Research Publication – Mobile Ecosystems – Artificial Intelligence – Men and boys.

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December 16th 2016:  Radio Free Mobile updates its flagship research product with the publication of: Mobile Ecosystems – Artificial Intelligence – Men and boys.

RFM research subscribers will receive their copy directly by email. 

Click here for a sample and here for purchase options

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The difference between men and boys will be the brains of their toys. Artificial Intelligence promises to substantially improve the Digital Life services offered by the ecosystems which has underpinned a period of feverish investment. Despite this activity, developments are at a very early stage with none of the big challenges of AI being close to being solved. It is the search engines that are ahead in AI followed by Apple, Microsoft and Amazon. AI remains the Achilles heel of Facebook.

  • Artificial Intelligence appears at last to be coming of age. The prospect of making real returns on investment has driven all of the ecosystems to invest heavily.
  • Three goals for AI. AI is still in its infancy with three big issues to be solved. These are: 1) the ability to train AIs using much less data than today, 2) the creation of an AI that can take what it has learned from one task and apply it to another and 3) the creation of AI that can build its own models rather than relying on humans to do it. Performance in solving these three problems is likely to separate the men from the boys in the long-term.
  • Early days. RFM finds that most claims to AI are simply advanced statistics and that true AI is at a very early stage. Even the best have made little headway with the three goals of AI.
  • Law of Robotics. There is no doubt that good quality AI has the potential to significantly improve the quality of Digital Life services offered by the different ecosystems. Consequently, RFM sees AI being a major differentiator and now includes an assessment of AI as Law of Robotics No. 8: An ecosystem must have good artificial intelligence.
  • Digital Assistants are the first real deployment of AI in ecosystems and are being offered free in order to generate the data that is needed to continually make them better. Consequently, digital assistants are a good first yardstick of each ecosystem’s competence in AI.
  • Search engines. AI still requires vast amounts of human labour, great skill and copious data to develop which hands a substantial advantage to those that have been doing it the longest. Understanding data has been the livelihood of the search engines for many years. This is the main reason why it is Google, Baidu and Yandex that are the global leaders in AI and all of them are aggressively investing to maintain their advantage.
  • Fast followers are made up by Microsoft, Apple and Amazon. Both Microsoft and Amazon have scope to earn a return on AI in their businesses that are not part of the ecosystem. Apple appears to have voluntarily hobbled its AI development with differential privacy.
  • Facebook is the laggard with one of the weakest positions in AI globally. RFM research indicates that Facebook has real problems with automation. These have to be fixed otherwise providing customised services to 1.8bn users manually will be cripplingly expensive

Yahoo – Calculated gumption

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Even if Verizon walks, there is value in Yahoo. 

  • Yahoo has revealed yet another hack casting further doubt over its deal with Verizon, but thanks to Alibaba, there still remains a good opportunity for those with a calculator and a bit of gumption.
  • Yahoo’s latest revelation involves yet another hack, this time twice the size of the previous one with an estimated 1bn user accounts affected.
  • To me, this looks like essentially all of Yahoo’s users have had their details stolen with half of them having suffered the indignity twice.
  • This latest event appears to have occurred over three years ago in August 2013, and worryingly, Yahoo has no idea how the incident occurred or what went wrong.
  • Alongside 1bn users, are 150,000 accounts belonging to US government, military and law enforcement personnel who have given Yahoo their professional contact details in order to unlock their accounts in the advent of a lost password.
  • For the last 10 years Yahoo has neglected its Internet assets but has still managed to enjoy high usage and engagement in the fixed Internet despite its failure in mobile.
  • It is this engagement that Verizon is paying $4.8bn for but I think that this latest hack is just another reason for users to finally wash their hands of Yahoo and use something else much safer such as Gmail, mac.com or outlook.com.
  • Furthermore, Yahoo has been experiencing a fall-off in traffic, falling one place in Alexa’s global rankings from No. 5 to No. 6, which is an initial indication that users have already started to leave.
  • Consequently, I think that Verizon has a fiduciary duty to its shareholders to at least demand a discount on the acquisition price or risk an ignominious write off not unlike that suffered by HP after its acquisition of Autonomy.
  • Fortunately for the shareholders of Yahoo, no such write-off is likely as the core business now makes up only a tiny part of the valuation of the company.
  • This comprises:
    • Alibaba in which Yahoo owns 383.6m shares with a market value of $34.9bn.
    • Yahoo Japan in which Yahoo owns 35.5% with a market value of $7.6bn.
    • Net Cash of $5.3bn.
    • Patents which I have previously valued at $500m but am becoming increasingly concerned that they are of little value.
    • Hence, I am reducing Yahoo’s patent value to zero.
    • Core business for which Verizon is nominally paying $4.8bn but given the risk that it walks away, I am now valuing it at zero.
  • This sum of the parts calculation values the equity of Yahoo at $47.8bn which with 948.5m shares in issue gives a price per share of $50.4.
  • This is some 23% above where the shares are currently trading meaning that, even in the advent of Verizon walking away and the core business imploding, there is still significant upside in the shares.
  • Yahoo looks very attractive but it will stake someone with gumption to risk real money in the shares.

