Ubuntu – Money and power

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There is a real risk of fragmentation in the Ubuntu camp.

  • All is not well in the world of Linux open source as the relationship between the money and the code seems to be breaking down.
  • Ubuntu is a desktop operating system based on Linux that is open and free.
  • Although it is open and there is a community around it, it is effectively controlled by Canonical, a loss making company that writes the vast majority of the code.
  • It is able to do this as Canonical is owned and financed by entrepreneur Mark Shuttleworth who has the means to pump money into dreams.
  • He has long been a supporter of Linux, but more recently the relationship between Canonical and the community appears to be coming unstuck.
  • The main bone of contention seems to be the most recent release by Canonical of Ubuntu that prioritises convergence (PC, tablet and phone) of devices over backward compatibility.
  • This disagreement has been simmering for a while but the release of Ubuntu 13.10 seems to have brought this to a head.
  • Criticism from the community has been harsh and tempers on both sides have become somewhat frayed.
  • From my perspective the direction that Canonical is taking in terms of promoting device convergence is the right one.
  • Stubbornly sticking to a desktop only version of the code will only result in rapid obsolescence.
  • Furthermore, Mark Shuttleworth pays all the bills at Canonical and as a result he is perfectly entitled to take the code in any direction that he sees fit.
  • The end result could easily be a split where Canonical takes the code in one direction and the open source community goes in another.
  • This would be bad news for both the open source community as it would lose a major source of free code and engineering resource.
  • From Canonical’s perspective, it would lose its image as a real player in the open source community and would become just another vendor of professional software services.
  • This fracturing could also dent its chances in China, where the Chinese are looking at adopting Ubuntu as the basis of their own ecosystem for Digital Life services.
  • The best solution would be for the two sides to make up but engineers can be unbelievably stubborn when it comes to their creations.

 

HPQ Q4 – Deadly drift

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Meg has stabilised the ship but it still has no course.

  • Things are better at HPQ but there remains no real plan for the future making the company very vulnerable to more innovative and nimble competitors.
  • Q4 Revenues / EPS were $29.1bn / $1.01 compared to estimates of $27.8bn / $1.00.
  • Revenues from corporations was responsible for the surprise where servers, storage, networking and corporate PCs all saw higher revenues than the year before.
  • Consumer was weak as has become the norm.
  • Guidance was given for Q1 and FY14 EPS at $0.82-$0.86 and $3.55-$3.75 which is in line with consensus at $0.85 and $3.66 respectively.
  • Meg has done a good job in stabilising the ship and HPQ’s weathering of the slump in the PC market is fair.
  • However, this company has no strategy that I can find and until it gains one, it is just going to drift.
  • This is, by far, the company’s biggest weakness.
  • My issues around management have, by and large, been addressed as most of the supervisory board has been swapped out.
  • HPQ has a group of reasonable assets which are related to one another but it seems to have no clue whatsoever how to put them together to create something special.
  • This is why the stock is on 7.2x 2014 PER and there it will stay until something changes.
  • This makes the company very vulnerable to competition.
  • Things are changing very quickly in this space and HPQ is a massive and easy target for innovative offerings looking to gain market share.
  • By just sitting there and not doing anything, HPQ’s is ensuring that it will always be on the back foot reacting to the market rather than driving it.
  • This is no mean feat. Leo Apotheker famously tried and failed to change HPQ.
  • Meg Whitman has stabilised the ship but does not seem to have the vision to succeed where Leo failed.
  • The stock remains uninteresting.

 

 

Windows RT – End of the road

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Microsoft has all but confirmed the end of RT.

