BlackBerry Q4 – Last lap?

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Q4 gives no reason to hope.

  • BlackBerry reported disappointing results as the two most important metrics of a company in trouble (revenue and cash flow) were very weak.
  • Q4 revenues / EPS were $977m / LOSS $0.06 compared to expectations of $1.11bn / LOSS $0.57.
  • $553m of cash was consumed during the quarter giving the company just over a year should cash consumption continue at this rate.
  • The good news is that John Chen is living up to his reputation and is tightly controlling the metrics that he can.
  • OPEX is already meaningfully down and inventory has been reduced by one third.
  • However, at the same time the things that he can’t control are likely to mean that BlackBerry has no real future.
  • BlackBerry devices and services are horribly out of date and have very little appeal to users.
  • The new releases are unlikely to change that appeal much as the focus appears to be backward-looking rather than forward.
  • Devices such as the Classic may help margins as it is being designed on the basis of the components that the company has lying around in inventory.
  • However, this will provide only a temporary respite as when the inventory is cleaned up, BlackBerry will be once again exposed to full market pricing for components.
  • Rivals such as Microsoft, AirWatch, Good and MobileIron have decent device management solutions that cover all platforms.
  • These companies are making strides with their security credentials and even BlackBerry’s most august customer, The White House, is trialling other solutions.
  • BB12 offers full backward compatibility which is excellent, but the subscriber base is already below 60m and falling fast.
  • It will be another 8 months before this is ready for roll-out by which time another 20m subscribers will be have deserted the platform.
  • The problem remains unchanged in the there is no room left for BlackBerry.
  • It has chosen to vacate the consumer market and in the enterprise its rivals have caught up and are now on a much sounder financial footing.
  • The only asset it has left is the installed base and this is evaporating fast.
  • I continue to believe the only real future for BlackBerry is a break-up and this values the shares at around $4.
  • Those still hanging on should head for the exit now.

Microsoft – Keeping mum.

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Good launches but no clues given for the longer term.

  • Microsoft stuck firmly to the script at its press conference when it launched Office for iPad, Mobile Device Management and its Enterprise Mobility Suite.
  • No clues were given as to whether Microsoft will focus down on the Enterprise or continue with the much more ambitious and difficult strategy to become a complete ecosystem company.
  • It is still early days but we should start to get an inkling when Microsoft starts talking about plans for its consumer assets such as Bing, Skype, Xbox and MSN.

Office for iPad.

  • Clearly a lot of thought has gone into this product and Microsoft has done its best to balance the user experience of programs that are designed for keyboard and mouse in a touch based environment.
  • The result is three good apps (Word, Excel and PowerPoint) that are available to download for free from the App store.
  • Anyone can now read office documents on an iPad but an Office 365 subscription is needed to be able to create documents or edit existing ones.
  • In terms of practicalities, these apps will be used for reading, writing text and making small edits but no one will be using the iPad for creating complex PowerPoints or intricate spreadsheets.
  • Hence the need for a PC will not be diminished by this launch.
  • I have long been of the opinion that Office for iPad could damage Windows OS sales but I think that the situation has changed.
  • The iPad (and Android tablets) represents a portion of the PC market that has already been lost.
  • These users are not coming back and so if Microsoft can still push its ecosystem to them, then there may be some potential for Microsoft to win these users back at some point in the future.
  • It also enriches the experience of the many office users in a PC who also own an iPad and it is likely to make them more loyal in the longer term to Office.
  • Hence I see this move as a good one, but it will have no meaningful impact on Microsoft’s numbers any time soon.

Mobile Device Management / Enterprise Mobility Suite.

  • Both of these functions have been available for a long time but what Microsoft is doing here is bringing them all together.
  • The Enterprise Mobility Suite brings together BYOD, identity management, device management, rights management and data protection into one place to make life more seamless for the enterprise.
  • Microsoft’s competitors here are smaller companies such as Good, AirWatch (bought by VMWare), MobileIron and Blackberry.
  • Microsoft has a massive advantage over all of these as it has a huge share of the installed enterprise infrastructure as well as the resources to make sure that this offering is better and cheaper than the rest.
  • Whether it chooses to take this route is uncertain but it is a great opportunity for Microsoft to take a dominant position in enterprise IT outside of the fixed world.

