Apple vs. Samsung. – Cycle mechanics.

 

 

 

 

 

  • Apple’s legal strategy became clearer on Friday as it moved to include the Samsung Galaxy SIII and the Samsung Galaxy Note II in its legal crusade to stop Samsung from making money from its innovations.
  • This takes the form of a new complaint that will be heard in March 2014.
  • Once again this exposes the problem that Apple has in keeping Samsung from making money from its innovations.
  • The legal cycle is longer than the smartphone cycle.
  • This means that by the time Apple has filed a complaint, it has been tried and an injunction granted, Samsung’s key revenue generators will be newer products and the impact of losing an older product will be minimal.
  • However I believe that Apple has a trick up its sleeve and it looks to be following exactly the legal strategy that I expected. (See here)
  • Remember the Samsung Galaxy Tab 10.1? On this product Apple managed to win a pre-trial injunction as it convinced a judge that a) Samsung was most likely infringing the asserted patents and b) that Apple was suffering financially as a result of Samsung selling the tablet.
  • It has been my suspicion for some time that Apple would do exactly the same in order to try and keep Samsung products out of the market when they are at the height of their popularity.
  • Apple has taken the first step towards this by filing the complaint against the big selling products.
  • I think that its second will be to request a pre-trial injunction along exactly the same lines as it did for the Samsung Galaxy Tab 10.1.
  • The difference this time is that I believe that Apple has a much stronger case to make a pre-trial injunction stick.
  • This is because:
  1.     Rightly or wrongly, Samsung suffered a heavy defeat at the hands of Apple earlier this year. In the absence of a successful appeal, Apple has emphatic and damning proof that Samsung products using Android are infringing Apple patents. Therefore, it is very likely that these new Samsung products will be found to infringe Apple patents.
  2.   Samsung has recently reported record profits in its handset business thanks to the Galaxy SIII and by its own admission the Samsung Galaxy Note has already sold 5m units. It is not difficult to believe that if these products had not been available, Apple would have sold more iPhones and iPads.
  • These two arguments strongly suggest that Apple has a strong case to file for a pre-trial injunction and more importantly, succeed in getting it.
  • This would be detrimental for Samsung, as all US sales would have to immediately cease.
  • However, given that Samsung sells many other products and in many other geographies, the hit is likely to be significantly less than 10% of EBIT.
  • That being said, I would expect the hit to the share price to be significantly greater than that.
  • Samsung has been a great stock recently, but I don’t want to own it as Apple’s legal strategy to hit its biggest products could easily bear fruit.

Black Friday – All online.

 

 

 

 

 

  • The headlines are hiding the realities of a pretty good weekend of retail sales in the US.
  • Purchasing online using PCs, tablets and smartphones saw very strong growth and as evidenced by the scrums in the shops, the US consumer has spent 12.8% more than he did last year.
  • The latest figures show that over the four day weekend 247m on line and real-life shop visits up 9.2% from 2011.
  • Total sales have been estimated at $59.1bn up 12.8% from 2011, a good sign for the all-important Q4 selling season.
  • This implies that the handset market, tablet market and Apple are set for a solid Q4.
  • Who knows, even the much lagging PC market and Windows 8 may see some glimmer of life before the end of the year.
  • The actual numbers for Friday (the big day) show a dip compared to last year, but this looks almost certain to have been a result of stores starting their promotions early on Thursday evening.
  • The three most important takeaways are:
  1.  A good omen for consumer spending in Q4 despite macro related uncertainties.
  2.  Online continues to grow as a percentage sales and smartphones have been increasingly used in store for price comparisons.
  3. iOS continued to dominate in terms of its share of weekend thanksgiving shopping data traffic on mobile devices. iOS managed to increase its share of traffic despite being outsold 2 to 1 in terms of devices when compared to Android.

