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Product launches make noise but change very little.
- Google updated its Nexus devices at an event held yesterday with two new handsets, a professional tablet and two new Chromecast devices.
- These new devices will all ship with the new version of Android (6.0, Marshmallow) that was launched at Google i/o in May 2015.
- For other devices, Marshmallow will be available as an update from October 5th.
- Huawei was the manufacturer of choice this time around which comes as no surprise as it has, once again, become a leader in Android having gained 310bp of smartphone share in Q2 15A.
- The two new devices, the Nexus 5X and 6P offer premium specification and functionality at a pretty reasonable price.
- Both devices sport a new component called “Android Sensor Hub” which is very like the component in the iPhone and can tell with high accuracy what the user is doing.
- This allows the user experience to be adjusted to cater to that activity be it walking, running, cycling or even getting in a car.
- The new Chromecast device includes a new small one that it is optimised for music streaming as well as an update to its well established big brother.
- These new devices come with a completely new app that aims to offer access to more content, improved functionality as well as a better user experience.
- Finally, the Pixel C tablet which has a 10” display as well as a detachable keyboard and takes aim at the iPad Pro that was launched earlier this month.
- At 10” this is a poor substitute for the iPad Pro (upon which Office will not be free due to screen size) and is miles adrift of the Surface Pro 3 which remains the only game in town when it comes to replacing a laptop.
- Even with deeper relationships with the operators, these devices are unlikely to get much volume but they do serve as a good option for any user that wants a purely Google experience.
- Google estimates that there are 1.4bn Android devices of which 1.0bn are running its ecosystem.
- I am inclined to think that Google has underestimated the total somewhat as there are 400m users in China alone almost none of whom are using Google.
- There are substantial numbers of non-Google devices outside of China which seem to have slipped through the cracks somewhere.
- Unfortunately these new devices and updates do nothing to fix the two biggest problems that Google faces.
- These remain:
- First: software distribution. Google remains unable to distribute its software to devices already in the market.
- Penetration of Android 5.0 is still only 21% despite being available for over a year meaning that Marshmallow (6.0) is unlikely to be in the hands of the majority of users before 2019 or 2020.
- This renders the innovations that Google has put into Marshmallow virtually useless as its competitors will have reversed engineered the good bits and put them into the hands of users long before then.
- Second: fragmentation.
- Android remains very fragmented which hobbles the quality of the user experience and makes life very hard for developers.
- Nexus devices have consistent software but they will make up such a small portion of the market that they are likely to be a rounding error.
- RFM research has concluded that these two issues combined with Apple gaining share at the high end, have been responsible for a decline in developer commitment to Google’s ecosystem (see here).
- The decline in developer commitment is a worrying sign and may be the beginnings of Google losing its iron grip on Android handset makers and mobile operators.
- This could hurt its ability to generate revenues from Android devices potentially making RFM’s medium-term forecasts for Google too high.
- With the shares at fair value and potential disappointments on the horizon, I think it is time to take money off the table.
- There remains far more opportunity in Microsoft.
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Yahoo! seems determined deliver Alibaba at any cost.
- There is so little good news coming from Yahoo! these days that it appears to feel that it must complete the spin-off of Alibaba to shareholders, even if it results in a big tax bill for investors.
- To me, this is an indication that there continues to be no progress on the turnaround and therefore substantial pressure to deliver something.
- Not only has the IRS declined to rule on the spin-off but it has also said that any guidance it gives in the future will not apply retroactively to transactions that are completed in the past.
- Consequently, there is now the risk that anything up to 30% of the value of the Alibaba investment may go to the IRS rather than shareholders of Yahoo!
- I think that the reasonable move would be to put the transaction on hold until there is clarity on how it will be treated for tax as this has the best outlook for preserving value for shareholders.
- The problem is that for the last 2 years there has been so little progress at Yahoo! other than the Alibaba investment, and a delay here would clearly put the focus back on the company’s lack of execution.
- I think that this is something the company cannot afford as I continue to believe that Yahoo! is squandering a huge proportion of the opportunity that it has in mobile.
- At its Q2 15A results, Yahoo! claimed to have 600m monthly active users on mobile which translated into $252m in revenues (ex-TAC).
