Windows Phone 8 – Thirsty horse?

 

 

 

 

 

  • Microsoft officially launched Windows Phone 8 at its event in San Francisco yesterday with the main question remaining: is anyone actually going to buy it?
  • With Nokia, Samsung and HTC all having launched devices, the software has already been widely displayed but a few new things emerged that should serve to enhance the user experience.
  • Facebook is now more deeply integrated into the device with alerts and updates being pushed to the lock-screen and there is a new kid’s corner that allows kids to play games without affecting other areas of the device.
  • The Windows Phone store now has 120,000 applications with 46 out of 50 of the top apps on iOS now available.
  • Four nice looking devices are now available from Nokia, HTC and Samsung and greater support from Verizon was also announced.
  • Pricing is in line with Android with Verizon carrying the HTC device for $199 with a two year contract with the cheaper Nokia device (Lumia 822) going on at $99.
  • Microsoft has everything going for it.
  • Its user experience is highly differentiated and well implemented.
  • It has a vast array of assets to integrate into the experience such as MSN, Skype, xBox and SkyDrive to offer something special and different to the consumer.
  • Most of the major handset manufacturers are producing nice looking and well-built devices at reasonable prices.
  • And finally operators, who are desperate to get out from under the boot of Apple and Google, are on board and ready to support the launches.
  • With Android looking weak and vulnerable, Microsoft has never had a better chance than now to make a meaningful and lasting impact on the mobile phone market.
  • However, you can lead a horse to water but you cannot make him drink.
  • Those with a vested interest in Microsoft Windows Phone 8 can do everything except make consumers buy the devices and this is where the Achilles heel of the entire proposition is to be found.
  • This user experience has been around for 3 years but virtually no one has bought into it.
  • What’s worse is the fact that Microsoft have been trying to crack this market for 16 years but have still really to make any meaningful impression.
  • Don’t get me wrong. I like the Microsoft proposition and I think it offers a substantial threat to Android on paper but in the stores no seems to care. Yet!
  • With devices going on sale in November, Windows Phone is not going to make much of an impression this year.
  • However, if Windows 8 touch devices start to see some traction in 2013 then there could be a strong halo effect where the Metro UI on the big devices helps blow away the veil of ignorance that lies over the consumers that has kept them firmly with Android.
  • This could then lead to a realisation that Microsoft has produced something that’s pretty cool and useful at the same time, resulting in a nice upswing in market share to the detriment of Android.
  • If this happens, then Nokia’s share price will go with it but I have no clue when this might come to pass.

Windows 8– A sedate frenzy

 

 

 

 

 

  • It has not been a mad rush nor a scrum down but there has been more interest in Windows 8 (especially the Surface) than the initial reviews would have led me to believe.
  • Furthermore, those that have got their hands on one and played around with it for the weekend have found it to be better than they had been led to believe.
  • There were queues outside Microsoft’s stores (not in Apple’s league) but queues none the less.
  • While most the attention was focused on the Surface (which is back ordered for 3 weeks), the new Asus, Acer and Sony ultrabooks with touch screens did not go unnoticed.
  • Digging around in the Surface RT’s desktop mode, the device is a bit more capable than expected offering a full explorer experience, the ability to mount network drives and access files on the home network.
  • Whether one can get the software to access the contents of those files on the Surface is another issue, but it’s a step in the right direction.
  • I suspect that those that went to the Microsoft store to play with the new devices are a poor representation of the wider buying consumer in general and here the data is not so good.
  • Recent polls suggest that more than 52% of consumers have not even heard of Windows 8 and of those that have 60% have no interest in buying or upgrading to the new OS.
  • “Windows 7 is fine for me”, was a common quip.
  • However, it is not the Windows 7 crowd that Windows 8 targets.
  • It’s those that are still running Vista or XP on an ancient old laptop or desktop and for these users I think it is an interesting proposition.
  • The key to this cycle is the fact that the average age of laptops and desktops which has increased markedly since people started spending on smartphones and iPads.
  • With something exciting in PCs again, the average age should now begin to reverse.
  • That, plus a slowing of the haemorrhage of content consumers from old laptops to iPads will also help stop the rot.
  • Every new release of Windows in history has created a product cycle and I believe that Windows 8 will be no different.
  • Black Friday has just come and gone, and hurricanes aside, it will be important to see what kind of impact Windows 8 has had, if any, as a steer for what will happen for the balance of the year.
  • At the moment the very short term outlook remains very weak and even if there was an upswing in demand, there is not the inventory to meet it meaning that, best case, the rest of 2012 will be soft.
  • The cycle will look a bit different this time compared to previous cycles, but then they always do, but it will be a cycle none the less.
  • The stocks involved in this cycle are assuming that there is no real cycle to speak of which makes them interesting when it comes to an investment case for 2013.
  • Here the market share gain story of Asustek, Samsung and maybe Lenovo looks interesting as does the rising tide that floats all boat theme leading one to Intel and Microsoft.
  • I haven’t pulled the trigger on any of these yet as they all remain firmly stuck in the dumps but it is a theme I want exposure to before 2013 gets underway.

