Facebook F8 – Family matters.

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Facebook is creating a family of products to address Digital Life.

  • Facebook has opened what I consider to be the most important season of industry meetings when it comes to really understanding the action and the money in the consumer electronics industry.
  • Between now and mid-June Facebook, Microsoft, Google and Apple will hold their developer conferences where they will unveil the innovations with which they intend to strengthen their ecosystems.
  • Users do not pay crazy prices for iPhones or let Google into every aspect of their lives for no reason.
  • They do so because they want access to the Digital Life services that these companies deliver and for that they are willing to pay in coin or in data.
  • In fact so commoditised has become the hardware that I would argue that over 90% of the mobile industries profits are in fact generated by people paying to access an ecosystem not a device.
  • Facebook kicked off the season with F8 where it is presenting to 2,000 developers how it intends to develop the Facebook user experience.
  • Facebook messenger has been a colossal success since it was stripped out of the larger Facebook app. and has now passed 600m users.
  • Facebook intends to build on this success and its offering is developing into a family of services which I presume will eventually cover most of the activities that users carry out on their phones.
  • To this end the big announcement of the day was that Messenger will now become a platform upon which developers can innovate.
  • It is starting small, with innovation limited to entertaining ways in which to communicate over the messenger system, but it is clear that the plans are this to evolve.
  • Facebook also announced the ability to communicate with businesses within the messenger app. neatly moving the system into e-commerce which is the single fastest growing activity on mobile devices albeit from a low base.
  • In effect, messenger is following the trajectory of Line and WeChat in creating its own platform from which it can offer value to users and keep them using its services for as long as possible.
  • I suspect that over time all of Facebook’s existing properties will be evolved to allow more developer innovation and to offer a more complete set of services.
  • Furthermore, I would expect them to end up working much more closely with each other so that users feel they are living in one place just with multiple rooms.
  • This is exactly what Facebook needs to do as its long term growth depends on users doing more than just social networking and messaging on Facebook.
  • Great coverage of Digital Life will mean greater relevance of advertisements and more time spent by users giving a much greater revenue opportunity.
  • This will have a significant impact on revenues but there is a long way to go before this revenue shows up in the numbers.
  • The first problem to solve is the awkward situation that exists with WhatsApp.
  • This asset is in the books at $19bn (1,357x 2014A Price / Sales) but Metcalf’s law of networking indicates that there is a lot of value to be gained if the two can be put seamlessly together.
  • This is badly needed if Facebook is to escape a massive goodwill write down as WhatsApp. Delivers virtually no tangible revenues of its own.
  • This is why WhatsApp. must become part of the Facebook family and I think that over the next year or two, we will see this become a reality.
  • Facebook announced nothing particularly new or revolutionary at its developer conference but it did announce what is needed to keep its revenue growth going over the medium term.
  • Its biggest asset is its 1.3bn MaUs and the 600m who regularly user Facebook and Messenger.
  • This gives it a massive advantage over its smaller competitors who will need to develop geographic or functionality niches to keep their users on board.
  • Facebook is slowly becoming an ecosystem but I need to see a lot more of the pie covered before I can be comfortable that it has arrived.

Apple – Fixing ABC.

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Apple is moving to fix the basics of iCloud to ensure its future.

