Samsung – Device advantage

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Samsung is using its control of  the device to its best advantage.

  • Samsung’s strategy to move into software and services is starting to bear fruit as it ChatOn IM service has broken the magic 100m user number.
  • This number has doubled in the last four months and is showing particular strength in China, India and the US.
  • I expect the number to grow strongly as ChatOn is installed on almost every Android and Bada device that the company makes.
  • The service is available in almost every country and supports 63 languages.
  • These are numbers from Samsung and there is no indication regarding how these numbers are counted or how active these users are.
  • Despite this, all of them will have at some point signed up meaning that they now have an account with Samsung.
  • This moves Samsung into contention with WhatsApp (300m users), Line (100m+ users) and BlackBerry (75m users)
  • This is the key advantage of controlling the device.
  • One can ensure that your app is front and centre and this seems to be working to great effect for Samsung.
  • This is a good step forward for a company that to date has largely just been all about hardware.
  • Samsung knows that it must move up into software and services if it is to preserve its margins and ChatOn is looking like a good start.
  • Samsung now has a relationship with 100m users. It may be a tenuous and fickle relationship, but at least it is there.
  • Samsung is now in a position to encourage those ChatOn users to try other things like games, social networking, music and so on.
  • If it can do that and get those users using its services then it will be well on the road to becoming a Digital Life supplier.
  • This is exactly what it must do to preserve its profitability as hardware commoditises.
  • This will bring it into direct conflict with Google and is why I believe that the big battle in tech over the next 5 years will be Samsung vs. Google. (see here for more details).
  • Everyone scoffs at Samsung’s ability to write software and 8 years ago I was among them.
  • Things are quietly changing.
  • Samsung is showing some signs of confounding its critics and soon I may have to afford Samsung a position in my list of Digital Life contenders. 

Mobile Developers – Still no number 3.

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Windows Phone is still shunned by developers.

  • The latest data from appcelerator shows a worrying trend.
  • While everyone seems to want a third ecosystem to emerge, the developers don’t seem to care which makes it more difficult to convince users to take-up something different.
  • All developers care about is getting paid which is why iPhone and iPad are at the top of the list again with 80% of developers “very interested” in building applications for those systems.
  • Next up is Android phones at 71% and then Android tablets at 59%.
  • The surprise entry is HTML 5 Mobile web applications which scored a hefty 60%.
  • This is a good sign for Mozilla and the Firefox OS as long as the vital promise can be delivered upon (see here).
  • However Windows Phone is languishing at 26% and has declined by 3% since the beginning of the year when the last survey was carried out.
  • One can make all sorts of criticisms of this data but if Windows Phone is to emerge as the third ecosystem this number has to rise and rise a lot.
  • Lack of decent applications is the number one reason why a Windows Phone is returned to the store and having owned one for 2 months I can see why.
  • The Nokia-written applications are superb but the rest is very low quality.
  • Even Microsoft’s own Skype application for Windows Phone is far below the functionality and performance that it has on Android and iOS.
  • The application developer / phone cycle is a virtuous one but one that has to be primed.
  • The more phones that are in the hands of users, the more application developers will write apps.
  • The apps there are, the more attractive the platform becomes. And so on.
  • To get this cycle going requires vast amounts of investment especially in this day and age and this is what Microsoft needs to get on with.
  • Numbers are not good enough. The applications have to be of decent quality.
  • I am hopeful that Nokia devices becoming part of Microsoft will encourage Microsoft to really invest in getting this platform off the ground.
  • This is a platform that is worthy of substantial investment unlike the white elephant that is Windows RT.

Windows RT – The last shoe

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The last shoe has dropped on Windows RT. Only Microsoft is left.

  • Samsung, Lenovo, Asustek, Acer and now finally Dell have all discontinued their Windows RT devices.
  • As of today the Dell XPS10 is no longer listed on its website and the company carefully steers visitors towards the Latitude 10 which runs full Windows 8 and Intel.
  • A fan will say that it has been withdrawn ahead of Dell’s event in New York next week but I am almost certain that a Windows RT product will not be launched to replace the XPS10.
  • The writing is on the wall. Windows RT is a total failure, is costing fortune even by Microsoft’s standards and should be stopped now.
  • The sales of Windows RT have been almost non existent and it is clear that the consumer has no interest in the platform.
  • This is because it is neither fish nor fowl. It is an expensive, heavy tablet that lacks the apps of the other platforms and the locked desktop means that it cannot function as a laptop.
  • Only full Windows 8 has the potential to be the dream hybrid product.
  • The problems with Windows RT are fourfold:
    • It looks like Windows 8 but the user can’t install anything on the desktop creating confusion and mistrust.
    • Many of the classic applications expected on a tablet are missing.
    • The devices are underpowered creating a poor user experience.
    • The devices are too expensive compared to the iPad and other tablets even after the recent round of reductions.
  • For these reasons users have shunned Windows RT and I cannot see any future for the platform.
  • Microsoft would be best served by focusing its energies and cash pile on getting full Windows 8 to run on ARM.
  • Then users can choose a Windows 8 device that they know will have full functionality.
  • The choice should be made on the basis of price, performance and battery life alone.
  • If this can be achieved (I am not optimistic) then ARM has a chance to grab some share in the PC market.
  • If things stay the way they are (and I can see no change before mid-2014) then ARM has no chance and estimates need to be cut.
  • The recent update to Surface RT does nothing to solve these problems and Microsoft looks to be throwing good money after bad.


