Uber – Fatal disengagement.

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Google is 5,000x better than Uber at autonomous driving.

  • Although Google is suing Uber for the alleged theft of its Lidar (key autonomy sensor) design, it does not seem to have helped Uber much as it appears to be by far the worst at autonomous driving.
  • This is still the case when one includes the regular car companies that most people have written off as having very little to offer in the new world of digital and autonomous cars.
  • The best measure of an autonomous driving solution is how often the driver has to take over to correct shortcomings in the autonomous driving software.
  • Regulations in California require those that test in the state to submit this data but typically, they all submit it in different ways (see here).
  • There are also different types of disengagement such as when the car is going to hit something (critical) or when the safety driver feels uncomfortable (ordinary).
  • Furthermore, companies test their cars in different conditions meaning that the data can really only be used as indication.
  • However, the contrasts are so stark that I think that meaningful conclusions can be drawn about how advanced the autonomous driving solutions from different players really are.
  • In order of performance the data shows:
    • No. 1 Waymo (Google) is 8x better than the number 2 with 1 disengagement every 5,128 miles driven.
    • Waymo has also driven at least 155x more miles (635,868) in the last 12 months than anyone else, meaning that it has collected more training data than all the others put together.
    • No. 2 BMW with 1 disengagement every 638 miles driven (8x worse than Waymo) but it only drove 638 miles raising questions to the validity of this data.
    • No. 3 Nissan with 1 disengagement every 146 miles and a total of 4,099 miles driven.
    • No. 4 Tesla with 1 disengagement every 3 miles with 550 miles driven but almost all of these occurred in wet road conditions.
    • I think that Tesla deliberately went out to push its system to the limit as wet conditions are known to be far more difficult for autonomous systems.
    • Hence, I do not think that is necessarily an indication of Tesla’s real position in the pecking order.
    • No. 5 Mercedes with 1 disengagement every 2 miles driven with 673 miles driven in total.
    • No. 6 Uber with 1 disengagement every 1 mile driven with a total of 20,354 miles in total.
    • Uber has just suspended its autonomous testing following a serious crash in Arizona despite the fact that it appears that the Uber vehicle was not responsible for the incident.
    • Uber has also been banned from testing in California for failing to register with the DMV.
  • This is yet another indication that the key to artificial intelligence (the heart of all autonomous driving systems) currently is the amount of time that one has been working on the algorithms as well as the amount of data collected (see here).
  • I am certain that this is why Waymo is the best because it began working on autonomous driving in 2009 (far earlier than anyone else) and in the last 2 years has driven more than 150x more miles than anyone else.
  • The fact that Uber, by quite some margin, ranks last is potentially a serious problem in the long-term.
  • This is because if the car companies have their own self driving technology (or use Google) then Uber may find itself being a middleman that is no longer required.
  • Uber currently has the advantage because it has already established itself as the market place for drivers and passengers to transact and these types of positions are extremely hard to disrupt once created.
  • This is why Uber commands the $70bn valuation that it does but unless it gets a handle on autonomous driving, this market place may become obsolete when humans stop driving cars.
  • I still think that the technology will become mature long before the market is ready to adopt it (see here) meaning that Uber should be able to pick-up a viable solution at an attractive price once 2020 deadlines are missed and funding runs out.
  • Despite this view, this is a key risk for Uber and one I would be uncomfortable with especially if I had put some money into the company at $62.5bn.

Google & Facebook – Trouble in paradise.

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Facebook will be hit much harder than Google.