Android Things – Good intentions.

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The road to hell is paved with good intentions. 

  • Google has updated its OS for Internet of Things (IoT) with the release of a developer preview, but I fear that if the OS is released to open source, the same chaos and insecurity that hampers Android will prevent this from becoming successful.
  • Releasing software to open source in the fixed world works well and all benefit from it, but in mobile devices it has caused nothing but problems for the last 15 years.
  • Android Things is an update of Brillo (launched at Google i/o in 2015) which to date has seen very little traction.
  • What has been more successful is Weave which is a communications layer that enables all of these devices to talk to each other as well as interact and integrate with Google services such as Google Assistant.
  • This has fared considerably better and is currently being implemented by Phillips, Samsung, Belkin, TP-Link, Honeywell, Wink and a number of others.
  • Using Android on IoT devices is fraught with problems as:
    • First: Most IoT devices today are not required to do much other than turn things on or off or relay the data from the sensors to another unit.
    • Consequently, using a smart operating system such as Android even when it has been stripped down appears to be overkill.
    • This is because a completely proprietary real time operating system (RTOS) will be easier and cheaper to deploy and will probably result in much longer battery life.
    • It also has the benefit of giving its owners complete control which is something that they wont have using Android Things.
    • Second: If the software is open source then those that use it are likely to pick and choose the elements and the APIs that they need for their device and drop the rest.
    • This means that every device will be running a slightly different version of Android Things making updates, security and software management almost impossible.
    • It will also make it much more difficult to include devices as part of a wider ecosystem as each device will need to be assessed to see what it has and whether it will work with other devices and services.
  • This is why I think that it is important that Android Things is like Android Wear and Android Auto which are not open source and remain tightly controlled by Google.
  • That way the software will be much more easily managed with timely updates and consistent APIs.
  • Despite this, I think that the piece of this puzzle that really matters to Alphabet is Weave.
  • Weave connects all of the devices together as well as connects them to Google services such as Google Assistant.
  • Furthermore, Weave sits mostly on a server which is fully under Google’s control and which it can update at anytime.
  • It is this piece that allows all of the devices to be integrated together (like HomeKit) and controlled from one place such as Google Assistant.
  • This is critical as it is this piece that will pass all of the data back to Google to help it improve its AI as well as monetise the usage in the normal way.
  • Consequently, I suspect that the best option for IoT device makers will be to do their own thing on the device but then ensure that the device can integrate with Weave such that they can benefit from being part of the wider ecosystem.
  • HomeKit and Weave are just two of a myriad of solutions that are available for IoT devices which in itself is a big problem.
  • This is because it is very difficult to decide which one to support and as a small company this could easily be an existential choice.
  • I think that these problems will keep IoT as a theme with a lot of promise but very little substance in 2017.
  • The two sub-segments of smart home and e-health are likely to emerge first but it is going to take far longer than the press releases would have us believe.
  • Alphabet remains on my indifferent list with most of the good news and none of the bad already priced into the shares.
  • I prefer Tencent, Baidu and Microsoft.

