AI Partnership – Fluff and stuff

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How society will benefit is very unclear.   

  • The ecosystem leaders have announced an artificial intelligence (AI) partnership aimed at benefiting society but the fact these players are also fierce competitors will ensure that real trust and co-operation will be difficult to achieve.
  • Google, Facebook, Amazon, Microsoft and IBM have jointly formed the Partnership on Artificial Intelligence to Benefit People and Society which aims to use AI to improve the quality of life in society.
  • Apple, Baidu and Yandex are all notable omissions from this list but the partnership has made it clear that the door is open for anyone who wants to join and contribute.
  • It looks very unlikely that the partnership will be sharing any actual algorithms but will work together to figure out best practice for developing AI as well as ensuring that a dystopian, man vs. machine world remains firmly in the realm of fiction.
  • Aside from this, the partnership is extremely vague on what the practicalities will be and how these companies will be working together for the benefit of all.
  • I suspect that this will be much harder to achieve than it sounds as these companies are all fierce competitors whose long term differentiation will, at least in part, hinge on their ability to make their machines better than the others.
  • A good example of this is dieting.
  • The biggest problem with dieting apps is telling the app what it is that you have eaten.
  • This process can be so tedious that many users simply give up after a short period.
  • However, this could be vastly improved with AI which could allow a device to use the camera to look at a plate and understand exactly what is there.
  • I think that this would have such a huge impact on the user experience such that engagement with the service would improve substantially.
  • Food app Lose It is already trying this but I think it remains very far away from something that would really satisfy RFM’s 7 Laws of Robotics and result in real adoption.
  • Consequently, whoever it is that cracks the problem through AI is not about to donate this to the partnership to help everyone weight.
  • Instead the algorithm will be used to create exclusive engagement that the app or ecosystem owner will be able to monetise with one of the three standard methods (see here).
  • Furthermore, the creator of this algorithm will have a fiduciary duty to deliver a return on the money invested by its stakeholders before allowing it to be freely used for the greater good.
  • Dieting is just one example but there are hundreds of others as AI looks certain to be one of the biggest differentiators in the ecosystem over the next 5-10 years.
  • Hence, AI algorithms are likely to become the most valuable asset that any ecosystem has as they will be the foundation upon which profitable businesses are built and sustained.
  • This is why I suspect that any AI the partnership offers to benefit society will not be particularly beneficial but if there can be agreements in other areas then there could be some benefit.
  • The net result is that the announcement is full of great intentions but until there is some substance around the fluff, it will be very difficult to tell whether society will benefit at all.

BlackBerry – Cold turkey

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BlackBerry finally breaks its addiction to hardware. 

  • BlackBerry reported poor Q2 17A results, but the decision to stop internal handset development buoyed sentiment allowing the shares to rise 5%.
  • Q2 17A revenues / adj-EPS were US$352m / US$0.00 compared to consensus at US$390m / LOSS US$0.05.
  • Within this, mobile device sales made up 30% of the total and with the close down of internal hardware design, I expect this number to quietly go to zero.
  • BlackBerry is not closing down hardware but is instead outsourcing everything to third parties.
  • This is relevant because BlackBerry will no longer have access to exclusive designs which is an admission that the era of having a physical keyboard on a device is well and truly over.
  • I have long believed that this has happened because users have become accustomed to typing on glass meaning that BlackBerry’s key differentiator became obsolete.
  • From here, there will be nothing to differentiate a BlackBerry from any other Android device meaning that margins will be 2-4% in the best instance.
  • This is not the kind of profitability that John Chen is used to and so I think he will be very happy to let hardware gently slip into oblivion.
  • Hence, the focus will shift to the software business which is going well revenue wise but needs attention when it comes to profitability.
  • At the moment it is the legacy SAF (Service Access Fees) business that is providing all of the profit with margins of 73.6% but revenues are declining fast with a 56% decline in the last 12 months.
  • This is because SAF has long been tied to hardware and represents revenues from the enterprise servers that support the devices and this looks to go the same way as hardware.
  • The Software and Services business is growing fast but is relatively unprofitable with EBIT margins of 18.6% and it is here where the real focus will be.
  • With two business looking set to decline to zero, the focus has to shift to the valuation of BlackBerry.
  • BlackBerry is currently a US$625m run-rate software business with an enterprise value of US$2.16bn (US$4.36bn market capitalisation and US$2.1bn in net cash).
  • That puts BlackBerry effectively on 3.6x EV/Sales with around 30% YoY revenue growth.
  • This is quite punchy when compared to IBM on 2016 EV/Sales of 2.0x but a bit cheaper than Citrix which is on around 4.3x 2016 EV/Sales.
  • Hence, I do not see much scope for BlackBerry to expand its revenue multiple from here.
  • The net result is that even with steady revenue growth and profit generation in the Software and Services business, a big rally is going to be pretty hard to come by even at these lowly levels.
  • Hence at around $8 per share, I think that BlackBerry has found a level where is should be stable.
  • Hence, I am pretty indifferent to the shares and would prefer Microsoft, Samsung, Baidu, Tencent or Apple.

