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Product mix saves the day.
- Samsung reported another difficult set of results and the prospect of price cuts on the Galaxy s6 was met with some alarm.
- That being said despite losing a substantial amount of scale in its handset business, the fact that Samsung managed to keep handset profits and margins flat compared to Q1 15A is very impressive.
- Q2 15A revenues / EBIT was KRW48.4tn / KRW6.90 which was in line with guidance given at the beginning of July.
- Most of the focus was on the IT and Mobile Coms business where 89m handsets where shipped of which around 73m where smartphones compared to RFM forecasts of 99m handsets and 83m smartphones.
- This represents a market share loss of 250bp in smartphones which mostly occurred in the mid to low end of the portfolio.
- Fortunately the mix shift towards the high end meant that revenues managed to stay broadly flat on Q1 15A at KRW25.5tn.
- I suspect that lower gross margins from losing scale were largely offset by the higher gross margins of the higher end devices.
- This combined with very tight OPEX control meant that margins also managed to remain flat at 10.6%.
- This steady performance paved the way for improvements at Device Solutions (Panels and Semis) and Consumer Electronics to boost group EBIT by 15.3% QoQ.
- Unfortunately, this good performance was undermined by Samsung’s intention to strategically cut prices on the s6 and s6 edge in order to hold onto share.
- This should be offset to some degree by the launch of the Note 5 and a larger screen edge product in H2 2015E.
- Consequently, I think that Samsung should be able to hold margins steady for another quarter and I continue to think that the worst is over for the company.
- As long as Samsung can hold its position in handset revenues and margins, then the good performance of Device Solutions should allow earnings to begin expanding again in Q3 15E, albeit at a much lower rate than before.
- Samsung is no longer a handset or ecosystem company but will instead be driven by the supply of cutting edge components.
- I think that it is still too early to look for upside in Samsung as the risk of another profitability collapse in handsets remains despite the best efforts of its management team.
- The torrid time being experienced by LG Electronics, Sony and HTC are indicators enough of how tough life has become.
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Facebook is making long-term ecosystem investments.
- Facebook reported good Q2 15A results but slowing growth in its core business and heavy investments caused short term investors to pause for thought.
- Q2 15A revenues / EPS were $4.04bn / $0.50m compared to consensus at $3.99bn / $0.47 despite a currency headwind that reduced revenues by $330m.
- MaUs climbed to 1.49bn while Instagram, Messenger and WhatsApp passed 300m, 700m and 800m respectively.
- Mobile now makes up over 75% of total advertising revenues and this looks set to continue increasing its share of revenues albeit at a slower pace going forward.
- Guidance for the balance of 2015E was cautious as the YoY growth rate declines seen in H1 15A are going to continue.
- On top of this, the company is showing no signs of reigning in its expenses and it continues to invest for long term growth.
- This was met with some nervousness by investors who sent the shares down 3.3% in after-hours trading.
- Despite the concerns, I think that this is exactly the right time for Facebook to be investing for its next leg of growth.
- Twitter has already ground to halt and has not yet decided how it will continue that growth putting it in a much more difficult position than Facebook.
- The best way for Facebook to continue its growth beyond the monetisation of social networking is to expand its offering to the other areas of the Digital Life pie where it currently has no presence.
- Over the last 6 months, I have become increasingly convinced that this is exactly what it intends to do.
- The functionality of Messenger is being expanded to cover activities such as gaming and media consumption and this should encourage users to spend more time with Facebook.
- More time with Facebook will give it more opportunity to monetise its users as well the ability to better understand its users.
- Both of these will be positive for revenues.
- I think that this is the key to long term growth as it looks like Facebook’s monetisation of its core social networking segment looks like it is starting to mature.
- I think that Facebook is making the right choices for the long term but the short-term focused market won’t like expenses that grow faster than sales.
- Consequently, I suspect that there will be a time to get involved with Facebook before its investments start to pay off but that time is not upon us yet.
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Twitter must broaden its product offering to grow again.
- A reasonable set of results was marred by the frank admission that the company has a lot to do before growth comes back.
- Q2 15A Revenues / Adjusted-EPS was $502.4m / $0.07 compared to consensus estimates at $481.9m / $0.04.
- However these figures included $12m of revenues from the newly acquired TellApart which was both unexpected and is not expected to continue as Twitter is not planning on fully monetising this asset yet.
- Q2 15A organic revenues were $490m, still above consensus indicating that in the area where it operates, Twitter’s monetisation remains top notch.