- Yahoo! has excellent coverage of Digital Life (73%), thanks to its acquisition spree, 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 care meaning that its revenue opportunity will continue to be taken by competitors.
- The result is a company that feels under pressure to deliver something to investors even if that means that a large portion of that value is lost.
- There is no sign that the underperformance of Yahoo! is coming to an end as execution in mobile remains very disappointing.
- For the ecosystem, I prefer Microsoft and might even be tempted to have a look at Samsung where I think the worst of the problems have now passed.
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While hardware exists, there is downside.
- Even assuming a successful acquisition of Good Technology, it is very difficult to see any upside in BlackBerry at the moment.
- BlackBerry reported very disappointing Q2 16A results as all three business lines missed expectations with hardware being the worst hit.
- BlackBerry recognised revenues on just 0.8m devices (0.2% smartphone share) leading to revenues of $201m some 24% behind consensus revenues.
- Revenues from service access fees (BlackBerry Enterprise Server (BES)) were $211m with software at $74m missing consensus by 7% and 26% respectively.
- It is pretty clear that the weakness is coming from customers switching away from the Blackberry platform in both devices and within the enterprise (BES).
- BlackBerry outlined three strategies for recovery.
- First: A revitalisation of the device business with new models including one supporting Android.
- This is a device with a slide-out keyboard.
- I continue to believe that this device will cost shareholders money and has virtually no chance of success (see here).
- I still think that BlackBerry has no future in devices and the sooner it abandons this activity, the more cash will be conserved.
- Second: Increase recurring revenues from the IPR portfolio.
- The problem here is that the outlook for successfully asserting IPR in the last 18 months has substantially deteriorated.
- Furthermore, its portfolio is already widely licenced and I think that the patents that actually have value are ageing rapidly.
- Consequently, I think that BlackBerry will really struggle to earn meaningful revenues from its portfolio and that the IPR assets are now worth $500m in the best instance.
- Third: Grow revenues in software and services.
- It is here where I see the real opportunity for recovery.
- Although hardware volumes are now tiny, I think that BlackBerry still has by far the largest installed base of customers which could be better monetised.
- This is where the acquisition of Good Technology comes in.
- Good Technology has a platform that allows the secure mobilisation of much more of the enterprise’s functionality than BlackBerry does.
- Its weakness is its small size which has limited its ability to penetrate the market.
- A combination with BlackBerry makes sense as now existing BlackBerry customers may have a much better reason to stay with BlackBerry and carry on paying.
- Enterprise Mobile Management is commoditising fast and adding on Good could help BlackBerry remain differentiated.
- The problem is that even with a successful software strategy, there is still meaningful short-term downside in the shares.
- BlackBerry acquired Good Technology for about 2x revenues mostly because the company was short of cash, had debt of $56m and was still losing money.
- If I combine BlackBerry with Good, I end up with software and service revenues of around $500m and low margins due to Good’s losses.
- Consequently, I might be prepared around pay around 3x revenues for this business giving me a value of $1.5bn.
- I think that the device business has negative value and could easily cancel out any residual value that is left in the IPR portfolio.
- BlackBerry’s market capitalisation is currently $3.4bn with a net cash position of $1.3bn (after Good has been paid for).
- With hardware and IPR having a net value of zero, the combined software and service business is already being valued at $2.1bn some 40% above my valuation.
- If BlackBerry can make this acquisition really work well then there may be long-term upside, but I fear short-term realities and risks will keep pressure on the shares for now.
- The sooner, the hardware business is put to one side, the better the outlook for recovery will be.
- For now, it still looks to be all downside.
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The stars are aligning for something special in the long-term.
- Facebook has announced that Instagram has passed 400m users in the latest of what has become a series of events that show that Facebook is edging towards becoming a fully-fledged ecosystem.
- Instagram has passed 400m users just 9 months after passing 300m and over 75% of the user base is now outside of USA.
- This comes hot on the heels of WhatsApp passing 900m users, the launch of Facebook M (see here), a move towards gaming and Facebook becoming a giant in video.
