MWC 2013 Day 1 – Writer’s block

 

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MWC is bigger than ever but the frantic rushing around has given way to a more leisurely stroll.

  • I very much doubt that I am alone in sitting here at the end of day 1 staring a blank screen and wondering what to fill the page with.
  • There were a few announcements but pretty much all of them were about evolving what is already there rather than any big change.
  • Therein lies the essence of where the mobile phone industry finds itself in 2013.
  • It is just like it was back in 2005 and 2006 when Symbian was all the rage, as it had been for some time, and the platform was evolving and growth was slowing.
  • The industry was ripe for a major change to take it a new direction and that is exactly where I see it today.
  • Growth is slowing, the smartphone part of the market is maturing and there is nothing on the horizon that is going to disrupt or change the current status quo.
  • I don’t know whether that disruption is wearable technology or application integration but most likely it is something that is so leftfield that no one will see it coming.
  • Against this backdrop the rest of the show and the rest of the year seems set to pass off relatively peacefully with smartphones in emerging markets growing and developed markets stagnating.
  • Stagnation is not necessarily bad.
  • If one is profitable and generating good cash flow then growth offers nothing other than a higher PER ratio.
  • Hence I think that emerging market smartphones is where all of the real action will be this year and many of the new comers to the ecosystem game are indeed focused there.
  • They are however ignoring the fact that Android looks vulnerable in developed markets and is exposed to a substantial loss of share should something viable, easy and fun appear at a reasonable price point.
  • Profitability will be the watchword to look for as Apple and Samsung together make more than 100% of the profits of the industry and this is where I hope the stragglers are focusing.
  • Emerging markets are brutal in terms of competition and with it almost impossible to differentiate on Android, the outlook for profitability outside of Samsung is bleak.
  • I would look to Nokia and Windows Phone as the place where real traction can be felt this year but they are making very heavy going of getting off the ground. 

Firefox OS – The Vital Promise

 

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The success of Firefox hinges on a single promise.

  • Lots of attendees and lots of partners were present for the launch of Mozilla’s Firefox OS that has been squarely aimed at emerging markets.
  • The new OS is written entirely in HTML-5, which adds a number of features that gives the system apart from its competitors.
    • Firstly, the software and hardware (by Qualcomm) have been thoroughly optimised to work together which dispels the old problem of web apps running slowly and consuming vast resources.
    • Secondly, with the whole device running in HTML-5, the apps can either run in the browser or stand-alone on the device. This allows application to be “temporarily installed” and then discarded after a single use.
    • This will resonate with those have loads of apps on their devices that gobble resources, need to be constantly updated but have hardly been used.  
    • Typical example would be a new game that promises to be great but ends up being poor. Typically this would sit on the device, gobbling resources but never touched again.
    • Firefox OS can download the apps into the browser, run them with the same performance as HTML-5 is native to these devices and then get rid of them when finished.
    • Thirdly, It going to be cheap.
    • Mozilla promises mid-high Smartphone performance at mid to high feature phone prices.
    • I think this means prices around the $80-$130 mark with one of the operator partners putting his peg in at $100.
    • To me, this is what will make FireFox OS work. If this promise is really delivered on, then there is a proposition that is worthy of hundreds of millions of users.
    • If not, then it will just be used by operators as a stick with which to try and beat Apple and Android into submission before failing and being dropped by the wayside.
    • Fourthly, it is not a new community. There are lots of developers out there already writing for HTML-5 meaning that developer traction and apps is unlikely to be a major problem.
  • However, the problems are legion:
    • It is open source code with 50% of the code being contributed by volunteers.
    • What is more Mozilla’s philosophy is for total openness with no one having overall control
    • Its very nice but this is a recipe for total anarchy especially in a world that is so driven by hardware.
    • Android is already chaotic enough and is incredibly vulnerable because of it. This could be far worse meaning that the users can never really get on top of the proposition.
    • Security is going to be a nightmare. Loads of app stores and developers delivering code directly to users basically means that there will be virtually no control preventing malicious code from getting past hapless users.
    • There may be some way of controlling this by running apps in the browser, but this not going to solve the problem entirely.
    • Mozilla and its partners have chosen the most brutally competitive and toughest part of the market to address.
    • This is why it must deliver on its promise or no one will ever notice.
  • The bottom line is that Mozilla has an interesting proposition but I think, like Jolla, it has missed an opportunity.
  • Android looks very vulnerable and there I see no reason why users in developed markets might not be tempted by something different when they come to change their phones.
  • This is a more benign market even though it is mature and I think that Mozilla and Jolla are ruled themselves out from a much easier win.
  • This is great for Nokia and Microsoft, as they have been pretty much left to their own devices in terms of sticking the knife into Android in developed markets.
  • Success is going to depend on the performance promise and on its partners making data available to users at much more reasonable prices.
  • I need to see 100m+ active subscribers to see FireFox OS as viable, 300m+ to call it a real success.