 Take Home Message

  • This was a good series of product announcements but the key piece of the puzzle remains unsolved.
  • Will Microsoft grab the real opportunity that lies before it and move to become a leading ecosystem in both personal and professional Digital Life or will it hunker down and become a dull enterprise company?
  • There is still no clear answer.
  • I hope that Nadella has the strength of character and the foresight to push Microsoft to its full potential but it will take all of his will power to blast the cobwebs from the halls of Redmond.
  • Either way, Microsoft remains attractively valued for now and the outlook for further rallies in the share price is good.
  • Microsoft is in my favoured list along with Yahoo! and Google.  


Facebook / Google –A whim and a prayer

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The Oculus acquisition puts the spotlight on corporate governance.

  • Facebook is an internet company that makes its money by monetising the traffic of users of its free service.
  • There is no rational reason for it to suddenly branch out into virtual reality hardware.
  • I cannot see any way that this acquisition will create value for Facebook shareholders.
  • This is because:
    • First: There is no way that virtual reality hardware will enhance the Facebook service that generates the traffic that is used to earn revenue.
    • Second: The price paid for this asset is so high that even in a blue sky scenario Facebook shareholders will probably lose out.
  • Consequently, this looks like a whimsical acquisition that does not have a prayer of earning a decent return.
  • This deal looks very much like Google’s decision to turn a ship into a floating retail store or to spend $1bn on a London HQ that it does not need.
  • This is a fundamental issue with both of these companies in that the economic interest and the control of the company are not aligned.
  • The founders have a much higher share of the votes compared to their economic interest which gives them the licence to spend other people’s money with no accountability.
  • Even when things go badly wrong, investors have no power to remove management, vote down resolutions or force it to return their own money back to them.
  • This was the problem that took Ericsson to the brink of bankruptcy 12 years ago resulting in a deeply discounted emergency rights issue.
  • While things are going well and the shares are rising, no one seems to care about this issue but when things go wrong it will be front and centre.
  • I can be pretty sure that any crisis in Facebook, Google or Alibaba will be much deeper and longer in duration because of investors’ inability to force management to act.
  • Hong Kong lost the listing of Alibaba to the NYSE because it would not allow an inequality of voting rights and economic interest.
  • Many commentators are berating the Hong Kong exchange for being out of date but in fact the reverse is true.
  • History has shown that it is the companies where the economic interest and the voting interest are aligned that always fare better in the longer run.
  • This inequality is perfectly acceptable in smaller companies where there a few expert investors who all know the score but in large public companies it is a completely different story.
  • I deal with this issue by valuing these companies on a fair and reasonable basis and then reducing that number by 30% to account for the governance shortcoming.
  • If there is still upside after that adjustment, then I can consider an investor well compensated for the additional risk he is taking. 


HTC – Cut and run.

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As good as the M8 is, it will not save HTC.

  • HTC launched is new flagship device at an event in New York and despite the specifications being widely leaked it did not disappoint.
  • The HTC One M8 is a great device.
  • It sports an attractive metal unibody design, a larger screen, 2.3Ghz Snapdragon processor, improved speakers and some fancy new imaging features.
  • The device will also have a case that uses tiny holes in the case to create a dot matrix display.
  • This allows data like time, weather and caller ID to be displayed without the user having to open the case.
  • On the surface these are incremental improvements on what was a good phone that keep it competitive with the high end of the market.
  • However, there is nothing here that makes it stand out.
  • HTC fans will argue that there are features that make it better than the Galaxy S5, LG G pro 2 or the rumoured iPhone 6 but even if they are right, it will not be enough to save the company.
  • The graveyard of technology is littered with the graves of great technologies that were slain by inferior technologies with great marketing.
  • Betamax vs. VHS is a great example.
  • It is here that the fundamental problem with HTC is to be found.
  • HTC does not have the resources to compete with the mighty marketing machines of Samsung, Apple, Microsoft or even LG.
  • It is not as if the device can sell itself on price as the unsubsidised price is somewhere around $900 which is right in line with its high end brothers.
  • This essentially means that the fan base will buy it but operators will not put real subsidies behind the device as there will not be the marketing punch from HTC to match it.
  • Barring a miracle, this means that market share is likely to continue falling leading further losses and the need to cut back operations again.
  • HTC is in the death spiral and the only way to break it is a massive investment in marketing to put market share back on an upward tack.
  • HTC simply does not have the resources or the bravery to attempt such as rescue and so I suspect that its rapid decline will continue.
  • Investors should be using any strength in the share price to cut their losses and run. 