- When I put all of this together, I see the beginnings of a real move towards becoming a proper ecosystem rather than a single service and having a much wider appeal in users’ digital lives.
- This is actually Facebook’s second attempt at this, the first of which was the disastrous Facebook Home.
- Facebook Home was a user experience that took over the home screen of an Android device putting Facebook’s services front and centre.
- Unfortunately, the user experience was not very good and it was very difficult for users to access other things on the device.
- The result was that it was vilified by users and quickly discontinued.
- In contrast to this walled garden approach, Facebook’s second attempt at the ecosystem is all about enticing users to spend more time with Facebook.
- Facebook is approaching much of this through extending the Messenger client very much like LINE and KakaoTalk but I think that if they begin to get traction, they be broken out into specific Digital Life apps.
- Following this to its natural conclusion, Facebook could, in a few years’ time, have 79% coverage of the Digital Life pie.
- This would put Facebook comfortably in first position compared to its ecosystem competitors.
- RFM research indicates (see here) that Facebook still has an awful lot of work to do both on its Digital Life services and on the quality with which it delivers the ecosystem to its users.
- This combined with its 1.4bn users would put it in a position to earn far more than the $14.6bn in revenues that the market expects it to generate this year.
- This makes Facebook a company with the potential for substantial long-term upside but I think that we are still a long way away from this becoming a reality.
- Consequently, I am keeping a close watch to ensure that developments continue in the right direction and I am also waiting for a big short-term correction to maximise the long term potential.
- For the moment Microsoft remains at the top of my list.
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MVNO builds users but not profits.
- Xiaomi has updated its flagship Chinese smartphone with the launch of the Xiaomi Mi 4c and also launched an MVNO to support its devices and ecosystem.
- Although the product logo makes it look an awful lot like the iPhone 5c, I suspect that the c stands for China just as the “i” in the 4i stands for India.
- The Mi 4c sports a 5” 1080p screen, 13MP / 5MP rear and front facing cameras, a 64bit Snapdragon 808 processor, fast charging and the Xiaomi Ecosystem on top of MIUI.
- The Mi 4c will be available for $204 – $235 (depending on memory and storage).
- Xiaomi also launched its MVNO service, Mi Mobile with a triple cut SIM card (fits all devices) and two PAYG packages: 1) $0.02 / minute and 2) 3GB of data for $10 per month.
- The voice plan uses China Telecom’s network while the data tariff uses China Unicom but users can bolt on voice to the data plan at the same rate being offered on CT’s network.
- These plans are significantly cheaper than tariffs being offered by China Mobile and as long as network quality is acceptable, it could see some traction.
- These two launches clearly demonstrate Xiaomi’s continuing strategy to entice users into its ecosystem and worry about the profits later.
- This continues to be my only real concern about Xiaomi but from an investment perspective and a $45bn valuation, it’s a pretty big one.
- The most pressing problem from Xiaomi’s perspective is that its momentum has ground to halt.
- After a fantastic run in 2014, Xiaomi’s quarterly unit shipment growth has been flat in 2015 at around 18m per quarter.
- I suspect that this has happened because there are limits to the volumes of devices than can be sold over the Internet.
- To fix this, Xiaomi is expanding into other countries as well as exploring the more traditional distribution methods such as mobile operators and distributers.
- Unfortunately, both of these mean increased costs and / or lower prices which will consume any volume based savings that result from higher volumes.
- The end result is that margins are likely to stay exactly where they are, meaning that the business itself will continue to generate very little cash.
- I think that this is a major problem because Xiaomi needs to develop its ecosystem in China and take advantage of the fact that its competitors in this field (BAT) are still at an early stage of development.
- Only by having hundreds of millions of users demanding to use Xiaomi Digital Life services on its devices can Xiaomi hope to make a decent margin on the devices that it sells.
- This is why it must restart its growth as RFM calculates that with its current volumes, it will fail to achieve the critical mass required to achieve high profitability before 2018.
- Xiaomi needs to invest heavily to build its ecosystem and I think that its internal cash flow is not strong enough to support this without returning to the market.
- At $10 for 3GB and $0.02 / minute, the MVNO is also unlikely to be able to plug the gap.
