HTC competitors in VR are bigger, better financed and in many cases they also own the platform.
  • Should VR become really popular then every Chinese Internet and consumer electronics company is likely to jump on the band wagon and make a device indistinguishable from the Vive.
  • This means rapid commoditisation with 2-4% operating margins in the best instance.
  • This outcome is clearly way below what market is hoping for as HTC has enjoyed a substantial rally in the share price driven by VR hopes and market hype.
  • I continue to believe that a fair value for HTC is to be found around its net cash balance which currently stands at NT39bn.
  • With its market capitalisation currently at NT79bn, I think that there is substantial downside in HTC and would use the current hopes to exit.
  • Facebook, on the other hand, is building what could be the biggest ecosystem of them all but I think that the shares could trade lower (see here) before any of this long term upside is realised.

Apple – Jack lives.

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The 3.5mm jack survives the attempt on its life. 

  • With the launch of the iPhone 7 approaching, the chatter is once again focusing on the headphone jack, with consensus now having decided that the 100 year old design will stay.
  • This makes complete sense to me as I have long been of the opinion that getting rid of the headphone jack would create more problems that in would solve.
  • The main reason to get rid of the headphone jack would be to free up space in the device for more battery or to make the device thinner.
  • I think that making the iPhone thinner is not a priority for Apple as:
    • First: I believe that the iPhone is already thin enough and making it thinner is unlikely to generate the kind of returns that would justify the investment to make it so.
    • Second: A thinner device would also have less structural rigidity meaning that it would be even more susceptible to being bent than its predecessors.
  • Furthermore, battery life is no longer a major issue for the iPhone although the required budget for power is likely to continue increasing as the device continues to add functionality.
  • I see significant risks in getting rid of the headphone jack as it will have to be replaced with either the existing lightening jack or Bluetooth.
  • Bluetooth headphones can have radio issues, are more expensive and need to be charged making them less appealing to average users and some airlines will force users to stop using their headphones at certain times during a flight.
  • Lightening jack would force all headphone manufactures to qualify with Apple’s MFI accessory program adding costs and headphones would no longer be universally compatible which I think is something that users will hate.
  • In the worst case, losing the 3.5mm jack could have a negative impact on the upgrade cycle where users are inclined to keep their older Apple devices for longer because of a feature that they love and investments they have made in accessories.
  • There would of course be adaptors but users tend to find these to be very inconvenient and I think they would hamper the ease and fun of use that is so important to iPhone.
  • Hence I continue think the 3.5mm headphone jack, whose initial design is over 100 years old, is here to stay a little while longer.
  • I still think the iPhone 7 will be an incremental upgrade to the iPhone 6s and as a result will not result in the huge upgrade cycle that the iPhone 6 did in 2014 and 2015.
  • Hence, I think it will be enough to keep revenues chugging along but will not return the company to growth.
  • I do not necessarily see this as a problem as even in steady state Apple is a cash machine without equal.
  • Apple still represents superb value for a long term income based investors but the problem the company faces is the lack of a growth catalyst.
  • Consequently, Baidu, Microsoft and Samsung offer a better capital growth opportunity in the short term.

Tencent & Supercell – Mix of clans

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Integration with China not critical but it is elsewhere. 

