Facebook Q4 – Some steam left

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  • Being limited to social networking will not hit growth in 2014.
  • Facebook reported strong Q4 results as it continued to improve on its ability to monetise the traffic being generated by mobile devices in its ecosystem.
  • Revenues / EPS were $2.39 / $0.31 compared to estimates of $2.35bn / $0.27 where mobile revenues drove most of the upside.
  • The user count is up to 1.23bn with 757m users engaging with the platform on a daily basis.
  • Mobile contributed $1.25bn of advertising revenue and is now 53% of all advertising sales.
  • Targeting remains the name of the game as it increases the relevance of the advertising meaning that consumers have less resistance to receiving it.
  • Furthermore, it also helps ASPs and higher prices advertising was a significant factor in driving the revenues.
  • Total ad impressions fell by 8% but pricing was up 92% YoY as Facebook focused on quality over quantity.
  • This was also due to the traffic migration to mobile where banner ads don’t work well and are of minimal value.
  • Facebook has managed to find its panacea for the drudgery of banner -based advertising which is advertising in the newsfeed.
  • Google does it by search with Yahoo! yet to find its way out from banner advertising.
  • In 2014 expenses including COGS and OPEX are expected to grow around 35%-40% which means that margins should remain flat to slightly down given consensus revenue growth estimate of 32%.
  • The biggest issue that Facebook faces is how to expand its reach outside of its core social networking proposition.
  • Fortunately, this is not an issue that is likely to hit revenue growth in the short term.
  • Social networking is by far the biggest activity carried out by users on smartphones but it is still only 24% of total activity.
  • By staying in that niche Facebook can only address 24% of the total opportunity and this means that sooner or later growth will run out of steam.
  • Fortunately for now, I suspect that the answer to this question is later and for 2014, the outlook is pretty rosy.
  • Facebook is trading on 53x 2014E PER which is towards the better end of internet valuations but I would prefer Google or Yahoo! which are less than half the price.
  • Yahoo! has the most upside but also has the most to prove.

 

Google Lenovo – The bigger picture.

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Google is taking big steps to bring Android to maturity.

  • Selling Motorola Mobility is a further step by Google to mature its ecosystem from the rather chaotic reality in which it currently exists.
  • Google has finally decided to get rid of Motorola Mobility letting it go to Lenovo for around half what it paid for it three years ago.
  • This removes the biggest conflict that exists within Android and now Google can be a proper partner to the OEMs rather than a competitor.
  • Lenovo is paying $2.91bn for the Motorola Mobility handset business comprising of $660m in cash, $700m in Lenovo shares at the time of closing and a $1.55bn 3 year promissory note.
  • Lenovo is getting a business that is losing around $200m per quarter, a strong, well-known brand and trademark and around 2,000 patents.
  • Given the mess that Google has made of its Motorola acquisition, it is getting a good price.
  • The trajectory upon which Motorola Mobility was fixed would have left it destroying value and consuming cash into perpetuity giving it a negative value to any rational investor.
  • I suspect that Google has sweetened the deal with the 2,000 patents but the strong brand is what Lenovo really needs.
  • It has made a good business from its acquisition of the ThinkPad brand and clearly it aims to repeat the same strategy.
  • I suspect that Lenovo will close down almost all of the existing Motorola Mobility activities, rebrand its devices and push them through the Motorola Mobility channels.
  • Together Lenovo and Motorola have 6.6% share of the global smartphone market moving it into third position behind Apple and just ahead of Huawei and LG Electronics who had around 5% each in Q4 13. (Data from Counterpoint Research).
  • This is probably not enough for Lenovo to make a proper return but there is a lot that it can do with the Motorola brand and leveraging its existing manufacturing assets.
  • However, this is going to require finesse from Lenovo.
  • Android is a commodity and refinements to the software and cool features will be required if Lenovo ever wants to see a decent return on this investment.
  • This is not a talent that Lenovo has in handsets and some careful strategic hires are going to be needed to make this work.
  • I do not think that this will come from Motorola Mobility as most of this sort of talent has long since left the company.
  • The bottom line is that Lenovo has a shot at earning a good return from this investment but software and service differentiation will be required.
  • The spectre of BenQ’s disastrous acquisition of the Siemens handset business will be large in its mind.  
  • For Google this move has much wider implications.
  • The recent IPR agreement with Samsung together with this transaction is a strong sign that Google is finally moving to make Android a mature ecosystem.
  • Android licensees can now treat Google as a proper partner rather than a competitor and focus on making the best handsets.
  • It removes the conflicts that have long existed within Android and aligns all players in the same direction.
  • The Android ecosystem has fantastic penetration but its usage is still far behind that of iOS.
  • Its users are not very loyal and developers are not really making a lot of money from applications.
  • All of this must change and it looks very much as if Google has finally woken up to this fact and is taking its rightful place as the leader of the pack.
  • If usage and loyalty improves Google benefits as it will be collecting the data and selling more advertising as a result.
  • This is why in the long-term Samsung and Google will come into conflict once again.
  • Returns on hardware will fall as handsets continue to commoditise and Samsung must move into the services layer if it is to maintain its profitability.
  • In essence this means throwing Google off its devices and replacing them with its own services which appeal to users.
  • Moving users from a Google ecosystem (on Samsung devices) into a Samsung ecosystem (on Samsung devices) will have the effect of increasing loyalty and hence pricing power which is the main driver of profitability.
  • This war is still some way off and recent moves in the Android camp have done nothing to dissuade me of its inevitability.
  • Samsung, LG Electronics, Sony Mobile and Huawei will be the main beneficiaries outside of Google should the Android ecosystem develop as Google hopes.
  • This is bad news for Microsoft and its allies that have benefited from the infighting and chaos in the Android camp.