  • Microsoft has finally confirmed what I have long suspected which is that Windows RT will be killed off sooner rather than later.
  • Always one to treat hot potatoes delicately, Microsoft has not explicitly said that RT will be terminated but has made it very clear that there will not be three operating systems.
  • Windows RT is an orphan child that sits between Windows 8 and Windows Phone and is neither fish nor fowl.
  • Hence the devices that are based on it are underpowered with hideously limited functionality on the desktop making them inferior to both Android and iOS tablets.
  • The result has been, virtually no sales to users, a massive write off of inventory by Microsoft and no support for the platform by any company outside of Microsoft.
  • Hence, I suspect that there will be no Surface 3 and no successor to the Nokia 2520.
  • Furthermore I am confident that RT will be quietly put to sleep during 2014.
  • Microsoft aims to bring Windows 8 and Windows Phone closer together and I would not be surprised to see elements of RT being incorporated into Windows Phone over time.
  • With this trajectory in mind, I suspect that volume commitments to the Surface 2 and the Nokia 2520 are almost non-existent.
  • Hence I am pretty certain that there will be no repeat of the huge write-off endured by Microsoft for either company.
  • I view this as excellent news as Microsoft is being more pragmatic in its approach to strategies that don’t work.
  • If Microsoft can apply this pragmatism to the rest of the company and to its choice of CEO, we might just have a phoenix rather than a turkey.

Xbox One vs. PS4 – Blu drives of death

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The bark is much worse than the bite.

  • It looks bad but the hard drive defect on the Xbox one looks to be no more frequent than the failures reported on the PS4.
  • The main difference is that this defect looks to be a design or manufacturing fault whereas the PS4 defects are varied and Sony is currently blaming damage incurred during shipping.
  • I am not sure I believe this explanation as none of those with affected consoles have complained of physical damage to the device on unboxing.
  • I suspect that this is Sony’s blanket explanation until it can find out what the causes of the defects are.
  • Microsoft’s case is worse. Everyone seems to have the same problem which points strongly to a manufacturing or design defect.
  • The one advantage that Microsoft has is that the defective consoles still work.
  • Games can be downloaded and played and all of the functionality seems to be working without a hitch.
  • There was substantial concern some months ago that the fact that the Xbox One has three interlaced operating systems would cause the software to be unstable.
  • My research found that there was a massive effort on Microsoft’s part to stabilise the software prior to launch but in the scramble, the hardware seems to have been overlooked.
  • Hardware defects are far easier to rectify than software and so Microsoft looks to have made the right choice in prioritising the software development.
  • Microsoft and Sony are stepping up and are shipping replacement consoles before the old ones are returned but Microsoft is taking the worse PR hit.
  • Large launches such as these always have problems and it looks like less than 1% of all consoles shipped from both camps are defective.
  • Hence, I suspect that once these wrinkles have been ironed out it will be a straight fight between the two.
  • Here the PS4 looks to me like it has an edge.
  • It is somewhat more powerful and costs $100 less.
  • That being said, Microsoft has a huge ecosystem of online assets and has done as much integration with its other services as it can.
  • Furthermore the console ships with the Kinect and has certain functions such as speech recognition that the PS4 does not.
  • Hence, as a product of the ecosystem and as an assault on the living room, Microsoft has an edge.
  • It also has much deeper pockets for a heavy marketing campaign than Sony ensuring that it will make more noise.
  • Hence, I think the market for the two systems will remain fairly balanced as it has been for many years.

26/11/13:  Correction: The section below is moot as it is based on the erroneous assumption that PrimeSense is used in the Xbox One. It isn’t. Its Microsoft proprietary. Apologies.

  • Apple’s acquisition of PrimeSense, the provider of the 3D motion detection technology used in the Xbox Kinect is not a problem.
  • The technology is already embedded and hardened in this version and so Microsoft will not need to find a replacement for another 8 years or so when the Xbox TWO comes out.
  • Microsoft along with Yahoo! remain the best sticks to look at when making an investment in the ecosystem.
  • While Sony remains the only Japanese company with a chance in this space, that is not saying very much.
  • It is much too early to be tempted with this one.

IPR: Samsung vs. Apple – Far from done

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Only the lawyers are benefitting from this pointless war.