- I see potential for another round as it becomes clear just how much its competitors are investing to build their own ecosystems and important it is for Xiaomi to keep up.
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Making a car still makes no financial sense.
- While commentators and investors are getting increasingly excited regarding the prospect of Apple launching an automobile, no one is considering the impact that this would have on profits and cash flow.
- Instead all of the focus is on Apple bulking up its team to 1,800 people and launching an automobile in 2019 (WSJ).
- The fundamental problem with the automotive industry is that companies do not really make money on making cars.
- Instead they make more on financing and after sales services such as extended warranties and service contracts.
- Furthermore, it is a highly regulated industry and one where the user purchase decision is driven by brand, performance and form factor.
- This is where the problems begin should Apple enter the automotive industry.
- Apple doesn’t know anything about engines, brakes, wheels or aerodynamics and it is very unlikely to be able to become an expert in these areas any time soon.
- Apple prides itself on earning 40% gross margins on the products that it sells and unless it can earn 40% gross margins on wheels, brakes and sheet metal, an automobile will be significantly margin dilutive.
- I think that this would be catastrophic for the valuation of the company as the main pillar of Apple’s valuation is its fantastic profitability.
- While I continue to think that Apple will not be launching a car, I do think that an infotainment unit is not out of the question.
- An infotainment unit plays directly to what Apple is good at and would likely be priced low enough to carry a price that gives Apple 40% gross margins.
- The downside to this is that to really be value add, an infotainment unit needs to be integrated into the systems of the automobile itself.
- This is the sole domain of the current automakers.
- Automakers may be seen as slow, slumbering giants but recent industry trade shows have served to be a wake-up call.
- I see them becoming fully aware of the importance of the infotainment unit and the connected car as well as the threat that is posed to them by Apple and Google.
- Consequently, I very much doubt that they will give free access to their systems meaning that Apple and Google will need to work with the car makers rather than against them.
- It is clear that the quality of the infotainment unit experience and the degree to which Digital Life services are made available in the car will become a part of the user purchase decision.
- However, it is very unlikely to become all of it as it is in smartphones and tablets.
- Hence, Apple’s lack of experience in automotive design and engineering is likely to be an issue in the creation of a product where it hopes to make 40% gross margins on the whole product.
- I continue to believe that an automobile product line would be highly detrimental to Apple’s profitability and as a result it I think it makes no financial sense to go down this road.
- However, an infotainment unit has the potential to work well, plays directly to Apple’s strengths and could make financial sense.
- This would be a good additional source of revenues and profits but is not going to have any tangible impact before 2020.
- I continue to prefer Microsoft for the ecosystem as so much less is expected of it compared to Apple or Google.
September 21st 2015: Radio Free Mobile updates its flagship research product with the publication of: Mobile Ecosystems – Gated communities
Click here for more details and purchase options
The days of walled gardens have passed and users can now come and go as they please. This results in users being able to pick and choose the services they want from different ecosystems. RFM’s analysis clearly indicates the number of services that a user takes from any one ecosystem will have a non-linear impact on the amount of value that the ecosystem owner can extract in the long-term. The iPhone 6 has allowed the iOS ecosystem to extend its lead over principal competitors Google and Microsoft. Facebook and Xiaomi are the two emerging players that warrant close observation.
- Gated communities. The key for an ecosystem owner will be to ensure that users take as many of its own services as possible. This is because there is a non-linear relationship between the number of services used and the potential for monetisation of that user by any of the three established methods: hardware, advertising or subscription.
- Google’s recent moves do nothing to solve its biggest problems which remain software fragmentation and its inability to distribute updates to its users. This combined with Google Play losing ground to the Apple App. Store puts Google in greater danger of losing its grip on Android users in developed markets.
- Facebook is far from becoming an ecosystem in its own right but its path to this goal has become much clearer. Utilising gaming through IM, media consumption through the increasing use of video in its apps and its own personal assistant service (Facebook M), would take Facebook to 79% coverage of the Digital Life pie.
- iOS has distanced itself further from its peers. Share of high-end users has grown and developers appear to be more focused on the App. Store than ever. This gives it more time to execute its long term strategy and in the short-term there is no immediate threat to its margins.