  • Although it is Google that is taking most of the heat in the current boycott of its digital display advertising, it is Facebook that is likely to be hit hardest by this problem.
  • A series of global firms have pulled their advertising from YouTube is response to finding their advertisement placed in videos which are deemed to be offensive or contain extremist content.
  • This is not a new problem but has come to a head after a series of lapses on the part of YouTube have gone viral raising the ire of companies who would appear to endorsing such content.
  • The net result is that a number of multinational companies (more likely to follow) have pulled their advertising from YouTube until they are confident that Google is able to ensure that their logos and advertising only appears along aside acceptable content.
  • This is a difficult problem because YouTube is adding 400 hours of content to its website every minute and thousands of websites are added to its network on a daily basis.
  • This makes monitoring content on a proactive basis extremely difficult which is why a meaningful number of lapses have come to light.
  • Fortunately for Google, I think that the impact of this issue will be limited and short-lived as:
    • First: this issue only affects YouTube and display advertising which RFM estimates makes up just 12% of gross revenues.
    • Hence, even if this were to fall to zero, the vast majority of Google’s business would be unaffected.
    • Second: Google is the best equipped to deal with this problem compared to any of its competitors.
    • The amount of content that has to be checked on a daily basis is so vast that it can only realistically be carried out by a machine.
    • This means that AI is needed to scan uploaded content and new websites and flag any that are suspected to contain content that Google customers are likely to consider objectionable.
    • Google has the best AI available when it comes to image and video recognition as well as sentence and text recognition.
  • Hence, I think that Google should be able to fix this problem in a comparatively short period of time.
  • However, I do not have the same degree of confidence when it comes to Facebook which already has this problem but has yet to suffer a loss of businesses as a result of it.
  • I think that when this does happen at Facebook, it will be a much more serious problem as this type of advertising is a much larger part of its revenue and I do not think that Facebook has the AI to fix it.
  • RFM research (see here) has found that Facebook is far behind its global peers when it comes to AI, mainly as a result of having not worked in the field for very long.
  • This means that while it is sitting on the world’s second largest treasure trove of data, it is unable to understand what most of it is and is therefore unable to weed out content that is objectionable to its customers.
  • I think that this will take a very long time to fix compared to Google and so when this issue hits Facebook, it will hit it harder and it is likely to last longer.
  • This is just another reason for me to remain pretty cautious on Facebook which I think will see much lower than expected growth this year which is likely to take a toll on the short-term valuation.
  • I also think that Google remains fully valued and would prefer the shares of Microsoft, Tencent, Baidu and Apple for long-term value based investors.

Tencent – Brute force.

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Tencent has time as most gaming AIs are relatively simple.

  • Tencent is finally jumping into artificial intelligence (AI) and I think that it is fortunate in that it is not very difficult to create good algorithms for the vast majority of the games that Tencent offers.
  • Tencent has created AI Lab which now has more than 250 employees whose task it is be to create algorithms that create more sophisticated game opponents as well as chat bots for companies that use WeChat and QQ to talk to their customers.
  • The general impression of AI seems to be that as soon as one has created an AI group, superb, hyper-intelligent algorithms will come rolling out of the door but in reality, this is very far from the truth.
  • RFM research has found (see here) that single biggest determinate of AI excellence to date is time and those that have been doing it the longest tend to have the best AI.
  • This is why RFM has found that it is the search engines thatare the most advanced even though some of the biggest brains in the field are employed elsewhere.
  • With Tencent just getting into this field, I think it will be a very long time before it will be in a position to roll out algorithms that are capable of making its services meaningfully more intelligent.
  • In the long run this will be crucial to maintaining its dominance in the Digital Life segments where it is present as I think competition will become much tougher as the market matures.
  • The good news is that it is unlikely to prove very difficult to create algorithms that are more than good enough to play the games that it offers to a very high standard.
  • This is because most games are either based on hand eye co-ordination or can be solved by an algorithm using a brute-force approach.
  • Brute force involves evaluating every possible outcome from a given position and choosing the best one.
  • With today’s improvements in memory and processing power, this is not very difficult to achieve.
  • The highest profile exception is Go which has so many possible combinations that brute force becomes impossible.
  • This is why DeepMind’s AlphaGo was such a breakthrough, as it uses AI to work out which options should be searched much like a human would.
  • Tencent has produced an AI Go player called Jueyi which has been able to play to a very high standard but I think that the design has been copied from AlphaGo.
  • AI is a co-operative field and DeepMind has published most of its methodology and results for the creation of AlphaGo in the scientific magazine Nature.
  • Consequently, I do not view this as a good example of Tencent coming up with an innovation of its own and I think we will not be seeing hyper-intelligent AIs appearing in Tencent’s services anytime soon.
  • However, I think that Tencent has time as its core markets are still seeing steady growth and it should be reasonably easy to improve the AI opponents in its core segment: gaming.
  • I still like Tencent as there remains substantial upside should it really begin to monetise the ecosystem that it has created but it has a very long way to go before it can be considered a force in AI.

Google – Cookie crumbles

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I see no solution to Google’s problems in Android O.

