Ericsson vs. Apple – Power of precedent

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Apple in a weak position in its fight against Ericsson.

  • Following the expiration of their licence deal in January 2015, Apple and Ericsson are heading to court to fight over the licensing of standard essential IP that relates to 3G and 4G.
  • Ericsson has filed 7 complaints in the US claiming that Apple infringes up to 41 of its standard essential patents.
  • Ericsson is also asking the ITC to ban Apple products from the US market as a result of the patent infringements.
  • Apple has countersued Ericsson claiming that by asking for a percentage of the wholesale price of the device, Ericsson is unfairly benefitting from Apple innovations around design which it claims is a driver of its high ASPs.
  • Ericsson claims that it offered Apple a licence, presumably on the same terms as before, but that Apple turned it down.
  • Of all the companies that licence standard essential patents, Ericsson is reputed to be one of the fairer players.
  • RFM research indicates that Ericsson seeks a price of around 1% of the wholesale price of the device compared to many of its peers which seek around 2%.
  • This is despite the fact that Ericsson has one of the stronger patent positions in both 3G and 4G.
  • The problem for Apple is that when it comes to settling legal disputes, what has happened or been agreed to in the past in often used as the basis for the outcome.
  • This means that Apple is at a significant disadvantage in the following ways:
    • First, Apple has previously agreed to pay Ericsson on the basis of the wholesale price of its devices.
    • This implicitly means that has accepted this system as fair and reasonable (how SEPs must be licensed).
    • Second, Apple has paid for these patents before meaning that it openly admits that its products infringe.
    • RFM believes that Ericsson is asking for the same royalty rate as its previous agreement.
    • Third, The fact that Apple has historically agreed to pay this rate means that it has implicitly agreed that this price both fair and reasonable.
    • Fourth, by offering a license to Apple, Ericsson shows a greater willingness to negotiate, which will help how it is viewed by the court when the dispute is heard.
  • I suspect that the net result is likely to be an outcome in Ericsson’s favour as the power of precedent means that the court is most likely to impose a royalty rate at the same level as before.
  • Ericsson’s request of a ban to the ITC is extremely unlikely to amount to anything as the White House set a strong legal precedent by previously vetoing an ITC imposed ban related to the infringement of standard essential patents.
  • The problem for Ericsson is time. Court cases take a very long time and I think that it will have to make a choice between accepting less money now or waiting for years to get paid.
  • The other problem is that if Ericsson gives in to Apple, it will then be forced to give into everyone else because it must licence its essential patents in a non-discriminatory fashion.
  • Given that Ericsson is profitable with good cash flow and a reasonable cash balance, it does not need the money now and can easily afford to wait it out.
  • Consequently, I expect Ericsson to stand its ground meaning that this complaint is likely to be heard by the court.
  • The net result is going to be yet another expensive fight where the only real beneficiaries are the lawyers.

Ecosystem economics – Sticky wicket

Reply to this post

RFM AvatarSmall

 

 

 

 

 

YouTube contributes no profit but a lot of value to Google.