GoPro vs. DJI – Autonomous gambit

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DJI is making a big gamble with the Mavic Pro. 

  • Hot on the heels of GoPro’s Karma launch (see here), DJI has launched a similar drone but I see it taking a big risk by using autonomous features as a major selling point.
  • The Mavic Pro is both lighter and smaller than the Karma but comes at a higher price and looks to be much less user friendly than the Karma.
  • What really makes the difference between the two is the fact that DJI has packed the Mavic Pro will autonomous features such as collision avoidance, object recognition and “follow me” functionality.
  • RFM research indicates that GoPro has avoided adding any of these features because they are not yet good enough to offer a good and reliable user experience.
  • If DJI has managed to perfect these features, this will represent a major step forward, but I fear that DJI’s hardware heritage means that it has not really internalised how important getting these features right has become.
  • DJI is probably Schenzen’s most prominent technology company as it is known throughout the world as the maker of the best drones available.
  • Drones are at an early stage of development meaning that they remain in the realm of hobbyists and professional photographers.
  • With these users, ease of use is not a major problem as they will invest the time to learn but for the average consumer, these devices are not really market ready.
  • This means that features such as collision avoidance and “follow me” have to work flawlessly before they the mass market will adopt them and they will actually do substantial damage to a brand if they are not.
  • This is why I think that GoPro has avoided adding these features.
  • This means that by promoting them, DJI has done what no one else could and got them to work, or it has misunderstood how important these features will become.
  • This is exactly the problem that sunk Lily Robotics which ran a very successful crowdfunding project but has subsequently been unable to live up to its promises and is now the subject of an investigation.
  • DJI is well known as a maker of quality drones but to date its default position on autonomy is that whenever the drone gets into difficulty it immediately hands-off control to the user.
  • This is when the user needs autonomy the most and I think that until the software is good enough to get the drone out of difficulty, these features are a non-starter.
  • Hence, I think that DJI is taking a big risk in headlining with these features as I fear that they will not live up to the promises that DJI is making.
  • This is the opportunity for the Karma to capitalise but when it comes to software and ecosystem, GoPro still has plenty of difficulties of its own (see here).
  • The net result is that easy to use and cost effective drones are still a long way away from the mass market and I think that they will remain in the domain of the hobbyist and professional for some time to come.
  • Very much like virtual reality, I do not see drones lifting the fortunes of GoPro or bringing DJI to a new level of growth for a long time, if ever.

HERE – Data odyssey.

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Car makers sharing data is the real story. 

