Microsoft and Nokia – Window of Opportunity

 

RFM AvatarSmall

 

 

 

 

 

As good as it is, the latest video can only hope to start the conversation.

  • Microsoft has launched a wonderful video to raise awareness of Windows Phone (see here).
  • Salient observations from the video are as follows.
    • This is not about Apple vs. Android. Android is not mentioned once. Its Apple vs. Samsung (through its Galaxy brand).
    • The screen shots of the Lumia at the end of the video are good, but they tell me nothing about why the user should switch.
    • The market share numbers are about right with 50 iPhones, 50 Galaxys and 2 Lumias.
  • The objective of this video is to get people talking about the Nokia Lumia and Windows Phone and in that respect the video is a rounding success.
  • The video has been around for 24 hours and has 617,000 views on tube but I think there is a reasonable chance that the video will go viral.
  • This will give Nokia and Microsoft momentum, which badly needs to be capitalised on.
  • This means that in the stores, the experience needs to be sold properly which is not the case today.
  • Windows Phone offers a totally different user experience that is alien to almost all of the smartphone users.
  • When they come to buy their next phones, they need to be shown what Windows Phone has to offer.
  • This is an incredibly difficult task, as just handing a demonstration unit to a prospective user is not going to create the kind of delight that is needed for the user walk out with the device.
  • Most devices at retail are not adequately demonstrated, are blank devices and not connected to the Internet.
  • This means that the user’s impression of Windows Phone bears no real resemblance to what the user experience really offers.
  • This, I believe, is why the take-off of Windows Phone has been agonisingly slow despite the high quality of the offering.
  • Nokia and Microsoft are aware of this problem and some progress has been made but there is still a lot to be fixed before the message can be effectively delivered.
  • Until then, I think that take off will be frustratingly slow but I am hopeful that these issues can be adequately addressed resulting in meaningful share being gained.
  • Most vulnerable to this share gain is Android, where I think that lower usage and a somewhat frustrating user experience are evidence of much lower user loyalty.
  • That being said, the video itself does seem to imply that user loyalty to the Galaxy brand is pretty high with users being prepared to enter into combat to protect its virtue.

 

 

 

 

 

Hewlett Packard – A brave stab

RFM AvatarSmall

 

 

 

 

 

Integrating Leap Motion could give HPQ an edge in PCs.

  • HPQ’s decision to integrate Leap Motion’s 3-D motion control into some of its devices offers potential for differentiation but there are hurdles to jump over.
  • Leap Motion makes and sells a 80mm x 20mm x 12mm device that plugs into the USB port of a computer and allows it to be controlled with any manner of 3D gestures made above the device.
  • Its ability to detect motion is incredibly accurate meaning that movements of all 10 fingers can be detected and understood separately.
  • The device can be used to control Mac OSX and Windows out of the box, but applications themselves have to be modified to work with the device.
  • Hence, an environment and application store called Airspace is provided with the device for installation on the user’s computer.
  • The first potential use for this technology is the replacement of a touch panel.
  • Touch has been a real problem for the ultrabook market as one needs it to properly realise the benefits of Windows 8 but it adds at least $100 of cost.
  • Ultrabook prices have been a limiting factor when it comes to take up to date.
  • The Leap Motion device retails for $80 meaning that HPQ should be able to integrate it for much less.
  • Using Leap Motion instead of touch would result in a lower build cost and have the added advantage of not getting the screen dirty.
  • The larger the screen becomes, the more expensive and the less intuitive touch becomes, meaning that this technology could work very nicely for smart TVs and so on.
  • Samsung’s integrated motion capture on its Smart TV’s is awful and badly needs to be fixed.
  • The problem with Leap Motion is software.
  • The device will only work with software that has been modified to accept this new input technology, meaning that in the early days its appeal will be quite limited.
  • However, HPQ ships a lot of computers meaning that there could be a lot of devices in the hands of users quite quickly should HPQ choose to push this into the mainstream.
  • HPQ will need to invest in writing software to ensure a decent and wide ranging user experience.
  • One of things I really need to see is software that will allow the device to replicate the touch experience without having to rewrite all of the applications.
  • Applications written for Windows 8 Metro are all optimised for touch and this technology needs to allow them to work as designed on a non-touch device out of the box.
  • This is just the sort of pump priming that would be needed to get the virtuous circle of devices and developers rolling resulting in mass adoption.
  • This looks like a good way for HPQ to reduce costs as well as differentiate itself in an increasingly competitive and difficult PC market.
  • Given the size of the device, it will be a while before this makes it into mobile phones, but Samsung already has something similar, albeit much more basic, in its high-end Galaxy devices.