  • Even though YouTube managed to earn around $4bn in revenues in 2014A, the inherent nature of video economics continue to prevent it from turning a real profit in its own right.
  • I suspect that the main reason for this is that most of the data that it gathers is monetised elsewhere within the Google ecosystem.
  • As a result, YouTube is an excellent example of how important it is to look at the overall economics of an ecosystem rather than its individual pieces.
  • I believe that YouTube is unprofitable for the following reasons.
    • First, Although it has billions of visitors, it is estimated by data analytics company, Pivotal, that 9% of users consume 83% of the videos viewed.
    • This has a substantial and negative effect on the advertising opportunity that exists for marketers on the platform.
    • Second, A large proportion of the videos are viewed from embedded players rather than on the site itself.
    • This reduces the opportunity for profiling of the user as well as the opportunity to advertise to that user.
    • Third, The real money in TV, movies and video is not made in the long tail.
    • In TV and video there is a small amount of content that appeals to almost everybody and then a long tail of categories and genres that appeal to special interest groups.
    • YouTube is the long tail whereas Netflix is the small amount that everyone watches.
    • Fourth, The popular content is many times more expensive to acquire but it is only here where the benefits of scale can lead to sustainable profitability.
    • The cost to support video streaming is much higher than it is for audio or a webpage.
    • A video requires much more storage space and transmission capacity than audio or a simple webpage.
    • This means that that in order to have comparable economics, advertising revenues per video have to much higher than for a piece or audio content or a webpage.
    • This is exactly the problem that made video calling over 3G completely pointless for mobile operators as they would have needed to charge 10x the price of a voice call for a video call in order to earn the same return.
    • Advertising revenues from video have been the fastest growing in recent years but I think they are still far below the levels needed to match the economics of audio or a webpage.
  • Given these limitations, I think it extremely unlikely that Google will turn YouTube into a meaningful profit centre anytime soon.
  • If YouTube is making no money, one has to ask why Google bothers holding onto it?
  • The answer to this is simply that video is a very important part of the ecosystem and I suspect that Google’s overall revenues would fall by much more than $4bn if YouTube was to be sold or closed.
  • This is because YouTube is an integral part of the overall Google ecosystem where I continue to believe that the whole is much greater than the sum of the parts. (see here).
  • Consequently, while YouTube does not turn a profit in its own right, I believe that it enhances Google’s ecosystem to a point where the overall return on investment is nicely positive.
  • This makes YouTube a very valuable asset despite the fact that it earns no money in its own right.
  • RFM forecasts that Google’s revenues from its ecosystem will grow nicely again during 2015E, albeit more slowly than it did in 2014A.
  • Google after Microsoft, is my second choice in the digital and mobile ecosystem.

Samsung vs. Google – Here comes trouble

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Mobile payments could cause the gorillas to start fighting again.

  • Google’s acquisition of technology from Softcard threatens to shatter the fragile peace that has existed between Samsung and Google since January 2014.
  • For more details please see Samsung & Google – Gorilla War – 27th May 2014
  • Following the failure of its own Google Wallet that was launched in 2011, Google has decided to acquire the technology and patents of Softcard in another effort to get a foothold in this important space.
  • At the same time Samsung has acquired LoopPay (see here) which I think will be already be integrated into the Samsung Galaxy s6 when it launches on Sunday.
  • This is because Samsung has been working with LoopPay for quite some time and I think that the acquisition is a sign that this is the technology that Samsung has decided it wants to run with for payments.
  • This will lead to Samsung and Google once again competing against one another for the attention of the user, but I do not think that Samsung is going to fall for the same trick twice. (see here).
  • Softcard is (or was) a collaboration between AT&T, T-Mobile and Verizon that offered users a NFC based mobile payments system.
  • Unfortunately due to a clumsy set up process, poor user experience and limited credit card support, Softcard has gained virtually no traction.
  • Vast sums of money have been poured into it as the cash burn looks like it is around $15m per month.
  • However, it looks like Google has simply acquired the technology and the patents, leaving most of the people and the infrastructure behind for the telecom operators to deal with.
  • Using Softcard will provide Google with much greater operator support but it will not fix the inherent usability problems that exist within both Google Wallet and Softcard.
  • Google must now put the two technologies together and come up with a seamless, easy and fun to use solution that users will love.
  • This will take quite some time (I am expecting some announcements at i/o on May 28th and 29th), giving Samsung a lead in terms of having something workable in the market.
  • Samsung has lost of lot of market share over the last 9 months but it is still the largest Android vendor by quite some margin.
  • In order to ensure that Google’s payment system has the best chance, I can see Google altering its Mobile Application Distribution Agreements (MADA) such that its payment system is required to be the default option with the app. placed front and centre on the device.
  • Samsung is Google’s biggest distributor of its ecosystem and I am pretty sure that this time it will refuse to put Google’s payment system in a more prominent position than its own.
  • This is because payments is one of the few areas left where Samsung can differentiate itself having ceded the entire ecosystem to Google in 2014.
  • The winner of this latest conflict will be decided by the user, but Google has an advantage by being able to tie its payments system into its very popular ecosystem.
  • This is likely to cause further conflict within the Android camp, handing the advantage to Apple and giving Microsoft an even greater opportunity to bring its ecosystem to life.
  • Microsoft remains my top choice for the ecosystem in 2015E as Yahoo! is still failing to make any real use of the assets it has.