  • Apple appears to be intent on improving the plumbing that makes a number of its Digital Life services far from best in class.
  • Apple looks like it is on the verge of acquiring FoundationDB, a start-up company that uses a new design of database that makes the storage, retrieval and analysis of data much faster and more efficient.
  • I presume that Apple intends to integrate this technology into iCloud and also make it the backbone of HealthKit and HomeKit.
  • iCloud looks good on the surface but its performance, stability and reliability leave a lot to be desired.
  • Users constantly report issues with synchronisation and back-up of devices as well as increasingly slow back-ups of their data to iCloud.
  • Part of the reason for this is that synchronisation and back-up look like very simple tasks but they are fiendishly difficult to get right.
  • iCloud has not been around long enough and has not been used in the enterprise where much higher standards are required to be selected.
  • Furthermore this type of software is not in Apple’s DNA which combined with its relative youth make it inferior to most of its competitors.
  • OneDrive is a much clumsier and less fun user experience, but because it is based on SharePoint it offers great reliability and enterprise class performance.
  • RFM research indicates that Apple is aiming to differentiate its devices in the long-term with HealthKit, Home Kit and Apple Pay.
  • If Apple can make its devices the hub that collects all of a user’s health and home data, it can offer functionality that none of its competitors will be able to do.
  • In that instance it will have achieved differentiation despite remaining weak in its own Digital Life services and consequently it will be able to preserve its hardware margins.
  • However, underneath this needs to be software plumbing and databases that are rock solid with fantastic performance.
  • Failure to fix the problems of iCloud will probably bring these long-term strategies crashing down and this is what I think is sitting behind Apple’s move to acquire FoundationDB.
  • Google and Microsoft have nothing to worry about for the moment but they should be using the opportunity to improve the user friendliness of their offerings before Apple gets its house in order.
  • Microsoft remains my top choice in the ecosystem, followed by Google with Apple staying in third place.

 

Microsoft – Days of Office.

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Office is by far Microsoft’s most valuable asset.

  • Microsoft is systematically removing any reason for the rivals to Office to continue existing.
  • Microsoft has announced that it has extended its partnership with Samsung, Pegatron, Dell and 9 others to ensure that its Office apps are installed at the factory on more devices than ever before.
  • Installation at the factory is an important factor when it comes to the success of an app because:
    • 1) Very like being the default option, having the app present in the box it ensures that the user does not have to search for, download and install the app from an app store.
    • Although it is increasingly easy for the user to do this himself, most users will not bother and studies have shown time and again that usage of apps is much greater when they are pre-installed at the factory.
    • 2) Office apps can be quite processor intensive meaning that their performance can be an issue.
    • Agreeing with the manufacturer to preinstall the apps ensures that they are properly tested and that optimisations occur to ensure that performance is as good as it can be.
  • Consequently, apps that are installed at the factory will often perform better and get used more than those that have to be downloaded.
  • It is clear that Microsoft’s intention is to put its Office apps on every platform that can run them and to ensure that users are strongly incentivised to use them.
  • The basic editing functions on the iOS and Android versions of Office can now be used by any user free of charge.
  • Furthermore, Office 365 is both reasonably priced (at $2 month more than Spotify) and free for students globally.
  • These changes mean that Microsoft has removed all of the reasons to use Google Docs, iWork, Libra Office and so on and as a result I think that they will cease to exist over time.
  • The Microsoft Office clones exist because historically either one could not access Office functionality on certain platforms or the software was too expensive.
  • In practice they are a reasonable approximation of the original but using them is painful when most of the rest of the world uses Office.
  • No one has ever been in doubt that Office is superior to anything else out there it was just a question of access and price.
  • Now that both of these barriers have been removed, I expect that the “Office clones” will wither and die over time.
  • Even people high up in the Linux and Google camps will admit behind closed doors that this is likely to be the case.
  • Office is rapidly becoming Microsoft’s most valuable asset and Microsoft is executing the right strategy in using it to bring users back into its ecosystem.
  • The first step is to ensure that content creators only use Office but on whatever platform they choose.
  • The second is to entice them back into the Microsoft ecosystem with a good marriage of Digital Work services and Digital Life services in a single user experience.
  • Here Microsoft is making slow but steady progress.
  • The one big hurdle that remains is how it markets its wares and tells its story.
  • Marketing remains firmly locked in the old way of doing things and is the only part of Microsoft that has not meaningfully changed over the last year.
  • If Microsoft begins to explain to users properly why they should be living their digital lives with Microsoft, then it has an excellent chance of really fulfilling its potential as the third ecosystem.
  • Until that happens, Microsoft is likely to continue in not making the most of its assets and will remain a hostage to the PC market.
  • Fortunately, none of this is priced into Microsoft’s stock making it safe to live in hope.