China Ecosystems – All about vertical.

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Greater verticalisation looks like it is coming to China. 

  • It looks like Qihoo is having another go at the smartphone market with the purchase of Blephone but behind this I see the next stage of competition between the Chinese Ecosystems.
  • Baidu, Alibaba, Tencent, (BATmen) Qihoo are all very good at what they do but in the mind of the users they are quite focused in their particular niches.
  • This is why the Chinese market is so fragmented as most users use services from all of these providers rather than sticking with just one.
  • In developed markets, users predominantly spend their Digital Lives in one ecosystem or another but not so in China.
  • This is how the sum of all the users of BATmen and Qihoo services is comfortably more than 3x the number of total smartphone users in China.
  • While the market and usage is growing, these players can grow nicely but as it begins to slow, they will need to compete more aggressively with each other in order to maintain their growth.
  • RFM research (see here) indicates that the best way to encourage users to try a new service over one that it is already established in the market, is to install the service on the device at the factory and set it as default.
  • This is common place in developed markets but in China devices are effectively blank when the reach the user and the user then picks and chooses which services he wants to download and use.
  • This is why I think Alibaba has purchased a controlling stake in Meizu and why it has created its own version of Android called Yun OS.
  • Now it looks like Qihoo is going the same way with the purchase of Blephone following its ill-fated relationship with CoolPad during 2015.
  • Qihoo has nearly 900m users of its mobile security software on mobile devices from which it derives advertising revenues but it has been trying to diversify away from this for some time.
  • The areas into which it is diversifying bring it directly into competition with the much bigger and much stronger BATmen but if it has control over hardware it has a chance to encourage users to try its service over those from the BATmen.
  • The problem of course is that Blephone does not have the volume of devices in the market to make a real difference but it is this same thought process that could lead to the acquisition of Xiaomi.
  • Xiaomi has all of the elements required including a good user experience and good volume in the market making it a prime candidate for acquisition by one of the BATmen.
  • Here I would put Baidu or Tencent at the top of the list as neither have yet made a play to assert greater control over hardware.
  • Xiaomi faces another very difficult year in 2017 and while it drifts sideways, I can only see its valuation continuing to sink and its investors getting itchy feet.
  • In China Tencent and Baidu remain my top two choices.

Samsung – Edge dancer.

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Samsung is left with very little on Android devices. 

  • Following the disaster of the Galaxy Note 7, Samsung really needs the Galaxy s8 to be resounding success to repair its damaged reputation but I see it being limited in what it can do by its deal with Google on the ecosystem.
  • In January 2014, Samsung and Google signed a deal where Samsung agreed that it would no longer compete with the Google ecosystem and would consign itself to places where Google decides not to play (see here).
  • Since that time, Samsung has managed use the fact that it outsells its nearest Android competitor by more than 2 to 1 to gain significant scale benefits to bring its margins back to double digit territory.
  • However, with Huawei snapping hard at its heels it is once again looking to see if it can also use software and services to eke out some differentiation instead of relying purely on scale.
  • To that end the Samsung Galaxy s8 is expected to sport a new look and feel to the user interface, more control of battery usage as well as features to make the user experience more intelligent and intuitive.
  • This is where Samsung’s acquisition of digital assistant Viv comes in and it is here that I see real problems.
  • This is because Google already has a service called Google Assistant and it is almost certain to be part of the agreement that Samsung signed with Google in 2014.
  • This means that on Samsung’s own devices it will be Google Assistant that sits on the home button and Google Assistant that will be set as default.
  • This leaves Viv out in the cold and it appears that Samsung aims to use it as part of making search and discovery on the device more intelligent which is something Google Assistant does not really do.
  • Viv has been demonstrated as a very cleaver assistant that understands complex multipart questions as well as context but Samsung will be unable to do anything meaningful with this functionality on Android devices.
  • This is a great example of how Samsung is left with very little on Android and will be permanently left dancing around the edge of the Google ecosystem.
  • Samsung remains completely free to do whatever it likes on Tizen smartphones but the problem is that no one buys them as they have no ecosystem and no 3rd party apps in volume.
  • This will leave Samsung still fully reliant on the volume advantage that it has over Huawei for its long-term profitability because the users are still almost certainly going to identify with Google when it comes to software and services.
  • Fortunately for Samsung, Huawei has had a pretty tough year in its home market with the gains made by Vivo and Oppo (see here) and whether it has the stomach for a very expensive battle with Samsung is increasingly unclear.
  • The net result is that I don’t think that innovations around artificial intelligence (Viv) and UI tweaks will curry much favour with the user base leaving Samsung still dependent upon volume.
  • Samsung’s share price has more than recovered following the Note 7 recall and is once again close to my KRW1.8m valuation.
  • Hence, I remain pretty indifferent to Samsung especially as the brand damage from the recall has yet to make itself clear.

