Digital sensors – Eyes and ears.

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Sensors are the eyes and ears of AI.

  • Data is the raw material of artificial intelligence (see here) meaning that will be increasingly critical that the sensors that collect that data are reliable and accurate.
  • Nowhere is this more true than in eHealth where inaccurate data is useless at best and deadly at worst.
  • This is why there is still a big market for extremely expensive medical monitoring equipment but I see signs everywhere that this is starting to come to an end.
  • This also explains the problems that the likes of Fitbit, Apple, Xiaomi, Garmin and others are having as the data they generate is such low quality that it can really only be used for recreational fitness.
  • I see two ways in which the data that these sensors generate can be improved.
    • First: Improve the quality of the sensors themselves.
    • If an optical heart rate sensor can gather data as reliably and as accurately as an ECG, then this would have substantial ramifications for cardiac medicine.
    • Not only could the equipment costs be slashed, but high-risk patients could be continuously and un-invasively monitored allowing many cardiac events to be predicted and stopped before they occur.
    • The sensor industry is feverishly working on this with the latest launches promising more and more accuracy and detail.
    • Despite this, I have yet to meet a cardiac sensor company that is claiming that it can hit the kind of quality that would allow it to be certified with the FDA.
    • The same is not true in blood pressure where small start-up Leman Micro Devices is making some bold claims.
    • It has come up with a tiny blood pressure sensor that can fit onto a smartphone which it thinks is very close to being good enough to measure blood pressure at a medical grade with FDA approval.
    • Second: create intelligent software that improves the quality of the data.
    • There are many examples of algorithms being used to meaningful conclusions from low quality data both in and out of the medical field.
    • In automotive, retro-fitted vibrations sensors are being used to track the condition of tyres, wheels, shock absorbers, brakes and the steering wheel (see here and here).
    • This is not because a great sensor has been invented, but because these companies have worked out to interpret the data that most people consider to be random noise.
    • Phillips is also quite good at this which is why its health watch is recognised to be generating good quality data even if it does struggle in other areas.
  • Hence, I see the road to accurate data being made by eroding the problem from both ends combining both better hardware sensors and much better software to interpret the signals.
  • I think that this is crucial as sensors are the eyes and ears of the machines upon which the world increasingly depends.
  • Consequently, I think that sensors will remain an area of intense investment and an area where I would want to be invested.
  • The issue of course is to separate the solutions that have real prospects from those that are merely riding the wave of hype and easy investment.


Smartphone hardware – Sticky fingers.

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Fingerprint sensors define the market this year.

  • The problem with covering the whole of the front of a smartphone with glass is that it creates a problem for fingerprint ID on the home button.
  • Samsung got around this by inconveniently locating fingerprint ID on the back of the device ensuring that it gets used much less than it otherwise would.
  • Another option is to put the fingerprint ID sensor on the power button which can be used to turn the screen on.
  • I think that this is currently the lead contender for the iPhone 8 as I have seen no indication that Apple has cracked the problem of putting the sensor under thick protective glass and still have it working reliably.
  • Qualcomm has just announced a solution that uses ultrasound that is capable of reading a fingerprint beneath an OLED display with a thickness up to 1.2mm as well as up to 0.8mm of glass.
  • Assuming the sensor is reliable, this specification should be more than enough to offer fingerprint recognition on any smartphone regardless of whether it uses the Snapdragon chipset.
  • Qualcomm is demonstrating the technology on a retrofitted Vivo smartphone and I suspect that Vivo will be the first to deploy it in a commercial device.
  • Apple and Samsung are working on their own solutions but I do not believe that they have solved the problems created by placing the sensor under the glass.
  • Fingerprint sensors have become part of everyday life on smartphones and with Samsung, Xiaomi and Essential Products setting the standard when it comes to screens, Apple has little choice but to follow.
  • Hence, with the upper and lower bezels of the device being no longer available, by far the best solution remains to place it under the screen on the virtual home button.
  • I think that anything else, including the power button, diminishes its usability and therefor its overall appeal.
  • Fortunately for Apple, the draw of its ecosystem is still very strong meaning that even if the sensor is on the power button or even the back, it is unlikely to meaningfully impact demand for the device.
  • This is because despite improvements, the user experience on Android remains meaningfully adrift of that on iOS which is so far keeping users very loyal to iOS.
  • Hence, I don’t see Apple rolling out this technology until it is rock solid in terms of reliability.
  • I think that the availability of under screen fingerprint sensors will have a significant impact on the handset market in Q4 17 as they enable an optimal user experience.
  • Anyone who can bring this to market by Q4 17 is likely to enjoy a temporary gain in market share, most likely over Samsung, but even the Qualcomm solution will not really be available until next year.
  • Consequently, I see Q4 17 continuing to be dominated by Samsung and Apple once again.
  • Samsung’s shares continue to be very strong, but I think that the valuation opportunity has now passed.
  • Consequently, I still prefer Tencent, Baidu and Microsoft.