 

Apple Q2 – Cash Compensation

RFM AvatarSmall

 

 

 

 

 

The payoff for investors is a fair one.

  • Apple played its trump card to keep investors happy by announcing a large increase in cash returns following mediocre results.

 

                              Q2A                      Consensus

Macs                     3.9m                           4.1m

iPhone                 37.4m                         35.4m

iPad                      19.5m                         18.5m

iPod                      5.6m                          6.0m

 

Revenues            $43.6bn                     $42.3bn

Gross Margin      37.5%                         38.5%

EPS                       $10.09                        $9.98

Source: Company Data, Bloomberg, Radio Free Mobile

  • Guidance was weaker than expected with revenues of $33.5bn-$35.5bn expected compared to consensus at $38.43bn.
  • Q3 gross margins are expected to be 36%-37% compared to forecasts of 38.8%.
  • Remember that Apple recently stated that it would no longer low ball the guidance and so if we take it at its word, this is disappointing guidance.
  • However, to make up for the softness, Apple is doubling its cash return program to $100bn from $50bn via an increase in the dividend and the buyback running until 2015.
  • The biggest problem is that iPhone ASPs are beginning to fall.
  • This implies that demand for older devices and lower storage versions are rising which strongly points to saturation of the $600+ segment.
  • Furthermore, guidance implies that iPhone shipments in Q3 will be little changed YoY against a market that is growing at 30% in volume terms.
  • Hence, if Apple wants to see growth in revenues and earnings again it must either address the growth segment of the smartphone market or enter new product categories like the much rumoured iWatch or iTV.
  • For the first time Apple talked about its launch schedule and guided that autumn 2013 would see new products and services.
  • Commentary was also strongly suggestive of new product categories rather than just upgrades and refreshes of existing products.
  • Here, the lead contender is a mid-range iPhone.
  • For the first time since this question first arose (3-4 years ago), the Asian supply chain is corroborating the story.
  • This means to me that the devices have been created but whether they are going into full production is uncertain.
  • This is a dangerous step.
  • Apple could easily re-ignite unit growth but the cannibalistic effect of a mid-range device and falling ASPs could easily wipe out revenue growth.
  • Furthermore, Apple does not do cheap very well meaning that there are greater risks attached to execution of this product than the rest of its portfolio, should it be launched.
  • Apple’s valuation remains unchallenging, and the return of cash to shareholders should provide some support to the shares.
  • On a long-term basis, I like the shares as the free cash flow generation is first class and nothing has really emerged yet to properly challenge the iOS ecosystem.
  • If Apple can create some decent services that iOS users come to love then it can start to edge out Google and the other third party service providers on iOS and take more of that value for itself.
  • However, with recent missteps like Apple Maps, iCloud and Mobile Me, this remains the company’s greatest challenge.

Samsung – Who is the master now?