Research Publication – Mobile Ecosystems – Devil in the details.

February 24th 2015:  Radio Free Mobile updates its flagship research product with the publication of: Mobile Ecosystems – Devil in the details

Mobile Ecosystems – Devil in the details –  (Click here for details and purchase options).  RFM corporate subscribers will receive their copy directly by email. 

Devil

Ecosystems are becoming more sophisticated as users do more and with their devices. Consequently, how one ecosystem differs from another is becoming less obvious. RFM has introduced 4 new Laws of Robotics to better evaluate the different players. iOS continues to gain in strength while Google is still struggling with software problems. The lead challengers are Microsoft, Xiaomi and Yahoo! all of whom have a lot to do. 

  • Maturing market. Users are becoming more sophisticated in terms of what they demand from their Digital Lives. Ecosystem providers are beginning to cotton onto this and differentiation between different players is becoming more difficult.
  • Devil in the details. To take this increasing sophistication into account, Radio Free Mobile has expanded the criteria by which the quality of an ecosystem is judged from 3 to 7. This is to take into account the increasing sophistication of ecosystems as well as to be able to more accurately reflect their strengths and weaknesses.
  • Four new laws. Law 4: App equivalency. How well the app. store of an ecosystem compares to Apple. Law 5: Data sharing. How well the user experience is enriched through apps and services sharing data. Law 6. User data integration. How well an ecosystem understands its users. Law 7. Software consistency. How consistent is the software used across the devices upon which the ecosystem is present.
  • iOS. RFM’s research indicates that Apple has decided not to compete on Digital Life services but instead to differentiate through exclusive functionality based around HomeKit, HealthKit and Apple Pay. The superb reception of the iPhone 6 has given Apple more time to get this strategy up and running before commoditisation starts to bite.
  • Google has the largest ecosystem but the user experience remains hobbled. The quality of the user experience and Google’s inability to get its software into the market in a timely fashion, continue to be serious hindrances to user loyalty and Google’s ability to monetise Android. RFM expects Google to aggressively exert its control over the Android software in the short to medium term.
  • Microsoft still has a massive hill to climb. Its ecosystem is gradually getting better but it continues hide its light under a bushel. Its marketing remains very weak and users still have no idea why they should consider Microsoft’s ecosystem. As a result, Microsoft actually lost market share during 2014A.
  • Others Xiaomi and Yahoo! head an ever growing list of challengers.

Click here for a full summary

 

 

 

Yahoo! – The missing point

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Yahoo! still fails to address the central issue of its ecosystem.

  • Yahoo! hosted its first mobile developer conference last week that barely created a ripple in the newsflow.
  • This was because it was devoid of anything really new other than the launch of mobile developer suite that looks a lot like the developer tools that Twitter already makes available through Fabric (see here).
  • The new mobile developer suite provides the ability for app. developers to access Yahoo! search and three mobile advertising options directly from within their apps.
  • The idea here is that it makes it much easier for app. developers to monetise through advertising and users of those apps to access search without having to leave the app.
  • This is all well and good but this hardly represents a big innovation that is going to bring developers flocking to use Yahoo!’s tools.
  • In fact, the only kind of developers I can see liking this are those that for some reason do not want to use Google.
  • Google is bigger and better in almost every way and in all likelihood offers better opportunities for monetisation.
  • This is a good step in Yahoo!’s evolution but it is still refusing to address the central issue.
  • Revenues are drifting sideways and despite Yahoo!’s claims of having a significant position in mobile, the facts do not stack up.
  • RFM estimates that Google had around 614m users of its ecosystem on Android at the end of 2014A from which it made $6.9bn in revenues (excludes iOS).
  • Yahoo! claims over 500m mobile users but it was only able to earn $1.2bn in revenues in 2014A.
  • This tells me that Yahoo!’s ecosystem remains an unconnected, unrefined jumble of assets which have not been streamlined and integrated.
  • Using Google as a benchmark and assuming Yahoo! has 500m mobile users, it would seem that this lack of execution on its acquisitions and assets have cost it $4.4bn in potential revenues in 2014A.
  • Its failure to address this opportunity is why the core business continues to underperform and until it moves to do something about sorting out its ecosystem, this will continue.
  • For the last two years Yahoo! has traded on a single investment that was not made by Marissa Mayer.
  • Now that the window for that trade has passed, one has to ask hard questions of the underlying business which so far, the company is failing to answer.
  • I expect Yahoo! to continue underperforming Google, Apple and Microsoft on its financial performance in 2015E.