Alphabet vs. EU – Timeslip

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Google has time on its side in Android.

  • I think that it is the remedies that the EU imposes that have the potential to do the real damage as long as they are quickly put in place.
  • I view the fine as almost an irrelevance.
  • Alphabet has been handed a $2.7bn fine by the EU as punishment for what the EU considers to be anti-competitive practices in using search results to promote its own shopping services over those of competitors.
  • This fine amounts to just 23 days of net cash flow from operations for Alphabet, causing only a small ripple in what is otherwise a powerhouse of cash generation.
  • Google has 90 days to change its algorithm to bring search results into line with what the EU considers to be fair or suffer a further fine equivalent to 5% of daily global revenues ($14m) for every day that the algorithm continues to breach the EU ruling.
  • Google clearly intends to appeal the ruling but I am doubtful whether it has a realistic chance of changing the outcome.
  • This is but one of three current complaints being made against Google with the Android and AdSense complaints yet to be addressed.
  • Of the other two, I think that the Android complaint has the scope to do the most damage.
  • Again, this is not because of a fine that could be even bigger than this one, but because of the possibility that the EU forces Google to unbundle Google Play from the rest of its Digital Life services.
  • This “bundling” is laid out in the Mobile Application Distribution Agreement (MADA) that each handset maker has to sign in order to get access to Google Play.
  • This agreement requires handset makers to install certain Google services on the device at the factory, set them as the default service as well as to put a search bar on the home screen.
  • It is well known that it is almost impossible to sell an Android device in developed markets that does not have Google Play on it meaning that every Android device in developed markets is effectively a Google ecosystem device.
  • Google’s position is that it is “entirely voluntary” for handset makers to sign the MADA which I believe is a very misleading statement.
  • This is because if handset makers do not sign the MADA, they are unlikely to be able to sell their devices in good volumes in developed markets.
  • This is why I believe that while the MADA is entirely voluntary technically, it is effectively mandatory because there will be no meaningful handset sales without it.
  • I don’t think for one moment that the EU will be fooled by the “entirely voluntary” defence which is why Google needs to come up with a far more robust defence for its conduct in Android.
  • If Google was forced to unbundle Google Play from its other Digital Life services, handset makers and operators would be free to set whatever they like by default potentially triggering a decline in the usage of Google’s services.
  • However, one thing that Google has in its favour is time, as these proceedings can take years to be resolved.
  • The longer it takes, the more time that Google will have to become entrenched with users before it is forced to unbundle Google Play from its other services.
  • By that time, if Android users are already hooked on Google’s services, the need to have the MADA will be diminished as users will simply download the services to which they have become accustomed from the app store.
  • Hence, the longer the process takes, the less teeth the remedy will have.
  • The caveat to this is the power of default and the example set by Apple Maps and Internet Explorer.
  • Apple Maps is an inferior service compared to both Google Maps and HERE but it has managed to gain traction in iOS by being set as default with no option for the user to change it.
  • Internet Explorer’s market share has been gradually eroded over a period of many years since Microsoft was forced to unbundle it from Windows.
  • Consequently, I think that there is still a possibility that Google loses its entrenched position with users if the EU forces it to relax the MADA requirement, but it could take a long time.
  • Alphabet’s share price has barely reacted to this news and at $955, I still find it to be unattractive preferring instead, Tencent, Microsoft and Baidu.