  • Tencent has announced that it is leading a buyout of Supercell but the structure of the transaction raises questions as to whether Tencent will be able to earn a good return on its investment.
  • Tencent is establishing a 100% owned consortium which will acquire an 84% stake in Supercell at a valuation of $10.2bn.
  • This represents the entirety of Softbank’s holding in Supercell as well as some of the shares that are currently owned by the employees of Supercell.
  • Tencent is leading this transaction and expects that other investors will join it as consortium members but its holding will not decrease below 50%.
  • Supercell will remain wholly independent from Tencent and will continue to manage its own business but will have access to Tencent’s expertise as well as its user base.
  • This independence is so great that Tencent will not consolidate the financial performance of the consortium even though it has a majority investment in it.
  • While this is great for those at Supercell that want life to carry on in the way that it has do date, it raises further concerns with regards to Tencent’s understanding of how to build an ecosystem.
  • Tencent has the best coverage of Digital Life in China (77%) and scores the best globally but when it comes to RFM’s Laws of Robotics it does not fare so well.
  • This is because RFM research indicates that Tencent has not fully taken on board what is required to really build a thriving ecosystem as opposed to series of discrete services.
  • Consequently, when ecosystems acquire Digital Life services to round out their portfolios of services, they really need to be fully integrated to offer the maximum potential for a return.
  • However, Tencent’s situation here is unusual.
  • I see Supercell as Tencent’s strategy to expand overseas and given that very little of Tencent’s existing portfolio is relevant overseas, integration of Chinese assets with Supercell is not important.
  • The real upside for Tencent from this transaction is for Supercell to become the basis of an ecosystem strategy outside of China.
  • Gaming is a great place to start as in developed markets, the segment is completely wide open as Microsoft, Sony and Amazon have not been able to convert their gaming communities to mobile.
  • This fact has not escaped Activision and this is why I think it acquired King Digital (see here).
  • I think that in order to really make a return on this investment Tencent will need to build on the success that Supercell has had in developed markets.
  • This include creating a deep and rich community around Supercell’s 100m daily active users with more games or other Digital Life services.
  • These could be added into the consortium and it is not impossible to imagine new partners contributing their assets in return for a share of the consortium over all.
  • The caveat here is that within the consortium asset integration will be of paramount importance and I don’t see this level of rigour within Tencent’s own Chinese ecosystem let alone a consortium that it claims not to control.
  • Hence, the consortium will need to operate with laser focus and execution to create real value outside of China.
  • Given the performance of other industry consortia to date, I have doubts as whether this will be achieved.
  • This is why I see more upside in Baidu, as I think Baidu understands these issues much better than Tencent does and as a result is likely to derive the most value from its ecosystem.
  • I continue to prefer Baidu, Samsung and Microsoft over Google, Amazon and Twitter.
  • Tencent, Facebook and Apple all have upside but face hurdles to overcome before that value can be fully realised.

Spotify – Magic 100

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 100m users begins to tip the scale in Spotify’s favour.

  • Spotify has announced that it has past 100m users of which 30m are paying subscribers.
  • Admittedly, it has taken Spotify a little longer than I anticipated to get there, but it has now reached a level of scale that should enable it to begin improving its profitability.
  • RFM’s ecosystem research has highlighted 2 key thresholds for digital ecosystems
    • First 100m users. This is the key threshold when an ecosystem will gain critical mass.
    • For an ecosystem relying solely on advertising, this is the point at which it will begin to cover the costs of its investments.
    • This threshold can be lower if the ecosystem or network service in question has other forms of monetisation such as subscription or on demand services.
    • Second 300m users. This is the point where the ecosystem really begins to monetise its assets effectively and make good returns.
    • It comes as no surprise to me whatsoever that all of the money in this industry today is being made by companies with 300m users or more.
    • For example: Apple, Google. Facebook, Baidu, Alibaba and Tencent.
  • 100m is significant for Spotify because I think this is the point at which the balance of power between it and the record labels begins to shift.
  • Spotify has to pay away 70% of the revenues that it makes to the record labels and this is the single biggest reason why the company is still losing money.
  • This split is historical and comes from a time when revenue from streaming had no impact on the total level of music sales for the industry.
  • However in 2015, streaming single-handedly kicked the music industry back to growth underlining its growing importance.
  • Furthermore, Spotify is rapidly reaching the point at which the record labels will need Spotify more than Spotify needs the labels.
  • At that point, I think that negotiations with the labels will have a very different tone and this is when I think that gross margins will begin to improve.
  • I continue to believe that Spotify is first and foremost a data company with the music that it offers being incidental.
  • This is because everyone offers 40m tracks and a search box but Spotify uses its understanding of its users to make the service significantly better than that of its competitors.
  • This is why I think that Spotify will continue to fare well despite its biggest competitor being the largest and best funded technology company in the world.
  • I still think that the market is big enough for two players and with spots filled I remain concerned for the outlook of the smaller players like Tidal, Deezer, Pandora and so on.

Apple vs. Google – Private investigations

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Apple can afford privacy where Google & Co. cannot.