 

 

Yahoo! Q4 – Tough love.

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Alibaba grabs attention but upside is in the ecosystem.

  • The value in Yahoo! continues to be driven by the Asian affiliates while the core business drifts gently downwards.
  • This is disturbing but also where the opportunity is to be found if Marissa can live up to her billing.
  • Revenues / EPS were $1.2bn / $0.33 compared to consensus of $1.2bn and $0.38.
  • Display advertising revenue continues to be the bugbear as it is still declining at 6% YoY masking the growth of 8% from search based revenue.
  • The good news is that this decline has slowed from 13% over the last year and I am hopeful that some effects of improving the product suite are starting to show through in the numbers.
  • However, until the decline can be halted, the numbers in the core business are going to continue to be disappointing.
  • Yahoo! claims now to have 400m mobile users but this is a number that makes no sense at all.
  • These are the kind of numbers that Google and Apple have achieved and Yahoo! remains way behind these two in developing a coherent mobile ecosystem.
  • What I can believe is that during Q4 2014, 400m mobile devices interacted with one of Yahoo!’s properties.
  • Beyond that I struggle. This is especially because there are no revenues that I can see coming from these supposed 400m users.
  • Adding Yahoo! to Tumblr and taking out the overlap, I can believe that Yahoo! has something in the region of 250-300m users but these are predominately in the fixed Internet.
  • Guidance was also not great with revenues of $1.06-$1.10bn compared to estimates of $1.08bn.
  • Yahoo!’s bottom line continues to be driven by the affiliates and particularly Alibaba which saw income from operations continue to grow strongly.
  • Alibaba is expected to IPO in 2014 where Yahoo!’s 24% holding could be worth anything up to $46bn if some estimates are to be believed.
  • Until this figure is crystallised, the share price of Yahoo! will be driven by little more than Alibaba, giving Marissa time to turn around the stubbornly sluggish advertising revenues.
  • When I look at Yahoo! it is still the dark horse of the mobile ecosystem race.
  • It has all of the assets to make a good ecosystem already in place. It just has to execute on those assets and tie them all together in a great mobile experience.
  • The market is giving Yahoo! no credit whatsoever for this and once Alibaba is out of the way there could be yet another leg up if Marissa can keep her promises.
  • This is why I like Yahoo! as it has both downside protection from Alibaba as well as upside from forgotten potential.
  • However, with declining display advertising and slow turnaround one has to be patient.
  • Yahoo! requires tough love both from investors and management.  