Magic Leap – Backwards leap.

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Massive setback means more money likely to be needed 

  • It appears that Magic Leap has hit a major problem with the commercialisation of its technology and the question really is: are its investors patient enough to hang on while a new solution is found?
  • Magic Leap is an augmented reality company that has a very high profile because:
    • First: It has promised a user experience that other augmented reality companies can only dream of.
    • In most systems the virtual world can only be superimposed on a portion of the user’s field of vision.
    • Effectively there is a letter box in front of the user within which the virtual world exits and from which it cannot escape.
    • For productivity applications, this is not really a problem but for the consumer, there is no way this will fly.
    • This is the problem that I think Magic Leap has solved and if it can produce a good product, it could dominate the consumer market for AR (see here).
    • Second: It has very high profile investors (Google, Alibaba etc.) and a valuation of $4.5bn.
    • $4.5bn is a sky-high valuation for a company with no product, no prototype and no time frame within which a product will come to market.
  • Despite some rumblings around whether one of its latest demonstration videos is genuine, the older demonstrations show clearly that Magic Leap offers a full superimposition of the virtual world onto the real.
  • However, this is not where the problems that I can see are to be found.
  • The problem is that the device is huge, clunky and uncomfortable to wear making it completely unsuitable for the consumer.
  • I have long held the view (see here) that for AR to work, the entire unit needs to be no heavier or intrusive than a regular pair of glasses.
  • The original idea was that Magic Leap would use a laser shone through a vibrating fibre optic lens to create the light field (see here) but it seems that this solution does not work properly.
  • A recent demonstration (the information) of a head unit attached to a PC with multiple cables produced images that were of a lower quality than Microsoft’s HoloLens.
  • It looks like this has laid bare the weakness in the laser / fibre optic solution in enabling a move from being the size of a fridge into a head unit.
  • Furthermore, the press does not like being made to feel foolish and so the knives are now out following the possibility that the latest video is a concept rather than real footage.
  • Either way, it looks like it is back to the drawing board for Magic Leap in terms of figuring out how to ut full field of view AR into a pair of glasses.
  • This is a huge problem as I suspect it means a lot more time and a lot more money.
  • With no revenues and aggressive hiring over the last 12 months, Magic Leap’s burn rate must be tens of millions of dollars a month raising the likelihood of another funding round probably at a lower valuation.
  • The big question is whether its investors will continue to support the longer development time required and if so, what price will they pay?
  • The longer development time also gives rivals such as HoloLens, Meta and Atheer Labs time to fix their issues with the field of view.
  • With risks increasing and sentiment souring the valuation can only come down.

 

ARM vs. Intel – Silver bullet?