Google – Trouble in paradise

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Lollipop in danger of sucking.

  • Despite promises of significant performance improvements, initial testing is showing that Lollipop is not much better than KitKat.
  • This will rub salt into the wound caused by the upgrade that has been sitting on the shelf for months and is still not in the market in any meaningful way.
  • Techspot (see here) ran some detailed tests on the Moto X, Moto G, LG G3 and Samsung Galaxy s5 before and after being upgraded to Lollipop (Android 5.0).
  • The devices were tested for CPU performance, GPU performance and battery life which arguably are the things that are going to impact the user experience the most.
  • The difference in CPU performance was negligible with the best devices registering a 5-6% performance improvement on multiple measures.
  • The GPU benchmarks also saw virtually no discernible improvement. It is worth noting that the new Android Runtime (ART) improvements are not geared towards 3D rendering which is what all of the benchmarks measure.
  • Battery life was also not meaningfully improved in any of the devices tested.
  • The net result is that as far as the user goes, he is very unlikely to see a significant performance improvement when he upgrades to Lollipop.
  • This is a far cry from the promises that Google made when it launched Lollipop with up to 2x performance improvement touted as a result of ART.
  • This is a classic example of how performance gains in optimal conditions in the lab evaporate when tried out in the real world.
  • This is due to differences in the way the stock software has been implemented and any tweaks that the handset makers may have made to the code to add differentiation.
  • That being said, the modifications by Motorola are minimal (having very recently been a Google company) meaning that manufacturer tinkering is unlikely to be the cause.
  • Apart from the material design user interface upgrade, which many manufacturers look set to remove any way, there is seems to be very little that will excite users.
  • Lollipop is not going to suddenly fix the problems of Android in terms of software consistency and the poor user experience.
  • This is bad news for Google and it is becoming increasingly clear that if Google wants to fix the user experience and software problems that plague its ecosystem, it will have to do so by completely taking complete control of the code.
  • I believe that this is very much on the cards and that in the medium term, we will see the Google software become just as controlled and inflexible as the software that runs iOS or Windows Phone.
  • Google’s weaknesses continue to leave the door open for Microsoft to come in and entice users away, but it will only succeed in doing so if it can fix its marketing and properly explain to users why they should consider the Microsoft ecosystem.
  • Microsoft remains my long term top pick in terms of a place to look for upside in the mobile and digital ecosystem.

Samsung – Back to basics

Reply to this post

RFM AvatarSmall

 

 

 

 

 

LoopPay must become seamless to create value for Samsung.