Apple Q2 – Service with a smile.

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Services are what really matters for long term profitability.

  • Apple reported disappointing Q2 results as it missed iPhone shipments which cast a pall over the superb performance of the iPad and the Mac.

 

Q2 results                 Q2A                      Consensus

iPhone (m)                      51m                             55.3m

iPad (m)                          26m                            24.9m

Mac (m)                           4.8m                          4.6m

iTunes ($m)                    $4.4bn                       $4.5bn

Revenues ($m)              $57.6bn                     $58.1bn

EPS                                   $14.50                        $14.36

 

  • The miss was explained with tight iPhone component supply and changes to North American operator upgrade policies but the reality is that the smartphone market is slowing down.
  • Now more than ever, the action is in the cheaper end of the market where Apple has declined to participate.
  • This leaves it fighting for share with Samsung and it is only going to get tougher as the number of people who can afford a $600 device is fundamentally limited.
  • As a result, guidance for Q3 was muted given the seasonal weakness in the market as well the level of saturation at the high-end of the market.

 

Q3E Guidance           Q3E                                           Consensus

Revenues                         $42bn-$44bn                       $46.1bn

Implied EPS                    $10.4n                                    $10.93

 

  • The good news is that iOS devices are still generating far more traffic than Android devices and iTunes revenues still dwarf those of Google Play.
  • I suspect that total revenues from iTunes still vastly outstrips all of the Android app store revenues combined underlining how far that ecosystem still has to go when it comes to usage.
  • This is an opportunity for Apple but one that to date it has done little to capitalise on.
  • This is the central challenge that must be addressed because premium pricing for cool hardware and software and service distribution will not last for ever.
  • When the others catch up, as they surely will, unless Apple has services that are exclusive to its own ecosystem its margins will begin to erode.
  • Apple was reticent to talk about where its R&D budget is going but I suspect that this is where a large part of the resources are going.
  • The problem is that services are not in Apple’s DNA and some of its efforts like icloud, ping and maps have not been exactly big hits.
  • If Apple can sort this problem out and come to market with its own services that win users over then, it has a chance to sustain margins.
  • Apple is in the same boat as Samsung but critically, it has a better chance of getting this right.

Samsung – Home on the range.

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The value is there but Samsung is driven by earnings.

  • Samsung’s Q4 was in line with estimates but I am getting increasingly concerned with its loss of momentum.
  • Samsung has a window (see here) to move to the next phase of its development but the window is narrower than I had previously thought.
  • Revenues / Net Income were KRW59.8bn / KRW7.3bn which missed many estimates but this has already been widely flagged and priced into the shares.
  • The IT and Mobile division (which is 94% mobile) continued to be the main driver making over 50% of sales of the group and reporting 17% margins.
  • This is an excellent performance given that revenues fell by 9% even though the number of devices shipped increased.
  • This was due to a shift to lower end smartphones as well as an increasingly competitive landscape.
  • Q1 will be a critical quarter as we will get a better view of the underlying profitability without the distorting effects of elevated marketing and employee bonuses.
  • I would expect margins to rise somewhat but whether they can return to the Q3 peak of 19% is another question entirely.
  • Hardware is continuing to commoditise and Samsung must make the transition into the ecosystem if it wants to sustain its current profitability.
  • This means throwing Google out of its devices and enticing developers to write applications and services exclusively for its devices.
  • It also means creating great services which will cause users to choose Samsung for these rather than for its great screens and cool designs which are pretty easy to replicate.
  • This is a very tough proposition and despite some traction with Chat-On and interesting software innovation in the Galaxy Note, there remains a very long way to go.
  • Failure to win here will mean that Samsung’s margins will begin to decline levelling out somewhere around 5-10%.
  • I had thought that Samsung would have some time to address this issue but pressure is growing faster as the market runs out of growth.
  • Furthermore I am concerned that the market is fragmenting meaning that more models have to be produced in order to maintain market share.
  • For a company like Samsung this can be hugely detrimental to margins as R&D rises even if sales don’t move.
  • This is why I am worried that earnings are not going to see any real momentum this year after a possible bump in Q1.
  • Samsung is cheap but it has always been cheap and with its less than satisfactory treatment of shareholders, that is not going to change any time soon.
  • Hence, the Samsung share will continue to be driven by earnings upgrades and downgrades.
  • There are no upgrades on the horizon meaning that Samsung is likely to remain range bound this year.
  • Microsoft, Yahoo! and Intel look like better prospects.