Share of mobile traffic generated as a result of Thankgiving holiday shopping in US (data source: IBM)

  • I see this as yet another nail in the coffin of loyalty to Android. (See here for others)
  • Android is selling like hotcakes at the moment but crucially, users are not using the devices anything like as much as iPhone and iPad users.
  • This sounds an awful lot like the heydays of Symbian when everyone had a Symbian device but no one used them for anything more than voice or text.
  • Android is not nearly as bad as that but the parallel is clear.
  • Hence there is a risk that when something better comes along at the right price point, users will drop Android with as little hesitation as they did with Symbian.
  • At the moment, the front runner to stick the knife into Android is Microsoft, but so far it has had no meaningful impact.
  • What is more Microsoft has been labouring for 16 years to make any real headway in mobile and so man doubt that it ever will despite its chances being the best that they have ever been. (see here for details)
  • It is much too early to write Android off but the signs for its ability to hang onto its dominant market position are worrying.

Jolla Ltd. – The phoenix and the zombie

 

 

 

 

 

  • The hardy chaps who spun out of Nokia to breathe new life into Meego launched their Sailfish OS yesterday at the Slush start-up event.
  • The company also announced that ST Ericsson would be supporting the OS on its NovaThor platform.
  • This is not as surprising as it sounds like this is a resurrection of the support ST Ericsson announced for Meego when it was part of Nokia.
  • Having a major chip vendor is a good step forward for Jolla none the less.
  • Furthermore as Sailfish is based on Linux it should not be too difficult to implement the OS on many of the other chipsets available in the market.
  • The new OS has made some interesting tweaks to the user experience with multitasking functionality being implemented using live tile-like functions on the home screen.
  • It has also gone for a novel approach to themes with the entire UI being able to adapt to the colour palette and style of any photograph.
  • The focus of Jolla will be the Chinese market as this remains both the largest and fastest growing of all the smartphone markets at the moment.
  • Jolla signed a sales and marketing agreement in July with D.phone, a large phone distributor in China, but how this will work and how Jolla makes money from it is unclear.
  • From the tone of the presentation it seems that Jolla aims to make and sell Sailfish devices under its own brand and under white label for others.
  • China sounds like a great idea given the growth but it is a nasty business.
  • Android is now selling at less than $100 and margins of the larger players are already coming under pressure.
  • Smaller vendors come and go with frightening regularity implying that they arrive, lose huge amounts of money and shut down again.
  • How a small Finnish start-up, with R&D in a very high cost country, aims to compete with that is unclear.
  • Furthermore the UI, which looks good, is untested.
  • Phones will have to be sold at interesting prices to get the users interested because at launch there will be far fewer applications available for download.
  • This implies that in the early days margins will be under extreme pressure and I am far from convinced that Jolla has the financial strength to withstand that kind of agony.
  • Jolla has an ecosystem, but it is tiny and the trick will be getting developers to make the most popular applications available on Sailfish.
  • This again will be a tough task as developers follow the money of which there is currently none on Sailfish.
  • A better proposition might be to license the OS to handset vendors and operators but then how do you charge for something that is freely available for $0?
  • The answer to that could be custom implementations. If Jolla can charge $5 a unit for implementing a custom version for an operator or a vendor, the company might just make it.
  • The market is certainly big enough for multiple offerings on mobile handsets, but underneath the Apple segment it is getting so tough that almost no one outside of Apple and Samsung are making any money.
  • Jolla’s choice of China is questionable as it is a place where other players will offer Jolla multiple rows of gleaming fangs rather than friendly hugs.
  • I also think that writing-off developed markets is a mistake.
  • Android looks weak and vulnerable (See here for details) and there is potential for a big upheaval in the current status quo.
  • With the potential for users to jump ship from Android, there is opportunity for Jolla and as such the company should be ready to address that segment.
  • I liked the user experience but the presentation on how Jolla would make money from it was woeful.
  • This is the single most important factor to the survival of this endeavour.
  • Jolla appeared as a phoenix but without the lifeblood of cash flow, it will be nothing more than a zombie with a short afterlife.

