Google Android – Road to nowhere.

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There is little point in updating software that just sits on the shelf.

  • The Android community is already getting excited about the features that will be available on the next version of Android regardless of the fact that few will have access to it for years.
  • Split screen support and more precise control of app permissions are on the top of the list of upgrades.
  • This will bring Android more closely into line with what iOS can offer but if it is not in the hands of users, it is useless.
  • This underlines the single biggest problem that Google faces.
  • Google has virtually no control over how and when its software is distributed and installed on the vast majority of its devices.
  • This means that if operators and handset vendors do not want to update their devices, there is very little that Google can do about it.
  • Some handset vendors do not want to update their existing devices because they fear that it will dis-incentivise users from buying a new handset.
  • This is a major reason why 99.5% of all Android devices remain on older versions of the code meaning that almost all Android users are not benefitting from Google’s latest innovations.
  • In contrast, iOS 9 is already on 80.2% of all iOS devices despite the update being made available at roughly the same time.
  • Effectively, new versions of Android are really only appearing on new devices ensuring that vertical fragmentation (different versions of the same code) will continue to persist for the foreseeable future.
  • RFM research indicates that Google’s ecosystem enjoys less usage and lower loyalty than iOS largely due to usability issues and endemic software fragmentation.
  • In order to fix this Google needs to take control of the user experience by exerting greater control over Android itself but while it is incapable of distributing the updates, they are next to useless.
  • To make matters worse, it gives competitors time to copy Google’s innovations and get them into the market long before Google can do so itself.
  • I have long believed that the only way in which Google can fix this is by taking complete control of both the software code as well as its distribution.
  • This spells the end of open source within the Android camp and I suspect that in a few years iAndroid will simply be a series of proprietary ecosystems sitting on top of a tiny Android / Linux kernel.
  • This will make life much harder for developers as the differences between the different ecosystems on Android will become much greater, making supporting them more difficult.
  • However, all Google really cares about is collecting traffic on its servers and keeping users in its ecosystem.
  • This approach is the only way in which this is likely to be achieved and I fully expect Google to close Android down in the medium term.
  • This is bad news for the Android alternates like Cyanogen, Xiaomi and anyone else building ecosystems on Android as they will have to do far more coding in the future for the same amount of money.
  • In the meantime Google’s ecosystem remains vulnerable to market share loss which has already occurred in some volumes at the high end.
  • These are not the only cracks appearing in the Google ecosystem which taken together makes it look more vulnerable than it has ever been.
  • The door has never been more open but competitors like Microsoft, Amazon and Yahoo appear unable to rise to the challenge.
  • I continue to think that Google shares have run past their fair value and I prefer Microsoft and Samsung in the short-term and Facebook in the long-term.

Autonomous Autos – Filibuster

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California is a great example of why this will take ages.

  • The California department of motor vehicles (CDMV) has made a proposal that obviates the use case of a self-driving vehicle in a large number of use cases.
  • The CDMV is proposing a law that requires a person who is licenced to drive the vehicle to be present at all times while the vehicle is in motion.
  • If this were to become law it would completely destroy the promise of freedom for those that can’t drive, the promise of releasing parents who become taxi services for teenage children and any form of automated delivery service.
  • There are substantial safety, legal and liability issues that relate to driverless cars and all these will have to be addressed before autonomous cars can really fulfil their potential.
  • This means that regulations and laws will have to be adjusted to make autonomous driving into account and when it comes to these areas time is not considered to be a precious resource.
  • Consequently, I suspect that the technology will be available to a commercial grade long before the lawmakers will allow it on the road in any meaningful way.
  • Many automakers have set a deadline of 2020 by when they expect to have a commercial offering in the market but I think that it is doubtful that these vehicles will leave the factories at that time.
  • Furthermore, while the vehicles might be ready by 2020, I also doubt that map will be.
  • I have long argued that it takes at least 6 years to make a good quality map and autonomous vehicles require a map of much greater accuracy than those that exist today.
  • Google and HERE have only just begun creating the new map meaning that it could be 2022 before its ready for the vehicles.
  • Hence, I think it is going to be way beyond 2020 before autonomous vehicles begin impacting the lives of the average consumer.
  • This is good news for the automotive industry which is notoriously slow to adapt to and implement new technology as it will have more time to defend its position against the new entrants.
  • Over the next few years I expect that every state and every country around the world will weigh in with its own rules and regulations that car makers will have to meet to get their cars on the road.
  • The net result is that the market will take much longer than expected to develop and those that are now rushing to get to market are likely to arrive way too early.
  • Consequently I can see lots of ventures struggling to keep the lights on and being acquired by the larger, slower moving companies.
  • I do not expect to be hiring an autonomous vehicle in Silicon Valley much before my retirement.