Microsoft Q2– The Good and the Bad

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Software looks strong but Nokia smartphones had a shocker.

  • While Microsoft reported excellent results, the Nokia smartphone business looks to have suffered badly.

 

The Good

  • Microsoft reported excellent results and guidance confounding the PC sceptics.
  • Revenues / EPS were $24.5bn / $0.78 compared to forecasts of $23.7bn / $0.69.
  • Enterprise, cloud and even consumer showed unexpected robustness giving hope that the worst is over for the PC market.
  • Xbox was strong shipping 3.9m units and large corporate upgrades to Windows 7 from Windows XP were significant factors in the revenue performance.
  • I suspect that in many corporations, the PCs are already capable of running Windows 7 but that the IT department has put off the pain of transition.
  • With Microsoft ending XP support many hands have been forced and the upgrades commenced.
  • Hence, it looks like a meaningful number of devices have simply been upgraded to Windows 7 rather than replaced leading to the discrepancy between Microsoft’s results and those of Intel.
  • Corporations also have a much higher attach rate of Office and other products to Windows which was also a factor in the strong performance.
  • Hence, the read through for the PC sector for the immediate term is not nearly as strong as many may think.
  • I am still looking for hybrid devices to start driving the PC market which I expect that to start happening in Q3. (see here).
  • Revenue guidance was in line with expectations but I am hopeful that cost cuts should continue to drive EPS expansion.
  • These results underpin my view that Microsoft is one of the best ways to gain exposure to the recovery I see coming in PCs.
  • Intel is also a good way in but is more exposed to hardware shipments which so far are lagging software.

 

The Bad

  • The Smartphone business, which Microsoft is about to take position of, looks to have had a sudden and very worrying loss of momentum.
  • Nokia declined to give specifics at it results but enough was disclosed so that conclusions can be drawn.
  • Q4 is the strongest quarter of the year where RFM and Counterpoint Research predict that the market grew by 10% QoQ with smartphones growing 12%.
  • Against that backdrop Nokia device revenues fell by 2% QoQ.
  • Furthermore with Mobile phone revenues being flat, it looks like all the pain was taken by smart devices.
  • RFM analysis suggests that Nokia has had to cut prices again to hold onto share but even that tactic has not worked very well.
  • Sell in volumes look to have been around 8.8m units with sell out volumes somewhere around 11m. (Sell-out data from Counterpoint).
  • RFM’s research suggests that the channel has warned Nokia of the impending weakness in demand for Lumia smartphones and that most of December’s sell through sales came from inventory being worked down.
  • It looks very much like Lumia inventory which stood at around 5.0m units (4-6 weeks) in October was worked down to around 3.3m units in order to account for the difference between the sell in and sell through numbers.
  • If demand has unravelled, as appears likely, the new level of inventory would still represent around 4-6 weeks but at a lower level of demand.
  • Hence, I suspect that Q1 is going to see sell-through of around 8m units which represents a real loss of momentum that had been nicely built up in H2 2013.
  • I see four main problems.
    • First. Android is getting better at the cheaper price points making the Lumia 520 not such great value at $135. Low end Lumia needs to be refreshed to re-extend the gap to Android.
    • Second. Microsoft continues to make a total mess of telling users why they should buy a Lumia device meaning that there is very little pull for the ecosystem from the handset end.
    • Third. The app. store is still woefully inadequate when compared to iOS and Android and this is a major turn off for prospective buyers of the devices.
    • Four. The change in ownership may have distracted the business from pushing the devices to the best of its ability. I am hopeful that this quarter will see this fixed.
  • Microsoft needs to rapidly address these problems as a loss of momentum could easily become a tailspin, resulting in Nokia devices becoming just another awful acquisition by Microsoft.
  • I still have high hopes for this ecosystem as it has so much going for it but this loss of momentum leaves me deeply worried.