 

 

 

HPQ and Autonomy – Caveat emptor

 

 

 

 

 

  • Hewlett Packard is painting itself as the honest victim of fraud, when it comes to the acquisition of Autonomy, but an honest fool is still not fit to run a big company.
  • Just 14 months ago, HPQ announced that it would spend almost all of its available cash to acquire Autonomy for £6.3bn ($10bn).
  • Yesterday it wrote off almost 90% of that acquisition, alleging that the directors of Autonomy had wilfully misrepresented the company’s financial position in order to obtain a higher valuation at the time of acquisition.
  • At the same time, the company reported disappointing results and guided weakly for the coming year.
  • Revenues will remain under pressure in fiscal year 2013 with full year / Q1 EPS expected $3.40-$3.60 / $0.68-$0.71. This compares unfavourably with consensus at $3.37 / $0.74.
  • As usual, the weakness is near term with the balance expected to be made up towards the end of the year.
  • This does not inspire confidence that the full year estimates will be met.
  • I view the mess surrounding Autonomy as the strongest signal yet that the board of HPQ is not fit for purpose.
  • The main reason for this is that noise around accounting irregularities at Autonomy is nothing new.
  • Autonomy’s detractors have been writing about this for years and there has been the occasional obvious sign that things were not quite right.
  • The most common red flag was that cash flow in some quarters often did not match profit. This is quite unusual in a software company.
  • The balance was often made up in subsequent quarters but critically, this and other issues caused people to wave the red flag.
  • To any reasonably prudent person, this would have made him doubly cautious when looking into the financial position of Autonomy.
  • History has shown that a determined person can deceive a competent auditor without too much difficulty because it is simply not economical or timely to look under every single rock or pebble.
  • In this case, there were more than enough red flags and so much money at stake to warrant a due diligence that went beyond the audited figures.
  • This case is also unusual as most of the time, the alleged perpetrators head for the hills but this time they are standing their ground.
  • This raises questions regarding HPQ’s allegations that only the FBI and the Serious Fraud Office will be able to answer.
  • To me, whether or not the management of Autonomy duped HPQ into paying way too much is irrelevant.
  • It has happened, shareholders have already paid the price and there is very limited scope to get any of the money back.
  • What is much more important is what this really says about the board of directors of HPQ and the long term outlook for the company.  
  • Management who were responsible for the deal have long since paid with their heads but the board who signed off on this deal are largely still there.
  • Meg Whitman was, at the time, one of those directors.
  • This adds considerable weight to my view that the management and directors of HPQ do not have what it takes to turn this company around.
  • HPQ needs vision, audacity and above all a new board of directors.
  • Until there is a complete clear out, I think that this company will lumber from one quarter to the next and present no real vision about how it becomes a proper technology company again.
  • I see its rivals who are adapting to the realities of the changing market, wearing it down and whittling away its market share.
  • The old English saying: a fool and his money are soon parted remains as true today as it was in the 16th century.

 

 

Guest Author – Cyrus Mewawalla – Chinese Social Media

Radio Free Mobile presents input from a guest author. Cyrus Mewawalla from CM Research on the Chinese Social Media Sector. 

China’s social media: Great potential but there are political risks

CM Research has teamed up with Trusted Sources, an emerging markets macro-economic research house, to provide you an informed view of the future of China’s social media sector. We have married our expertise in the global technology, media and telecom sectors with Trusted Sources’ expertise in China’s macro and political outlook in an effort to guide investors through what could be a difficult time for Chinese internet companies. We expect to publish a series of co-authored reports on emerging market TMT themes on a quarterly basis for our clients.

 

China’s social media has great potential

  • Mobile, Social, Cloud and Big Data are the big investment themes across the global technology sector.
  • China’s social networks operate in protected markets – Facebook, Twitter and Google are not allowed in.
  • China’s social media industry dynamics are conducive to growth – social network penetration, smartphone penetration and 3G penetration are all at around 30 per cent, the point in the technology cycle at which growth typically accelerates.
  • Western social networks generate the bulk of their revenues from internet display advertising. But social media is moving to the mobile internet. Smaller screen sizes and shorter customer attention spans make it difficult to monetise. China’s social networks have a more diversified revenue model, with online games playing an important role. This positions them well for the difficult transition of social media from the PC to the mobile internet.
  • But internet statistics released by China’s leading social networks do not face sufficient third party scrutiny. For the time being, investors therefore run the risk of basing investment decisions on highly questionable data.
  • China’s internet companies are not as skilled as converting internet traffic into internet advertising revenues as their Western peers

 