Windows RT – Confusion abound

 

 

 

 

 

  • Windows 8 launches tomorrow, doubtless to much fanfare, but will the users be interested?
  • No one has any confidence in the ability of this new OS to stimulate a pickup in PC sales and share prices are indicating that there will not be one.
  • A lot of this depends on the reception of Windows on ARM (Windows RT) as these will be the cheapest devices but no one (least of all me) seems to be sure what Windows RT is and what it will deliver.
  • I had hoped that Windows RT is simply a full Windows 8 implementation on the ARM processor but unfortunately it is not as good as that.
  • The naming of Windows RT has caused enormous confusion as many have assumed that Windows on ARM is simply a run-time.
  • This would lead to Windows RT only being the metro based UI and nothing more. i.e. basically what iOS is.
  • It is not quite as bad as that but it is not what I had hoped for.
  • The proposition has been sold as a tablet that can turn into a laptop but it looks to me that the laptop function will fall short of what I would want from my device.
  • Windows RT will run in both Metro and Desktop (Laptop) mode but in desktop mode it will only run preinstalled Microsoft applications and nothing more.
  • Microsoft has re-written Office to run on ARM but whether these will be fully functioning applications in desktop mode or mini-versions is unclear.
  • The device will only install third party applications written to the Metro UI and that execute in the runtime (confusingly called WinRT) written for it.
  • All applications written for Intel’s x86 processor will not run in Windows RT nor will anything written exclusively for a 64bit system.
  • Microsoft has also limited access to some browser APIs which are fully available in Windows 8. This has raised fears among developers that the Windows RT will end up as locked down as iOS.
  • This explains a couple of things. This is why there has been some manufacturer reluctance to support Windows RT because its appeal is not clear at all.
  • It also explains why Microsoft is bundling Office into every copy of Windows RT.
  • Windows RT is not the dream that I had hoped for.
  • Consequently its appeal to the user base is very uncertain.
  • It is cheaper than the equivalent product from Apple, which is good, but if consumers who unknowingly buy RT expecting Windows 8, are going to get very annoyed in short order.
  • I can see a number of devices coming back to the store for failing to be able to install the applications users have on their other Windows devices.
  • In the non-touch world, Windows 8 has little appeal as it offers little that’s incremental to the superb Windows 7.
  • In the touch world one needs to something that’s more special than, incremental to and different from. Apple in order to see traction.
  • Windows RT is not as special or as incremental as I had hoped but it is very different.
  • The net result is great uncertainty but the one thing that looks certain is that the ARM powered devices are not going to get that much traction in their current iteration.
  • Everyone I know is waiting for the Intel versions before buying.
  • When Windows RT is the same as Windows 8, then there is a strong case for ARM powered devices but I think it is going to be a while before this arrives.
  • Hence, when the PC market swings up, as I am sure it will, it will be Intel that really benefits.
  • There are two stories in PCs that I like for the upswing.
  • First, the rising tide floats all boats story and here I think that both Intel and Microsoft look very attractive and very cheap.
  • Second, the market share shift story where Asustek, Samsung and Lenovo continue to take share from Dell, HPQ and Acer due to their superior form-factor development ability.
  • I am itching to buy MSFT but haven’t been brave enough to pull the trigger yet.

 

Storage – Obsolete? Me?