- Monthly active users (MaUs) were 304m as the company added just 2m active users during the quarter.
- Q3 15E guidance was in line with expectations at $545m – $560m (consensus at $556.6m) putting the company on course to earn just over $2bn in revenues in 2015E.
- Market cheer following the release of the numbers was quickly dashed by the frank admission that growth has dried up and that it will be a long time before it can be restored.
- This sent the shares down 11% in after-hours trading to $32.41.
- Twitter identified three areas that need action but unfortunately I do not think that any of these will fix the fundamental issue that has caused Twitter’s growth to flat line.
- These areas are:
- Better execution.
- Simpler and easier to understand offering.
- Better marketing.
- Twitter is hoping that action on these areas will allow it to restart user growth by increasing its appeal to the mass market.
- Here, I disagree and I think that these areas are simply dancing around the edge of the real problem.
- I have believed for a long time that Twitter must broaden its product offering in order to appeal to the mass market.
- RFM calculates that Twitter’s current product offering only addresses 9% of the Digital Life Pie in contrast to Google at 61% and Yahoo! at 73%.
- For a company based on advertising, this is a fundamental limitation to monetisation which is the main reason why I think that growth has stalled.
- Fixing the three areas is likely to bring incremental improvements and somewhat better monetisation through higher engagement but the mass market is likely to still remain elusive.
- Twitter needs to use its platform to offer a wider range of services which will drive users to spend more time with Twitter.
- In essence it must go from being a one product company to an ecosystem and this will require a radical shift in strategy from where the company is today.
- It is important to remember that Jack Dorsey is only keeping the seat warm and this could be why there has been no mention of a move in this direction.
- Facebook is beginning to move in this direction with the continual expansion of functionality of its messenger platform and this second attempt at becoming an ecosystem looks much more likely to succeed than the awful Facebook Home.
- Until Twitter commits to moving in this direction, I think that there will be no meaningful return to growth leaving the valuation of the shares looking very stretched.
- Consequently, the shares look like they have further to travel in the southerly direction.
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Baidu is looking to create a Rocket Internet of China.
- Baidu is investing heavily in its e-commerce services and the platform that powers them to augment the slowing growth that is coming from its core businesses.
- Baidu reported difficult results and guidance as the slowdown in the Chinese economy and signs of stabilisation in mobile caused results and guidance to miss expectations.
- Q2 15A revenues / EPS were RMB16.6bn / RMB10.19 (per ADS) compared to consensus at RMB16.6bn / RMB10.76 (per ADS) which was slightly adrift of Q2 15A revenue guidance given in April 2015 which was RMB16.75bn.
- Revenues from mobile devices was 50% of the total which was the same as it was in Q1 15A.
- This is slightly worrying as mobile is growing much faster than fixed which implies that Baidu has lost some share during Q2 15A.
- The miss on EPS was primarily caused by increases in expenses from content costs at iQiyi and investments being made in Baidu online to offline strategy (O2O).
- O2O represents services that already exist but can be improved and made more efficient by running them online or on mobile. (Uber, mobile payments, eBay etc are all examples).
- The move into O2O brings Baidu into the core businesses of Tencent and Alibaba where competition will be fierce and margins lower.
- Baidu reported a 24% YoY growth in mobile users to 624m, 304m users of its mobile maps and 35m users of its mobile wallet.
- Guidance was disappointing with Q3 15E revenues forecast at RMB18.17bn – RMB18.58bn (midpoint RMB18.38bn) which missed consensus at RMB18.84 by 2.4%.
- The combination of the inevitable slowing of the Chinese economy and the early stage of Baidu’s mobile ecosystem looks to be behind the weaker than expected guidance.
- This is why I suspect that Baidu’s is branching out into O2O as e-commerce is already large and well established but with plenty of growth still left in the Chinese market.
- While this will drive revenues in the medium term, profitability is likely to suffer as O2O will have much lower gross margins than the 60% that Baidu currently enjoys on its search and other online services.
- In the short-term the theme is likely to remain heavy investments in O2O and falling margins before these investments begin to payoff.
- This combined with the slowing outlook for the core businesses creates enough uncertainty around Baidu to keep me cautious for now.
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The signs are good for Windows 10.
- Some of the first in-depth reviews of Windows 10 are in and while there are still some problems, Windows 10 looks to be the most promising release since Windows XP.