 

 

Amazon – Wood for the trees

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Amazon embarks on another random experiment.

  • Amazon looks set to launch a new innovation in its app store that amounts to Amazon giving away paid for apps as well as in-app purchases.
  • This looks very likely to be an extension to the Amazon Prime service where those that pay $99 per year for frees shipping on their goods also get access to Amazon’s music and movie streaming service and now a series of apps one usually has to pay for.
  • This makes sense as I think it very likely that Amazon will be paying third parties for what is normally paid for software downloaded by its users.
  • The aim is to increase the usage of its app store which to date has seen much less activity than Amazon would have hoped.
  • This is another classic example of how Amazon still can’t see the wood for the trees in not understanding what it is trying to achieve.
  • RFM research indicates that the quality of the Amazon app. store much better than many would expect.
  • When compared against the experience on iOS (100%), Amazon scores 74% which is below Google Play at 97% but much better than Windows Phone which scores 58%. (see here).
  • This strongly indicates that the reason why the app store is not being used is because the rest of the ecosystem is so poor not due to any shortcoming in the app store itself.
  • RFM research indicates that a vibrant app store is a very important part of an ecosystem’s offering to the consumer but it is not everything.
  • RFM thinks that an ecosystem must also have a good offering of Digital Life services and score well on six other usability criteria.
  • Against these other measures Amazon ecosystem scores a lowly 39% compared to the big ecosystems which score around 70%.
  • When this added to the fact that users have to pay $99 to get access to the ecosystem whether they want the free shipping or not, it is clear why Amazon continues to fail.
  • Unfortunately, Amazon appears to have no concept of what it needs to do to build a vibrant ecosystem preferring to embark on a series of expensive experiments.
  • Its pricing policy, its disjointed approach to hardware and its haphazard acquisition strategy are all signs that Amazon has neither internalised what the ecosystem is nor what is needed to make it work.
  • Until it does, this part of the business is likely to continue bleeding large amounts of money, diluting Amazon’s wafer thin and volatile operating margins further.
  • I see another year of expensive experimentation ahead meaning that long suffering shareholders will be picking up the bill.
  • I think that Amazon will underperform Microsoft, Google and Apple in 2015 as all of whom know exactly what they are trying to achieve.

Android Wear – Wearing thin Pt II

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TAG Heuer smartwatch unlikely to meet its own high standards.