Internet TV – All hail the king

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Rising content value is likely to drive a verticalisation of the industry.

  • Every man and his dog seem to be preparing to launch a streaming TV service with Apple and Comcast being the latest.
  • Apple and Comcast is a particularly strong combination as one has almost limitless resources and the other is close to controlling almost all the distribution as well as a good slug of content.
  • While, Netflix shareholders fret about the impact this would have, it is worth remembering two factors.
    • Users are driven by content
    • Apple’s reach into the television is still very limited.
  • This means that as long as Netflix is available on almost every platform users have under their TV’s and it has exclusive content, users will not be switching it off in favour of something else.
  • This headlong rush into Internet TV is likely to ensure that the user experience and the service itself rapidly becomes a commodity with all the value migrating into content.
  • Here, a natural conflict arises.
  • To the owner of a piece of content, the most value will be earned the more widely it is distributed.  However the operator of a service will want to limit distribution to his network only.
  • This will be the only way in which one service will be differentiated from another and I suspect that users will be forced to subscribe to multiple services to get everything that they want.
  • Hence the likely outcome will be TV services bidding higher and higher for content that they want to keep to themselves.
  • This will erode their margins while widening the margins of the content owner.
  • As value migrates more into content, there will be an added incentive for the networks to own their own studios and I can see an M&A frenzy around those assets that are still independent.
  • Two good examples of this would be Media Rights Capital (the privately owned studio behind House of Cards) or Lionsgate.
  • Taking assets like this on board would ensure a source of exclusive content that would not beggar the service provider to acquire.
  • This is where I would be investing in the entertainment industry as the service providers are already commoditising fast and without content users will not pay to play.



Sony – All the stops

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Sony is making the right moves to become a proper ecosystem.

  • It’s a long shot for Sony to become one of the major ecosystems but it is doing everything it can to make it happen.
  • Sony actually has a better chance than a number of competitors due to the assets that the company has had lying around inside its organisation for years.
  • Sony has suffered from the same problem as Microsoft and many others where different parts of the same company are often ignorant of one another and do not cooperate.
  • I think that Hirai-san understands this problem and knows that he must break it down if Son y is to have a chance at success.
  • The latest iteration of this is to use its own Sony Pictures Television studio to create exclusive content that will be sold through the PS4.
  • Microsoft is trying this with a TV series based on its Halo game as is Amazon but Sony is the one that has the best chance of making this stick due to its in house expertise.
  • The first step in Sony’s recovery is to get all of the Sony assets pulling together and then to look at covering the rest of the Digital Life pie.
  • With gaming and media, Sony has 40% of Digital Life covered but is missing many of the other important activities like social networking, messaging and browsing.
  • The key to success of the first stage will be the quality of the exclusive content.
  • If Sony can repeat what Netflix has achieved with House of Cards then the PlayStation platform may get a lot stickier but that’s a big if.
  • Sony remains the only Japanese company that has a hope of a long term future in consumer electronics and it is encouraging to see it trying to finally make the most of what it has.
  • I am not getting excited about the prospects for the stock yet, but in the ecosystem race I would rank it above Amazon and Blackberry in terms of prospects to make a proper go of it. 



Yahoo! – Game on

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An encouraging move by Yahoo! to fix its ecosystem.