Facebook – Go to place

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Facebook has everything it needs to disrupt classifieds.

  • Facebook is jumping into the world of classifieds and recommendations but it will take a lot more than just throwing it out there to make it successful.
  • In the US this is aimed squarely at Angie’s List and Yelp but the performance of the searches that Facebook makes for local goods and services so far is somewhat patchy.
  • What Facebook is doing is providing the ability to search through businesses that have a Facebook page and using user reviews on those pages as a rating system.
  • This sort of service is a winner takes all game and here I apply my rule of thumb for network companies.
  • Any company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit.
  • In social networking and messaging, Facebook is already there but looking at the service that has been launched (see here) quality, usage and engagement all remain issues.
  • For example, a business that has a better Facebook page will appear to be superior to competitors even if the service that it offers is not.
  • The key to this will be to use the strength of the social network and encourage its users to look for goods and services that exist within its own network rather than look elsewhere.
  • To do this, I think it will be recommendation by people that the searcher already knows that will make it compelling and there is no sign of this yet.
  • A review by someone you already know and trust is far more valuable than the review of a stranger and this is something that Facebook’s competition will really struggle to emulate.
  • This is where Facebook has the potential to deal massive damage to the likes of Yelp and Angie’s List.
  • However, execution will be critical as Facebook must now encourage its huge user base to give the listings a try as well as make it easy and fun to use.
  • It will also need to tie it in well with Facebook M (see here) which is Facebook’s answer to Siri, Google Now, Cortana and the like.
  • Social based recommendations has the potential to undermine the online classifieds as they exist today, but this is much more difficult than it sounds.
  • Once an online destination is known as the “go to place” for something it takes a truly mighty effort to undermine it.
  • The classic example of this is Craigslist which offers a poor user experience but has easily managed to resist attempts by well financed and much better offerings to undermine it.
  • This is where Facebook’s ingenuity and its ability to execute really becomes important as this is very far from a guaranteed success.
  • Like Yahoo, all of the elements are in place but Facebook has to put them together in a compelling and fun to use way.
  • This is what Yahoo appears to be completely incapable of doing.
  • Facebook has executed superbly when it comes to the monetisation of mobile and of video and so I think it has a good chance of pulling this off.
  • Facebook remains an embryonic ecosystem but one that has substantial upside if it can continue its record of excellent execution.

GoPro – Needs a hero

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GoPro must make the ecosystem its top priority.

  • I think that GoPro will soon begin to really struggle as the hardware element of its product becomes less and less relevant.
  • The outlook for GoPro is exactly the same as it is for almost every other seller of consumer electronics: execute on the ecosystem or be commoditised by Asia.
  • There is no doubt that GoPro makes fantastic cameras and its ability to cram 4K video with good frame rates and storage into such a small package and still have good battery life is second to none.
  • However, the competition is not standing still and inexorably it will close the gap on GoPro and erode the hardware advantage away.
  • This combined with a slowing market for its products means that GoPro has to find another way to engage with its users to ensure that they will always buy a GoPro product and that they will pay a premium for them.
  • This means that GoPro must focus on the user experience and the services that it offers with its cameras and it must enter the ecosystem.
  • Most users shoot far more video and take far more pictures than they will ever use and smart software that can help the user sort through and keep the good stuff will add value.
  • Furthermore, there is a lot that can be done in the cloud and around building a community to which users want to belong and engage with.
  • Unfortunately, I think that GoPro has neglected to really focus on these areas and now finds itself behind the curve when it comes to creating an easy and fun to use experience.
  • I also worry that GoPro has not really internalised how important the ecosystem is to maintaining its brand equity, user preference and most important of all margins.
  • It is still not too late as its hardware is still far ahead, but I would be looking to see real focus on and improvement in the user experience and in the community before the end of 2016.
  • In the meantime, the outlook is pretty tough with demand unlikely to live up to the 15% growth predicted by the consensus estimate.
  • Fortunately, GoPro’s PER multiple is now at a much more reasonable level in the mid-teens but if there is no growth in 2016, it could fall further.
  • It is at this point that it could become an acquisition target and I could see Google or Sony considering on picking up GoPro at a bargain price.
  • I think it much less likely that Apple will buy it.