 

 

 

 

 

  • Those predicting the demise of the HDD need to think again.
  • The idea has long been that the superior performance of a solid state disk drive (SSD) combined with its lower power consumption would push the hard disk drive into obsolescence but it hasn’t happened.
  • The more that time goes by, the less likely this seems.
  • When 1GB of flash storage costs the same as 1GB of magnetic storage then of course it’s a no brainer, but the horizon for this magic event always seems to get further and further away.
  • Heat Assisted Magnetic Recording (HAMR) promises to push capacity to 30-50TB per 3.5inch internal hard drive a mere 8-12x of cutting edge today which will cause the $/GB to plummet further.
  • The net result is likely to be that for the foreseeable future, the cost of HDD storage will be so much less than SSD that it will not make economic sense to do away with it.
  • This is why I think that hybrid drives are going to become a very important part of storage in computing and probably tablets and ultrabook devices as well.
  • A hybrid drive is a single unit that combines both flash memory and a HDD together with the idea being to give the flash-like performance at a fraction of the cost of having all that storage in flash memory.
  • Both Seagate and Western Digital have announced hybrid devices and now Apple has announced an in house version for its Macintosh computers. (Fusion Drive).
  • This all sounds great but there is a catch.
  • The catch is software. The two storage systems masquerade as a single volume which means that what gets stored where has to be monitored and adjusted based on how the device is used.
  • Software is not the strong suit of either Western Digital or Seagate and I suspect that this functionality is going to prove much more difficult to get right than they are letting on.
  • Apple, on the other hands is much better at this sort of thing and I have greater confidence that the performance of the Fusion drive will superior at least for a couple of iterations.
  • This area of software is right up there with synchronisation in terms of difficulty.
  • It looks very simple but is fiendishly difficult to get right and I can see all the players floundering and struggling to get it right.
  • The net result is that HDDs are not going anywhere, in fact they are likely to have a much longer lease of life than anyone who looks at the memory market is forecasting.

 

Technology Sector– Bottoms up?

 

 

 

 

 

  • The technology sector had a horrible week last week with bad results from all of the bellwethers and benchmark indices that fell around 4% in the last 4 sessions of the week.
  • This was pretty much across the board from PC makers to semiconductor companies to software and internet companies.
  • The message is clear: The economy remains weak and as a result Q4 is going to sub seasonal in terms of the holiday selling season experienced by most participants.
  • The market was worried about this but clearly there had been some hope that Windows 8 and the smartphone market would pull the industry out of its current slump.
  • Admittedly, I had been in the hoping camp as the fundamentals of Windows 8 point to an OS that offers a huge jump in functionality which should ignite some interest in consumers when it becomes available on Friday.
  • But alas, confidence has taken another hit. No inventories have been built and everyone seems to be expecting that consumers will ignore Windows 8 until 2013.
  • For most of last week, estimates were cut, economic data depressed everyone and valuations corrected.
  • However, one thing stands out. If there is some interest from the consumer, then everything is going sell out very quickly.
  • This will lead to rush orders, a demand spike and inventory building all at the same time.
  • Before you know it, the semiconductor sector will have rallied 20% and we will back on an upwards tack.
  • Question is: when will this happen? It is very difficult to tell but the time to get interested is when stocks stop reacting negatively to bad news.
  • Texas Instruments guided very badly for Q4 last night but the shares hardly moved in after hours trading which is enough to make me raise my eyebrows.
  • Texas forecast Q4 revenues / Adj. EPS at $2.83bn-$3.07bn / $0.30-$0.37 compared to consensus at $3.22bn / $0.37.
  • This is a reflection of customers refusing to build inventory into any recovery until there is much stronger evidence of a demand pick up.
  • However the shares were almost unchanged in late trading last night strongly implying that the weakening in sentiment from the bellwethers last week had prepared the market for bad guidance.
  • This makes we wonder whether a weak Q4 has now been priced in and whether we should again be looking for the upturn.
  • It is going to take a few more results like this to convince me, but I am beginning to wonder about a broad brushed technology rally in January 2013.
  • For now, it is all going to be about Apple with new products being launched tonight and consumers queuing around the block to buy its products.
  • I see a comfortable 10% rally in Apple before year end and it is the only technology stock that I hold at the moment.

 

Google – Engineering disease

 

 

 

 

 