- The fact that the upgrade is free, the new start menu, Cortana, search and task view have all scored well with reviewers while Windows Store, the control panel and general stability all need more work.
- Despite these shortcomings, the view is overwhelmingly positive meaning that there should be very good uptake of Windows 10 during the 12 months free upgrade time frame.
- I don’t think that Windows 10 is about to kick-start the PC market back to growth, but it promises to offer a more consistent experience for users giving some much needed cohesiveness to the ecosystem.
- For the last 15 years, Microsoft has had a monotonous rhythm with its operating systems alternating between very good (eagles) and awful (turkeys).
- I suspect that this because Microsoft always runs out of time and in order to make the promised release date, it begins dropping features and cutting corners. (Windows Vista and Windows 8).
- It then spends the next 2 years fixing all of the problems in the current release, ending up with a superb desktop offering. (Windows XP, Windows 7 and I suspect Windows 10).
- This should generate some positive momentum the Microsoft ecosystem and most importantly substantially reduce software fragmentation.
- Currently, Xbox runs one version of the code while phones run another and XP and 7 dominate the PC.
- Despite being the latest OS on offer, Windows 8 runs a tiny percentage of PCs as its predecessors are simply easier to use and meaningfully superior for desktops and portable computers.
- Windows 10 will run on every device that Microsoft powers and the free upgrade should ensure rapid uptake of Windows 10 over the next 12 months.
- With 1.5bn PCs already out there, I think that the target of 1bn active Windows 10 devices by fiscal 18 is a very low hurdle indeed.
- With Windows 10 being free, I would hope that this target is reached much more quickly although corporations are going to take longer to upgrade than consumers.
- This should mean much greater software consistency across all Windows devices which will allow the user experience to be recognisable on any device.
- The fact that many more devices will be addressable with a single piece of code, will also provide a much needed boost to Microsoft’s efforts to get third party developers on board.
- If this can be combined with marketing that explains why users should engage with Windows rather than just telling them that it exists, then the ecosystem strategy should have a good chance of success.
- The ecosystem is central to Microsoft’s long term growth prospects but fortunately the shares are assuming that the ecosystem fails to get any real traction with users.
- Hence, Microsoft remains my top choice in the ecosystem as Google has just rallied past my valuation and Apple needs another product cycle to drive it further from here.
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Amazon and Google star while Yahoo! fails to understudy.
Amazon – Profits can be us
- Amazon reported results that surprised the market as the company has finally started showing some profits.
- Q2 15A revenues / EPS was $23.2bn / $0.19 which was significantly ahead of consensus at $22.4bn / LOSS $0.14.
- The real driver was North America which posted 5.1% EBIT margins in Q2 15A compared to 3.9% in Q1 15A.
- The overseas business also played a part as EBIT margins improved to LOSS 0.3% in Q2 15A from LOSS 1.0% in Q1 15A.
- Amazon Web Services (AWS) also contributed well with 81% growth to $1.82bn in revenues upon which Amazon earned $391m or 21.4% EBIT margins.
- Active accounts also grew to 285m while Amazon Prime continued to see good growth where RFM estimates that Amazon is closing in on 35m users.
- However, much of this good work looks like it will be undone in Q3 15E where Amazon expects revenues / EBIT to be $23.3bn – $25.5bn ($24.4bn midpoint) / LOSS $480m – $70m (LOSS $205m midpoint) compared to consensus at $23.8bn / LOSS $229m.
- Although the forecasts are in line with consensus prior to the beat of Q2 15A, Amazon has given the market confidence that it can make profits when it wants to.
- However, this still requires for the investments (instead of profits) that Amazon is making to bear fruit and here I remain concerned.
- Its ecosystem strategy is still haphazard at best and I see no change to the series of expensive experiments upon which Amazon is engaged.
- Consequently, while Amazon may be able to show profits when it needs to, I can’t see value in Amazon until it decides to do so on a sustainable basis.
- The stock continues to price in profitability that is way ahead of forecasts which combined with its muddy strategy outside of retail, leads me to prefer other players.
Google Q2 15A – The trouble with arriving
- Good results and a promised focus on revenue growth and profitability has pushed Google’s shares close to RFM’s valuation.
- Q2 15A revenues / EPS were $14.4bn / $6.99 compared to consensus at $14.3bn / $6.73 and RFM at $14.7bn / $7.31.
- Advertising revenues from YouTube and mobile continued to underpin steady revenue growth but the real story was OPEX.
- General and Administrative expenses have been very high as a percentage of sales for some time and this quarter saw both an improvement and the promise of greater discipline.