Magic Leap – Field of dreams

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I think that Magic Leap has solved the field of view problem in AR.

  • There are many augmented reality (AR) companies out there but the best financed is almost certainly Magic Leap.
  • AR is very different from virtual reality as VR creates an entirely artificial world while AR superimposes virtual objects on top of what one can already see.
  • When I think about use cases, AR has far more applications that users are going to be willing to pay for in contrast to VR which looks to me to be limited to high end games and media.
  • On top of a massive $542m round in October 2014 led by Google Ventures, the company is raising another $827m with a post money valuation of around $4bn.
  • I assume that this round will also be led by Google which I suspect wants the right of first refusal on acquisition should the technology prove to be commercially viable.
  • Although I think AR has much greater commercial potential, it is much more difficult to get right and I think that it is here where the vast sums are being invested.
  • Every demonstration that I have seen is using the same basic idea to superimpose virtual objects upon the real world.
  • From the patent applications of Magic Leap and commentary from those who have been able to have a demonstration, I believe that Magic Leap is doing the same.
  • The user wears headgear through which he has normal vision of his immediate surroundings.
  • On each side there is a projector (one for each eye) which shines the virtual image across the front of the lenses through which the user sees the real world.
  • In those lenses are waveguides which pick up the light being shone across the lenses and direct it into the user’s eye giving the desired superimposition.
  • The problem is that today, limitations in the technology mean that the virtual world can only be superimposed on a portion of the user’s field of vision.
  • Effectively there is a letter box within which the virtual world exits and from which it cannot escape.
  • For many commercial and medical purposes, I don’t think that this is a problem but for the consumer it’s a deal breaker.
  • This is why I suspect that the first applications of offerings like Microsoft HoloLens and Atheer Air are likely to be focused on commercial, medical and educational use long before consumer.
  • I think that Magic Leap is going after the consumer and on that basis, I think it has found a way to fix the limited field of view problem.
  • This would also explain why its hardware is still much bigger than its competition are and why it could still be another 2 years before there is a product.
  • Developer units of Hololens and Atheer Air are shipping in early 2016.
  • Furthermore, I think it is looking to create a much more intuitive and immersive experience and consequently the system needs to track things like eye and body movements and be able to properly understand them.
  • For the consumer I still think that there are three key criteria that need to be met before real traction will result.
  • These are hardware, user experience and ecosystem and these are discussed in more detail here.
  • Hardware and user experience will be critical to getting in the game but I strongly suspect that it will be the ecosystem that wins it.
  • Here, having Google on board will be a major help but it will need a much wider base of third party developers if it ever wants to hit the mainstream.
  • With a valuation already at $4bn and the probability that more will be needed, massive success is already being assumed.
  • This is very far from guaranteed and I suspect that as Magic Leap endeavours to meet the hardware criteria (see here), the size of the technical challenge will become exponentially larger.
  • This is the biggest challenge that Magic Leap faces as I think that it is already aware of and has dealt with the user experience and is planning for the ecosystem.
  • In any event it is going to have to sell huge volumes of what is initially going to be a niche product just to keep its investors happy.

Yahoo! – Extended sentence.

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Investors are sentenced to another year of fumbling and uncertainty.