Flexible Displays – Two years late

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After two years, Samsung has decided to experiment.

  • After much delay it seems that a device with a curved display is about to make a debut on the market.
  • This technology has been in the works for more than three years but now the Samsung Galaxy Note 3 is expected to have a brother called the Galaxy Note 3 active.
  • The device will have a bendable plastic display and will also be waterproof along the lines of the Sony Experia devices.
  • The delays have been caused by two problems.
  • Firstly: yield. The encapsulation of the curved display has proved to be tricky and yields have been so low that the devices would have been too expensive and too unreliable for the market.
  • I believe that this problem has largely been solved.
  • Secondly: demand. Samsung has been struggling to work out what these displays add to the user experience and has come up blank.
  • Likewise, many of its handset customers are of the same opinion as Samsung has met with no real demand when trying to sell these screens to other handset makers.
  • I have long been a believer in bendable and flexible displays but at the moment, I am in the minority.
  • I agree completely with Samsung and the other handset makers that there is no obvious use for a curved or a flexible display.
  • However, even a curved display enables significant form factor differentiation and in Android that is a very rare commodity.
  • A screen that curves around the bezel is a pointless gimmick but history has repeatedly shown that pointless gimmicks sell phones if they are perceived to be cool.
  • Hence, I see this as an experiment by Samsung to see what demand a curved display will generate.
  • If it proves popular, I can see many more models in the works and also screen supply evaporating for customers outside of the Samsung group.
  • It is through these screens and the resulting form factor differentiation that I can see Samsung hanging onto its margins in smartphones while it works out how to move up into software and services.
  • Samsung is cheap but there is no momentum or catalyst that I can see that will enable the shares to challenge previous highs.


BlackBerry – O Canada

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BlackBerry is to remain Canadian but at what price?

  • BlackBerry has agreed to be acquired by a consortium led by Toronto based Fairfax Financial Holdings for $9.00 a share.
  • There will now be a 6 week due diligence period during which BlackBerry is free to seek other offers but if it decides to go down an alternative route it will have to pay Fairfax at least $141m as a termination fee.
  • This is essentially a classic leveraged buy-out and the consortium will be seeking significant financing to complete the deal.
  • I see two possible motivations for the deal.
  • First. An emotionally driven desire to ensure that Canada remains present in the technology industry.
    • This desire could be particularly strong after the ignominious exit of Nortel Networks.
    • It is of no surprise that Fairfax Financial is a Canadian institution and if this is the primary driver of the deal, the consortium will look to do a turnaround of the whole company with a probable relisting.
    • I cannot see this strategy working (see here) and see the strong possibility that the debt raised for this deal ends up trading at cents on the dollar.
  • Second. A break-up and refocus of the company.
    • BlackBerry’s departure from any attempt to win consumers means that BBM no longer fits within BlackBerry.
    • Furthermore, this is an asset with significant value and I can see this being sold off.
    • BlackBerry also has a meaningful patent portfolio that could raise more than $1bn if it were to be sold.
    • The handset business needs to be downsized to focus on the target customers (enterprise and prosumer) and the service revenues that they generate.
    • It is not impossible that the handset business is closed all together and the company moves to a complete ODM sourcing of handsets.
    • If the new entity can be made cash generative once again then the debt could be paid down with a combination of operating cash and the proceeds of the sale of BBM and the patent portfolio.
    • This would leave the equity holders with a clean, much smaller but cash generative business that could be sold or relisted.
  • The problem with both of these strategies is that there appears to be no room left for BlackBerry. (see here)
  • Microsoft with Nokia is looking to move in and hoover up all of BlackBerry’s customers.
  • Furthermore the transition to BES 10 from BES 7 requires a full upgrade giving customers the perfect opportunity to switch to something else.
  • Current holders of the equity should be glad that they have found someone willing to take the shares off their hands for $9 per share.
  • Given the outlook, $9 per share is a great price.