Google vs. Amazon – Battle of the Home pt II.

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Alexa still ahead despite very poor performance.

  • New data suggests that Google Assistant is even more superior to Amazon Alexa than RFM’s tests have suggested, but still Google remains at risk of suffering a Betamax-like defeat (see here).
  • The digital agency, 360i has written a piece of proprietary software aimed at scientifically testing how good digital assistants are at answering queries (see here).
  • This software asks 3,000 questions and then assesses the answers given.
  • It is here that I suspect some human intervention is needed as both Google Assistant and Amazon Alexa often give answers that I think software will have difficulty in assessing.
  • This is why I suspect the results are being considered as very preliminary and that some human parsing of the answers is needed.
  • While, there is no hard data available yet, 360i has said that the initial indication is that for any question, Google is six times more likely to come up with the right answer compared to Amazon Alexa.
  • This contrast is so stark, that I suspect that Google will still beat Alexa hands down once the real data has been scrutinised and published.
  • This reflects RFM’s own much less scientific tests where every person asked to live with Amazon and Google side by side for four days expressed a strong preference for Google Assistant.
  • The one exception was a small child who was much more interested in endlessly turning the lights on and off rather than improving his general knowledge.
  • It is here that we find Google Home’s great failing as Google Home does not support the smart light system tested, as it is only available with Amazon Alexa.
  • This problem is reflected right the way through the entire smart home ecosystem where every smart device one can think of works with Amazon Alexa but only a small proportion work with Google Assistant.
  • Amazon has been extremely welcoming to third party developers giving a lot of support as well as meaningful discounts for running their services on AWS.
  • The same cannot be said of Google as almost every developer I have spoken to has not been complimentary when describing the experience of trying to develop for Google Home.
  • I find this to be a big surprise because Google’s Android developer program has been huge and thriving for years.
  • This is why Google suffered such a resounding defeat at CES in January where Amazon Echo was everywhere and Google Home was barely seen or talked about.
  • Google’s strategy to fix this issue is to focus developers on the assistant rather than the device.
  • This has two advantages:
    • First It ensures that any device with Google Assistant in it can control any product written to the one API.
    • Second and most importantly, developing for the Google Assistant is part of the highly successful Android developer program rather than the poor effort made by Google’s hardware division to date.
  • I still think that smart home is Google’s to lose but Amazon Alexa is still orders of magnitude greater when it comes to the number of home devices in the hands of users.
  • The home speaker is a much more convenient device with which to control the home as there is no requirement to remove the device from a pocket or unlock it.
  • Furthermore, I don’t think that users have yet really understood that the functionality on the phone is exactly the same as it is on the home speaker or anything else meaning that Amazon still has the volume advantage in the mind of the developer.
  • I still think that Google has the advantage as it has by far the better product but developers start really making their products work with the assistant soon, then the game will quickly be lost.
  • Google’s outlook for 2017 remains pretty good but the shares still look fairly priced leaving me preferring Microsoft, Tencent and Baidu.

Microsoft & Facebook – BFF

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I see Microsoft and Facebook creeping quietly together. 