  • Yahoo!’s management appeared weary and browbeaten when it announced that instead of spinning out Alibaba, it would spin out everything else leaving Alibaba alone inside the old company.
  • The rationale behind this change is simply that spinning Alibaba carries a risk of substantial taxation while doing the opposite does not.
  • The problem is that spinning out the core assets is much more complicated which condemns investors to another year of waiting to realise the value that obviously does exist inside this company.
  • As things stand today, the core business of Yahoo! is valued at zero when taking the value of its investments in Alibaba and Yahoo Japan into account.
  • This business may not be growing and may be suffering from very poor execution, but it remains profitable and cash generative.
  • Even if nothing happens and Yahoo! has its lunch slowly eaten by Google, Facebook et al, the core business is still worth much more than zero.
  • This is because it could be managed for oblivion with costs being trimmed to match the revenue declines and extracting as much cash as possible.
  • The problem is that Marissa’s track record over the last three years has been awful.
  • She has invested substantial amounts of money in assets to bring the company back to growth but still revenues chug along at around $1bn per quarter.
  • Investors fear that money will continue to spent on investments that fail to rescue the company and in a very extreme case, the core business could in theory be worth zero.
  • This likely to be very far from reality but with another year of uncertainty ahead, the outlook remains very weak.
  • This is because, Yahoo! is still massively underperforming its potential and is struggling to hold onto its executives.
  • Yahoo! has a leading position in Digital Life which combined with its 600m mobile users should be generating $3,923m in mobile advertising revenues per quarter.
  • Unfortunately, in Q3 15A Yahoo delivered $271m in mobile revenues underperforming its potential by 93%.
  • To make matters worse, management appeared to be content with this figure leading me to believe that it does not really understand what it should be doing nor how it should be doing it.
  • The reason for this underperformance is clear.
  • It has all of the assets to create a vibrant and thriving ecosystem but it has failed to put the pieces together.
  • Consequently, Yahoo! scores very badly on RFM’s 7 Laws of Robotics measures which assess the quality and appeal of a digital ecosystem.
  • The realisation of this potential will take superb execution followed up with ingenious marketing, neither of which the current management team seem capable of.
  • I think a management change is on the cards and Marissa’s upcoming maternity leave offers her an opportunity to make a quiet and graceful exit.
  • I have no doubts that this would be well received with the shares regaining a little value for the core business.

Firefox OS – The Walking Dead.

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Firefox joins the stagger of zombies that somehow lives on in open source.

  • Mozilla has announced the end of Firefox OS for mobile operators, ending a three year crusade to do the impossible.
  • This comes hot on the heels of Jolla being close to shutting up shop (see here) and the almost complete disappearance of Ubuntu Touch.
  • Mozilla is holding its annual developer conference and has admitted that its team could not deliver the best experience possible which was responsible for its lack of tangible traction.
  • As a result it will no longer offer Firefox phones through carriers although the code will continue to live on in some form within the open-source community.
  • Nearly 3 years ago, FireFox OS launched with much fanfare and promising that it could offer mid to high end smartphone performance at mid to high feature phone prices (see here).
  • Unfortunately, I have long suspected that this promise defied the laws of economics and the aggressive price declines that plagued Android meant that Firefox OS never really stood a chance.
  • Consequently, its lack of scale meant that it could never match the performance of Android within its price point.
  • Furthermore, its lack of an ecosystem meant that users could see no reason why they should buy it.
  • The result has been no real traction resulting in its withdrawal from the market.
  • It is becoming increasingly clear that there are really only two options for those wishing to offer a mobile device.
  • Either one gets on board with Google meaning that there is very little scope for differentiation or one does the whole thing oneself (DIY).
  • (I consider that those creating non-Google Android devices are or soon will be doing virtually the whole thing themselves as Google increasingly moves functionality out of open source).
  • The problem with DIY is that it requires a significant amount of investment to make a decent, differentiated product meaning that substantial volumes are required to make the DIY route viable.
  • This is why it is only the big players with substantial resources and high user numbers that are likely to be able to go down this route.
  • The result is likely to be a continuing concentration of the market meaning that only those with an ecosystem or a technological edge will be able to make a decent return.
  • For everyone else a dreary, commoditised half-life awaits that only massive volumes will be able to improve.
  • So far only Samsung and Google have been able to earn a decent return outside of iOS but in China the big ecosystems are also faring quite well but are investing heavily to become full ecosystems.
  • Hence, I suspect that the smaller offerings are likely to continue failing unless someone can come up with a compelling differentiator.
  • The problem is that everyone thinks that they have one right up to the moment that they join the legion of the walking dead.

HERE & Autos – Ejector seat.

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HERE will be key to ejecting Apple and Google from the car.