  •  At its recent developer conference Apple gave more details about its intentions when it comes to privacy, highlighting a technology called differential privacy.
  • Differential privacy is nothing new as it has been around since the 1960s and it works by injecting meaningless data in between real user generated data blocks when it is sent to the server.
  • User profiles are not created but the data is analysed using machine learning to draw global insights that can then be used to improve the ecosystem for users.
  • In this way the service can be improved without using the personal data of the user.
  • This all sounds great but it only works with two of the three ecosystem monetisation strategies, meaning that for many ecosystems, this is not an option.
  • RFM’s ecosystem monetisation model sees three methods of monetisation for any digital ecosystem:
    • First: Own the hardware and keep the ecosystem or the service exclusive to that hardware and charge a premium for it.
    • This is what Apple does so effectively and where the Android makers are really struggling.
    • This works nicely with differential privacy as the user has already paid for the ecosystem through the price of the device and so no data is needed to generate revenues.
    • Second: Make the ecosystem or service available on as many devices as possible and sell advertising based on usage.
    • The experience is “free” but money is earned by using users’ personal data to generate advertising or relevant marketing.
    • This is Google, Facebook, Baidu, Twitter and so on.
    • This monetisation method will not work with differential privacy as user profiles are at the heart of its efficacy.
    • Third: Charge the user a per month fee to get access to the service and keep it free of annoying advertising.
    • This is just beginning to emerge for ecosystems but individual services like Netflix, Spotify, Amazon Prime and Xbox Live are already well established.
    • This will also work with differential privacy as the user is paying to use the service.
  • This is a major problem for Google and Facebook because most users think that they are customers of these companies when in reality they are product.
  • It is this lack of understanding that has led to the backlash against using advertising which Apple is more than happy to fuel.
  • Hence, users do not realise that they are in fact paying for Google and Facebook services and are doing so with their data rather than cash.
  • This is how Apple can afford to take the high ground on privacy where Google, Facebook, Baidu and so on cannot.
  • I suspect that if this were to come to a head like it has for Wired (see here) and Axel Springer (see here), Google could offer its users the option to pay cash as a subscription for its services rather than receive advertising.
  • In this instance, I suspect that the vast majority of users would opt to receive advertising pretty much putting an end to this problem.
  • This is why I remain unconcerned that privacy will cause revenues to dip at Google.
  • It still has the last resort of subscription to make its living and the vast majority of its users like and value its services.
  • I continue to prefer Baidu, Microsoft and Samsung over Google and I still see plenty of long term upside in Apple for income investors who can be patient.

Tencent & Activision Blizzard – Colonial times.

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 Tencent and Activision go where Microsoft and Sony fail to tread.

  • Tencent appears close to buying a majority holding in the Finnish mobile games publisher, Supercell which is best known for its Clash of Clans and Clash Royale strategy games.
  • This will bring Tencent into head to head competition with Activision Blizzard which I believe is also about to make a land grab for mobile gaming through its acquisition of King Digital.
  • This is a highly significant move because in my opinion it marks Tencent’s first real move outside of China.
  • Tencent’s investments in Kik and Snapchat are minority investments and consequently I think that they will be of very little help when it comes to a strategy to expand into Digital Life services outside of China.
  • Furthermore the Instant Messaging segment of Digital Life is very well defined with dominant players already present.
  • Gaming, on the other hand, is the most important segment of the Digital Life pie outside of China, and nthere is no dominant player.
  • Xbox and PlayStation are the dominant gaming platforms in developed markets but both of these have completely failed to create any impact in mobile and remain stuck in consoles.
  • Consequently, I see the mobile gaming segment as wide open and in developed markets Supercell has the No. 3 and No. 5 slot in the top grossing gaming charts on both iOS and Google Play (AppAnnie).
  • Furthermore, Clash of Clans has been constantly in the top 5 grossing apps on the Apple App Store and Google Play for a very long time making this a great platform from which to begin building a position in developed markets.
  • In China, Tencent is already dominant in games and I see this acquisition being all about moving outside of its home market rather than bringing Supercell’s games to China.
  • Activision Blizzard recently closed its $6bn acquisition of King Digital which only has one game in the charts but critically, has over 500m active users.
  • Activision has lots of games but few mobile users, making this a perfect fit as long as it can execute on successfully bringing its games to King’s users.
  • I think that both of these companies have much more to do than bringing their games to mobile as it is critical to create a thriving community around those games and it is from there one can monetise and expand.
  • Here, I think that Tencent has the biggest advantage as it has already done this with great success in China with Weixin / Wechat and Qzone (Social Networking).
  • Tencent still has a hill to climb as RFM research indicates that Tencent has not fully taken on board what is required to really build a thriving ecosystem as opposed to series of discrete services.
  • However, I think that it understands these principles better than Activision does.
  • For both of these companies, turning successful gaming apps into thriving communities from which they can expand will be tricky and take time and in that regard Microsoft and Sony still have a chance.
  • However, both of them have failed to bring their thriving gaming communities to mobile and are now really running out of time to do so.
  • With Microsoft seeming to lose interest in the consumer and Sony’s inability to create a good user experience, I don’t seem them making any impact in mobile leaving the way open for others.
  • Tencent and Activision now head a very short list of those that I think have potential in developed markets.
  • I still prefer Baidu to Tencent as it really understands the ecosystem but should things change at Tencent, then there is substantial upside potential.
  • I prefer both of these companies to Alibaba, Google and Twitter.