But there are political risks

  • Changes to China’s leadership team will be announced over the next two to three weeks.
  • China’s leaders are interested in the social media sector for two reasons: it is a high growth sector, whose profits largely flow to the private sector rather than the state-controlled telecom sector; and it potentially represents a challenge to the Communist Party’s monopoly hold on political power and to the authority of the state.
  • Social networks profit from information flows, but in China’s case those flows may present a challenge to the existing political order.
  • The risk of stronger political repression of social networks – by means of banning, cramping, or undermining certain social media business models – although imponderable, is credible. It will certainly not be shrinking during the present period of relative political fluidity when the authorities will focus on establishing control after getting through the leadership transition.
  • Over the next six to nine months, Chinese internet companies whose businesses and cash flows are directly linked to social media activity – such as Renren, Sina and Tencent – appear the most vulnerable. By contrast telecom operators such as China Mobile may offer investors a more hedged exposure to the high-growth Chinese internet sector.

 For a copy of the full report please contact Cyrus:
Cyrus Mewawalla, CM Research, +44 203 393 3866 cyrus@researchcm.com www.researchcm.com

 

Windows Surface – Early score.

 

 

 

 

 

  • Windows 8 and the Surface RT have been out for a few weeks now and the early indications are that lift-off has been pretty sluggish.
  • The reviews have been moderately positive with the real negatives not being the way in which touch and keyboard / mouse have been put together, but in the functionality limitations of Windows RT itself.
  • I think that this is encouraging as it bodes well for touch based ultrabooks on Windows 8 in terms of user acceptance of hybrid devices.
  • Price, in these difficult times, is a big issue but this is more easily overcome than if the consumers thought that the hybrid user experience was rubbish.
  • The normally effervescent Steve Ballmer is on the road promoting the Windows Surface Pro (Windows 8 on Intel) and even he had to admit that the Surface RT was off to a modest start.
  • When translated into reality, this basically means that sales have been pretty poor.
  • Furthermore, a recent poll by Tech Report also found that 61% of respondents thought that Windows RT would be marginalised with only 13% thinking that it would become the dominant form of Windows.
  • This again supports the notion that the problems with Windows on ARM (Windows RT) are the limitations in terms of functionality.
  • The obvious roadmap for Windows RT is to become indistinguishable from Windows 8 but this is going to take a while.
  • When this is truly the case, then Windows on ARM can really flourish as it is then that the power and cost advantages can be exploited without consumers having to make a functionality trade off.
  • Until then I suspect it will remain something of a science project.
  • Hence, the real appeal of the Surface device is unlikely to be known before the Surface Pro ships.
  • With the Surface Pro, price is going to be critical because if it is super expensive, many users may find themselves better off with a hybrid ultrabook from one of the PC makers.
  • This is due to ship early in 2013 with many people expecting the launch in January.
  • Boringly, the jury is still out.

 

Nokia Here – Move to where?

 

 

 

 

 

  • Nokia held an event yesterday to launch enhancements to its mapping offering but it was not clear to me how Nokia itself would benefit in the short term.
  • Here represents an enhancement to the maps application by putting much of the functionality in the cloud while at the same time still enabling mapping and directions on devices without a connection.
  • Three things are worth noting:
  1.     Nokia maps and location services will now be made available on pretty much all platforms and devices.
  2.     Nokia announced a deal with Mozilla where Here will be deeply integrated into the Firefox OS that’s due to properly debut on devices next year
  3.     Nokia is acquiring 3D mapping company Earthmine. Earthmine has technology that makes the collection and creation of a 3D environment like Google Streetview quicker and easier. This should accelerate the development of Nokia’s mapping offering bringing it close to what Google has to offer.
  • The timing is perfect. Apple is reeling from the mess that it has made of Apple maps and the iOS platform is ripe for a high quality alternative to the superb Google Maps that Apple has binned.
  • Nokia has already made the submission to be allowed entry into the App Store and here lies the catch.
  • Does Apple really want to approve this application? It could erode the stickiness of the iOS as those that must have this application will be able to get it anywhere.
  • This is the exact reason why Apple got rid of Google maps in the first place and to do the maps itself. It has no incentive to see Here on the App Store.
  • In allowing this application onto iOS, Apple will be enabling potentially damaging competition.
  • I can see how Apple would come under intense pressure if it were to refuse but I am pretty sure that Apple will be looking for ways to hold up, hinder and delay the publication of this application until it has its own house in order.  
  • In addition, we can be pretty sure that this application will be better, faster and more functional on Windows Phone and Windows 8 than it will anywhere else.
  • (Strangely though the 3D functionality is only currently available for Chrome, Firefox and Safari. It does not yet work on Internet Explorer!)
  • In the long run, one can see how users could be enticed to switch to Windows Phone if they really were to fall in love with the Here application on iOS or Android.
  • Outside of the highly remote probability that Nokia will be able to entice users to leave iOS and come to Windows Phone, I am not sure how Nokia benefits from this strategy.
  • By making it available anywhere, it has effectively made sure that, for the moment, there is no added incentive to go to Windows Phone.
  • This is clearly a long game and strategically, Here makes perfect sense, but it is risky.
  • Apple might say no and in the short term development costs are going to rise without a commensurate increase in revenues.
  • I am not sure that Nokia has long enough to make Windows Phone work for Here to make a significant difference.