  • I continue to think that Facebook and Microsoft make very good partners and I see them doing more and more together over the long-term.
  • In addition to building an undersea cable together (see here), Facebook and Microsoft have a long history of collaboration and when I look at their assets and the directions they are taking, it continues to be an excellent fit.
  • The latest place where they have appeared together is Section F which is a huge start-up campus in Paris with space for 1,000 start-ups.
  • Both companies are involved with Microsoft lending support to build is AI program and Facebook also being a major launch partner.
  • Facebook and Microsoft have often worked well together in the past and I can see this collaboration deepening going forward.
  • This is because Microsoft and Facebook are now going in very different directions meaning that there is almost nowhere where they directly compete with one another.
  • Facebook has the intention to become by far the biggest consumer ecosystem of them all while Microsoft appears to be edging away from the consumer and is increasingly dominating the enterprise.
  • If I look at their respective Digital Life pies there is also a good fit as Facebook is very strong in Social Networking and Instant Messaging while Microsoft has good assets in Gaming, Search and Browsing.
  • Consequently, I think that should Microsoft decide to bite the bullet on consumer, Facebook would represent a natural place for many of those assets to find a home.
  • While Microsoft is not the best in AI, it is far better than Facebook, and sharing that expertise would move Facebook meaningfully forward.
  • This could also benefit Microsoft as it really is only able to generate data using Bing but if it had access to some of the data being generated by Facebook, this could help it to both improve the diversity of algorithms it creates as well as the speed of development.
  • Even in Gaming where Facebook is already present with Oculus, the fit as good and it has already been announced that the VR headset will be able to be powered by the Xbox.
  • I don’t think that Facebook and Microsoft will merge but there are many areas in which collaboration is mutually beneficial and there is a remote possibility that Facebook will buy some of Microsoft’s consumer assets.
  • In the short-term I prefer Microsoft as its increasing strength in enterprise still gives plenty of support to its current valuation.
  • However, over the long term, I suspect that Facebook’s growth into new Digital Life segments will provide greater upside potential once it has overcome the short-term slowdown in growth (see here).


Etsy – Red flags.

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Etsy serves as a warning to Uber.

  • The struggles of e-commerce player Etsy is yet another sign how important it is for a network business to have either 60% share or be double the size of its next competitor.
  • This should serve as a warning to Uber.
  • Etsy is an e-commerce market place (like Alibaba) that specialises in the selling arts and crafts products made by small artisan producers.
  • It is a 3P e-commerce provider in that it simply serves as a market place rather than Amazon which mostly runs its own inventory and makes a retail margin.
  • To make money, Etsy charges sellers to be on its platform and also sells them services to make the process of selling their products simple and easy.
  • Etsy is often described as “the handcrafter’s” and it is here where its real problem lies.
  • In October 2015, Amazon launched Handmade at Amazon and in doing so became a direct and brutal competitor of Etsy.
  • Although Etsy remains the leader in the small niche of handmade artisan goods, it simply has no chance of competing against Amazon.
  • Amazon can use its scale to put real pressure on pricing at Etsy and this has been felt with a real downturn in Etsy’s financial performance.
  • Etsy has reacted by cutting 21% of its workforce and focusing on areas where it thinks that it can compete.
  • These include improved search functionality as well as smoothing the buying process to ensure the highest possible conversion rate.
  • However, cuts are being made across the board including both R&D and Marketing implying that Etsy has had to make some hard choices.
  • The essential problem is that many users who buy handcrafts also buy products on Amazon, meaning that its easier for them just to stay where they are rather than go somewhere else.
  • This means that Amazon can continue to turn the screws on Etsy and Etsy merchants are likely to have ro migrate to Amazon as this is where they will find most buyers.
  • Etsy has failed to maintain its place as the go to place to buy and sell handmade artisan products as it has been unable to keep Amazon out of its niche despite having been there for many years.
  • The result is likely to be that the current cuts will have a negative impact on revenues, necessitating further cuts and so on.
  • Hence, I think that Etsy will be unable to survive in its own and is likely to end up being forced to sell itself at a valuation far less than the market is pricing in today.
  • Network based businesses are an all or nothing market where if one is a niche player, one must defend that niche at all costs.
  • As long as one remains the go to place to transact with more than 60% share or double the nearest competitor, a good return will be earned.
  • However, the minute that is hallowed status is broken, with a much larger player getting some traction in that niche, then I think the game is over.
  • This should serve as a red flag to Uber.
  • Uber is vulnerable right now as the current turmoil has allowed Lyft to make up some ground in its home market of USA.
  • Uber cannot afford to let Lyft get to close to half its size otherwise it will be at risk of losing that “go to” status signalling a bloodbath in its home market.
  • Uber still has time to act, but for Etsy, I think the game is over.
  • While there may be bargains to be had on its site, the share price is certainly not one of them.