  • Google has released a developer preview of the upcoming Android Oreo (Android 8.0) software, but I can’t see anything here that will help solve either the endemic fragmentation or Google’s chronic inability to update its own ecosystem devices (non-Pixel).
  • The preview of Android O headlines with a series of tweaks that provide incremental improvements to the user experience as well as API upgrades to enable developers to write better apps.
  • A few of these upgrades include:
    • Notifications: tweaks to make notifications easier and more consistent to manage.
    • Autofill framework: includes browser like autofill for commonly used data such as name and email.
    • Picture in Picture mode which is already available on Android TV will now be available to phones as well.
    • Adaptive Icons which can change their appearance depending upon which device they are being displayed.
  • These are all well and good and represent steady improvements in the user experience, but they do nothing to solve the two big issues that continue to hamper the Android user experience thereby keeping usage lower and users less loyal when compared to iOS.
  • These are:
    • First endemic fragmentation: There are thousands of different implementations of Android which behave differently and result in variations in the user experience.
    • RFM research indicates that this variation creates user frustration, lower usage and lower loyalty.
    • Second software distribution: Google has no control over the updates that are applied to the devices that run its ecosystem on Android.
    • This means that it takes up to four years for new software to fully penetrate its user base.
    • This gives rivals plenty of time to copy Google’s innovations and put them into their devices long before Google’s own innovations reach the hands of users.
  • I have long believed that both of these problems are largely responsible (more than demographics) for the much lower usage experienced by Android devices in general.
  • Google’s Android revenues are dependent on usage and I think that these issues are substantially limiting Google’s monetisation potential on Android.
  • This is why I have long held the opinion that Google must take Android fully proprietary to fix these problems and begin to realise its full potential when it comes to monetisation (see here)
  • I am still hopeful that we will see announcements that quietly take Android in this direction at Google i/o this year but the indication from this preview is that i/o 2017 could be yet another year of ignoring the elephant in the room.
  • I remain pretty cautious on Google, preferring instead Microsoft, Baidu and Tencent.

Samsung – Edge dancer pt. II

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I think Bixby will struggle against Google Assistant.

  • Samsung has launched its offensive on the digital assistant market but I think it will still be dancing around the edge of the main act on the Galaxy s8: Google Assistant.
  • Samsung has announced that its new digital assistant, Bixby will be present on the Samsung Galaxy 8 with its own dedicated key on the side of the device.
  • Bixby promises to offer:
    • First, completeness: This promises to give users complete control of enabled apps rather than the few tasks offered by other assistants.
    • Second contextual awareness: Samsung is promising that Bixby will be aware of the context within which it has been triggered, making it more relevant and useful.
    • I suspect that it will do this using the hooks in Android that Google wrote to enable Google Assistant to do the same thing.
    • Third natural language recognition: Bixby should be able to understand complex, multi-part questions as well as prompt the user to clarify the pieces that it does not understand.
  • These features are very similar to those promised by Viv, the artificial intelligence company that Samsung purchased in October 2016 which is clearly the source of this product.
  • If Bixby can truly fulfil the promises that it is making, then it will almost certainly will be better than Google Assistant.
  • However, I think that this is a very big ask given that RFM research has found that AI excellence to date has been a factor of time and data volume.
  • Viv was founded in 2012 and has no data from commercial products while Google has been crunching data for 20 years and has orders of magnitude more data than its nearest rival.
  • Consequently, I think that compared to this highly ambitious billing, Bixby is going to fall very far short of the promises that it has made.
  • Furthermore, Samsung’s delivery of Bixby is going to be hobbled by the 2014 agreement that it made with Google where it agreed not to compete in the ecosystem (see here).
  • This is why I suspect that Bixby has been relegated to a button on the side of the device whereas it will be Google Assistant that is sitting on the all-important home button.
  • As a result I think on the smartphone, Bixby will lose out to Google Assistant but on other devices it has some chance.
  • Samsung has a good portfolio of other electronic devices, which combined with its SmartThings offering, could allow Bixby to offer intelligent and intuitive control of other Samsung devices.
  • This could help Samsung to encourage greater ownership of Samsung devices across its range but again this will depend on how good Bixby really is.
  • Over 20% of all Google mobile searches are already done using voice meaning that many users are already conditioned to pressing the home button and asking as well as being used to Google’s quality of service.
  • Consequently, I think that the odds are heavily stacked against Samsung having much success with Bixby but as long as it can continue to outsell Huawei by more than 2 phones to 1, the profitability of its handset business should remain intact.
  • I still pretty cautious on Samsung as I am not convinced that the full fall-out from the Note 7 disaster has been felt in terms of market share, which is what makes the Galaxy s8 launch so important.
  • I prefer Baidu, Tencent and Microsoft.