  • HERE has begun its strategy to increasingly automate and imrpove transport but the most impressive feature so far is the fact that the 3 owners of HERE are sharing their data with each other.
  • Far more data than has been historically available is being used to create 4 new services that should be deeper, richer and more useful than any that have gone before.
  • These are:
    • First: HERE real-time traffic.
    • This takes probe data that typically provides traffic information and combines it with sensor data such as braking to provide more detail with regards to what is really happening on the road.
    • Using data from BMW, Audi and Daimler cars will reveal more information such as when some lanes are blocked while others are moving to give the driver better information upon which to base decisions.
    • Second: HERE Hazard Warnings.
    • This uses data from sensors such as impact, brakes and cameras to allow the driver to anticipate hazards rather than be forced to react to them.
    • Third: HERE Road signs.
    • This uses vehicle cameras to detect temporary and permanent changes to street signs that can improve assisted driving systems as well as warn the driver with regard to road changes and hazards.
    • Fourth: HERE On-Street parking.
    • This uses predicative statistics as well as data from the ignition to estimate where parking is most likely to be available and for how long the driver can expect to spend looking for parking.
  • These services are the first step in an odyssey to create fully autonomous driving but I think that the real story here is that they all use shared data from competing car makers.
  • Given that only a small percentage of cars on the road are connected, the initial appeal of these services will be small at first but it is the intent that they signal that is so significant.
  • This is the first time that car makers have allowed what they consider to be highly proprietary information to be shared with their competitors.
  • This is crucial because the opportunity created by sharing this kind of data is much greater for all involved but getting old fashioned companies to embrace this concept has been a real struggle.
  • As more companies sign up and agree to share their anonymised data the opportunity for everybody involved will continue to rapidly increase.
  • Furthermore, HERE and its partners will have exclusive access to this data giving them insights that neither Apple or Google will be able to replicate.
  • This how the automotive industry may be able to fight off the threat that Apple and particularly Google represent to their brands as digital services become more and more important.
  • I have had concerns with regards to data sharing within the HERE consortium (see here) and this announcement goes quite some way to alleviating that concern.
  • If HERE can also make its partners feel that all stakeholders are being fairly treated then it will have really improved its chances of creating a location platform with long term differentiation.
  • Google Maps faces none of these problems as users of Google Maps tend to agree to share their data with Google and there is only one stake holder in the operation.
  • This is why it is essential that the car makers prevent Google from sucking out all their data through Android Auto because this would really damage their (and HERE’s) long term differentiation.
  • HERE has an opportunity to be every bit as good (or even better) than Google Maps but success depends on openness, trust and commitment between its owners and partners.
  • So far, HERE is doing well at fostering all of these attributes and I see its chances of success continuing to improve.

Snap (chat) – Spectacular experiment.

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Snap’s new product is a mere toe in the water. 

  • Snapchat (now rebranded Snap) has launched spectacles that work in a similar way to Google Glass but try to deal with the many shortcomings of their predecessor.
  • The new glasses are aimed to be fashionable, can capture and upload 10-30 seconds of video and are priced to go at $130.
  • The problems with Google Glass were legion but chiefly comprised of:
    • First: They made other people uncomfortable.
    • Second: They were ludicrously expensive at $1,500.
    • Third: They looked dreadful.
  • Consequently, it came as no surprise that wearers were shunned by the general public and that the product did not sell well.
  • Snap’s Spectacles address the second and third issues quite well but I fear that its very young demographic might find it very hard to find even $130 for this product.
  • The product also makes a stab at addressing the first issue by using a bright LED around the lens that makes it clear when the camera is on.
  • How well this works remains to be seen but it is encouraging to see Snap acknowledging previous failures and trying to address them as well as leaving certain segments that are well covered by GoPro et al well alone.
  • Since the time of Google Glass, video uploading has become much more common place and maybe the time is right for Snap Spectacles.
  • However, no-one really knows how well this product will fare which is why Snap is launching this product very gradually.
  • This makes complete sense as there are still plenty of potential pitfalls that could prevent the Spectacles from shipping in big volumes.
  • At the end of the day this is an experiment and I suspect that even if the device ships in big volumes, Snap will not really make any money from it.
  • Instead I see the aim being to drive video traffic to its site rather than that of YouTube or Facebook by making the user experience much easier and more fun.
  • Facebook and YouTube dominate the market for mobile based video advertising revenues which is still growing very quickly and this is an important area for Snap as it moves into its monetisation stage.
  • If it fails, I doubt we will see an Amazon or Microsoft-like $1bn write down of inventory but rather an ending of the product with barely a ripple.
  • Snap has carved out a niche for itself but it must now find ways to monetise the traffic as it has a $20bn valuation to live up to.
  • It has already made a start down this path but I see it as still well adrift of an income statement that will make investors in the last round happy.

Verizon / Yahoo – Irrelevant challenge.

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With Verizon, Yahoo likely to become irrelevant. 