  • The Android Wear story took another turn on Thursday (19th March 2015) with the launch of a partnership between TAG Heuer, Intel and Google to create a smartwatch.
  • This will take Android Wear significantly up market but the success of this product remains very uncertain.
  • From TAG Heuer’s point of view, it sees the huge hype surrounding the Apple Watch and feels that it has to get in on the act or be left behind and watch its market erode.
  • I think that we are nowhere close to this becoming a reality but it’s thought process is understandable.
  • I suspect that TAG Heuer will contribute the design and the brand, Intel the silicon and Google the software and services.
  • I strongly suspect that Intel and Google will be putting up the majority of the development costs of the product which is expected to be launched before the end of the year.
  • For TAG Heuer, this is not the first time it has experimented with electronics as it introduced a mobile phone called Meridiist in 2008.
  • This product sank without trace but that did not stop TAG Heuer adding solar power and announcing the Meridiist infinite device last year.
  • TAG Heuer has no real presence in the mobile phone market and as a result experiments that fail are unlikely to do it much harm.
  • However, a smart watch based on Android Wear with the guts from Intel is the worst combination for the device to have terrible performance and battery life.
  • Furthermore, continuous heart rate monitoring is now table stakes in the smartwatch business and I doubt very much that Intel has come up with a sensor that actually works.
  • Those that have solved this problem have tended to have designed the entire sensor themselves which is what I believe Apple has also done.
  • Failure to have decent battery life, flawless functionality and heart rate monitoring is likely to see this product ship almost no volume especially as it will be priced at a substantial premium to other devices including the entry level Apple Watch.
  • TAG Heuer has a strong brand but it is a brand built on chronographs and a sporting heritage which basically means that the device must perform superbly or damage the TAG Heuer brand.
  • This is something that TAG Heuer cannot afford regardless of its (unfounded) fears of being left behind by a revolution in the wrist watch industry.
  • I think that the shortcomings of Android Wear (see here) will mean that the device will fail to live up to the standards demanded by the TAG Heuer brand and that the device will not launch this year.
  • By partnering with TAG Heuer, Google is going in the right direction as wrist watches are driven by fashion and luxury, meaning that it is the existing watch manufacturers who have the greatest opportunity to succeed should they get the product right.
  • This is represents a PR boost for Android Wear but it does nothing to fix the inherent problems of Android Wear and hence I see no reason to change my cautious stance on the software platform.
  • I will not be surprised to see this project follow Meridiist and disappear without trace once it is established that the product will not meet TAG Heuer’s exacting standards.
  • Android Wear remains ill-suited for wearables and I think that this continues to leave the door open for Microsoft should it get its act together.
  • Microsoft is still my number one choice for the ecosystem.

 

 

 

Android Wear – Wearing thin

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Being closed is not what is causing Wear to fail.

  • The fact that Android Wear is not doing well has nothing to with software and everything to do with how unsuited it is for a wearable device.
  • There are complaints floating around the industry that the fact that Android Wear is not very customisable is hurting its appeal to handset makers.
  • Android Wear is not very customisable because it is not open source code but instead is completely controlled and managed by Google.
  • The irony is that fragmentation in wearables is actually much less of an issue than it is in smartphones and it is here that Google needs to focus its efforts.
  • RFM research indicates that the lack of ease and fun of use is a major reason why Android devices are used much less than an iOS device at the same price point.
  • This is mostly due to the endemic fragmentation that plagues Android and is a problem which Google must fix if it is to:
    • 1) ever offer a proper challenge to iOS,
    • 2) prevent Microsoft from stealing market share when it gets its act together.
  • This is why I strongly believe that Google will end up turning open source Android into a closed proprietary OS similar to Windows Phone or iOS.
  • Almost all handset makers are now dependent on Google as a large majority of their users in developed markets demand Google services.
  • Hence, there is very little to prevent Google taking complete control in developed markets as handset makers have nowhere else to go.
  • In emerging markets it is a very different story as users do not demand Google services and so other options such as writing the code oneself, Cyanogen, Ubuntu, Firefox, Tizen and Sailfish have a much greater chance of being successful.
  • The bigger problem with Android Wear is that even a stripped down version of Android is unsuitable for a wearable device.
  • A wearable should be cool, be small, function well and have a battery life measured in months not hours.
  • Android wear does none of these things and consequently I think that it is devices like the Misfit Shine that will dominate the wearables space once a good use for these products has been found.
  • So far not even the Apple Watch makes a decent replacement for a traditional time piece and consequently I think that it will fail to ship in the kind of volumes that many are predicting.
  • Consequently, I suspect that wearables will end up running proprietary software that is suited to their purpose and that the third party apps. ecosystem will be far less important there than it is on smartphones and tablets.
  • While Android Wear is on the right path in terms software consistency, it is ill suited for wearables and I think it simply serves as a sign of what Google is trying to do with Android overall.
  • In the meantime, the door remains wide open for Microsoft which remains my top choice for exposure to the ecosystem.

Nintendo – Do or die

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Mobile represents Nintendo’s best shot at a future.