 

 

Netflix Q4– On to stage 2

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Content will be the key asset for Netflix from here.

  • Netflix handsomely beat forecasts with Q4 revenues / EPS of $1.18bn / $0.79 compared to forecasts of $1.17bn / $0.66
  • Subscriber numbers were also strong with 2.33m added in the last quarter taking the total to 44.4m worldwide. 41.4m of these accounts are paying Netflix money.
  • US subscribers were 31.7m passing arch rival HBO’s total and international subscribers came to nearly 10m.
  • International subs. grew 20% compared to 6% for US domestic.
  • Guidance was also positive with another 2.25m users expected to be added and revenues / EPS of $1.27bn (implied) / $0.78.
  • This compares favourably to forecasts of $1.24bn / $0.75.
  • The real surprise was in the subscriber number where the street has been worried about a slowdown in subscriber additions.
  • Netflix has established itself as the leading OTT (over-the-top) television provider soundly beating efforts from the great and the good in the technology and media industries.
  • The argument about whether this is a viable media delivery conduit is over and from here on the company is going to be driven by content.
  • Here Netflix is not sitting still and has committed to spend $7.75bn on original content.
  • It has been doing well with smash hits such as House of Cards and Orange is the New Black.
  • As its competitors such as HBO, Google, Amazon and the entire cable TV industry catch up its current technology and user experience edge will be competed away.
  • Therefore only availability of content will drive Netflix’s growth in the long term and here it must continue to own content that can be exclusive on its own system.
  • The net neutrality problem (see here) is unlikely to cause an issue for the short-term but there is a risk that the ISPs eventually decide to bleed Netflix dry in return for allowing its streaming to be delivered to the users in a usable way.
  • Netflix has the first mover advantage and its ease of use and availability is accelerating the move away from traditional broadcast much to the TV industry’s dismay.
  • However the sleeping denizens have been prodded awake and their resources far outweigh those of Netflix.
  • Long term success will be determined by the shrewdness of its content executives in how they spend the relatively limited content budget.
  • This is not without risk and at nearly 200x 2014 PER much of the good news is already priced in.
  • If I am paying nosebleed multiples, I would rather own Amazon.

 

Rockstar – Falling star

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Desperate tactics indicate all is not well at Rockstar.