- Xiaomi had a fantastic 2014 but has completely run out of momentum as there are limits to the volumes that can be achieved via internet distribution. This means traditional methods need to be explored resulting in higher costs and even lower margins. Xiaomi cannot allow non-Xiaomi devices to run its ecosystem if it ever wants to make a decent profit
- Microsoft’s strategy for consumer is increasingly unclear. The rationalisation of its mobile business means that its consumer ecosystem will decline. Other options to address consumer via Xbox or cross device will be harder to execute and only the Digital Work ecosystem is likely to excel on the platforms of others.
Radio Free Mobile will return on Monday September 21st.
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Hardware innovation made exciting with software functionality.
- Apple returned to what it does best in making innovations in the user experience that are enabled by the new hardware upgrades that it has launched in its new products.
- The iPad Pro was by far the most interesting product launched at the event as Apple inches closer towards being able to replace more of the laptop’s functions.
- The device sports a 13inch screen and a 3rd generation A9X processor that is 70% faster than the A8 at CPU tasks and 90% faster when it comes to graphics processing.
- What really makes this product is the accessories that have been launched with it, both of which follow in Surface Pro 3’s footsteps:
- First. Apple Pencil which is a stylus that offers by far the most realistic drawing and painting experience seen on a digital device to date.
- The stylus is also very accurate and enables a range of functions and interactivity that were not really practical before.
- The stylus comes at an acceptable $99.
- Second. A new cover that also doubles as a keyboard very much like the Surface.
- This device comes at an eye watering $169 leading me to think that it has to offer a truly great typing experience to justify that price.
- The device is also limiting in that it has to be connected to the iPad Pro to function which limits its usability.
- The one thing that is still missing from this product is mouse support and if that is included in future releases of iOS9, this would take a big step in replacing the laptop altogether.
- Microsoft was a surprise act showing how Office works on the iPad Pro which speaks volumes with regards to how Microsoft’s ecosystem strategy has really been taken to heart.
- Office on iPad has been improved but the precision of a mouse and the full Office apps are still required before one can really label this as a laptop replacement.
- The iPad Pro is expensive starting at $799 and going up well above $1000 for the top model.
- This will give comfort to the Ultrabook makers and the Surface team who will have been somewhat concerned about being undercut on price.
- This device is still far from replacing the laptop but it is getting closer.
- A new version of the Apple TV has been launched with a custom version of iOS and a new remote that makes interaction with the media easier and more enjoyable.
- Apple’s vision for TV is that the future will all be about apps and has designed the product in this regard.
- To be honest, it could hardly have said anything else as this way TV fits into all of its other products rather than having to design a whole new experience from scratch.
- However, users have become used to apps and there is no reason why consuming TV through apps might not become the norm.
- This is especially the case as the TV market is fragmenting and several subscriptions will increasingly be required to ensure that the user has access to everything.
- Apple has added nice new functionality using Siri as the engine for content discovery as well as information discovery and retrieval while watching or listening.
- Apple has also added gaming, shopping and browsing through specialised third party apps in the App Store.
- However, it is clear that this is no replacement for a PlayStation or an Xbox as the games discussed and demonstrated clearly fall into the casual gaming segment.
- Casual gaming on TVs has been a disaster to date but Apple has done what it does best to the user experience and perhaps this will drive the inclusion of TV with the phone and the tablet into the casual gaming experience.
- Apple TV comes at a reasonable price at $199 for the 64GB version.
iPhone 6S and 6S+
- The new iPhones sport higher resolution cameras (12MP), 4K video, the new A9 processor, tougher cover glass and the first time inclusion of pressure sensitivity to the touch interface.
- This is nice upgrade but what was most interesting was the innovations in the user experience that Apple has created as a result of this hardware upgrade.
- Most interesting is what Apple calls peek and pop which allows a soft press to give the user a preview of a message, photo, or what is happening in an app and then a harder press to launch the previewed content or function.
- This has been implemented everywhere in iOS9 to good effect creating a nice upgrade to the user experience that is unusual in the S version of the iPhone.
- Pricing remains the same with availability in several countries on September 25 and 130 countries by the end of the year.