Snap Inc. – Snap in the box.

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Facebook keeps Snap Inc. in its box.

  • Despite launching in August 2016, Instagram Stories has been extremely successful in mitigating the threat from Snap Inc. as it already has 50% more users than Snapchat.
  • In a blog detailing some feature updates, Facebook has disclosed that Instagram Stories now has over 250m daily active users (DaU) all of whom have been added in the last 10 months.
  • By comparison Snap Inc reported 166m DaU at its Q1 results in May and a far more pedestrian level of user growth.
  • This is a strong indication that Facebook has been very successful in preventing its users from going outside its fledgling ecosystem of apps by replicating new services in house.
  • It is also a sign of how critical the network effect is as Facebook’s 2bn users can all be directed to the Instagram app, use the same credentials and get going with a minimum amount of fuss.
  • By contrast, Snapchat is a completely different system to which users have to be separately recruited.
  • It is this ease of transition and the fact that it is quite simple to cross promote Instagram Stories that has allowed Facebook to imitate an innovation and quickly dwarf the original creator.
  • This is extremely concerning because I suspect that Facebook has more than 90% penetration of the smartphone users that matter from a marketing perspective.
  • If this avenue in increasingly closed off to Snap Inc., then very real questions need to be asked about its medium-term growth prospects.
  • Snap’s narrow focus on Instant Messaging begs the comparison to Twitter, but I do not think that this comparison goes far enough.
  • Twitter is stuck in a niche that it has fully monetised and its attempts to branch out into video are faltering (see here).
  • This means that its outlook for growth remains very bleak.
  • However, in the Digital Life Pie segment of microblogging and related messaging, where Twitter is present it is dominant with no opposition.
  • This means that once it stops spending money in trying to grow, it should make good, but static returns from monetising that niche.
  • Snap Inc on the other hand still has some growth ahead of it but Facebook is doing a very good job of keeping it out of its core user base.
  • I still think that the company could conceivably generate revenues of $800m in 2017E and $1.2bn in 2018E as it is quite far from fully monetising the users and traffic that it already has.
  • However, this is not enough to justify the current valuation.
  • Assuming that all goes well for the next 18 months, I can still be comfortable with a valuation of $14.4bn (see here).
  • While the current valuation is now closer to this figure than it was a few months ago, at $17 a share Snap Inc is still 13% above what I would consider to be fair value.
  • Consequently, I still see no reason to get involved especially as Facebook is showing every sign of very successfully keeping Snap in its box.
  • Twitter, for all of its faults, still has better prospects.

Digital Car – Sitting ducks pt. II

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The best automotive infotainment unit is the one in my pocket

  • A car maker with a future is a car maker that realises how vital its data is and pays the buyers of its vehicles for the right to use it.
  • This also has the added benefit of creating a relationship with the buyer of the vehicle which is something car companies have not really bothered with to date.
  • The latest survey from IHS examines the technology that consumers are and are not willing to pay for when they buy a new vehicle (see here).
  • The data shows that consumers across the world are most willing to pay for a sunroof and rear seat entertainment systems with things like telematics and in-car Wi-Fi trailing significantly.
  • The survey also revealed that consumers expect technology in vehicles to evolve as quickly as it does in mobile devices.
  • This creates an enormous problem for an industry with a 4 to 5 year design cycle where even the top end infotainment systems costing thousands of dollars are using hardware that is 5 years out of date.
  • The result is that they can be outperformed by a $150 Android device.
  • This means that the user is likely to have a better digital experience in a top of the range vehicle with a cheap smartphone rather than with the infotainment unit.
  • This strongly encourages the user to access his Digital Life with his smartphone in the vehicle rather than to use the infotainment unit.
  • This is the last thing every car maker needs.
  • Users still buy cars based on performance, form factor, safety and economy but increasingly digital services will play a part in the user’s decision of which car he buys.
  • If the infotainment unit is not being used and everything is being done on a smartphone then the digital battle will have already been lost and cars will have moved closer to being commodities.