 

 

Microsoft – Tale of two Steves

 

 

 

 

 

  • They say that I should not be surprised by the exit of Steve Sinofsky’s departure from Microsoft but I am as I was expecting the other Steve to leave.
  • With Sinofsky’s exit, goes any real chance of Ballmer leaving Microsoft any time soon and also the prospect of a near term catalyst to drive the share price.
  • I view Steve Ballmer as an engineering driven, drill sergeant who can be a bit like a bull in a china shop.
  • Historically, this approach has been very effective but the new challenges that Microsoft now faces arguably needs a more creative mind to address.
  • Hence, the idea that Steve Ballmer is staying on is negative to me but will probably please the gents over at Infinity Loop.
  • Steve Sinofsky has done good things in his time and has a reputation of delivering software on time.
  • Admittedly, he has done this by cutting features in order to make a deadline but these can be retrofitted through updates.
  • He took over Windows and produced the superb Windows 7, a successful update to Office and now Windows 8.
  • Windows 8 is off to a slow start but that’s not because Microsoft has not delivered what it said it would when it said it would.
  • Hence, I believe that Steve Sinofsky was looking to take over as CEO.
  • Steve Ballmer has long been rumoured to be looking for the right time to hang up his stripes.
  • He has seemed to me unhappy in the role for some time now, and following the launch of Windows 8 (arguably the most important launch since Windows 95), looked like a great time.
  • I suspect that Sinofsky had been waiting for this and when it did not materialise, his position become untenable.
  • Ballmer is 56 years old and could carry on for another 10 years before retiring which, with Sinofsky at 47, is far too long to wait.
  • I think that when it became clear to him that he would not become CEO for some considerable amount of time, the relationship with Microsoft soured making it time to move on.
  • I view this as a negative for Microsoft as a change in its culture and philosophy would help the company better meet the challenges it faces in a world that increasingly looks beyond the PC.
  • Whether Sinofsky was the right man to effect that change is highly questionable, but perhaps this manoeuvre opens the door to the next venture for Scott Forstall when he becomes free in 2013.

Apple vs. HTC – Someone blinked.

 

 

 

 

 