RFM AvatarSmall

 

 

 

 

 

Samsung is moving to take control of Android

  • Samsung’s latest participation in the open source community shows: a) how fragmented Android is and b) how Google could easily lose control of Android.
  • Android is offered to the open source community on the basis of the Apache licence.
  • This means that when the product is shipped, any modifications made to the source code have to be contributed back to the community.
  • This is exactly what Samsung is doing in releasing its kernel for the Galaxy S4 to the community.
  • However, Samsung did not release one kernel but three (GT-19500, GT-19505 and SGH-1337M).
  • This is in indication that even within each model, where one would expect some consistency, there is enough variation to warrant a separate release.
  • Add this to the very high level of non-Google compliant devices and the desire of every handset maker to differentiate, means to me that Android should no longer be counted as an ecosystem.
  • In fact Android is really just an OS and it is the ecosystem that goes on top of that where the difference is made. 
  • For example I forecast that there will be 873m Android devices in the hands of users by the end of 2013.
  • However only around 260m of those will be Google compliant with the remainder being forked variants such as Android or Chinese versions.
  • Hence, the Android ecosystem as Google refers to it is not 1bn users. It is more like 300m. The rest are other ecosystems.
  • Fragmentation is alive and well in Android and the developers will soon have to start choosing which version to support.
  • Samsung also ships just over 50% of all Android devices meaning that if developers ensure that their applications work on Samsung devices they have over half the market covered.
  • Adding others will mean the same amount of work for a fraction of the reward.
  • Hence I suspect that developers will begin following Samsung’s modifications to Android to maximise their addressable market.
  • In time this will mean that Samsung will be in effective control of the platform.
  • Eventually, I think Samsung will rip out all of the Google applications and hooks into its servers and replace them with its own.
  • With the developers following its modifications to the source code, this will effectively become the official master code line, wresting control of it from Google.
  • This is going to take some time to accomplish, but Samsung must do it if it wants to maintain its current level of profitability as hardware becomes more and more of a commodity.
  • Hence while Samsung and Google exist in a reasonably harmonious state at the moment, this will change as Samsung feels the need to move into its patch.
  • Please see here for more on the topic of Samsung vs. Google.

Dell – Don’t be Greedy

RFM AvatarSmall

 

 

 

 

 

Those holding out for $15 may be disappointed.

  • The exit of Blackstone has little to do with PC forecasts and everything to do with a bidding war that was increasingly likely to end in disaster.
  • I suspect that Blackstone realised that paying “more than $14.25” was effectively giving shareholders a far better return than they were entitled to given the risks involved.
  • Dell is at a strategic dead end and in my calculations a fair price for that is around $12 per share.
  • To see a higher price, substantial risks need to be taken to derive and implement a new strategy which could fail leaving Dell far worse off than it is today.
  • Hence offering shareholders $14.25 or more a share is offering them a greater return than they are entitled to.
  • This is because they are unwilling to take the risk of a strategic turnaround and if the deal was to fall through, I suspect the shares would be rapidly marked back to around $12.
  • Hence, to me the Dell / Silverlake offer of $13.65 is a pretty good price for shareholders.
  • The problem now is that I understand that even Silverlake is getting cold feet and it will cost it a fortune ($750m) to walk away.
  • Greed and fear remain as alive today as they have ever been.
  • However, I think that Silverlake is wrong to get cold feet. At $13.65 a share there is a lot of money to be made if execution is solid as the PC market is far from dead.
  • At that price, Silverlake and Michael Dell will need to raise around $19bn in debt to make the deal happen.
  • I strongly believe that the plan is to split the company up and sell off the PC business.
  • The idea here is that the valuations of the server, software and services business are being heavily polluted by the PC business.
  • Get rid of the PC Business and Silverlake will find itself with a range of business with some growth potential that can now be properly valued.
  • The key to this is that Silverlake and Dell must sell the PC business for $19bn or more.
  • That way they can get rid of all the debt raised leaving them with a large stake in a growth business acquired at a low price.
  • $19bn requires the PC business to sell at 0.7x EV/Sales, some 40% higher than HPQ which is on 0.5x EV/Sales.
  • To get that 40%, the PC business will need to be turned around or at least put on a clear and credible strategic path.
  • Here lies the risk, as Dell’s competitive edge as long since been eroded and very little has been done to find a new one.
  • Despite the risk, Silverlake are pretty savvy bunch in my experience and I am pretty confident they can come with something innovative given a chance.
  • However, Carl Ichan is still hovering in the wings and seems to be willing to pay $15 a share for a very substantial stake.
  • Shareholders voting for Carl Ichan had better make sure it is their shares that he buys as I seriously doubt those left behind will ever see $15 again should he get in the driving seat.