  • Verizon is embarking on building an ecosystem but second rate assets are unlikely to get Verizon very far without inspirational management to make these assets shine.
  • On top of the $3bn it is paying for Yahoo’s core business, Verizon also appears to be in advanced discussions to purchase a video streaming start-up called Vessel.
  • This would take Verizon / Yahoo’s coverage of Digital Life to 51% putting it ahead of many of its competitors.
  • However, Digital Life is only a measure of whether an ecosystem has the right assets and makes no measure of quality or execution.
  • This is addressed with RFM’s 7 Laws of Robotics and it is on these measures that Yahoo falls over.
  • The problem at Yahoo is simple.
  • While it has good assets and good traction in the fixed Internet, it has been unable to migrate any of that traction into mobile.
  • Yahoo claims to have over 600m monthly active users on mobile and I suspect that almost all of these only use Yahoo Mail on the phones and nothing else.
  • Yahoo has invested large sums of money in digital assets during Marissa Mayer’s tenure but high management turnover combined with very poor execution has meant a very poor return for investors.
  • For example, RFM calculates that Yahoo has been able to monetise just 12% of the opportunity presented by the assets that it owns (see here).
  • The challenge for Verizon is to take these assets, add them to the others that it already owns and to create a thriving community on mobile devices.
  • Verizon has two big problems.
    • First: Second rate assets.
    • The assets that it has purchased are second rate in the eyes of users who prefer the services of Google and Facebook.
    • This means that Verizon has a lot of work to do to make these assets more appealing as well as ensure that they work well on both mobile and fixed.
    • Second: Bench strength
    • Yahoo’s management has shown that it is unable to execute meaning that it is up to Verizon’s team to turn the Yahoo assets around.
    • Unfortunately, I suspect that Verizon’s history as a provider of packets and capacity, means that it lacks the bench strength to make this acquisition deliver any of the potential that it offers.
  • Hence, I fear that the net result will be that Yahoo becomes increasingly obscure as more and more of the user’s Digital Life moves from the PC onto mobile.
  • Yahoo continues to offer an irrelevant challenge to Google, Facebook, Apple or even Microsoft each of whom are cementing their position in the digital ecosystems of life and work.
  • Of these I prefer Samsung, Microsoft and Baidu although Apple looks very attractive for a long term investor happy with the dividends and share buy backs.

Chinese Autos – Handsets on wheels.

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Chinese automakers give away a crown jewel. 

  • The willingness of the Chinese automakers to give away digital differentiation to the BATmen (see here) clearly indicates they do not understand how important digital will probably become.
  • SAIC was the first to move (see here) in launching a car with the entire head unit powered by Yun OS (Alibaba) while eight other companies including BYD and Chiang are already intending to use Baidu’s CarLife.
  • The multinationals are also getting in on the act with Audi recently signing a deal with all three of the BATmen to add their services to the cars that it ships in China.
  • I am pretty certain that others will follow.
  • From a digital perspective, it makes no sense whatsoever for the foreign car companies to try and create digital experiences for their Chinese customers.
  • This is because like Google, Apple, Facebook, Twitter and so on the environment will make it almost impossible for them to succeed especially where their services compete against those of Chinese companies.
  • However, the Chinese car companies have no such limitation.
  • Hence, they are potentially giving away one of the big long-term differentiators and I am far from convinced that they have any understanding of the implications of what they are doing.
  • Fast forward 15 years to a world where autonomous vehicles are everywhere, it will be the brains of the vehicle that largely differentiates it from its competitors.
  • If the brains of that vehicle come from one of the BATmen then all vehicles will have access to those brains as it is in the BATmen’s interest to ensure as wide a distribution of their services as possible.
  • This could leave the Chinese car makers as commodities with all of the value accruing to the ecosystem owners, just as it does in the handset industry.
  • This just one facet of a huge problem that I see in China.
  • Outside of the internet industry, there is precious little understanding of how important software and services are becoming and so very little is being done to effectively combat commoditisation.
  • Many Chinese companies believe that they will be able to differentiate in hardware but the example of Android shows that any hardware innovation is rapidly copied failing to alleviate the problem.
  • There are a few exceptions to this but unless Chinese device makers really begin to internalise the importance of the user experience, a very bleak future awaits them.
  • This is how many industries in China remain wide open to the BATmen as the existing players have very little understanding of the threat that the BATmen represent to their long term livelihoods.
  • Consequently, in China Baidu and Tencent are the only place where I would feel comfortable for the long term.