 

LeEco – Electric millstone.

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I think, LeEco must exit automotive to survive.

  • It looks very much like LeEco is giving up its grand plans for a 12,000 employee eco-headquarters in return for hard cash in order to give the ecosystem strategy time to succeed.
  • Despite these radical actions, I still think that LeEco’s only chance is to give up its automotive ambitions and focus on its core business: the ecosystem.
  • LeEco has recently raised $2.2bn (see here) which I calculated would leave $622m free to support the fledgling ecosystem of products and services.
  • However, the sale of the 48 acres it purchased from Yahoo to Genzon Group, the Chinese real estate developer this increases my estimate of free cash for investment to $1.132bn.
  • This is because to reach the $622, I took off $250 for purchasing the land but this outflow is now an inflow of $260m, improving cash flow by $510m.
  • This will give the company time to develop its offering but I remain concerned that its automotive ambitions remain a major problem.
  • LeEco’s automotive strategy is centred on an electric vehicle start-up called Faraday Future in which its founder is the major backer.
  • It broke ground on a huge 3m square-foot factory in Nevada in April 2016 but because contractors have not been paid, work has since ground to a halt.
  • Furthermore, Faraday Future has now reduced the size of the planned factory by 80% to 600,000 square-feet, cut the number of models from seven to two and delayed the factory opening by at least 1 year.
  • Faraday Future’s problems do not end there as senior management turnover has been high in the last 9 months and there could be as much as $300m in unpaid bills.
  • As Apple (see here) and even Tesla have found, building cars is a difficult business that requires a lot of time and very deep pockets.
  • I am pretty certain that Faraday Future has none of these things making its chances of long-term solvency very slim.
  • This is why I think that LeEco’s best interests will be served by not having this millstone hanging around its neck.
  • Faraday Future clearly needs hundreds of millions of dollars of new investment which LeEco simply cannot afford if it is to have any chance at delivering on its ecosystem ambitions.
  • These ambitions begin with a media consumption strategy that needs both heavy investment in terms of content and attention to detail when it comes to software and the user experience.
  • Furthermore, management needs to be focused on delivering on these ambitions rather than being distracted by building self-driving cars.
  • RFM research has found that currently, the user experience in the automobile has no effect on the user’s decision on where to live his Digital Life and therefore building a car to deliver one’s ecosystem makes no sense at all.
  • This combined with the difficulties, cost and poor profitability of automobiles, is why I think that Apple backed off (see here).
  • Hence, I think that for LeEco to have the best chance of succeeding, it needs to extract itself from Faraday Future and forget about self-driving cars.
  • Building a thriving ecosystem is difficult enough and throwing in cash constraints and management distractions can only make it next to impossible.

 

Spotify – Patience pays.

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I think shareholders will see more value by being patient.