  • With the complete cessation of any attempts at the ecosystem (see here), the acquisition of unique hardware is the only way left for Samsung to differentiate.
  • To this end Samsung has announced the acquisition of LoopPay which is an enabler of wireless payments with any terminal that has a mag-stripe reader.
  • Loop Pay consists of a piece of hardware that wirelessly transmits the data of the card to the sensor in the card terminal that reads the magnetic stripe.
  • This is the main advantage that LoopPay has over Apple Pay which requires an NFC enabled terminal.
  • LoopPay will work with any terminal in the world whereas less than 10% of terminals in the US alone are NFC enabled.
  • LoopPay also includes an app. to manage all of the stored cards and to ensure that the appropriate security is observed when making a transaction.
  • There are two disadvantages:
    • First: The user still has to sign or enter a PIN to complete the transaction making using LoopPay no less onerous than using the original card.
    • Second: It requires the user to have a case on his device that turns it into a brick or he has to carry around an extra fob.
  • This is why LoopPay sells itself on “leave your wallet” at home rather than as a “much easier way to pay”.
  • I have suspected for a long time that the Samsung Galaxy s6 will include the LoopPay hardware integrated into the phone which will solve the second problem.
  • However the first problem will be more difficult to solve.
  • LoopPay expects to be able to enable tokenised transactions (like Apple Pay) this year which should solve this problem but how successful it will be remains to be seen.
  • There is a simple test.
  • If the user can pay for goods and services as easily with a Samsung Galaxy s6 as easily and safely as he can with Apple Pay then this will be a resounding success.
  • There is no space for compromise.
  • The slightest complexity, extra step or compromise and this will be a complete failure as many wireless payments solutions have already found to their cost.
  • To date LoopPay has prided itself on supporting any card and a very large range of smartphones but that is now going to change.
  • I suspect that users of other smartphones will be able to use LoopPay with the external piece of hardware but only Samsung devices will have it integrated.
  • This will give Samsung an important differentiator if painless mobile based payments become something that users demand on their mobile phones.
  • Samsung will also have the advantage of having the system work on any payment terminal in the world as long as LoopPay can solve the usability problem with tokenised transactions.
  • Given the complexities involved in tokenised transactions, I don’t expect this to make a real difference on the Galaxy s6 but it could be fully ready for the s7.
  • Consequently, I still see very little that is going to make users rush out and pay up for the Galaxy s6 meaning that Samsung faces another very difficult year.
  • With no catalyst and difficult comparisons to H1 2014, I still prefer Microsoft, Google and even Apple for the ecosystem.

 

Sony – Silo city?

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Sony’s strategy raises more concerns that it solves.

  • Sony has announced its medium term strategy with the aim of delivering JPY500bn in operating profit for the full year ending March 2017E.
  • This would represent a return on equity (RoE) of 10% which will be the yardstick against which performance will be based.
  • The three main tenets of its new strategy are as follows:
    1. Pursue profitability without necessarily pursuing volume.
    2. Each business unit to have greater autonomy but also greater responsibility for helping to deliver group 10% RoE. Sony recognises that this will vary across the different parts of the business and has classified its businesses accordingly. (Growth drivers, Stable profit and those that will be volatile).
    3. Each business unit being positioned as being part of an overall portfolio of assets rather than stand-alone units.
  • Sony also aims to continue its conversion into a holding company structure with the business units operating as wholly owned subsidiaries.
  • The aim here is to speed up decision making and to ensure that each unit is self-sustaining.
  • Speeding up decision making and ensuring that each unit is part of an overall portfolio is good news for Sony’s ecosystem ambitions but the rest of it is troubling.
  • Making the business units more autonomous will not encourage them to co-operate and raises the risk that the old-silo mentality returns in force.
  • Furthermore, it makes the realisation of profitability from the ecosystem much more difficult.
  • If Sony is successful in creating an ecosystem based on a great user experience derived from PlayStation and rolled out across the rest of the company (see here), I can see a huge internal battling emerging for how that profit is allocated.
  • If Mobile becomes very profitable due to users being willing to pay up for the Sony ecosystem, how will this profit be allocated?
  • The gaming and the media segments will rightly demand some of the profitability due to their contribution to the ecosystem but the mobile business will need that profit to meet its targets.
  • Carving out the units also makes it easier to hive them off or shut them down which makes me think that Sony has missed the fact that the real profit is generated when these businesses all pull together.
  • The potential for these conflicts will also dis-incentivise the units to collaborate with each other in the first place meaning that Sony returns to the silos that have plagued it for the last 10 years.
  • If this happens then the ecosystem strategy will fail and the targets will be missed.
  • There are three ways to make money from the ecosystem: 1) premium hardware pricing, 2) Advertising or 3) subscription.
  • Sony can realistically only address 1 and 3 and both of these require a collaborative structure where the assets all pull together and incentives are based on overall performance rather than the individual pieces.
  • This is exactly what Microsoft is doing and is why I am increasingly confident that it has a real chance to be a major ecosystem.
  • This new strategy raises more concerns than it addresses and makes me worry that, after all, Sony has missed the point of what it should be trying to achieve.
  • I continue to prefer Microsoft and Google as plays on the ecosystem and my concerns regarding Sony have just gone up a notch.

Samsung – The final nail

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Using Microsoft apps is the final nail in the ecosystem coffin.