 

GOOG Q1 / MSFT Q3 – Have and Have not

RFM AvatarSmall

 

 

 

 

 

Google looks steady while Microsoft continues to chase its own tail.

  • Sift through the details of Google and Microsoft’s earnings announcements and you will see clear signs of the old and the new.
  • How consumers interact with machines and the internet is radically changing and Microsoft is struggling to remain relevant in that segment.
  • Google reported revenues / EPS that beat expectations with $11.0bn / $11.58 compared to forecasts of $11.2bn / $10.68.
  • The EPS beat was mostly due to a one time R&D tax credit.  
  • Motorola Mobility was once again a thorn in the side of shareholders with another thumping loss of $179m (-18% EBIT margin).
  • Microsoft defied gravity with enterprise and server software making up for the slump in consumer.
  • Microsoft reported revenues / EPS of $20.5bn / $0.72 compared to forecasts of $20.5bn / $0.68.
  • Good cost control allowed margins to expand producing the better than expected EPS.
  • The Windows division was weak with revenues of $5.7bn compared to forecasts of $5.9bn but clearly the market was braced for worse given the 14% Q1 decline in PC shipments.
  • Essentially, 25% of PC users have no real need of an advanced operating system as they only use the PC to browse, communicate and consume content.
  • It is this 25% abandoning the PC that is causing the much weaker than expected PC sales.
  • It is Android and iOS that are picking up the majority of these users and given a 4-5 year replacement cycle for PCs, I would expect this weakness to continue for a while yet.
  • The remaining 75% are content creators and I do not think that they are likely to abandon Microsoft.
  • However, many of them (including me) are finding that Windows 7 is plenty good enough for their needs and see no reason to upgrade yet.
  • This is where the Microsoft marketing machine needs to be woken from its stupor of “build it and they will come” because it has been built but no one has turned up.
  • These users need to be shown what Windows 8 really has to offer because right now they seem to have no clue.
  • Users with no clue will not be buying Windows 8. They will either stick with Windows 7 or go for iOS and Android.
  • Rapid prosecution of this problem could stop the rot and prevent some of the 25% from deserting Windows but at the moment Microsoft is showing neither the will nor the ability to do anything about it.
  • Google, on the other hand, is well placed and is actively investing in its services to keep users inside its ecosystem.
  • It knows what it wants, where it is going and how to get there.
  • The result is likely to be further steady growth in advertising revenues as well as user numbers in the Android ecosystem.
  • This is why Google is on 16.7x 2013 PER and Microsoft is on 10.4x 2013 PER and I see no reason for this to change anytime soon.

Microsoft – From Danger Comes Gold

RFM AvatarSmall

 

 

 

 

 

Danger has been a superb acquisition for Microsoft.