  • Many have derided Google for its mishap in releasing its Q3 results early but it seems to me that real mistake has been the $12.5bn acquisition of Motorola Mobility
  • Whichever way you slice the cake, Google has delivered nothing from this acquisition for shareholders.
  • The thumping $527m Q3 12 EBIT loss (of which $376 is restructuring) from Motorola completely obscures the fantastic progress that Google has made with Android.
  • Revenues from mobile advertising are now at a run rate of $8bn a year (up 220% YoY) with 0.5bn Android devices in the market and 1.3m being added every day.
  • At this rate, Android is on course to double its user base to 1bn in just over 1 years’ time.
  • But right now no one cares. Everyone is focused on the fact that $12.5bn has gone out the door followed by another $527m in the last three months.
  • The only winners so far have been the long-suffering shareholders of Motorola Mobility who got a cracking deal and have smiled all the way to the bank.
  • I see two reasons for this acquisition:
  • First: To acquire a patent portfolio that could be used to protect the Android community from the ravages of patent prosecution from the likes of Apple and Microsoft.
  • Second: To increase vertical integration such that, should the need arise, Google could become more like Apple and derive value from all parts of the mobile value chain.
  • I have no issue with the first reason, and in fact it needed to be done as Android vendors have little no IPR with which to protect themselves.
  • Unfortunately Google has made nothing other than a total mess of defending the Android camp.
  • Firstly, when HTC tried to use Google patents to protect itself at the ITC they were thrown out as HTC had only borrowed them.
  • Turns out, you can’t sue for patents that you don’t legally own, which would seem to render Google’s entire strategy to defend Android ineffective.
  • Secondly, Google itself is now under investigation for allegedly using standard essential patents in a manner that contravenes FRAND licensing terms.
  • It seems to me that Google is pretty new to this patent licensing game and is making elementary errors to the detriment of the Android community.
  • The second reason makes no sense to me at all.
  • The success of the Android user experience has had the effect of accelerating the commoditisation of hardware allowing more value to accrue to Google from the ecosystem.
  • Motorola was a great hardware maker once but it has been crushed by Samsung who is showing every sign of being the only one capable of making money from hardware.
  • Despite public protestations, I am certain that in reality Samsung and others are not happy at all with Google becoming a hardware maker.
  • They have no reason to be so as suddenly a trusted partner becomes a competitor. How do you make that work?
  • It never has done in the past. Remember Symbian?
  • When Nokia bought a controlling stake in Symbian, support from other vendors collapsed and it all ended in tears and huge losses.
  • Why would you waste money and resources to nature a dead duck at the risk of killing the golden eagle?
  • If you are rational you wouldn’t, which is why I am sure that Google will end up selling the hardware piece of Motorola.
  • However, at the moment, the only explanation I can come up with for hanging onto Motorola handsets is that Google is racked by what I call engineering disease.
  • Engineers often get so excited about whether they can develop something that they forget to ask whether they should develop that something.
  • Engineering disease almost always ends in disaster and I strongly believe that unless Google gets rid of Motorola Mobility in short order, heavy losses will continue as Motorola’s business dwindles into oblivion.
  • Worst of all, it pushes other handset vendors, who are shipping almost all of Android’s volumes ($2bn advertising revenues per quarter for Google), into the arms of Microsoft.
  • Microsoft is a threat with Windows 8 (despite what Eric says), from which Google is likely to earn much less or zero.
  • Take Home Message
  • Google is a great company, that has just got a lot cheaper, but I am not touching it until I have either been proved spectacularly wrong or until Google lances the boil.

$100 Tablet – lose lose

 

 

 

 

 

  • The notion of a tablet that costs $100 may sound exciting but those that rush out to purchase the device are likely to quickly discover that you get what you pay for. (i.e. not much)
  • Details of a Nexus tablet from Google at $99 have continually surfaced from Asia which combined with Google’s event scheduled for October 29th makes it seem likely that this device just may be on the shelves in November.
  • In this age of austerity and empty pockets its sounds ideal but then what use is a tablet that doesn’t really do what you want it to?
  • In order to make this price point (and not lose a fortune) one has to cut corners everywhere.
  • The screen will have to be low resolution in order to keep it cheap as well as not place too many demands on a low-end processor that will already be stretched to the limit.
  • The rumour mill has the processor as a WonderMedia PRIZM 8950 delivering a relatively puny (for this day and age) 800Mhz tied with a Mali GPU.
  • This is going to seriously hamper performance and you can bet that there will be grumpy faces as the angry birds fly jerkily towards the targets at a glacial pace.
  • So what is a $100 tablet all about?
  • Probably the same as the $49 Android phone that I heard about the other day.
  • It is about getting a device in the hand of an anxious user at a price that he can afford.
  • I suspect that these first time buyers care more about being able to put their hunk of plastic, glass and metal on the table to ensure that all and sundry can see that they have the means to join the post PC world.
  • This is an important factor particularly in many emerging markets.
  • It is not so much about being able to that much with the device but when they try there is risk.
  • I can see users becoming negatively disposed towards Android as the hardware limits the user experience.
  • In 2 or 3 years’ time, the story is likely to be much different as usability will be a much bigger factor in the user’s purchase decision when they come to considering a replacement.
  • I think that this is the same for both tablets and handsets and is at this point that we may see the mid-range names such as HTC and LGE finally enjoy some recovery.
  • However, for now the outlook remains bleak I would not go near either of them.
  • For this tablet in itself, it runs the risk of negatively disposing users towards Android, taking sales from higher priced, better performing alternatives and damaging the Nexus brand.
  • Good for total volumes but bad for Android and long term bad for Google as users could seek alternatives after a rotten experience due to hardware, but blamed on software.
  • Apple won’t be losing any sleep over this.