  • Furthermore, I think that the automotive industry has its strategy with regard to telematics completely back to front.
  • Instead of forcing users to pay for telematics, they should be giving users a discount or free services for agreeing to grant access to the data that these systems generate.
  • Using digital ecosystems as a benchmark, I think that car companies could give users meaningful discounts on the price of the vehicle and still end up with higher revenues and margins.
  • This is because the data that these vehicles generate could be very valuable to other companies who provide services based on collecting data.
  • For example, using cars as weather or traffic probes would cut down on the need to install expensive infrastructure.
  • However, to be valuable, all cars need to be generating this data and while car makers continue to charge users for this feature, penetration will remain low leaving the door open for disruptors.
  • One only has to delve very briefly into the world of start-ups to see this disruption coming.
  • For example, many start-ups are providing their automotive related digital services on smartphones and not infotainment units and there is significant development of technology that could by-pass the car companies entirely.
  • For example, a quick tour of the automotive section of a technology trade show revealed two companies that use vibration to work out exactly what is happening within the vehicle rather than use the traditional sensors.
  • One of these claimed that it could, using 10 vibration sensors on a helicopter, completely replace the 160 sensors currently being used.
  • This data could easily be relayed to a smartphone app and cut the car companies out from the only data source which remains proprietary to them.
  • I found these start-ups on the stands of the very companies which they intend to disrupt, further reinforcing my opinion that most of the automotive industry still has its head in the sand.
  • Instead automakers should be aggressively moving to obviate the reason to be bypassed by making their infotainment units and sensor data easy to use and readily available with simple APIs.
  • Currently, by far the best infotainment unit I have is the one that is in my pocket which is further enhanced because I can use it in any vehicle (including trains and planes).
  • While, this reality persists, the automotive industry remains a sitting duck for the ecosystem companies who have long understood the value of that which the car industry seems to ignore.


  • RFM would like to acknowledge John Ellis of Ellis and Associates which was the starting point for some of the views presented here (see here).


Facebook – Soft target

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Facebook chasing broadcast rather than Netflix or YouTube.

  • Facebook’s move into Media Consumption is well underway but it looks to me to be going after broadcast rather than premium or user-generated content.
  • Facebook has closed a deal for a reality TV show called Last State Standing and is close to doing a deal to shoot and air a second season of Loosely Exactly Nicole which originally aired on MTV.
  • It is also commissioning shorter shows from the likes of Vox Media and Buzzfeed.
  • This is in no way a move to compete with the high-end shows on Netflix or the user generated content on YouTube but instead looks like it is aiming at broadcast.
  • Despite the atmosphere of cord cutting, broadcast TV is still an advertising market that is worth $70bn a year and it is the younger end of this market that Facebook is targeting.
  • This looks to be somewhat experimental as Facebook is not really targeting expensive, high quality content as one of the shows it is looking at was cancelled after one season on MTV and has an IMDB rating of just 5.1.
  • These shows will air first on Facebook via a video tab called Spotlight that will be present at the side of the screen and will be funded by advertising.
  • The broadcast market represents a much softer target in my opinion as Facebook can add all sorts of interactive and social functionality on top to make the experience much more engaging than just watching TV.
  • The level of investment being made at the moment is small with a few hundred thousand dollars being spent per episode on its big shows as well as a few tens of thousands being spent for shorter segments from producers like Vox Media.
  • I see this as a sign of Facebook’s media consumption strategy reaching the point where it can be considered to be properly present in this segment of Digital Life.
  • This will bring its coverage of Digital Life to 46% up from 36% where it is today.
  • For me, this represents a 28% increase in its addressable market which should allow revenue growth to re-accelerate after the slowdown I have been long expecting this year.
  • Given that Spotlight is not yet available in the app and that Facebook is just closing the deals to produce this content now, I do not expect these shows to hit Facebook until 2018.
  • Consequently, for 2017, I see Facebook’s growth potential remaining hampered by the fact that it has already fully monetised the segments of Digital Life where it is already present.
  • The result is likely to be a much slower growth profile, which I think is something that the market has still not fully anticipated.
  • Hence, I can see disappointments coming in the Q2 17 and Q3 17 results as the market adjusts to this more sanguine short-term outlook.
  • It is at the point I would be looking to go back into Facebook as 2018 could see an uplift in financial performance driven by monetisation coming from Media Consumption.
  • This should be followed up by Facebook’s expansion into Gaming and Search which would bring its coverage up to 78% and global market leadership, pipping Tencent which is currently on 77%.
  • This is what underpins my long term positive view on Facebook, although I am expecting weakness in the short-term as it will be sometime before the new business lines can pick up the mantle of growth.
  • In the meantime, I prefer Tencent, Microsoft or Baidu.