  • Microsoft’s acquisition of Danger (11th February 2008) has been described as a classic M&A failure with some $400m going up in smoke but I have long believed that it was the patents that Microsoft was after.
  • The business and the people have long since withered away but the patents live on and live strong.
  • These have been used to great effect allowing Microsoft to be a thorn in the side of anyone who makes an Android device.
  • Danger was the company that made the T-Mobile Sidekick and offered the supporting service.
  • It was the first device and service to really use the cloud and to create an App Store.
  • In its day it proved popular with teenagers and celebrities.
  • The system was based on Java and when founder Andy Rubin left in 2003 to create the company Android he took the ideas of Danger with him but critically not the patents.
  • Like all engineers creating product, patent infringement is an afterthought and so he created Android to the best of his abilities.
  • The result is that many aspects of Android are very similar to the old Danger system for which Microsoft now holds all the patents.
  • I think that Microsoft has been exceptionally clever in its use of these patents.
  • It could have blundered in and made Android prohibitively expensive for everyone trying to make devices but instead it has used these patents to ensure on-going support for Windows Phone and on-going licence fees.
  • The question is often asked why do the likes of Samsung, LGE, HTC and so on persist in making Windows Phone when they ship virtually no volumes and appear to still pay $16 per unit to Microsoft for the privilege?
  • I love long suspected that the answer is that by staying on as a Windows Phone licensee, they are able to get much cheaper access to the Danger patents that they need to ship Android.
  • This is doubly clever, as it allows Microsoft to seemly go on charging a royalty for its Windows Phone software when the rest of the software for mobile world has long been free.
  • If Windows Phone were to become free, then the next stop would be Windows for PC and one can see how the whole house of cards could be threatened.
  • In reality, Android is not really free either because of the work that is needed to get from the source code distribution to a working product but that is another story.
  • 20 licence deals have been signed so far of which the latest is Foxconn / Hon Hai and there are certainly more to come.
  • In this way, Microsoft is in a good position to keep its hopes in mobile alive outside of Nokia.
  • This ensures that the whole industry is ready to make devices en mass should Microsoft pull its finger out and really make users love its Windows 8 ecosystem.

Yahoo! Q1 – Darker horse

RFM AvatarSmall

 

 

 

 

 

Difficult results in display advertising mask the potential.

  • Yahoo! reported disappointing results as display advertising continued to decline despite the remedial actions put in place by the new team.  
  • Q1 Revenues / EPS were $1.07bn / $0.35 compared to consensus at $1.10bn / $0.25. Better expense control was the main reason for the EPS beat.
  • The problem was display advertising which declined 11% YoY.
  • Here Yahoo has made changes to its user experience resulting in fewer ads per page.
  • While the fall in ads numbers has an immediate impact on revenues, the improvement in the user experience takes much longer to be seen explaining the current shortfall.
  • The usage metrics have moved in the right direction but Yahoo! expects that it won’t be until H2 2013, that display advertising begins growing again.
  • Consequently, guidance for Q2 was soft with revenues expected at $1.06bn-$1.09bn compared to forecasts at $1.11bn leaving full year also looking soft at $4.5bn-$4.6bn compared to consensus at $4.6bn.
  • Clearly the market was hoping that results from the transition would be coming through more quickly and I expect that many will be looking to take profits after a good run.
  • Yahoo! recognised once again that mobile is incredibly important for its future but still seems undecided in terms of how it wants to address it.
  • It has partnerships with most of the big ecosystem players but providing stock quotes and weather data for iOS applications hardly constitutes a proper mobile strategy in my view.
  • Yahoo! stated that it now has 300m mobile monthly users up from 200m just three months ago but did not explain what this number means.
  • I suspect that this is the number of times that a Yahoo service or data feed has been hit from a mobile device each month.
  • Given that Yahoo! has around 120m active users overall, I think this is an indication of an increase in usage of Yahoo! services on mobile devices and nothing more.
  • Usage metrics are going in the right direction and the talent attrition has been stopped but there is no real sign of this in the numbers yet.
  • If the future for Yahoo! is imobile, it needs to get an ecosystem up and running because at the moment Yahoo! is almost invisible to the user on a mobile device.
  • I think that a user experience along the lines of Facebook home is probably the right place to go but Yahoo! does not have anything like the same user draw that Facebook does to kick start such a move.
  • Hence, I think that Yahoo! needs to get its 120m users actively using and loving its applications on their mobile devices before attempting to spread its influence further.
  • Yahoo! already has the assets to be a proper player in the internet ecosystem, but I am yet to be convinced that it has the depth of character and the insight to really make it work.
  • Yahoo! is my dark horse among the internet ecosystem players and these results make it a darker one for at least the next quarter.  