  • Spotify is closing in on finally doing a deal with the record labels that I think will remove the last obstacle to the company going public.
  • Spotify and three of the largest record labels have been dancing around each other for a significant period of time without coming to any definitive agreement.
  • This is crucial because without the content from these three labels. Spotify would be unable to provide its current service.
  • I have long argued that as Spotify’s user base grows, so does its negotiating power and that the longer it took to arrive at an agreement, the better it is for Spotify (see here)
  • However, the time for Spotify to go public is approaching fast and I suspect that without a deal with Universal, Sony and Warner, any valuation that Spotify would achieve at IPO would be materially impacted.
  • Furthermore, with this hanging over its head, the stock would be very volatile in the public market as, in theory, the labels could wipe Spotify out at any time by pulling their music from its service.
  • In practice, this is never going to happen because with every month that passes, the labels need Spotify more than it needs the labels and I am pretty sure that if they were going to pull their music from Spotify, they would have done so ages ago.
  • This is because streaming is now the only source of growth in the music industry without which the labels would lose what has become their most important route to market.
  • Spotify is unique in that it is the only major platform to have a free-tier and adding in those users takes Spotify’s total user count well north of 100m.
  • This is hugely significant, as although these users do not pay Spotify directly, they generate vast amounts of data which can be used to improve and train its algorithms.
  • This is critical because it is those algorithms that allow Spotify to both understand the music it has on its platform as well as accurately match it to the users that it has.
  • In the long-term, I think that this gives Spotify the opportunity to cut the labels out completely which would have the effect of substantially enriching both artists as well as shareholders of Spotify.
  • I think that this is why Spotify is not keen to do a deal with the labels that limits the provision of music to free users as data collection and algorithm training would most likely be impacted.
  • The other side of the coin is that I suspect that Spotify has guided its investors to a time when it can IPO, giving existing shareholders visibility as to when they will see a return on their investments.
  • I believe that doing an IPO without a signed deal with all three of the biggest labels has difficulty written all over it which is why Spotify is considering caving in to some of the labels’ demands.
  • Although this will bring some short-term benefits to Spotify and its shareholders, I think that a deal in the short-term could delay Spotify’s ability to supplant the labels which I have long believed is where the real upside lies.
  • This is because I see that this is how Spotify goes from earning $0.30 on the subscription dollar to $0.50 or more.
  • Hence, I think that the best outcome for shareholders will be achieved by being patient and letting the IPO exit window slip for as long as required for Spotify to become powerful enough to dictate terms to the labels.
  • I continue to see only a minor threat from Apple Music as Spotify is still adding paid subscribers much more quickly and shows every sign of having better artificial intelligence with which to differentiate its service.
  • Whether Spotify can convince its shareholder of the merits of delaying their exit remains to be seen.

Amazon vs. Google – Homefront pt. II.

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Amazon is pre-emptively moving to keep Google out.

  • Amazon is pulling out all of the stops to ensure that it is Alexa, rather than Google Assistant, that ends up becoming the nerve centre for controlling the smart home.
  • In its latest move, Amazon is offering credits for AWS that are likely to ensure that connecting one’s smart home device to Alexa remains free in almost every circumstance.
  • As the scope of Alexa improves and users can do more with Alexa, it is likely that creators of smart home devices will require more space on AWS that will require them to start paying Amazon.
  • Most device developers are small start-ups with very limited funds meaning that this will be a big incentive to do more with Alexa.
  • At the moment, the free tier gives developers 1m AWS Lamda requests and 750 hours of EC2 compute time per month.
  • Beyond that, developers end up incurring a monthly charge which is something that Amazon is wisely keen to avoid.
  • With this new program, Amazon is offering a one-time credit of $100 as well as $100 per month towards any charges that they incur as a result of usage of their devices.
  • This is likely to ensure that almost all developers of smart home devices will not have to pay anything to Amazon until they are generating so much usage that they are making plenty of money themselves.
  • I think that this is a very shrewd move as it encourages more developers to sign up to make their devices work with Alexa and also encourages them to make the skills deeper and more intuitive.
  • Currently, most skills are very basic and as a result they suffer from usability problems which in most cases makes it easier to turn the device on manually rather than using Alexa.
  • This looks like a pre-emptive move to keep Google at bay as I see Google making rapid moves to improve its Google Home developer program after being all but wiped out at CES 2017.
  • Even though Amazon has close to 10m devices installed in the houses of users compared to Google at 0.5m – 1m, the Google Home experience is so superior to Alexa that I still see a risk of Amazon losing this race (see here).
  • This is why I see Amazon doing everything that it can to show developers love and support which is something that to date, Google has badly neglected.
  • The result is that very few of the smart home device developers are making sure that their devices works with Google Home giving many users more reason go with Amazon’s Echo devices rather than Google.
  • Amazon is also very fortunate that the market’s view of Alexa is so positive as a side by side test of the Amazon Echo against Google Home shows how inferior Amazon is compared to Google.
  • This is why it is still Google’s battle to lose but Amazon is clearly doing everything that it can to ensure that it is Alexa rather than Google that dominates the potentially extremely lucrative market for intelligent home automation.
  • From an investment perspective, neither of these two companies are desperately appealing leaving me preferring Baidu, Microsoft and Tencent with Apple for long-term income based investors.

 

Yahoo – Earned asset

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This time Marissa has really earned her payoff.