  • Yesterday’s verdict has no bearing on the eventual outcome of what has turned into a pointless war of tit for tat.
  • Apple has won a $290m ruling against Samsung in its continuing battle over patent infringement.
  • This ruling comes from the court case that Apple emphatically won over a year ago with damages of $1.05 being awarded.
  • This award was then reduced by $410.5m by Judge Lucy Koh after finding that the jurors had miscalculated when arriving at the $1.05bn figure.
  • Apple naturally appealed and yesterday’s finding reinstates $290m of the $410.5m that was originally knocked off the total.
  • Samsung had calculated the total to be $52m while Apple had calculated it at $380m.
  • This trial has resolved nothing.
  • Samsung will of course now appeal which in addition to all of the other outstanding complaints, trials and appeals ensures that the merry-go-round has plenty of momentum left.
  • It is likely to be many years yet before Apple sees a penny from Samsung and in that instance I very much doubt that this latest figure will end up being the one paid.
  • This strongly highlights both the futility of this battle and the sorry state of the US patent system.
  • The single biggest problem is that legal cycle is substantially longer than the product cycle.
  • This means that by the time infringement has been proved and all appeals heard, the products in question have not been shipping for some years. (see here)
  • The purpose of the patent system is to allow an innovator to recoup his investment via the grant of a temporary monopoly.
  • With the way the US patent system currently operates, this goal can never be met and so some form of reform is needed.
  • Hence it is in the best interest of both Samsung and Apple to settle this issue and get back to the business of making mobile devices and developing their digital ecosystems.
  • Unfortunately, Apple and Samsung look set to continue slugging it out in this pointless and hideously expensive war that benefits no one but the lawyers.

Microsoft – Which way to jump

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Microsoft remains at the strategic crossroads.

  • Microsoft held its annual meeting today and held firm to the ideals that the street does not want to hear.
  • Microsoft was talking all about taking risks and having money to invest and not about slimming down and focusing just on enterprise.
  • The company is at a stalemate and until a new CEO is in place, there it will stay.
  • The current (default) choice is to stay with the consumer assets and to become an full blown ecosystem across all devices and use cases.
  • The other is to jettison the consumer assets such as Bing and Xbox and to focus on just serving the enterprise.
  • This is what Wall Street wants as it sees the other strategy as doomed to failure and hence a waste of time and money.
  • The problem is that an about face of this nature will require not just the ejection of Bing and Xbox but of all the consumer assets including things like MSN.
  • This would also include the feature phone business of Nokia if not the smartphones as well.
  • I believe that addressing the entire ecosystem is the right strategy for growth but it is one that requires a huge personality overflowing with charisma and willpower to execute.
  • If Microsoft ever really wants to grow again, it must stick with the consumer business as it is there where the upside is to be found and where market share is lowest.
  • Jettisoning these businesses will not be straight forward, which combined with the stated strategy both at Build and again today, reinforces the likelihood that this will not happen.
  • Hence I suspect that the new CEO will end up breaking Microsoft down and building it back up so that the separate businesses talks to each other and co-operate in ways they have never done before.
  • This remains the future of the company and in my opinion the only real hope for a meaningful rally in the share price.
  • Focusing on Enterprise will create a bounce in terms of valuation but EPS growth would most likely remain in the doldrums forever.
  • As usual, the right path is the hard path.

Wearables – Solution of nothing

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The market remains completely unready for wearables.

  • Samsung was first to market with a smart watch but shipments of the Galaxy Gear have been pathetically low.
  • Business Korea is reporting industry sources admitting to 800-900 units per day with a cumulative total of just 50,000 units.
  • Had this device been available only in Korea, I would not have been to worried, but the Galaxy Gear is available in most locations.
  • This is the clearest indication yet that the concept of a smart watch remains a solution looking for a problem.
  • I was in the audience of a wearables panel last week and the main conclusion of the panel (who were executives with plenty of skin in the wearables game) was the same: there is still no compelling use case for wearable computing beyond a pedometer that talks to your phone.
  • Beyond a simple remote control for a mobile phone, there is no reason to buy a smart watch and until someone comes up with a reason they will not sell.
  • There has to be a very compelling reason as watches are devices of high fashion and for many men it’s the only piece of jewellery that they can wear.
  • Hence I think that technology on the wrist has to have a large fashion element and in many circumstances that will require a known brand.
  • Neither Samsung nor Apple has a strong enough brand to sell a wristwatch on its own merit and so a really compelling use needs to be created to get users over the hump.
  • Apple is certainly the most likely company to come up with the use case that blows this segment wide open but its delay in launch makes me wonder whether it is struggling to find it.
  • Until we see that wonder moment, this segment is going to remain still-born but with interesting experiments. 