Tencent – Feathering the nest

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Rovio could help Tencent spread its wings.

  • Rovio is almost certainly past its prime but it has an asset that could be capitalised on should the right buyer come along.
  • Tencent is not showing any real signs of being the right buyer at the moment but its ownership of Supercell makes Rovio a good strategic fit.
  • Rovio is the creator of the well-known Angry Birds franchise where its revenue from games has been revitalised by the recent good performance of the Angry Birds movie.
  • 2016 revenue / EBIT was Euro190m / Euro17.1m with a bump in games, thanks to the movie, bringing the company back into profit.
  • The revenues from the movie will be recognised over the 2017 and 2018 financial years.
  • Tencent has had some success in taking Western games and leveraging them into China as League of Legends has become a major hit in China through Tencent’s patronage.
  • I have been fairly disappointed with Tencent’s acquisition of Supercell so far as while it is now able to leverage Supercell’s hugely popular games into China, I think the real opportunity lies outside.
  • The Chinese market is starting to slow meaning that the BATmen will need to look elsewhere long-term for sources of growth.
  • Of all of the BATmen, Tencent has the greatest opportunity as the Digital Life segment in China within which it is the strongest remains unoccupied in developed markets.
  • This is kargely because the big multiplayer gaming communities Xbox Live, PlayStation Network, Valve (see here) have all failed to leverage their communities from PCs and consoles into mobile.
  • Activision Blizzard, which I think purchased King Digital exactly for this purpose, is also not doing a great job of it as active users of King mobile assets have gone into freefall.
  • This leaves the way open for Tencent to begin to build its assault on developed markets starting with the all-important segment of Gaming which it dominates at home.
  • However, it has not shown much intent to make the most of this opportunity instead concentrating on leveraging overseas games into its home market.
  • In Supercell it considers itself to be a financial investor which is why it seems to have been left pretty much to its own devices.
  • Rovio would be a good fit for Tencent alongside Supercell but I still think that the real opportunity lies in using these assets to grow its presence overseas.
  • Tencent has by far the strongest ecosystem in China with 77% coverage of the Chinese Digital Life pie which is why I think there is so much upside.
  • It makes almost all of its money from selling media and games with only a small proportion coming from monetisation of the ecosystem it has created.
  • If it was to effectively monetise its ecosystem at home and aggressively push into developed markets, it could become one of the biggest digital ecosystems globally.
  • However, there is still a long way to go in recognising this opportunity and it needs to structure its assets appropriately to take advantage of that.
  • Consequently, I don’t see Tencent seeing the benefit of this for some time to come but the good news is that there is still enough growth left at home to sustain the valuation for a while.
  • Tencent, alongside Baidu and Microsoft are my favourite ecosystems at the moment.