 

Q3 Results – Rotten start

 

 

 

 

 

  • Q3 reporting got underway last night with both bellwethers IBM and Intel reporting Q3 results.
  • Both sets of results were disappointing and both fell after hours.
  • This was compounded by a failure to beat guidance by cloud computing vendor Fortinet which cost the stock a mere 18%.
  • This sets the scene for a very poor earnings season where it looks like there is no absolutely confidence in Windows 8’s ability to drive a pick-up in PC and tablet sales.
  • Furthermore, with IBM, the signs of slowing in the enterprise IT spend are now stronger and more plain for all to see meaning that the safe haven of software is not so safe anymore.
  • So it looks very much as if Apple is going to make all the running in Q4 with new products being launched Tuesday next week.
  • No one, not even the bulls of Microsoft, seem to believe that Windows 8 is going to have much effect on the PC / Tablet market in Q4, meaning that if consumers do like it there is likely to be a big bounce in both estimates and stock prices.
  • I had been hoping the supply chain would have started to see some serious ramp up in volumes in anticipation of Windows 8, but frankly sentiment is so bad that no one is taking the risk.
  • This basically puts off any real recovery in the PC makers, suppliers, semiconductor vendors and outsource partners until January.
  • Some numbers:
  • Intel reported Q3 revenues and EPS of $13.46bn / $0.58 compared to consensus at $13.20bn / $0.49. No surprise there Intel had already warned.
  • Guidance was the problem with Q4 revenues / gross margins expected at $13.1bn – $14.1bn ($13.6bn) / 57% +/- a couple of points. This compares unfavourably to consensus at $13.7bn / 61.4%.
  • People were already pessimistic on Windows 8 for Q4 and now they are going to be even more so. Gross margins have missed due to underloading of fabs and product transitions.
  • Furthermore datacenters, which have been making up for weak PCs all year, also suddenly slowed underlining the weak numbers from IBM.
  • IBM Q3 revenues / EPS were $24.7bn / $3.62 compared to estimates of $25.4bn / $3.61.
  • Guidance was unchanged with EPS of at least $15.10 expected for the year. EPS is not the problem here. It is revenues.
  • IBM bemoaned the macro environment as North America has slowed meaningfully in the last three months underlining the sudden softness Intel saw in datacenters.
  • Software deals are being pushed back and this marks a significant weakening of the outlook for software and IT services.
  • Until now it has all been about business still being there but being more difficult to get hold of, highlighting the need for great execution.
  • However, now it looks like great execution is no longer enough and that the business itself is being delayed or cancelled.
  • IBM is an expensive stock compared to both its peers and the tech sector overall and these numbers will challenge both its status as a safe haven against macro weakness and its premium valuation.
  • Not even cloud computing has escaped the ravages of macro which appears to have taken the edge off Fortinet’s ability to beat and raise quarter after quarter.
  • Cloud computing stocks trade in the stratosphere and I expect that the Q3 reporting season is going to bring them back to lower and more reasonable altitudes.
  • Take Home Message
  • Nothing looks safe and secure anymore in technology and the sector, ex-Apple,seems set to labour in Q4.
  • I own Apple for a pop to $700 and nothing else at the moment having toyed with, and rejected, the idea of owning Intel into numbers for a Windows 8 related bounce. (Phew!).