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Last time it was software. This time its emulators 

  • Qualcomm and Microsoft have announced that Windows is once again coming to the ARM processor but this time the approach is completely different to the disaster that was Windows RT.
  • In Windows RT, Microsoft modified Windows 8 such that it would work on an ARM processor and in the process killed flexibility and backwards compatibility to legacy software.
  • The result was a platform that was shunned by both developers and users, completely killing any hope that ARM would gain penetration in Intel’s home turf of PCs.
  • The fact that Intel has cut its lower end Atom line of products that aimed to compete with ARM in Android tablets has left space in the market for these products to grow into.
  • This time the approach is completely different as Qualcomm and Microsoft have produced an x86 emulator that fools the software into thinking that there is an x86 chip present.
  • The net result is that any Win32 and universal Windows app will run on the device with no modifications being required by the developer.
  • The net result is hoped to be cheaper, fan-less, always-on, mid to low end PCs that have longer battery life than their counterparts powered by Intel.
  • Qualcomm and Microsoft have also promised that Adobe Photoshop, Microsoft Office and Windows 10 games will all run on these products and it is here that I find the big caveat in this strategy.
  • This caveat is performance.
  • Intel processors may be power hogs but they offer blistering performance in real world devices as well as in benchmark tests.
  • ARM has been able to match some of the benchmarks but has never been able to come close to Intel in real devices.
  • This is why the mention of Photoshop, Office and games is so important as these three are well known to be very processor intensive.
  • Their requirements are so high that the software is written directly to the processor (written to the metal) to avoid any lags created by going to the processor via the operating system.
  • This is where the problem will occur as processor heavy apps will no longer be written directly to the metal but instead will be going through the emulator.
  • The emulator process is as follows:
    1. Translate requests from the x86 programs sitting on top of it into the RISC instruction set that ARM understands.
    2. Execute the request on the ARM processor.
    3. Translate the results back into the x86 instruction set so that the app can run.
  • Consequently, the emulator will incur additional processing overhead as well as consume power.
  • The big questions are how much will it consume and will it have an impact on the overall user experience?
  • For Intel, this is a critical question because if there is no impact it could see its market share in the mid-range PC market (most of the volume) come under serious threat.
  • In Q3 16A Intel reported non-GAAP gross margin of 64.8% compared to Qualcomm at 58.9% but if I remove the profits from licencing, I estimate that Qualcomm’s chip gross margin is around 40%.
  • Consequently, if Qualcomm’s Snapdragon chipset plus the emulator can match Intel’s performance, Intel will have to cut its prices to stay in contention.
  • This could see its gross margin come under sustained pressure as the first real challenge to its monopoly finally hits home.
  • History is on Intel’s side as emulators on battery powered devices have always impacted the user experience so much that the experience failed to win over users.
  • In order to put pressure on Intel, the Qualcomm powered Windows 10 devices will have offer the same level of functionality and performance, better battery life as well as a cheaper price.
  • These are my three criteria for Qualcomm to really challenge Intel and success will come down to the quality of the emulator that it has created.
  • Qualcomm will also need to work closely with the device makers as there are endless hardware configurations for Windows 10 PCs and clumsy integration could easily make a complete mess of the elegant product that Qualcomm and Microsoft have created.
  • The first devices will be available early 2017 (launch at CES 2017 looks likely) and it is by these that Intel’s outlook will be judged.
  • This is obviously negative for Intel but it is worth remembering that every attempt to dislodge Intel to date has been a miserable failure.

Jolla – Safe(-ish) anchorage

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Sailfish finds a life line with the Russian government. 