BlackBerry – Hero to zero

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BlackBerry’s revenues per user are falling off a cliff.

  • BlackBerry is doing everything it can to preserve its user base but in doing so is killing its own handset business and its service business.
  • Indonesia is a prime example, which is one of BlackBerry’s most important markets.
  • Use of BBM has been very popular here as it has been seen as a way to easily and securely communicate without anyone looking over your shoulder.
  • However, this has been a view that is largely held by the older generation with younger users more comfortable in using alternatives such as WhatApp, LINE and so on.
  • Hence, BBM has been more commonly used to communicate up and down the generations with the youth segment using other things with each other.
  • While BBM was only available on BlackBerry devices, people would still buy the devices despite their low specification and awful user experience.
  • Now that BBM is available on iOS and Android that need has evaporated and where BlackBerry was seeing revenues of $100 per device purchase, it will now see zero.
  • There is already evidence of this BlackBerry’s share of the Indonesian smartphone market has fallen to 20% in Q3 2013 from 50% a year earlier and is likely to fall much further.
  • Local handset makers are already seeing some success in creating very cheap, QWERTY based Android products that ship with BBM installed.
  • To me, this is the nail in the coffin for the BlackBerry hardware business and the sooner that the new team shuts this down, the better.
  • The problem is that BlackBerry currently has no real way of monetising BBM and as BlackBerry device share continues to collapse, both hardware and service revenues will go with it.
  • To make matters worse, BBM is an also-ran in the global chat market as the big players have 4 to 8 times as many users and some are already monetising.
  • Hence the only value that remains in BlackBerry is the patent portfolio (RFM valuation $1bn), the service business (RFM valuation $500m) and BBM (RFM valuation $200m) (see here).
  • This gives a share valuation of $6.32, in the best instance, leaving me with no enthusiasm whatsoever for the recovery story.  

Snapchat – Hypeware

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The hype is peaking. Its time to sell.

  • The hype around Snapchat has hit fever pitch this week with constant chatter regarding its spurning of the advances of both Facebook and Google.
  • Snapchat is thought to have rejected an offer from Facebook to acquire the company for $3bn with Google having apparently offered $4bn.
  • Snapchat is basically an IM service focused on video and pictures that is thought to have around 250m users.
  • Its biggest user base is to be found among teens which combined with its rapid user growth has made it a very hot property.
  • This is because Facebook, Google and others are struggling to be seen as new and cool and some stats are showing that they are losing their edge with this market.
  • This is important as this group of users represents the adults of tomorrow but in the frenzy certain things seem to have been forgotten.
  • Teenagers may be hip and cool and represent the future but they have no money.
  • Also forgotten has been the fact that this segment is notoriously fickle and services like this can fall out of fashion from one day to the next.
  • This means that there are limits to the degree to which this segment can be effectively monetised and risks to its longevity.
  • Advertising to this segment certainly has value but that value is limited when those targeted by the ads are not the ones paying for the products.
  • Hence, the degree to which Snapchat can monetise its users is likely to be much lower than those services which have an older, more affluent and probably loyal user base.
  • Snapchat has no revenues and the degree to which it can monetise its users is totally unknown.
  • Hence, valuation figures in these sorts of discussions will be based on nothing more than conjecture and hope.
  • Right now the company is the hottest thing since sliced bread and consequently the figures are ludicrously high.
  • The founders and VCs would be best served to offload the loaf before it starts to go stale.