  • Yahoo! looks at last to be beginning to do something about grouping its collection of assets into a cohesive ecosystem.
  • One of the most important of these assets is gaming as users spend 32% of their time on smartphones playing games.
  • This makes it one of the most important segments of the Digital Life pie.
  • To that end Yahoo! has launched a back-end platform that allows developers to deliver games across the Yahoo! network but critically across the web, Android and iOS devices. (see here)
  • The platform is also a multiplayer platform and players will be able to play against each other whatever device they are currently using.
  • This gives Yahoo! the opportunity to collect all the data with regards to what players are playing, what they like and what they are discussing.
  • This is the bread and butter from which Yahoo! can start to generate some advertising revenues from mobile devices.
  • The original Yahoo! games such as Poker and Pool will make it onto the new platform but the real drive is to get developers to write new games.
  • Here, I suspect that Yahoo! will have to prime the pump somewhat by incentivising developers to support its platform but it should not last too long.
  • Despite questionable public user figures, Yahoo! easily has over 200m proper users and this is exactly what I have been looking for to give me confidence regarding the viability of this ecosystem.
  • Yahoo!’s two biggest problems are:
    • Almost all of its usage is in the fixed Internet.
    • Its assets remain fairly disparate and not well set up for mobile.
  • The Yahoo Games Network is exactly the right way to begin addressing these problems as:
    • Those that love Yahoo! games in the fixed line will now be able to play them on their mobiles.
    • It is a step towards pulling the assets together into a coherent Digital Life offering.
  • There remains a long way to go and success will be determined by how well Yahoo! manages to execute this strategy, but it gives me hope that there may be signs of life.
  • Yahoo! has spent the last 18 months assembling a collection of assets that give it great coverage of Digital Life but painful little progress has been made in developing them into an ecosystem.
  • This gives me hope but I am still very far from declaring Yahoo! as one of the majors.
  • Yahoo! continues to trade in the shadow of Alibaba meaning that the core assets are still ignored.
  • These assets are what will drive a further rally in the share price and while they remain ignored, there is opportunity to get in early. 

Windows Phone – Berry picking

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Growing preference for Windows Phone spells the end for Blackberry.

  • After a difficult few months there is at last some good news for Windows Phone.
  • The appeal of Windows Phone to the enterprise is proving to be strong to the point where good customer preference is emerging.
  • IBM, one of the pre-eminent enterprise IT suppliers, has found that many of its customers would prefer to use Windows Phone as their mobile platform of choice. (see here).
  • The reason is pretty simple.
  • When a Windows Phone is connected to the Microsoft exchange server within an enterprise the experience for both the user and the IT administrator is truly seamless.
  • RFM has tested Windows Phone connected to exchange as well as to Google and other methods for getting corporate data onto the mobile device.
  • In RFM’s opinion, the experience with Windows Phone and exchange is orders of magnitude better than anything else (with the exception of specialist offerings such as Good, AirWatch and MobileIron).
  • However, all of these offerings require the enterprise to pay extra for and to implement these solutions whereas Windows Phone works out of the box.
  • In addition to advanced enterprise features for the worker, the device also supports features such as secure boot protocols, data compartmentalization (aka, sandboxing) and data encryption that IT administrators love.
  • This does nothing to fix the issues around the consumer ecosystem, but it makes Windows Phone a compelling offering for anyone who is running Microsoft infrastructure within their company.
  • In the world today, that is almost everyone.
  • This is very bad news for Blackberry which has trying to affect a rescue by refocusing on the enterprise.
  • It has a great installed base (declining fast) but the current server most enterprises use needs to be swapped out for a new one.
  • This combined with the fact that very few employees actually want a Blackberry device makes it an easy choice to switch off BES and use Windows Phone.
  • This combined with the ever-improving offerings for Bring-Your-Own-Device offered on Android and iOS spells the end for Blackberry.
  • The solution is inferior, more complicated to set up and the users don’t even like the devices that much.
  • This is why I am forecasting that Blackberry’s smartphone market share will have fallen to 0.4% by the end of this year and that its ecosystem will be a shadow of its former self at 34.4m users.
  • RFM calculates that the break-up value of BlackBerry is only $4.37 per share and that’s before all the cash has been burned in the rescue attempt.
  • Anyone holding on for a recovery is likely to be very disappointed.