  • One of the skirmishes is over. Apple and HTC have signed a 10 year license deal dismissing all outstanding patent litigation.
  • As usual no details whatsoever have been released leaving everyone in the realm of speculation and conjecture.
  • The first conclusion that one can draw is that someone blinked.
  • Typically what happens in these cases is that one side has a sudden strengthening of its hand and the other side decides that it is time to settle.
  • This is exactly what I believe happened with Nokia and Qualcomm 6 years ago and the same is very likely to have happened here.
  • To date, Apple has had the upper hand in this case with wins at the ITC and HTC’s disastrous acquisition of S3 Graphics.
  • Apple has also historically taken the position of refusing to licence its patents.
  • Instead it has insisted that competitors design around them.
  • Because none of its patents are standard essential, governed by FRAND, this is a perfectly reasonable position to take.
  • For Apple and HTC to suddenly announce a deal, something must have changed which leads me to believe that it could have been something to do with HTC’s LTE patents.
  • HTC acquired these patents in April 2012 and they are deemed to be standard essential for LTE meaning that (if true) the iPhone 5 and iPad will infringe them.
  • Early September saw HTC starting to get more aggressive with these patents.
  • Apple’s riposte against this case is that the patents are invalid.
  • Not because they have no worth but because HTC doesn’t own them properly (as in the Google case) and that HTC simply bought them to assert them against Apple.
  • Interestingly, Apple does not seem to have disputed the validity of the LTE patents themselves.
  • Both of these complaints look very weak to me and my guess is that after some searching and analysis, Apple concluded that HTC finally had something that might stick.
  • This is what could have led Apple and HTC to sit around the table and make a deal.
  • For the first time, HTC would have had something to bargain with and it could have been this that led to the deal.
  • The result is that I suspect that HTC will be paying Apple some royalties.
  • This is because standard essential patents are unable to command royalties on a par with implementation patents and because Apple has had the upper hand most of the time.
  • However, the LTE patents are likely to have ensured that they are not punitive, putting HTC in a better financial and legal position that it has been for some time.
  • This deal is doubly useful for HTC as it sends a signal that it has something of value which should deter other aggressive lawsuits from other predators.
  • The downside of course, is that HTC’s costs will now rise and margins will fall further, something that it can ill afford.
  • I estimate that HTC will be paying Apple around 1% of the wholesale price of every infringing handset that it ships.
  • The legal problem may now be fixed but HTC still has a huge mountain to climb in order to regain any of its former glory.
  • At least now management is now free to concentrate on the assent of Everest rather than fighting legal claims.
  • Every patent infringement dispute is different and I do not for one moment think that it signals a change in Apple’s IPR strategy.
  • In my opinion, It also has no read across for the fight going on between Samsung and Apple and Motorola (Google) and Apple.

 

Cheap Tablets – Plenty pain for no gain.

 

 

 

 

 

  • The arrival of the iPad Mini threatens to disrupt the mid to low end of the tablet market but its price premium is likely to ensure that its impact on tablets below $250 is minimal.
  • The tablet market is essentially very similar to the smartphone market in that there is action at the two ends of the market and very little in the middle.
  • Anyone trying to operate between these two ends is likely to really struggle to sell meaningful volumes, let alone make any money.
  • At the top end of the market, there is Apple selling content at cost in order to make money on hardware and at the other there is Amazon selling hardware at cost in order to make money on content.
  • Amazon’s offering is of interest to consumers as the devices that it sells are cheap making Android tablets accessible to a much wider range of consumers.
  • This is why I believe that Amazon has seen moderate success with its tablets to date.
  • Everyone else has had to labour with the problem of relevance.
  • Why would anyone pay the same price for an Android tablet that has a greatly inferior content experience? They haven’t and I believe they will continue to shun these products.
  • I am sure that the same if true at the other end of the market too where Android 10 inch tablets have struggled to make any real headway.
  • Barnes and Noble’s tablets are cheap but the inferior content offering is likely to keep them a distant second to whatever Amazon offers.
  • Fortunately for both of them, the iPad Mini has come in a price range that is significantly above what they both offer, meaning that their volumes are likely to be unaffected.
  • The bottom end of the iPad Mini range is $329 some 65% above the Amazon Fire HD at $199 and the B&N Nook HD also at $199.
  • Against these two the Google Nexus 7 and Samsung Galaxy Tab 2 have no chance as both are also at $199 but offer half the capacity at just 8GB.
  • This is the problem of trying to make a margin against someone who is selling at cost.
  • Neither the Nexus 7 nor the Tab 2 have any differentiated content offering, further reinforcing my view that these tablets are most likely to become expensive paperweights.
  • In this segment, Amazon offers the best deal on hardware as well as the best content offering at that price point.
  • As such, it is likely to dominate with the offer offerings not really having much of an impact.
  • Consequently, the impact of the iPad Mini is most likely to be on those tablet makers that are trying to make money from 7 inch hardware in the mid-tier.
  • Those that look especially exposed are the Google Nexus 7 16GB at $249, the Samsung Galaxy Tab (cellular, 8GB) at $329 and so on and so forth.
  • The tablet market is unique in that it has become the fastest commoditising market that I have ever seen.
  • Consequently, outside of Apple and potentially Amazon, it is likely to remain a bloodbath.
  • Without content in this space, one has no chance and now the iPad mini has put the kibosh on those aiming to make a margin in the hardware of a 7 inch tablet.