Android and Windows – Hit and hope

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Blue stack is a nice idea but it is just not practical. 

  • Android applications are available on PCs, Macs and now Windows 8.
  • This has been made possible via an emulation environment that mimics Android but runs on Mac and Win XP, Vista, 7 and now 8.
  • The issue is whether users of these devices care about running these applications. I suspect the answer is no.
  • The first issue is the quality of the apps themselves.
  • Google Play has a lot of useless junk and even the good stuff is optimised to run on small screens.
  • There are very few Android apps optimised for tablets, meaning that almost all apps are simply the phone app zoomed up.
  • This is a poor user experience.
  • Take that and add, no touch based input, an even larger screen and the fact that apps are no longer running natively and what looked like a great idea rapidly runs out of puff.
  • Favourite games suddenly become much less appealing when one has to re learn the inputs with a mouse or track pad rather than a finger.
  • If one can get around the issue with the quality of the applications, I can just about see this flying on Windows 8 tablets.
  • However, most developers have made commitments to Windows 8 and applications written directly onto the system are always going to work better than ones sitting in an emulator.
  • Furthermore they will consume less system resources meaning that they drain less battery life, and perform better.
  • Blue Stack has been installed by a number of PC vendors on their factory builds but it has hardly been a revelation.
  • Hence, I suspect that the vast majority of users would rather do other things on their larger computing devices and as such I doubt whether Blue Stack will ever become an important part of the compute experience.
  • With no pull from users for the capability to run Android apps on computers, Blue Stack’s ability to command a price for its product is likely to wither and with it the company.

 

Samsung TV – Iceberg dodger

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Samsung’s software is poor but it is learning how to dodge the icebergs in its path.

  • Afraid to get lost in the noise, Samsung has announced some new functionality prior to MWC for its Smart TVs which will spread to its tablets and smartphones.
  • The new service is called TV Discovery which is a user experience that amalgamates TV and video content into a system where it is easy to find what one is looking for.
  • The system also offers recommendations based on viewing habits and can move content between devices.
  • It also links up with Samsung tablets giving them a universal remote function and the ability to share what they are watching with friends.
  • Initially content from Netflix and Blockbuster in the US and Acetrax, Wuaki, MovieMax, FilmIn, Chili, Pathé and SF Anytime in the European Countries will be available with more to come.
  • I see two main reasons for this move:
    • To slow the commoditisation of televisions by improving the user experience and driving desirability of this functionality which will only be available to Samsung TVs.
    • This is another step that Samsung is taking in creating its own ecosystem.
  • Deep down Samsung knows that hardware will sustain it for only so long and it is investing to try and change its stars.
  • Hence, it must take some control of the user experience and this is what Discovery TV, Samsung Apps and its additions to the Android user experience are all about.
  • If users come to love these things, they will prefer to buy Samsung and the commoditisation disaster will have been averted.
  • So far the results are poor.
  • Smart TV functionality is bad. Video codecs that are claimed to be supported do not play, network elements appear and disappear at random and good luck trying to play Angry Birds using the motion sensor embedded on top of the latest TVs.
  • Discovery TV is the next step and I suspect that it will also offer a fairly poor user experience that will not keep Apple TV, Roku and Boxee up at night.
  • However at this stage it doesn’t matter.
  • Samsung remains fantastically profitable and it has some considerable time before its hardware edge is completely eroded.
  • It is very encouraging that Samsung is acting now.
  • Many companies will sit on market leadership and fat margins and do nothing until it is too late.
  • As a result, while its initial efforts are unlikely to amount to anything, Samsung has given itself a better chance of being ready when its current competitive edge is lost.
  • It is too early to tell whether Samsung will be successful, but I can see it managing to dodge the icebergs that sank, Nokia, Motorola, HPQ and Dell among others.