  • The hardy sailors at Jolla have had a pretty stormy couple of years but their ship may have found safe-ish anchorage in Moscow.
  • At the end of 2015, Jolla joined the stagger of zombies (see here) when it ran out of money and had to pause its operations.
  • However, in May this year it secured $12m in funding and has recently won a battle with Samsung’s Tizen to be selected by Russia’s Ministry of Communications as its mobile platform of choice for Russia.
  • Sailfish has benefitted from the increasingly frosty relationship between Russia and the US where the fact that Sailfish has nothing whatsoever to do with any of the US-based platforms was a major plus.
  • Local search player, Yandex does not have the advantage that the BATmen do in China where there is a firewall to keep foreign services from being present in the local market.
  • Hence, Yandex is up against Google and has a big incentive to see devices in the market where Google services are absent.
  • This is because Google’s commercial agreements make it very difficult for competing services to be the default option on the device when it reaches the user.
  • Sailfish was also able to beat out Yun OS which is Alibaba’s proprietary fork of Android because, although the OS is secure, the SDK for developers still comes directly from Google.
  • Sailfish also has the advantage of being able to run Android apps using an emulator called Alien from Myriad Group
  • However, because it is an emulator, there are issues with the performance of those apps and games in particular.
  • While Jolla has done well to secure the backing of the Russian government, it is no guarantee that it will see any success in the market.
  • The key will be how well Sailfish can work with services from Yandex which is the local leader in search and has a series of Digital Life services that are applicable to the local market.
  • To make this work effectively, Yandex services will need to be ported to Sailfish which is where a start-up. funded by the head of ESN Energy, called Open Mobile comes into play.
  • This start-up has adopted Sailfish and aims to integrate Russian specific services onto Sailfish to increase its appeal locally.
  • The key to the success or failure of this venture will be how well a Sailfish device can cover the Russian Digital Life pie and how well it fares against RFM’s 7 Laws of Robotics.
  • To date Sailfish has scored poorly on these measures as there has been no real ecosystem available, just an operating system.
  • Furthermore, I think that the backing of Yandex and the local operators will be of crucial importance as the platform will need a big marketing push to raise its awareness with Russian users.
  • Jolla is still running on financial fumes but it now has a chance to see some income should it gain some traction in the local market.
  • In that regard its fate lies in the hands of the Russian operators and Yandex.

VR / AR – legions of limitations

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VR hits a bump but AR in the enterprise fares better.

  • It looks very much as if 2016 for augmented reality (AR) and virtual reality (VR) has panned out much as I feared it would (see here) in contrast to the optimism and hype at CES 2016.
  • The supply chain has invested heavily in production of VR and AR units but has subsequently seen HTC’s Vive, Occulus Rift and Samsung’s Gear VR all undershoot expectations with no immediate improvement on the horizon.
  • Worst of the lot is Sony’s Playstation VR which was expected to ship 2.6m units during 2016 but now looks set to ship just 750,000 (SuperData).
  • Google Daydream has also disappointed with shipments now expected to be around 250,000 rather than 450,000.
  • This is a strong indication that the limitations of VR in particular remain legion including:
    • Price: Many of the devices cost several hundreds of dollars and also require a PC to run, further increasing the cost.
    • Clunky: VR and AR units are still large, clunky and uncomfortable to wear.
    • In many cases they also make the user feel foolish when wearing one.
    • Comfort and security: VR in cuts the user off from almost all sensory inputs from his immediate environment severely limiting the situations in which the user would feel comfortable using one.
    • Many units also cause feelings of nausea due to an imperfect replication of the real world compared to what the brain is expecting.
    • Cable: Many units require an HDMI cable which prevents the user from moving and also increases the risk of a fall should the user trip over the cable.
    • Content: Both games and content remain in short supply limiting the reasons for users to immediately adopt the platform.
    • The adult entertainment industry is a good yardstick for the adoption of new media types and even this has been slower than expected to jump in.
  • The low volumes of the Sony PlayStation VR headset is the most surprising as I have long been of the opinion that it has the best chance of success.
  • This is because the unit is cheaper than the others, runs on the PS4 which already has an audience of nearly 100m dedicated game players.
  • For these reasons, I think that PS4 VR has a big advantage over the others but its marketing efforts have not been particularly aggressive which has also hurt its appeal.
  • The net result is that VR is clearly not ready for the prime time and there remains a lot of work to do before volumes will really take off.
  • I do not see this happening in 2017 meaning that the outlook for next year remains pretty grim.
  • AR has exactly the same problems with the exception that it has plenty of applications in the enterprise where the content, comfort and price limitations are less important.
  • Consequently, those AR companies that are focused on productivity applications are likely to fare better in the short term.
  • I would steer clear of any investment depending on VR for now and HTC in particular.