  • It looks very much like Samsung has discarded all of its in house software on the Samsung Galaxy S6 in favour of productivity apps from Microsoft and the ecosystem from Google.
  • Removing all the usual pre-installed apps. should make the device appear mush quicker and much cleaner when it comes to performance.
  • Following its deal with Google a year ago, Google’s ecosystem will be front and centre on the device but the surprise is that Microsoft’s apps will also be pre-loaded onto the device.
  • As no one ever seemed to use its pre-installed apps., Samsung seems to have made the wise move to not install them on the device.
  • Die-hards will still be able to download them but I doubt many will.
  • Microsoft is a small exclusive for Samsung, as Microsoft’s Word, Excel and PowerPoint are currently only available for Android tablets with a screen size of 7 inches or more.
  • This is a significant boost for Microsoft as preinstalled apps always get used far more than those that have to be downloaded.
  • The fact that Apple’s inferior maps app. gained a significant amount of market share against Google Maps when Google was no longer preinstalled on the iPhone is testament to this fact.
  • Microsoft’s move to make the reading and basic editing of Office documents free on other platforms is a significant boost to its appeal to the consumer.
  • This is likely to come to the detriment of other offerings that are also free but do not have the widespread reach and acceptance that Office has.
  • For Samsung, this is the final stage of its capitulation when it comes to the ecosystem.
  • In January 2014 it ceded the consumer ecosystem to Google and now it looks very much as if it has ceded the enterprise ecosystem to Microsoft.
  • Samsung badly needs the Galaxy S6 to be a hit but outside of a few gimmicks, there is still nothing I can see that will excite users.
  • The inclusion of Microsoft should appeal to content creators and prosumers but the fact that the Google ecosystem is available from many different vendors will really limit Samsun’s ability to differentiate.
  • Assuming Samsung can hold share steady and continue to streamline its cost base it could be able to hold profitability around the current 7% without the Galaxy S6 being a smash hit.
  • With very little to encourage users to pay up for the device, this looks like a best case scenario.
  • Hence, I think Samsung will remain in the doldrums this year and prefer the likes of Microsoft and Google as places to look in for investing in the ecosystem.

 

Apple – Hot wheels

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Infotainment makes more sense than a car.

  • Apple has money to burn, but I think that success has not gone to the collective head of the management team.
  • If the chatter is correct, there is a project inside Apple taking up the time of 1,000 employees that is looking at the creation of an automobile.
  • This would be a fully electric car that would probably be capable of driving itself. (Apple will need to fix its map first if it wants the car drive itself outside of California).
  • With 1,000 people on the project, it is going to be costing around $100m a year to run which is far too much given how far-fetched this idea is.
  • My single biggest concern on this idea is that a car does not fit Apple’s business profile.
  • Apple makes high-end products with high margins and does not push into the mass market often at the expense of growth.
  • Cars are not very profitable and in fact many car companies make more money on the financing they offer to customers than the cars themselves.
  • Consequently, it is very likely that even if a car was successful, it would put Apple’s margins under meaningful pressure.
  • Historically, this is something that Apple has assiduously avoided throughout its history, and I suspect that this would have an adverse effect on the valuation of the shares.
  • Hence, I suspect that Apple has a small skunkworks operation that is looking into ways in which it can draw the automobile into the iOS ecosystem.
  • I very much doubt that there are 1,000 people on this project and would make an estimate of 100.
  • I don’t think it will end up making a car but it is not impossible that it ends up making the infotainment unit for the automakers to integrate into their vehicles.
  • This is a device on which it could make excellent margins because Apple would not have to be making 40% gross margins on engines, wheels, brake pads and so on.
  • Furthermore, the sales opportunity would be much greater given that the Apple unit would going into products that are already well established in the market.
  • Finally, given that the best automakers tend to be very bad at making decent infotainment units, there is an opportunity for both sides of the equation to benefit.
  • This is a project that I can see delivering value for shareholders in contrast to a car which would probably do the opposite.
  • Apple has cash burning a hole in its pockets but I think that success has not gone to its head and that prudence continues to rule the roost.
  • That being said, the catalyst I have been looking for an Apple has now passed, and I am looking further afield to Microsoft or Google for sort term upside.