  • Following the sale of the Yahoo core business to Verizon, Marissa Mayer will step down as CEO of Yahoo and will receive a severance package worth $23m.
  • This has once again raised the issue of excessive payoffs to failed senior executives, but I think that for the first time since she became CEO, she has earned every penny of her severance.
  • Yahoo has completely failed to build a digital ecosystem but it has successfully sold an asset that can easily be argued to be worth nothing for $4.48bn.
  • While the core business is cash generative, it is in decline and has also suffered two of the worst security breaches in Internet history.
  • I think that these breaches could easily trigger a mass exodus of users.
  • Over the last 12 months, Yahoo has admitted that around 1.5bn user accounts have been compromised in two very large break ins.
  • This is more accounts than Yahoo actually has, implying that every account that Yahoo has been compromised with a good number of its users having suffered the indignity twice.
  • If this was not enough, Yahoo’s Q4 16 results showed improving margins solely due to cost cuts which deflected attention away from the fact that revenues are still falling, albeit more slowly than before.
  • For the last 10 years, Yahoo has neglected its Internet assets but it has still managed to enjoy high usage and engagement in the fixed Internet despite its failure in mobile.
  • It is this engagement that Verizon is paying $4.48bn for.
  • However, recent events have given users the perfect excuse to finally close their Yahoo email account and move to something else.
  • Following the disclosures of these hacks, Verizon attempted to have the price cut by $925m but Yahoo managed to beat it down to a much smaller $350m discount.
  • Furthermore, Yahoo will only shoulder half of the liability for any class action lawsuits that result.
  • If I was Verizon, I would have been looking for Yahoo to shoulder all of the liability as it was due to Yahoo’s inattention and neglect that allowed the breaches to occur in the first place.
  • Despite is very poor business performance, Yahoo’s management has done a superb job in capitalising on Verizon’s apparent desperation to build a digital ecosystem and on its belief that it needs Yahoo’s assets to do that.
  • I have long thought that there was a very real chance that Verizon would walk away from this transaction leaving Yahoo with a fast depreciating asset and a potentially large liability.
  • Consequently, I think that Marissa Mayer has probably enriched shareholders by more than $1.5bn making her $23m payoff look very reasonable indeed.
  • With Yahoo’s shares now at $46, there is still some upside left but much less than the last that I valued the shares at $50.4 (see here).

Intel – Auto ambition

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Intel must break out of the mould that success has cast for it.

  • The acquisition of Mobileye by Intel highlights both Intel’s determination not to miss the next big trend as well as the concentration of Google’s competitors around HERE.
  • Intel will buy Mobileye for $15.4bn and merge it with its existing autonomous driving business to create one of the leading supplier of autonomous driving systems.
  • Intel already has a substantial effort in this space but adding Mobileye gives it a very strong position in visual sensors and most importantly, gives it direct access to 80% of the automotive market.
  • These doors were already open for Intel but I think that going in with Mobileye will ensure that the automotive industry takes it much more seriously.
  • I think that missing the boat in mobile has damaged Intel’s reputation to the point where some potential customers think that Intel has little to offer beyond chips for PCs and chips for servers.
  • In reality, this is very far from the truth but dispelling that impression is one of the most important tasks that Intel faces over the next few years.
  • The fact that Intel will soon become one of the top 4 shareholders of HERE will also help in improving its credibility in both location and automotive.
  • This is because HERE is the only realistic alternative to Google in high definition maps for autonomous driving which are now recognised as essential for a car to drive itself.
  • Even Mobileye, which early in 2016 was adamant that a HD map was not needed, has caved in and is now working with HERE to use its HD map in its systems.
  • In addition, other ecosystems such as Tencent, Baidu, Facebook and Amazon are also working with HERE for their location data, all of which will benefit Intel as it tries to break the mould that the market has set for it.
  • Mobileye represents that second largest acquisition in Intel’s history underlining the need for semiconductor companies to move into markets beyond consumer electronics and PCs.
  • This is why Qualcomm is buying NXP and why Samsung is buying Harmon.
  • Intel has now armed itself with the potential to offer an end to end solution for autonomous driving but the key to success will be how well it can execute on that offering.
  • History is not in Intel’s side but I detect a change in the way Intel thinks about its place in the world that just might allow it to break the x86 mould that history has cast for it.