- GNA fell to 8% of sales down from 9% of sales in Q115A and Q214A but this still remains far above the 5% that I consider to be reasonable.
- The main issue is that there has been considerable uncertainty whether the new CFO, Ruth Porat, would be both willing and able to reign in what is widely seen as excessive OPEX spending.
- Commentary on the conference call, as well as some tangible results in Q2 15A, has given the market hope that Porat will be able to normalise spending.
- This could boost EBIT by around $3bn a year lifting margins by more than 300bp should GNA move into line with the industry at 5% of sales.
- This has been an overhang on Google’s valuation for some time and hope that this will be addressed is what has driven the shares.
- Google at $644 is now slightly above RFM’s current valuation of $626 per share meaning that Microsoft is now by far the one with the most upside.
Microsoft Q4 15A – Ducks on parade
- Microsoft reported a reasonable quarter that was marred by the $7.5bn write-down of the Devices and Services business acquired from Nokia in 2013.
- This represents substantially all of the acquired assets meaning that they are now considered to be almost worthless.
- Excluding this, Q4 15 revenues / EPS was $22.2bn / $0.62 compared to consensus at $22.0bn / $0.58 and RFM at $22.4bn / $0.60.
- The underlying trend of weakness in perpetual licensing businesses being offset by growth in cloud, Dynamics, Office365 and corporate unfolded as expected.
- Guidance for fiscal Q1 16E was disappointing as a combination of the strong US$, heavy cutbacks in the phone division and a longer than expected wait before Windows 10 has an impact, hurt forecasts.
- Q1 16E revenue is expected to be around $21bn which is below both consensus at $22bn and RFM at $23bn.
- However, OPEX improvements will be felt very quickly as OPEX for FY16E is now expected to be $32.1bn-$32.4bn reflecting the restructuring benefits coming from the phone business.
- Microsoft now has its ducks in a row and this coming fiscal year is going to be all about executing on the strategy and making sure that Windows 10 is successful.
- Microsoft is aiming to drive Windows revenues back to growth with Windows 10 but I will be happy if it just remains flat.
- Keeping legacy revenues flat with growth coming from cloud and Office 365 is enough for there to be upside in the valuation of the shares.
- If Microsoft can return Windows to growth and make a success of its ecosystem, this would be the icing on the cake.
- Microsoft remains my top choice in the ecosystem as Google’s recent rally leaves less on the table for investors.
Apple Q3 15A – Next cycle please.
- Apple reported results in line with expectations but there were signs that the pent-up demand for the iPhone 6 is beginning to wane.
- It is this cycle that has driven hype and expectations for Apple and I expect things to normalise from here.
- Q3 15A revenues / EPS were $49.6bn / $1.85 compared to consensus at $49.3bn / $1.81.
- 47.5m iPhone shipped compared to consensus at 48.8m while iPad sold 10.9m units which was in line with expectations of 10.9m units.
- 4.8m Macintosh computers sold just below consensus of 5.0m units but Apple is the only computer maker that saw YoY growth this quarter.
- I do not believe that the iPhone miss is a big issue as the company deliberately reduced inventory by 0.6m units to make way for the iPhone 6s that I expect to launch in September.
- Apple declined to give hard numbers for either the Apple Watch or Apple Music but I estimate that around 2m Apple Watches sold during the quarter.
- Furthermore it looks as if Apple Watch is most appealing to Asian users as WeChat and LINE are two of the three 3rd party apps. seeing the most usage on the device.
- With shipments even lower than the 3m I had previously forecast (see here), my view that wearables remain a problem looking for a solution is further strengthened.
- Until Apple can come up with a must have reason to buy the Apple Watch, its unit shipments are likely to continue to be disappointing.
- Guidance for fiscal Q4 15E was somewhat light with midpoint revenues / implied EBIT forecast at $50bn / $13.2bn compared to consensus at $51bn / $13.7bn respectively.
- Apple was at pains to point out that 73% of its iPhone users had not made the upgrade to iPhone 6 as a sign of further growth, but I think that these upgrades will merely underpin volumes at current levels rather than drive revenue growth.
- Consequently, I think that the real growth from the iPhone 6 has already been seen, meaning that revenue from other devices or segments is needed to drive growth from here.
- On this basis, I think that Apple shares are not unfairly valued but while I think they offer a fair return to the investor for the risk assumed, it is not exceptional.