BlackBerry Q2 – Ballad of the fat lady II

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The fat lady has sung on BlackBerry’s attempt to appeal to the consumer.

  • BlackBerry has issued a horrible warning on Q2 14 missing revenue forecasts by a massive 47%.
  • Q2 Revenues are expected to be $1.6bn compared to estimates of $3.0bn as just 5.9m devices have been sold to users compared to consensus of 7.9m and Radio Free Mobile at 8.3m.
  • As a result of the weak demand, shipments into inventory were only 3.7m resulting in the huge revenue miss.
  • As a result of the lower revenues, EPS will now be a loss of $0.47-$0.51 compared to a consensus loss at $0.11.
  • On top of this BlackBerry is also taking a charge against inventory and supply commitments on the Z10 device that will total around $930m-$960m.
  • BlackBerry will also cut around 4,500 jobs as it downsizes its portfolio to four devices and focuses on the enterprise and prosumer.
  • I expect further hefty restructuring charges to follow.
  • This warning underlines the fact that BlackBerry’s attempt to satisfy the consumer demand for smartphones (see here) has been a total disaster and will now be stopped.
  • The biggest question is what will happen to BBM?
  • This is an asset that actually has some value.
  • BBM still has around 75m users (mostly in emerging markets) that are very active (30+ minutes per day).
  • Looking at the valuations being thrown around for WhatsApp, Line and others, BBM has significant value if it can be extracted from its troubled parent.
  • Hence I think there is some interest around this asset and would not be surprised to see it parcelled up and sold off.
  • The rest of the company is a much more difficult proposition and I can’t see anyone being willing to take it on.
  • With Nokia now being part of Microsoft that potential buyer is no longer at the table.
  • Furthermore, the offering that Microsoft makes to prosumers and enterprise will be much more tightly integrated with its superb enterprise offering leaving companies with no reason use BlackBerry.
  • BB10 requires a complete re-install of the BlackBerry Enterprise Server, offering companies the perfect opportunity to bail out of the system.
  • The “Bring-your-own” device market is dominated by Apple and Samsung and with Microsoft likely to get better and better in the enterprise, there seems to be no room left for BlackBerry.
  • Hence, the shares are likely to drift in the southerly direction from here, albeit with a nice bounce should BBM be sold.
  • Other than that bounce, there is no reason to hold the shares which could easily end up with a valuation of zero.
  • The fat lady has sung on the consumer strategy and I am deeply concerned that she will return for an encore.


Apple – Rumour is not reality

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Apple’s rivals will be resting bit easier tonight.

  • The launch of the iPhone 5s and 5c show that Apple is still uninterested in the low end and remains unwilling to address the demand for larger screens.
  • Apple launched two new phones to replace the iPhone 5 at an event at its headquarters but showed very little that was new and innovative.
  • The iPhone 5s is an update to the iPhone 5 that adds a fingerprint sensor to the “wake” key, an upgraded apps processor (A7), a new component that tracks all motion data as well as an upgraded camera and flash.
  • This device will come at the same price as the iPhone 5 ($649 16GB unlocked).
  • The iPhone 5c is essentially an iPhone 5 in a polycarbonate case (5 choices of colour) with a few upgrades such as a larger battery and a better camera.
  • The iPhone 5c will be available for $100 less at $549 for a 16GB unlocked version.
  • There was no sign of: Apple TV, a larger screen iPhone or new iPads all of which had been rumoured.
  • Apple has played a very delicate game in releasing a cheaper iPhone as the threat of cannibalisation is very real.
  • However, there are significant differences between the two versions in terms of hardware and look and feel to justify the small price difference and so cannibalisation is not really is an issue.
  • The real issue is that at $549, Apple is still doing nothing to address the low end which will relieve the likes of Windows Phone and Android.
  • Furthermore these devices do nothing to address consumer demand for larger and brighter screens.
  • This is a segment that Samsung has created and it is still growing nicely.
  • In failing to address it, Apple is foregoing a substantial revenue opportunity.
  • Furthermore, the relatively small and pokey screen of the iPhone 5s and 5c make the device look tired and old next to the Samsung Galaxy S4 and Note III.
  • The iPhone 5s may have new wonders hidden inside but potential buyers are unlikely to notice having been put off by the small screen.
  • Net-net Apple has done enough to protect the slice of the market it occupies and extend slightly into lower price categories but there is nothing revolutionary here.
  • Hence, I don’t see numbers or market share changing much leaving the current status quo undisturbed.
  • Apple remains inexpensive relative to its cash generative ability and bank balance but there is nothing in these devices that is going to re-ignite belief that another growth spurt is around the corner.
  • I prefer Microsoft or Yahoo!.