Mobile Gaming – Return to roots

RFM AvatarSmall

 

 

 

 

 

App based gaming remains the future of this critical segment.

  • Say what you like about games but nearly one third of all time spent on smartphones is still spent playing games.  
  • Gaming is alive and well but it is rapidly shedding the genre of social gaming and returning to its roots in applications
  • With the advent of smartphones and tablets the traditional gaming market polarised into the casual segment and the console market.
  • Those who had been light console users flocked to this new medium as it better suited their usage and was much cheaper.
  • It also brought many new users into the world of gaming.
  • Then came Facebook and the social games like Farmville and CityVille.
  • For a while, these looked like the next greatest thing and while this gaming concept was reasonably fresh, users ballooned and purchases where made inside the environments.
  • Unfortunately, users are a fickle bunch meaning that unless something is properly engaging they will move on after a while.
  • Many of the social games required users to buy upgrades in order to accelerate developments in the game which worked for a while.
  • However, the majority of gamers were playing for free and rapidly began to tire with the slow development.
  • The result was a fall in interest which has become an avalanche resulting in the decline of Zynga and now the withdrawal by EA of its servers supporting Sims Social, SimCity Social and Pet Society.
  • Despite the decline of social gaming, gaming remains a critical piece of the mobile ecosystem with users spending 32% of their time on smartphones playing games.
  • This means to me that gaming is returning to its roots of individual applications with the option of online interaction through the ecosystem such as Game Center on iOS or xBox on Microsoft.
  • If Facebook wants to get access to the gaming segment, as it attempts to extend its influence beyond social networking, it will need to create something like Game Center or xBox as social gaming looks to be a thing of the past.
  • Of all the gaming offerings out there, it is Microsoft and Sony that have the real potential to command the mobile space but so far both of them have been ineffectual at doing so.
  • Game Center from Apple also has potential but it is uncertain just how much value Apple derives from it or how many active users there currently are.

Smart Watch – Which watch to watch

RFM AvatarSmall

 

 

 

 

 

There are still too many reasons why this won’t work.

  • Wearable technology is not a new idea; it is just that no one has managed to create any with mass market appeal.
  • Remember the Microsoft SPOT watches from 2003? (Click here if you can’t)
  • Another example is the older generation of the iPod Nano which came with a wrist strap and a clock function but it never really caught on.
  • I suspect that a combination of short battery life and the fact that one had to turn it on to get the time was a factor in its demise.
  • However, I think the biggest factor was the fact that watches are major items of fashion and Apple is not a fashion brand.
  • This, I believe will be the single biggest factor limiting the appeal of smart watches beyond the geek crowd.
  • There are endless rumours circulating about how Apple has 100 people working on a smart watch through Microsoft ordering components to Samsung tinkering with prototypes.
  • At this stage all they are doing is experimentation and I do not believe that there are firm plans to launch products.
  • This is because the evidence is that in their current form, smart watches are unlikely to sell.  
  • The one that comes closest is the Martian Passport Watch.
  • To me, this is because it can almost pass as a regular watch and will function as one when the user glances at it just to know the time.
  • In my mind there are three criteria that need to be met before this segment will fly.
    • First. A smart watch needs to offer functionality that adds utility. i.e. it needs to do something more than act as a mini-screen and remote control for a smartphone.
    • Second. A smart watch needs to tell the time with exactly the same ease, reliability and battery life as a regular watch.
    • Third and most important. A smart watch must be seen as fashion item. This, I suspect, will require the involvement of the big brands who, so far, are conspicuously absent from this whole wearable technology fad.
  • Fulfil all three of these requirements and I can see the segment taking off but until then it is likely to remain the realm of dreams and white elephants.