Motorola – Something right.

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With the Moto 360, Motorola has finally got something right.

  • Smart watches are still a problem looking for a solution but with the Moto 360, Motorola has put the first tick in the box.
  • The Moto 360 is a smart watch that actually looks like a regular watch.
  • Hence it is a regular wrist watch first with some bells and whistles added.
  • Everyone else has added the bells and whistles first leaving fashion and telling the time as an afterthought.
  • It has a round face and attention has been placed on styling to make it a fashion accessory in its own right.
  • The device will be available in a range of different options including a metal or leather strap.
  • There are difficulties in making a round screen but 80% of watches sold today are round and the aim here is to appeal as a watch first and a smartphone remote control second.
  • Outside of its styling there is nothing special about this device and I suspect that devices like the Galaxy Gear and Galaxy Fit will beat it hands down when it comes to functionality.
  • That being said, as long as the price and battery life are right, I would not be surprised to see this device outsell competing devices with better functionality.
  • This is because watch sales are driven as much by fashion as they are by telling the time and the MOTO 360 is only the second device I have seen that takes that into account.
  • The piece that is missing from this segment remains the driver to purchase a smart watch in the first place.
  • No one has come up with a use case that is going to make users abandon their Fossils, Citizens or Rolexes and strap one of these onto their wrists.
  • Until they do, this market is going to be tiny with no real impact on the ecosystem.
  • Hence, I doubt that Lenovo will be making any money out of this device, but it is interesting enough to make management pause before cutting all of the expensive US talent it has acquired.
  • The timing of the device’s launch is apposite. 

Facebook – Goodwill hunting.

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No change at WhatsApp means a thumping goodwill write-down.

  • Speculation is rife with regards to why Facebook was willing to pay $19bn for WhatsApp and how it will earn a positive return on that investment.
  • The market’s view is that data from chats will be collected and used to sell advertising while RFM believes that WhatsApp will follow LINE and KakaoTalk into mobile gaming.
  • I believe that taking WhatsApp into the critical segment of mobile gaming is the only way by which Facebook can hope to earn a decent return on this investment.
  • However, both Facebook and WhatsApp have been adamant that nothing is going to change.
  • Personal data will not be harvested from chats and WhatsApp will not be going into gaming.
  • Instead, Facebook aims to grow the WhatsApp user base to 1bn users and not worry about monetisation.
  • That leaves investors with one revenue stream from this asset which is the fee that users pay to use the service.
  • This is $1 per user per year but collection of this fee is not rigidly enforced.
  • This is why I believe that WhatsApp’s revenues are $0.50 per user per year in the best instance.
  • I think that WhatsApp can reach 1bn users with Facebook behind it but growth beyond this will be very slow as Facebook’s own user base is showing.
  • As the user base grows, I am sure that ARPU will also fall but, for the moment, I will stick with using $0.50 per user per year.
  • 1bn users would translate into $500m in revenues on an annual basis.
  • If I assume 90% margins this translates into cash flow of $450m.
  • If I further assume that the user base grows at 4% for ever and that Facebook’s cost of capital is 10% then WhatsApp is worth $7.5bn.
  • This may sound absurd, but these are exactly the calculations that Facebook’s finance department will be obliged to carry out when it carries out its annual goodwill impairment tests in the years to come.
  • To justify $19bn these revenues will need to grow at 7.7% forever which everybody knows is impossible.
  • Hence, without another clear source of revenues, Facebook will be forced to take a goodwill write-down in excess of $10bn.
  • This is why I am certain that, behind closed doors, there is a substantial monetisation strategy which includes a move to gaming as well as user chat data collection.
  • This strategy, even if it is not public, can be applied to the goodwill impairment tests at the end of each year and this is how I believe that Facebook intends to avoid an embarrassing and expensive hit.
  • Once they are in the door and hooked on the service, then they can be safely monetised as they will not want to lose the service.
  • There is no such thing as free internet but users need to have hope in order to keep them signing up.