Dell – As good as it gets

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Icahn’s surrender still leaves an uphill battle.

  • Carl Icahn has given up his fight to take control and turn around Dell leaving the field clear for Michael Dell and Silver Lake.
  • The proposal now stands at $13.88 per share including the $0.13 dividend that was offered to keep Icahn on the back foot.
  • At this price and with Icahn bowing out the deal is almost certain to pass at the shareholders meeting later this week. (Thurs 12th Sept).
  • The question now is: what will Dell and Silver Lake do to turnaround the company.
  • The group has two choices:
    • One. It can reinvest in R&D (margins would fall in the short-term) in order to properly address the changes in the PC market.
    • Form factor, look and feel are important again but without any R&D there is no chance to really emerge ahead of the pack.
    • Most PC makers outsourced R&D to their ODM partners as Intel and Microsoft drained the PC industry of profitability leaving them unable to differentiate in the new environment that Windows 8 brings.
    • Investing in R&D could make Dell products exciting again and stop the inevitable market share loss that I see happening as Asustek and Samsung come to market with innovative and differentiated products.
    • Two. Break the company up, sell off the PC business and focus on software and services.
    • This would restore growth but it would cause the revenues to more than halve before growing again but off a much lower revenue base.
    • Dell has around $10bn in debt which is likely to grow meaningfully to acquire the equity.
    • The PC market is in very poor shape but I suspect that Dell’s PC business is big enough such that it could be patched-up and sold off generating enough proceeds to pay down the debt.
    • This would leave Michael Dell and Silver Lake with the equity of the software and services piece.
    • Get this growing steadily and follow up with an IPO and one has the makings of a very tidy profit.
  • I suspect that Silver Lake and Dell are looking mainly at option 2 as it is the least risky and is a simpler and quicker proposition.
  • That being said the real risk lies in being able to sell the PC business and getting enough money for it to pay down the debt.
  • This in itself is risky enough and could result in disaster if the PC market continues to deteriorate and the new management is unable to do anything about it.
  • Dell and Silver Lake are proposing to pay 14.6x 2013 PER for a business which is in no better shape than HPQ.
  • HPQ is currently trading on 6.3x 2013 PER which makes the offer from Dell and Silver Lake very attractive in my view.
  • This is especially the case as current shareholders will not be risking their shirts in the turnaround and are already benefitting in some upside.
  • Given the share price is very close to the offer price, selling now just in case the vote fails, looks like the safest option.


Nokia / Microsoft – Course change

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Smartphone margins are likely to imminently collapse.

  • Rationale, the deal structure and recent actions all suggest that a substantial increase in investment in the Windows Phone ecosystem has begun.
  • It seems like action is already being taken with the lowering of the price of the flagship Nokia Lumia 1020 by $100 to $199 with a two year contract.
  • AT&T is matching this price and there is also a free camera grip being added to the bundle for those brave enough to take the plunge.
  • If one looks back at last week’s announcement, several things stand out.
    • First. The only reason why it would be better for Nokia shareholders to no longer own the handset business would be if the business was expected to fail on its own.
    • Given Microsoft’s poor history in the hardware and handset markets (Xbox excepted), the only thing it brings to the table is deep pockets.
    • Greater integration will also help but the real issue here is that the platform needs massive investment in order to see proper success and there was no way that Nokia could afford that on its own.
    • Second. Microsoft has made available to Nokia €1.5bn of financing that is, in effect, a prepayment on the acquisition.
    • Nokia is not short of cash and so the only rational reason for this is a fund for Nokia to immediately ratchet up spending on Windows Phone.
    • Third. Everyone knows what Windows Phone is but no-one has the first clue why they should buy it.
    • This is a failure of both how the ecosystem is marketed but also the scale of that marketing.
    • Windows Phone is up against the vast resources of both Apple and Samsung and to make a dent, the volume and style both have to meaningfully cranked-up.
  • As a result, I think it very likely that a large increase in investments in Windows Phone has already begun and that in the coming quarters one is going to see a collapse in Smart Devices profitability.
  • Fortunately this no longer matters as the value of the device business has been crystallised and all that counts is what value can be derived from NSN, the patent portfolio and Here.
  • I think it likely that the next 12-18 months will see the sale of the patent portfolio and the Here business leaving NSN and a pile of cash.
  • I expect Rajeev Suri to be confirmed as the next CEO of Nokia over time and a large pot of cash to be returned to shareholders.
  • This deal could be transformational for Microsoft if the company can fix the marketing issues and get users to adopt Windows Phone.
  • It now has the money but does it have the talent?