Android – Critical weakness

 

 

 

 

 

  • Without a shadow of doubt, Android dominates the unit volume statistics but in order to have real long-term value to Google and those who make the devices, the users have to be loyal to the ecosystem.
  • This is where I question the value of Android, as I believe that users have yet to develop the kind of loyalty that Nokia saw in its heyday and that Apple enjoys now.
  • Without this loyalty, Android will eventually fall prey to the next and greatest thing that emerges in the handset space, which is increasingly looking like an easy, integrated and cool user experience (like Apple) but a cheaper price.
  • This is where I believe that Android falls over as to get Android really working the user must do a lot of systems integration himself, something I believe that most users have neither time nor the technology know-how to do.
  • The evidence is everywhere. The latest is from (http://insights.chitika.com/2012/iphone-5-galaxy-s-iii-study/) which has surveyed the web traffic from the Samsung Galaxy SIII and iPhone 5 over 7 days from October 3rd to October 9th.
  • Here the Apple iPhone 5 took 56% of the traffic compared to the SIII which took 44%.
  • Of course this data is full of holes, but remember that Samsung recently boasted of selling 20m SIIIs whereas supply had constrained Apple to around a quarter of that total at that time.
  • This contrast is so striking that it more than makes up for any shortcomings in the survey methodology.
  • The conclusion is inescapable: iPhone 5 users use much more traffic than SIII users.
  • This and all of the other analyses point in the same direction:
  • There are huge benefits and value in an integrated, easy to use, switch-it-on-and-it-just-works experience which Android still sorely lacks.
  • This is a major reason why iPhone loyalty is so high and why I believe that loyalty to Android is not.
  • At the moment there is no real contest. Either you buy iOS or you buy Android and I believe that Android is a great choice for many, as you get a lot more hardware bang for your buck and an OK user experience.
  • It is here that Android’s underbelly is exposed.
  • What happens when there is a user experience that is: 1) as easy to use as Apple’s, 2) more integrated than Apple and 3) available at a great price on good hardware?
  • This is why I believe that all the fuss about Android vs. iOS is overblown.
  • The real war will be Android vs. Microsoft Windows Phone 8.
  • Microsoft has all the tools, the assets and the talent to take a large slice of share from Android but its travails over the last 16 years cast severe doubts about its ability to execute on that dream.
  • War will be fully declared on October 26th.

 

Apple and TSMC – Forgotten reality

 

 

 

 

 

  • It is no secret that Apple is thinking of moving its chip manufacturing from Samsung to TSMC, but while everyone is getting excited about the technology, everyone is ignoring the economics.
  • Apple’s first applications processor was heavily dependent on Samsung technology and ever since Apple’s acquisition of PA Semi it has been working to design out Samsung’s technology and replace it with its own.
  • This makes perfect sense because designing its own chips allows the hardware and software to be more tightly integrated giving a faster more responsive user experience and less battery consumption.
  • All of Apple’s chips from the A1 to A6 have been exclusively manufactured by Samsung LSI and there has been a long running discussion round whether Apple will switch to TSMC for the A7 and beyond.
  • One would expect the A7 to debut in either the iPad 4 or the iPhone 7 during 2013.
  • This makes perfect sense from a strategic point of view, as Apple and Samsung can hardly be described as having a good relationship and a vast percentage of Apple’s COGS already heads to Samsung.
  • Hence reducing its reliance on Samsung looks like a sensible move.
  • Consequently, everyone is jumping up and down about A7 on 20nm and quad core and the benefits that these might bring to Apple devices but no one has asked: How much will it cost?
  • Samsung LSI is an upstart in the world of foundry and still has a very long way to go to challenge the scale and power of TSMC.
  • It has been investing like crazy to expand its operations over the last two years but it still has to win a lot of share to become a big player.
  • Consequently, I strongly believe that Samsung LSI was (and still is) prepared to accept mid 20s margins on its business to Apple in order to win the business in the first place.
  • I think that this has been a contributing factor behind Apple’s ability to earn margins on its devices that its competitors can only dream of.
  • TSMC, on the other hand, earns somewhere around low to mid thirties on the business that it does with its many clients.
  • Clients, which I suspect will be somewhat put-out should Apple be given an exclusive and sweetheart deal to move to TSMC.
  • Is Apple’s business worth alienating the rest of its user base? I suspect not.
  •  As a result, I think that it will be much easier said than done for Apple to move its foundry business from Samsung to TSMC given the cost increase that it would entail.
  • I do not think that TSMC is about to lower its margins to everybody by around 100bp to accommodate Apple, and hence believe that if Apple wants to be with TSMC it will have to accept the same conditions as everyone else.
  • Therefore I do not see Apple moving to TSMC as a dead cert because the same service is very likely to cost a lot more there than at Samsung LSI.
  • Apple and Samsung may not be great friends but I have long believed that Samsung is very good at keeping its different businesses at arm’s length.
  • Hence, the fact that Apple and Samsung are at war over handsets and tablets will have no effect on the way Samsung treats Apple when it comes to component supply and foundry services.
  • I am far from convinced that we will see Apple going anywhere anytime soon.