Yahoo! Q2 15A – Where is the money?
- Yahoo! reported another disappointing set of results as execution remains an enormous drag on both fixed and mobile revenues.
- Top line revenues grew 15% but once this was adjusted for Traffic Acquisition Costs (TAC) growth was flat YoY.
- This means that the revenue growth that Yahoo! has booked is being paid away to third parties implying that Yahoo!’s value add to these new revenues is zero.
- Q2 15A revenues (ex-TAC) / net income were $1.04bn / $152.5m compared to consensus at $1.03bn / $178m.
- Although the number of display ads sold increased by 9% and the price of those ads increased by 10%, none of this accrued to Yahoo! as it was all paid away through TAC.
- This is due to the new deals that Yahoo! has struck with Mozilla, Oracle and others but only time will tell whether this will translate into any meaningful value for the Yahoo! shareholder.
- Although Yahoo! is investing in growth, none of this is going to come through in terms of financial benefits in Q3 15E.
- Guidance was soft with revenues (ex-TAC) / adj. EBITDA forecasted at $1.00bn – $1.04bn / $200m – $240m.
- This compares unfavourably to consensus which was looking for $1.08bn / $281m.
- Furthermore, I continue to believe that Yahoo! is squandering a huge proportion of the opportunity that it has in mobile.
- Yahoo! claimed to have 600m monthly active users on mobile which in Q2 15A translated into $252m in revenues (ex-TAC).
- Yahoo! has excellent coverage of Digital Life (73%) meaning that its addressable market is not dissimilar to that of Google.
- With 63% coverage of Digital Life, RFM estimates that Google generated $2.63bn in revenues from 749m users of Android devices.
- If I assume that Yahoo! had executed on its assets as well as Google then Yahoo! should have generated something like $2.5bn in revenues from mobile in Q2 15A.
- In a nutshell Yahoo!’s poor execution in mobile has meant that it has missed out on 90% of the monetisation opportunity from mobile devices.
- I think that this is because its users on mobile use it for very simple things like checking email and news and do not engage with Yahoo! as an ecosystem.
- Until Yahoo! makes its mobile assets engaging, consistent and integrated, users are unlikely to engage meaning that its revenue opportunity will be taken by competitors.
- The result will be a company that underperforms its peers and a stock price that is driven solely by legacy investments.
Short trip to Scotland. Returning Monday 27th July.
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Jolla is to Intex what Cyanogen is to Micromax.
- Jolla has received another shot in the arm from a deal that it has struck with Intex for Sailfish to be the heart of Intex’s strategy to create an ecosystem upon its devices for the Indian market.
- This is very similar to what Micromax announced in October last year using Cyanogen (see here).
- However this has really yet to see the light of day as the Micromax Yureka and Yuphoria are predominantly Google ecosystem devices consigning any Indian specific services into the background.
- In essence the Micromax “Bollysystem” does not seem to have an Indian specific experience to it making this all about Google, consigning Micromax to a commodity.
- Whatever the outcome, Sailfish has one huge advantage over Cyanogen as Google has no presence on Sailfish meaning that the experience can be all about India rather than Google.
- This is exactly what Jolla and Intex are aiming for as the announcement goes hand in hand with announcements with Times Internet and Snapdeal.
- Times Internet is a leading provider of digital media for the Indian market while Snapdeal is an ecommerce provider.
- While this will help Sailfish offer greater coverage of the Digital Life pie for Indian users, there remains an awful long way to go and here Jolla is very weak.
- It now has a store with native Sailfish apps and it can run 100,000 Android apps on its platform but the situation is far from ideal.
- Android and iOS now have over 1.3m apps available and Android apps that run on Sailfish do so through and emulator rather than native which will create issues around performance compared to Android.
- Jolla will make its money by taking a share of any revenues generated from Digital Life services within the ecosystem which is exactly the model that Cyanogen has adopted.
- Jolla and Intex are the underdogs here as Intex is No. 2 in the Indian market and Cyanogen has $80m in the bank which I suspect is something like 20x what Jolla has.
- However, when it comes to the creation of the “Bollysystem”, Jolla and Intex are going in the right direction in ensuring that Google is completely excluded.
- India is virgin territory where most people have never used Google services and therefore do not demand them in a mobile device.
- In fact I think that in India the Android brand is far stronger than Google’s.
- Consequently, selling devices with Google services is in fact seeding the market on Google’s behalf and will make it much harder to establish a successful ecosystem focused on the local market (see here).