Instagram vs. Twitter – Picture power.

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I am becoming increasingly concerned regarding Twitter’s long-term ability to monetise its service.

  • It was some months ago when Instagram pulled the plug on its Twitter API that allowed users to view Instagram photos inside tweets.
  • Users wanting to display Instagram photos can now only post a link which takes the user to the Instagram site to view the photo.
  • The reasoning was obvious. Twitter users looking at Instagram photos via an API do nothing for Instagram but help Twitter learn more about its users.
  • If Instagram could get this activity moved to its site, then it would be Instagram grabbing the usage, learning about its users and improving its ability to sell advertising.
  • The fear was that brands that were using this arrangement to interact with their customers would disengage from Instagram and just move everything to Twitter.
  • However, the gamble has paid off as data from Simply Measured shows that while engagement with Instagram photos on Twitter has fallen, there has been a corresponding pick-up of activity on FaceBook and Instagram.
  • This is basically telling me that in a straight choice, brands tend to prefer Instagram and FaceBook as a way of interacting with their customers rather than Twitter.
  • It is here the weakness of Twitter is ultimately exposed as a service that is based on text.
  • Text is great to get going with but, as BlackBerry has found, it carried little weight as users become more sophisticated.
  • This essentially means that what people use Twitter for is limited and to break out of that mould will be difficult.
  • Twitter has made some strides in this direction with the enablement of e-commerce with services like Chirpify and its relationship with American express, but there remains a huge hill to climb.
  • At the end of the day, if brands prefer to use Instagram and Facebook to relay their message, they will pay more for it and the advertising that can be sold around that will be more valuable.
  • This reinforces my view that as an advertising and revenue generation proposition, Instagram and FaceBook are meaningfully more valuable than Twitter.
  • Twitter has fantastic reach and a huge user base but users don’t spend that much time on the site and the usage is of a type that is hard to monetise.
  • Hence, in any IPO Twitter should be priced at a discount to FaceBook and the other internet brands.
  • However, I suspect these arguments will fall on deaf ears in the scramble to throw good money after bad.

Microsoft Office – Play with fire

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Microsoft needs to see the wood for the trees if it wants to maintain loyalty.

  • Microsoft has changed the terms on which it sells Office 13.  
    • Firstly, users are no longer able to port Office onto a new PC whereas before one migration was allowed.
    • A user who replaces his PC or has to replace a large part of his system due to a crash will have to buy the software again.
    • This does not amount to a huge change as the Office licenses that are sold to companies are already tied to the hardware but those that are affected are those that are dangerous to annoy.
    • Secondly, Microsoft has quietly hiked the price of Office for Mac by 20%.
  • In 2012, Enterprise represented around 80% of Microsoft’s revenues with 20% coming from individuals.
  • Furthermore 75-80% of the Windows division’s revenue comes from OEM sales meaning that only the tiniest fraction of revenues come from people buying software online or off the shelf to then install.
  • It is this slice that will be most affected by this change.
  • Here, one finds the enthusiast market and it is this lot that write the blogs and review the products.
  • Already they are not happy.
  • There is also a case to be made for fair use. A user who buys a piece of software should not have to purchase the same software again simply because he or she has to replace the hardware.
  • This move will encourage piracy. When EA released one of its games with exactly the same limitation, it rapidly became the most pirated piece of software in history.
  • It will also encourage people to think about alternatives such as LibreOffice 4 or Google Docs.
  • I suspect that a similar fate awaits Office 13 and as a result of this change, Microsoft will lose far more revenue than it could ever have gained from preventing installs on a second piece of hardware or price hikes.
  • Microsoft is not in a position to annoy its customers or damage its image as there have never been more viable alternatives to its software than there are today.
  • Its core market of PCs is being whittled away as users buy different devices, almost all of whom do not run Microsoft and from whom Microsoft makes nothing.
  • This is a classic example of the ivory towers syndrome that infects Microsoft where each division does what it thinks best and no one really thinks about the whole.
  • Somewhere in a back-room in Redmond some Office bod will have decided that this change makes sense for the Office business, but not for one second has that bod looked at the bigger picture.
  • Microsoft has great assets but it needs to persuade its users to stay loyal not just trample over them in the mistaken belief that they have nowhere else to go.