GoPro – Almost a hero

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GoPro almost gets it right. 

  • GoPro’s launch of its Karma drone and the update to its camera line with the Hero 5 Black and the Hero 5 Session are strong launches but once again GoPro falls over when it comes to software and service.
  • First: Karma Drone
  • This is now clearly the flagship product, offering both a drone and a handheld camera with stabiliser in a single package.
  • A vast amount of thought has gone into this product and GoPro has produced a drone that intends to be as easy to use and versatile as possible.
  • As a result, it makes some compromises between ease of use and advanced features.
  • However, I think that for almost all users, ease of use is the single biggest issue that they have with flying a drone.
  • What I think GoPro has done really well is to include as much autonomy into the product that it can without compromising reliability.
  • This is where DJI really falls over with the Phantom 4 which includes obstacle avoidance but in reality, it doesn’t really work as it should.
    • First: It won’t avoid all obstacles and will crash into things like power cables.
    • Second: The default position with this product is to hand control back to the user when it gets into trouble.
    • In many ways this is self-defeating as these are exactly the times when the user needs autonomy the most.
  • Karma’s autonomy is extremely limited and GoPro has done very well in avoiding the temptation to include features that will help sell the product but which won’t really work as the user expects.
  • The pickle that Lily Robotics has got itself into with its autonomous Lily drone is a great example of what a bad idea this is.
  • In this regard, I think GoPro has come up with a very competitive product although I think that the end market for drones is far from big enough to bring meaningful new growth to GoPro.
  • Second: Hero 5.
  • There are two products in the line-up the Hero 5 Black and the Hero 5 Session.
  • Both of these are solid updates and add image stabilisation, voice control as well as auto-upload of video to the cloud.
  • Third: GoPro Plus.
  • Unfortunately, this is where it all falls to pieces as I think that by charging for its cloud service, giving very limited capacity and only allowing GoPro camera content GoPro has ensured failure.
  • GoPro Plus is selling for $4.99 a month but it is limited to 35 hours of 1080p video or 62,500 12MP pictures.
  • I suspect that this is going to turn off the vast majority of users and it is likely that there will be a host of players, such as Google, that will offer this service for nothing.
  • This is where I see GoPro continuing to completely misunderstand what will drive its business over the next 3 to 5 years.
  • Its ability to differentiate in cameras has already evaporated and this use case for a drone will be quickly copied if proves to be popular.
  • I think that GoPro should have made its cloud service both free to use and open to non-GoPro cameras.
  • GoPro badly needs user loyalty and if it was winning hearts and minds in the cloud, there would be a much better chance of those users choosing a GoPro when they come to buy a new camera.
  • Furthermore, if everyone was using GoPro tools for editing video then there would be a lot of insight that GoPro would be able to draw on from using AI to analyse the data.
  • Furthermore, it would have built a community around its service that could in turn be monetised in ways other than selling cameras.
  • This is where Google, Amazon, Facebook, Baidu and Alibaba are likely to enter as they understand the value that owning the community can bring to them in the long-run.
  • Consequently, I fear that any bump in profits that these products provide will be short-lived as the ravages of Chinese competition have never been harder or faster.
  • The only device companies that I think have a sustainable position at the moment are Apple, and Samsung.
  • Investing elsewhere could prove very painful.

Twitter – Video star?

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Only video can keep Twitter from $10. 