  • It looks very much as if Rockstar has been having a hard time earning a decent return on the $4.5bn that it spent to acquire 6,000 patents in 2011.
  • So much so that its tactics appear to be getting dirtier causing more and more commentators to label it with the ignominious title: “patent troll”.
  • Investing in patents and earning a return on them is a perfectly acceptable business model.
  • The problem is that patent licensing is such a grey area that it invites abuse from those with questionable business ethics or those that are in financial trouble.
  • I suspect that Rockstar’s biggest problem is not even of its own making but was caused by its owners.
  • In 2011 a confluence of events led to a mad scramble for patents that drove valuations to crazy levels.
  • Rockstar bought right at the top and I suspect it has been struggling to earn a return on that investment ever since.
  • Taking out the patents that Apple took for itself, I have estimated that Rockstar has around 4,000 patents with a combined purchase price of $3.7bn. (see here)
  • The situation has now unravelled to a point where the cable industry has banded together and launched a suit against Rockstar accusing it of underhand licencing practises.
  • This complaint makes interesting reading as one can draw conclusions about what is going on inside Rockstar from it.
  • This is not because the complaints necessarily have any merit but because there is likely to be at least an element of truth to them.
    • First: The cable industry claims that Rockstar refuses to discuss licensing terms and instead simply demands royalties on its entire portfolio.
    • Lisencing an entire portfolio is common in the industry but this usually occurs after each side has had a close look at the patents in question.
    • Failure to allow examination of patents is very unusual indeed.
    • In fact, it looks like a tactic to hide the fact that the patent portfolio is both ageing and weak.
    • Many of the fundamental patents are nearly 20 years and will soon be expiring.
    • If Rockstar can win licences for its entire portfolio then the age of some patents won’t matter as there are plenty of new ones still in force.
    • In effect the younger weaker patents will be helping to continue revenues from strong but expiring patents.
    • This is a strong indication that Rockstar massively overpaid for the portfolio and failed to do its due diligence properly.
    • This tactic will backfire because if it comes to litigation, Rockstar will have to assert some patents which will then be examined in exhaustive detail.
    • Second: The cable industry claims that Rockstar is moving standard essential patents (SEPs) through subsidiaries in order to avoid its obligations under FRAND (see here).
    • This looks like a baseless accusation as a SEP is bound by FRAND no matter who owns it.
    • Furthermore, FRAND has become much more powerful now that it has the backing of the White House. (see here)
    • I suspect that Rockstar is actually trying to sell off bits and pieces of the portfolio in order to claw back some of the cash it blew in its headlong rush into patent investment.
  • The end result is that Rockstar is in a very difficult position.
  • It is meeting far more resistance than expected when it comes to licencing its patents and the real value of those patents is way below what it paid.
  • At the same time it will be under enormous pressure from its owners to show a decent return which is something it will probably be unable to do.
  • It is this pressure, that I suspect has forced it to use increasingly exotic methods of patent licensing.
  • The best solution is for Rockstar’s shareholders to allow it to write down the purchase price to a more realistic level.
  • This will reduce the pressure allowing Rockstar to show positive returns on much lower levels of revenue.
  • To me this is only fair as it was its shareholders that bid the crazy price in the first place.

 

Posted in IPR

Nintendo – Nadir of fortunes

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There is worse to come for Nintendo.

  • Nintendo issued a horrible profit warning on Friday and held a sanguine press conference but there is still worse to come.
  • The problem is that Nintendo has not cut its estimates nearly hard enough and I suspect that Iwata-san will be apologising to investors again before the end of his fiscal year.
  • The previous forecast of 9m for the fiscal year ending March 2014 was ludicrously high but even the adjusted figure of 2.8m is very optimistic (see here).
  • Nintendo launched the Wii U late in 2012 and had 9 months of being the only new console in the market.
  • In the first six months of fiscal 2014 (March to September), the device managed to ship 460,000 units just 5% of its goal (9m) for the entire fiscal year.
  • This target has been moved down to 2.8m but it is obvious that that is not nearly enough.
  • The issues with the Wii U are:
    • First: It is horribly underpowered. Its competitors, the PS4 and Xbox One, knock the socks off it when it comes to hardware and graphics performance.
    • With that kind of disadvantage, the device needs to be extremely cheap to compensate for that shortcoming.
    • Unfortunately at $299, it is not nearly cheap enough with the PS4 priced at just $100 more.
    • Second: It has no differentiation.
    • The original Wii was brilliant.
    • It opened a whole new way of interacting with a gaming console which brought the users in in droves.
    • This edge has now been copied and competed away as all this kind of functionality and better is available for all of the console systems.
  • This leaves users wondering what is so special about the Wii U and the depressing answer is: nothing.
  • For 25% more a user can purchase a vastly superior system for which developers will write cool games. It is a no brainer.
  • This is why the device is gathering dust on the shelves and I see no reason why this is going to change.
  • If the device failed to ship more than 0.5m with no competition in the market, I fail to see why shipments will not fall further in the last 6 months of fiscal 2014.
  • Hence, I suspect that shipments of the Wii U will be less than 1m for the fiscal year missing this new target by 64%.
  • There is another warning coming.
  • When it comes, I hope that Nintendo will have owned up to the realities it faces.
  • This means getting out of consoles and focusing instead on software.
  • It has a number of reasonable gaming brands and these could be leveraged nicely into the casual gaming market.
  • However, this would mean biting the bullet on hardware which I am certain that Nintendo is very reluctant to do.
  • Japanese management has a habit of hanging onto businesses for far longer than it should and I think Nintendo will be no different.
  • Hence, the next time Iwata-san gets up to cut his estimates; I doubt there will be any good news.
  • Sony remains the only Japanese company that has a hope of a future in consumer electronics.