- This was by far the most disappointing update with a few new colours announced, 3 straps from Hermes and an update to Apple Watch OS2.
- The functionality upgrade was incremental and the presentation was stilted and halting.
- It was almost as if the chap presenting the upgrades was not sure why he was there.
- This continues to support my position on this device as an experiment and one that has massively underperformed market expectations.
- That magic spark of genius that makes the user want to go out and buy an Apple device is completely absent from this device and I think that it will continue to be niche at best.
Take Home Message
- This was a much better day for Apple than I had expected.
- The highlights were:
- The iPad Pro which inches Apple closer to having a genuine laptop replacement although it is still quite far off.
- The use of force touch to great effect in the new iPhone 6S and 6S+
- The integration of voice, touch and Siri to substantially improve on the Apple TV’s user experience.
- I think that Apple has done enough to keep itself ahead in the smartphone game but I still think that the big upgrade cycle to the iPhone 6 generation is coming to an end.
- The iPhone 6S keeps Apple looking fresh but it is not about to unleash another leg of revenue growth.
- Hence, slower growth is likely to be the outlook but on that basis the shares are not unfairly valued.
- I still prefer Microsoft for the ecosystem whose hardware innovation has earned some serious respect with Apple mimicking the concept behind two of its devices (type cover and stylus).
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Further proof that the Surface Pro 3 is the winning design.
- Dell, HPQ, Accenture and Avanade have all signed up to sell and support the Microsoft Surface Pro 3 and its descendants to their enterprise customers.
- This is despite the fact that it competes with their in-house designs.
- This is a strong endorsement of how important research and development has become in the PC market and underlines that Dell and HPQ continue to struggle with innovation (see here)
- This initiative is also incredibly important because it has the scope to take the Surface Pro from being a niche product and make it something that changes the landscape of mobile computing.
- I have believed for some time that the Surface Pro 3 is the first device that really renders the laptop form factor obsolete (see here).
- The main reason for this is that Microsoft has spent over $100m on working out how to cram the all the power and functionality of a desktop PC into a tablet form factor.
- The PC makers have come up with nothing more than laptops with a removable screen which have been rightly shunned by computer buyers.
- I believe the Surface Pro 3 is a revolutionary product as:
- First. It is the only tablet on the market that truly obviates the need for a laptop.
- Second. The use cases that are available such as a truly portable desktop (see here) and pen-based input offer the user meaningful improvements to the user experience when not in the office.
- Third. The hardware has been designed to allow the user to get more out of Office and productivity applications in general.
- In this regard it soundly beats anything else that is available in the market including the MacBook Air.
- The one area where this product fails badly is as a laptop but this is irrelevant as the whole point of this product is to offer something better.
- Unfortunately, Microsoft has been selling laptops for so long that it has marketed the Surface Pro 3 with the very average and very expensive type cover making it look like a laptop
- In my opinion, this is the worst use case for this product and in this configuration, a laptop is a better product in every regard except size and weight.
- Because Microsoft has chosen to market it this way, the users simply do not understand what this product is and what it is capable of.
- It is not until the user gets his hands on it that he can begin to understand what it is really capable of.
- With HPQ, Dell, Accenture and Avanade selling and supporting this product to the enterprise, the scope for this realisation to spread much more quickly is vastly improved.
- I have believed for some time that this is the key to recovery in the PC market in the medium term.
- Once the market realises that the laptop is obsolete, the replacement cycle of laptops is likely to quickly decrease from 5-7 years to something much shorter.
- This will cause a multi-year spike in PC shipments that is almost certain to be mistaken for a return to growth.
- In reality this will be a big product cycle that waxes and wanes.
- The capitulation by Dell and HPQ is also a strong signal that their products do not measure up and I am hoping that Microsoft is smart enough to allow all the PC makers to copy its design.
- It is this, combined with price reductions through design and volumes that will allow this to reach the mass market and pull the PC market out of its slump.
- Microsoft and Intel are the two most obvious beneficiaries from this but the rising tide of the PC market will float all boats.
- It has been far slower than I had hoped but there are at last some signs that things may yet come right.