  • Twitter’s first attempt at streaming video has won some good feedback but the numbers need to be bigger to really move the needle against YouTube or Facebook.
  • The first of ten broadcasts of NFL games aired on 15th September and reached 2.5m users with around 250K online at any one time recording an average viewing time of 22 minutes.
  • In contrast, 15.4m people watched the game on CBS and NFL networks with 48.1m people watching at least 1 minute of the game.
  • In addition to Twitter, users could watch the game digitally using NFL mobile from Verizon or digital CBS but the vast majority appear to have used Twitter.
  • The feedback has been broadly positive but some users did notice that there was a delay between the live broadcast and the video seen via Twitter.
  • Twitter paid $10m to the NFL for the right to stream 10 of its games this year in a hope to encourage users to do more with Twitter than just blogging and Instant Messaging.
  • Blogging and Instant Messaging make up a total of 16% of the Digital Life pie which I have long believed that Twitter has already fully monetised.
  • I am convinced that this is the reason for its growth grinding to a halt (see here).
  • If Twitter can entice its 300m users to do more with Twitter beyond these activities, then there is scope for revenues to begin growing again as it will have more traffic to monetise.
  • The advantage that Twitter has is that it knows with great accuracy what its users like as they actively chose to follow issues compared to Facebook which is based on friends and hence, much more vague.
  • This means that the value of its targeting is very good but while users spend only a short time with Twitter, there are limits to the amount of money it can earn.
  • This is why the video strategy is so important.
  • Media Consumption makes up another 10% of the Digital Life pie and should Twitter generate significant traction from it, there should be significant upside from current revenue levels.
  • Without this growth, I still fear that Twitter’s shares will fall below $10 because even at these levels, with no growth, the shares are expensive.
  • At that point, I would expect an acquirer to step in and add Twitter to its ecosystem.
  • However, should Twitter gain meaningful traction in video, then it should be able to continue as an independent entity.
  • This is a big if as YouTube and Facebook dominate this segment and both Facebook and Alphabet are much bigger and much stronger than Twitter.
  • This is where Twitter’s very accurate targeting is important and I suspect that this is why the NFL chose to go with Twitter rather than Facebook or YouTube in this deal.
  • The first signs are moderately encouraging but the jury is still out as to whether this will drive a revenue increase for Twitter and so I would continue to view the shares at $19.11 with extreme caution.
  • Microsoft, Samsung or Baidu are better options in my view.

Spotify – Home free

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Free users are the life blood of Spotify. 

  • Spotify’s recent jump to 40m paid subscribers demonstrates just how critical its free users are and why their numbers need to keep moving upwards.
  • Spotify has announced that it has hit 40m paid users gaining 10m users in the last 5 months (2m per month) compared to Apple which has 17m users gaining 4m in the last 4 months (1m per month).
  • Apple has a huge advantage over Spotify because its service is installed on the devices belonging to over 440m users with whom it already has a payment relationship and who can activate the service with the touch of a button.
  • Furthermore, on the Apple App Store, Spotify is a lot more expensive than Apple Music because of Spotify is forced to pass 30% of its revenues to Apple for distributing its service (see here).
  • Against this Spotify competes with a superior service but its key weakness to date has been its marketing because only people who already use the service really know that it is better.
  • This is why the free tier is so important.
  • Free users don’t pay anything but have to endure regular programming breaks so that Spotify can afford to pay the labels for access to the music.
  • This is often a bad business but in Spotify’s case, I think it is providing the company with a huge advantage to which the latest figures are testament.
    • First: Free users get to spend time with the service without paying for it, making it much easier to make these users understand why the service is better than anything else available.
    • In effect, it is like a trial that never expires and I think that increasing numbers of these users are becoming attached enough to the service to be willing to pay to get rid of the advertisements.
    • Second: These free users generate data which Spotify can use to train its algorithms which can in turn be used to make the service better.
    • Apple also has a lot of data but has not been nearly as good at turning raw data into actionable intelligence with which it can improve its service.
    • With the total user count now past 100m users, I think Spotify has hit critical mass and will soon be able to negotiate better terms with the labels to keep more of the revenues for itself.
    • I have long believed that it is the music labels that are making the most money from music streaming (see here) but I think that the balance will soon tip in favour of the music streaming companies and the artists.
    • This is because the time is rapidly approaching when the labels will need the music streamers and the artists more than the streamers and artists need the labels (see here).
    • This is why I remain unconcerned with the risk contract renegotiation with the labels as the risk will soon be in the other direction.
  • I think that the key issue for Spotify going forward is to maintain momentum of growth of its free users.
  • It is the free user pool that has been the source of its outperformance of Apple, meaning that it will be critical to keep the paid tier (where the real money will be made) increasing at this very healthy rate.
  • I continue to think that there is enough space in this market for 2 big players and with those spots filled, it is the fortunes of Pandora, Tidal, Deezer and so on that trouble me now.