 

NTT DoCoMo / Tizen – Spectre of Bit Pipe

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NTT DoCoMo must succeed where everyone else has failed.

  • NTT DoCoMo now faces one of the greatest challenges in its history as it too, is now at risk of becoming a bit pipe.
  • Tizen’s status is looking increasingly uncertain as one of its major proponents has shelved plans to launch handsets based on the platform.
  • NTT DoCoMo is one of its leading proponents of and holds the chair of the Tizen Association.
  • However, it has cited the slow growth and saturation of the Japanese market as the reason for shelving the devices.
  • This move comes just three months after NTTDoCoMo finally started selling the iPhone on its network.
  • I see this as no co-incidence and suspect that NTT DoCoMo has realised that in its current state, Tizen has no hope of competing.
  • Tizen is the end product of at least 10 years of industry co-operation to build Linux based smartphones that to date has really only produced two working devices both of which failed to have any impact.
  • The idea is that by using common code, handset makers can make smartphones to their own specifications much more cheaply.
  • Tizen has also long been driven by operators who are keen to preserve their own brand identities that are getting weaker and weaker as Apple and Samsung dominate the market.
  • Unfortunately, almost all operators do not have the first clue how to design a user experience and so the users have continued to view them as simple voice and data bit pipes.
  • Historically, NTT DoCoMo’s dominance of its home market has allowed it to have a huge impact on the user experience which in the early days of the mobile internet it did a good job.
  • Hence, users identified NTT DoCoMo with the user experience on the device meaning that competitive pressure on tariffs was less.
  • NTT DoCoMo’s need to preserve this position is what has driven it to look at Tizen as its own home grown Linux offering proved to be brutally expensive.
  • While Tizen offers a solution to this problem, it has long suffered from two problems which no one has been able to fix.
    • First: Standardisation by consensus. Tizen’s specification is set by a series of committees.
    • Getting two engineers to agree is difficult enough at the best of times.
    • This has meant that the Tizen specification is a compromise on everything that is optimal for no one.
    • Second: Samsung does not really care about Tizen despite ist protestations of commitment.
    • Samsung’s main focus is Android and when it is ready, I believe that it will take Android off in its own direction thereby removing Google.
    • Samsung has to remove Google if it wants to maintain its long term margins and a custom Android version is best way it can do that (see here)
    • Samsung is dominant in Android and (currently) it will take the developers with it should it fork the code.
    • If it were to jump instead to Tizen, it would need to convince all the developers to add another platform which, as Microsoft is finding, is incredibly hard even when you have lots of money.
    • Hence, at this juncture it has no present and future need of Tizen and I continue to believe that it hangs onto it only as an insurance policy.
  • Tizen continues to drift along but until these two issues are solved I cannot see anyone making handsets based on the software or it gaining any real commercial traction.
  • NTT DoCoMo now faces a real challenge as there is now very little to set its user experience apart from KDDI or Softbank.
  • If the glory days are to return, it must solve a problem that every other operator in the world has failed to solve.
  • The longer it takes, the closer and closer NTT DoCoMo will come to being just another bit pipe.