- While Jolla and Intex have got the strategy right, it remains to be seen whether they are able to execute on this strategy as neither are currently market leaders.
- Furthermore, the lack of a thriving third party ecosystem on Sailfish is going to be a problem when selling this proposition to users who often enter a mobile phone shop with Android on their minds.
- Intex shipped 2.0m smartphones in Q1 15A compared to Micromax’s 3.2m, giving it a reasonable chance of success as long as it puts the full weight of its resources and distribution behind this idea.
- An experiment at small scale is almost certain to fail.
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Nokia is not about to start making phones again.
- The wires are full of the notion that Nokia is again about to plunge headlong into the mobile phone business but I think that this is very unlikely.
- What is far more likely is that Nokia licences out its brand name to a company that already makes mobile phones in order for it to win some volume in low end feature phones.
- Microsoft’s right to use the Nokia brand on its feature phones expires in 2016 giving the opportunity to monetise the brand back to Nokia.
- Although all of the attention is focused on smartphones, the feature phone market is still significant, shipping around 135m units per quarter.
- Against this backdrop, devices using Nokia’s brand still have around 20% market share and good recognition with users in those price tiers.
- Consequently, there is still value in the Nokia brand in the feature phone market, which I think Nokia is aiming monetise in 2016.
- For an EMS vendor like Foxconn this represents an opportunity to move up the value chain and increase its wafer thin margins by becoming an OEM and direct to consumers.
- Currently EMS vendors make their money by manufacturing phones on behalf of OEMs who then sell them onto to consumers.
- Selling directly to consumers will allow the EMS vendor to keep more profit but it will have to manage sales and distribution itself.
- The hope here is that by doing a deal with Nokia for its brand, sales and distribution will be much easier given the strength of the brand thereby making this strategy viable.
- Nokia’s exposure to this is likely to be nothing more than a brand royalty that I think could net an extra $50-$100m in revenues per year.
- This would be coming at almost 100% margins making it a no brainer from Nokia’s perspective.
- Consequently, I do not see Nokia blowing the cobwebs out from the old closed operations and turning the lights back on.
- This is simply zero risk monetisation of an asset that would otherwise go to waste.
- Nokia has done a good job at maximising the value from its operations for shareholders which combined with a potential sale of HERE and the licencing if its brand, looks set to continue.
- Consequently, I can still see upside in the Nokia share price but I remain nervous that this value will be consumed by the merger with Alcatel which is at risk of not living up to expectations.
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Facebook is mounting its second assault on the ecosystem.
- Facebook is moving inexorably towards becoming a fully-fledged ecosystem after a number of false starts.
- Facebook now appears to be working on a digital assistant (Moneypenny) that will be aimed at helping users find and buy products online.
- This is another service that is likely to be offered via messenger and is one that users are likely to end up paying for.
- This is different to Siri, Google Now and Cortana which aim to assist the user with every aspect of their digital work lives as well as answering any question that the user throws at them.
- Moneypenny’s approach will be much narrower and I suspect that this is because of the high level of machine learning and artificial intelligence that is required to make these services effective.
- There is a reason why Google Now is far better at understanding what the user is asking for and delivering the right answer than Siri or Cortana.
- One possibility is that Facebook will use some degree of human intervention to fulfil the requests but this would make it much more expensive to run.
- This combined with Facebook’s move into gaming (see here) and its increasing use of video, make it look more and more like an ecosystem.
- Its previous attempts at this were aimed at taking over the home screen of the device which failed as the user experience offered was very poor.
- This time Facebook is taking a very different approach.
- The aim now is to grow its appeal by offering users a greater range of services to address the activities they carry out on their smartphones.
- Gaming, shopping and potentially search can now be added to social networking and instant messaging which will give Facebook pretty good coverage of the activities that users spend most of their time on.
- By running all of its services through either the Facebook or Messenger apps., Facebook can create a more consistent and integrated user experience with which users will identify.
- This is key to generating user preference which will in turn allow Facebook to more effectively monetise the traffic that runs through its servers.
- The more of the Digital Life pie that Facebook can cover with a good service, the greater will be its monetisation opportunity giving it more headroom before it runs out of growth.
- Facebook is expensive (87x 2015E & 34x 2016E PER) but it is cheaper than Twitter (52x 2016E) on 2016E PER reflecting its better medium term outlook.
- Consequently, I would be more comfortable owning Facebook than I would bottom fishing for either Twitter or Yahoo! at this point.