Samsung Rex – King Cnut

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Rex is not strong enough to hold back the tide of Asha. 

  • Samsung has renewed its assault on the forgotten 1bn with the launch of a new range of mid-range phones called Rex.
  • There are three devices the Rex 60, 70, 80 and 90.
  • The devices are all dual SIM (which Samsung actually does very well), full face touch, browsing through Opera and it looks like applications through Java.
  • Pricing is in line with the Asha series of devices with the range having been set at $75-$120 in India.
  • How this related to Bada and the Wave devices in unclear but it looks to me like Samsung is looking to push this range way down through the tiers which is why Bada has not been used.
  • Bada supports both Linux kernel and an RTOS and its ability to go towards the higher end of the range has limited Samsung’s ability to push it very low.
  • So it seems like this will be the new low-end platform with Bada being consigned to the growing graveyard of mobile OSs.
  • It looks like Rex is based on an RTOS, with Samsung’s proprietary OS and TouchWiz Lite UI on top.
  • Third party apps look like they are being delivered through Java as well potentially through the Opera Mini browser meaning that the offering is going to be pretty thin.
  • Then again at these price points, does it really matter?
  • These compete with the very low-end of Android, but like Nokia, they will perform much better.
  • Hopefully Samsung has learned the secret of making cheap phones which is to produce many models off a single platform and a single build of software.
  • Given, that these devices are all being released at the same time, I am hopeful that this will prove to be the case.
  • No matter how successful these devices are, the brutal environment at the low end of the market is going to keep margins under pressure.
  • Hence, while these devices might help Samsung grow volumes, revenues and profits, there is likely to be some pressure on margins.
  • This launch does not make me too concerned regarding Nokia’s Asha range as Samsung cannot be too aggressive for fear of diluting the huge margins it earns from high end Android.
  • Furthermore, the market at the low-end is already brutally competitive meaning that Samsun’s effect on pricing is unlikely to be anything new.
  • However the low end is plenty big enough for a few players to survive.
  • Asha remains Nokia’s life blood and a potential plan B should Microsoft continue to fail in the mobile handset market.

 

HPQ – size 12s

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This new excursion into tablets and smartphones has all the hallmarks of the malaise that currently grips HPQ. 

  • Not content with blowing $1.2bn on attempting to enter the mobile market by acquiring Palm, it appears that HPQ is back for another whirl with Android tablets and smartphones.
  • A Windows 8 tablet I can understand as it fits into the existing PC business and may help it to address market share losses to tablets.
  • However, with Android I see nothing but fast growing inventories, uninterested consumers and further losses.
  • The problem here is differentiation.
  • Everyone has access to the Android software and Android tablets pretty much all look the same, do the same thing and cost not much less than an iPad.
  • The applications for Android tablets are poor as the vast majority are simply the phone app running at 2x zoom, ensuring a sub-standard user experience.
  • The questions are:
    • How will HPQ make its tablets and smartphones (presumably) different from everyone else’s?
    • How will HPQ persuade users to purchase its Android tablet rather than iPad which will have a similar price and a vastly superior app offering?
  • The short answer is that it won’t.
  • This has all the hallmarks of yet another classic blunder by HPQ.
  • The company makes the correct conclusion that it needs to address the space but assumes that it will be successful simply because of who it is.
  • This move, very much like the acquisition of Palm and the move towards software and services needs to be properly thought about before blundering in with its size 12s and hoping for the best.
  • This is yet another sign of the malaise that is destroying HPQ.
  • Its senior management and its board of directors do not seem capable of leading the company out of its current predicament.
  • Until the focus switches from who is to blame for its problems to how they will be fixed, the slow death spiral seems likely to continue.
  • The shares are fantastically cheap and are going to remain so until both boards have been wiped clean.