  • The three German automakers (Audi, BMW and Daimler) have closed the deal with Nokia and are now masters of the 6,500 strong mapping organisation HERE.
  • The new owners are committed to HERE remaining an open and independent company and do not intend to have any operational influence over the running of HERE.
  • Furthermore, the new owners are open to expanding the shareholder base to other partners and not just those from the automotive industry.
  • Consequently, I think that the shareholder base will expand to include many other members of the automotive industry and I think all members will benefit from wider ownership.
  • This is because, the more automakers there are as shareholders, the more data is likely to be contributed back to HERE to make the map and the overall service better.
  • Furthermore, if car makers can incentivise the consumers to allow their data to be anonymously fed back into the map, the cost of maintaining the overall map will become much lower.
  • This does not have to be limited to roads but could also include driving conditions, fuel consumption as well as data from the engine management system of the car itself.
  • This would provide significant differentiation from Google Maps and make up for the fact that Google Maps currently is far better than HERE when it comes to search and for points of interest.
  • However, this data will only really improve the map that can be sold to enterprises and used by the consumer.
  • For autonomous driving, a much more precise and higher resolution map as well as a 3D representation of the road and its hazards needs to be created.
  • For this, HERE will need to deploy its vehicles with new equipment capable of collecting 700,000 data points per second.
  • Consequently, the three sixes rule of having a global map (6,000 people, $600m in cost and 6 years) is likely to still apply.
  • Furthermore, I think that this will see the end of Tom Tom’s ability to compete in maps as I do not believe that it has the resources to create a global map of this quality.
  • The most important aspect of this acquisition is that mapping and location is the most important Digital Life service in the automobile.
  • While users spend only 3% of their time on smartphones and tablets using mapping, that figure is far higher in the automobile.
  • Just as telephony and SMS was the starting point for smartphones, so I think that location is the starting point for the Digital Life services in the automobile.
  • Consequently, with HERE safely in the hands of the automotive industry, it has taken an important step to ensuring that Google and Apple do not turn cars into commoditised smartphones.
  • The key to this is for the automakers to:
    • First, allow Google and Apple to come into the car such that smartphone users are kept happy.
    • Second, at the same time ensure that the location based services and data generated by the automobile are the back bone to their own differentiating services that are both useful and fun for the user.
  • This is a huge ask for the automakers many of whom are just beginning to realise how important software is but it is one they must conquer at all costs.
  • Failure to do so will result in the users demanding Apple, Google etc. being allowed in which will be a disaster for long term differentiation and profitability.
  • Taking the helm of HERE is a first and critical step in this journey.

Mobile gaming – The last wilderness.

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Mobile gaming is the last wilderness but explorers are coming.

  • Mobile gaming is the single largest segment of the Digital Life pie but as of yet there is no dominant player.
  • There are three very strong multiplayer gaming offerings (Sony, Microsoft and Tencent) but as of yet none of them have managed to break out of their respective niche (consoles and China).
  • Apple and Google are the two dominant ecosystems outside of China today, but they too, have both failed to create a multiplayer gaming environment that generates meaningful engagement from users.
  • Users of smartphones spend 25% of their time playing games while for tablet users its 51%.
  • Putting these two together leads RFM to estimate that mobile device users spend 31% of their time playing games making gaming the largest segment ahead of social networking at 21%.
  • Consequently, in terms of engagement and monetisation opportunity, gaming is the single biggest opportunity in mobile but the segment remains completely open.
  • It is the games makers like Supercell, King and Big Fish Games who are capitalising on gaming but in terms of the incremental monetisation opportunity created by having a multiplayer environment as part of an ecosystem, very little is happening.
  • However there are signs that this is beginning to change with both Activision Blizzard (see here) and Tencent starting to make their move into this space.
  • Activision has done this through the acquisition of King Digital while Tencent is moving outside of China using its investment in Glu Mobile.
  • Tencent’s idea is to make its most successful Chinese games available to a wider audience but I suspect that this is unlikely to work.
  • Just as foreign games have little appeal to Chinese users, Chinese games will have little appeal to non-Chinese consumers.
  • If Tencent really wants to conquer this space outside of China, it will need to create a thriving multiplayer community based on games that non-Chinese users want to play.
  • Activision Blizzard also has a long way to go as although King has 500m active monthly users, they only play Candy Crush and nothing else.
  • Activision will have to create a compelling offering to entice these users to play mobile versions of its other offerings and thereby turn a one hit wonder into something that will last.
  • This gives both Sony and Microsoft time to extend their leading gaming offerings into mobile, but so far their efforts have had very little success.
  • For both of these companies, gaming is their best chance to get a foothold in mobile as their console offerings are very strong and the segment itself remains wide open.
  • However, they have to act soon as others have seen this gap and are moving to make the most of the opportunity.
  • The time to execute is now.