Dell – Greed and fear

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I see the possibility that the whole deal collapses.  

  • Some investors seem to think that they have a right to benefit in the potential upside in Dell without taking any of the risk.
  • Some of the existing shareholders are complaining that the valuation at $13.65 a share deal is too low and are holding out for something like $15-$17 a share.
  • In their defence, it is their duty to maximise the return that they earn for their stakeholders but frankly, their arguments have no merit.
  • Dell has been trading very low valuations for a reason. It is at a strategic dead end.
  • It has lost its core competence; its end market is, at best, in a steady state long term and its software and services strategy is still born.
  • To turn this around something drastic has to happen. I outlined the two options that I see here.
  • That drastic action involves risk and could easily blow up in the face of whoever owns the company at that time.
  • For example, if Dell (as a public company) was to announce a huge increase in R&D and a subsequent fall earnings and cash flow for at least two years, I believe the shares would fall hard.
  • This indicates that the market would assume that the strategy fails and simply serves to hasten the company’s decline.
  • On that basis I do not believe that the shares are undervalued.
  • At yesterday’s close of $13.79, Dell was trading at 8.1x 2013 PER and 0.4x 2013 EV / Sales.
  • HPQ which is in a similar or worse pickle than Dell is on 5.1x 2013 PER and 2013 0.5x EV / Sales.
  • Apple (ex-cash) is on 7.2x 2013 PER and 1.8x EV / Sales.
  • Dell does not look cheap even at this price.
  • This is especially the case, if you assume that the company simply chugs along with the PC market and makes no real strategic change.
  • Dell is cheap, only if one assumes that there is a recovery somewhere down the line and it is clear that that is not going to happen without a highly risky strategic shift.
  • The danger for existing shareholders is that they force a price that diminishes the return for those willing to take that risk and as a result they back out.
  • At that point, one would see the price quickly return to trade in line with HPQ with existing shareholders taking a rapid 30% hit.
  • Greed and fear remain as alive and well today as they have ever been.

Samsung – Borrowed time

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Hardware has made Samsung great but it must now repeat that success in software.

  • Samsung’s great talent has always been hardware, but the company is now making attempts to change its stars.
  • It is well established in the technology industry that hardware is becoming a commodity and that in the future, it is software where differentiation will be made.
  • Apple, Cisco and others have shown that the most money is made when one makes a return on software by selling hardware.
  • One can make better margins by selling software alone, but in the vast majority of cases one’s revenues would be much lower meaning that overall, much less profit would be generated.
  • Furthermore, by creating both the hardware and the software, one can ensure that they work optimally together.
  • Hardware that is designed to run a specific type of software and vice a versa produces better software performance with lower battery drain. This substantially enhances the overall user experience.
  • Samsung’s success has been built on taking innovations from elsewhere and making them smaller, cooler, better and cheaper.
  • In mobile devices this has also been complimented with real improvements in form factor design and ergonomics.
  • Samsung is now the world no 1 in Smartphones, featurephones, televisions, DRAM and NAND which beggars the question: what is next?
  • The next stage has to be related to software and looking at recent announcements, this is where a significant amount of investment is going.
  • New innovation centres on the east and west coasts of US and substantial venture funds are the beginnings of Samsung’s attempts to bring software into its DNA.
  • To date, Samsung has been non-committal when it comes to software opting to use every platform available in order not to miss the boat should one platform really take off.
  • This has worked really well when it comes to Android but the problem is that everyone has access to Android making it almost impossible to differentiate in software.
  • This is not going to be a problem for a while, as Samsung still has bendable screens up its sleeve but they won’t keep it going forever.
  • Samsung’s expertise in software has improved in leaps and bounds over the last 8 years but there is still a long way to go.
  • The software on its televisions leaves a huge amount to be desired, and its in-house software platform, Bada, has had nothing like the traction that was targeted.
  • Samsung has time and it has money but it must become a software company if it is to avoid Nokia’s fate when the next big thing in technology suddenly leaps into prominence.