  • Nintendo has finally caved in to the inevitable and announced that its beloved gaming brands will now be making an appearance on smartphones and tablets.
  • While this probably signals the end of Nintendo as a hardware maker, I think it is the only way in which Nintendo will survive as a going concern.
  • Nintendo is entering into a partnership with game publisher DeNA which will create a multi-device membership service within which new games featuring the Nintendo characters will be offered.
  • Existing games running on Wii, Wii U and 3DS will not be ported over but these devices will have access to the new games.
  • This represents a massive change of direction for Nintendo.
  • Until now it has refused to make its gaming brands available on any hardware other than its own in order to drive sales of its own hardware.
  • When a company has a strong brand, competitive devices and desirable software this is absolutely the right strategy.
  • However, Nintendo’s brand has weakened materially and its devices are no longer competitive when compared to the offerings from Sony and Microsoft.
  • Consequently its gaming brands are at risk of falling into obscurity leaving the company and its shareholders with nothing of any real value.
  • By allowing its brands to sell on smartphones and tablets, Nintendo is opening up the possibility to sell hundreds of millions of games and of returning to the forefront of gaming consciousness.
  • The end result is likely to be lower revenues but much higher margins and absolute profits.
  • For the shareholder, the only thing that matters is absolute profit which is why I suspect the shares were up so strongly on the back of this announcement.
  • A few big hits will ensure that the next generation of gamers come to know and love Nintendo games and their characters thereby ensuring the company’s future.
  • Japanese managements have a horrible habit of holding out until it is too late but I think Iwata-san has just made it in time.
  • Nintendo has enough cash in the bank to invest in creating a great service utilising its beloved brands.
  • This is very likely to dampen demand for its hardware but it is not beyond the realms of possibility that mobile can act as an enticement for users to come back to Nintendo hardware at some point.
  • Mobile will only be a subset of all the games that are available and if users can be made to fall in love with Nintendo again on mobile, they may end up buying a Nintendo gaming device to experience the other games that are on offer.
  • I suspect that this is exactly Nintendo’s strategy which is why it has also announced the development of a new hardware platform called NX.
  • This is a long shot at best but Iwata-san’s sage actions give the company an outside chance at staying in hardware as opposed to none at all.
  • However, I think that Nintendo will end up having to close hardware development as it is very unlikely to ever achieve the scale required for it to be profitable enough to cover its cost of capital.
  • As a software developer, Nintendo will have lower revenues than before, but critically it will be more profitable than ever before with better cash flow.
  • Furthermore, by selling huge volumes at much lower prices, Nintendo can ensure the appeal of its gaming brands to a whole new generation of game players that up till now it has stubbornly ignored.
  • This move vastly improves the outlook for Nintendo giving it a shot at a real future rather than a long and painful kiss goodnight.

Cyanogen – The great skirt escape

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Cyanogen promises clients an escape from under Google’s skirts.

  • Cyanogen is a company on a mission with 120 employees and raising $100m to take its business to the next level.
  • Cyanogen is very much like Canonical except that it uses Android as its base rather than Ubuntu.
  • Both of these companies adapt community-built handset software to a point where a customer can use it to deliver his ecosystem over a mobile device.
  • In return for the tools and help in rolling out Digital Life services on a mobile device, the ecosystem owner or handset vendor pays Cyanogen or Canonical a per handset royalty when it ships commercial product.
  • RFM research indicates that this royalty is between $6 and $2 per handset based on volume.
  • This business model looks to have evolved from the early days of smartphone OS licensing pioneered by Symbian and Microsoft.
  • At the moment Cyanogen offers its software to OnePlus, Alcatel-TCL and Micromax and I suspect that volumes in 2014 were tiny.
  • RFM estimates that there are around 120 people working at Cyanogen, almost all of whom are engineers.
  • This would give an OPEX run rate of around $1.8m per month and requiring something like $26m in revenues to break-even.
  • At an average of $3 per handset, Cyanogen’s customers would need to ship 8.6m units to break-even which given the size of the smartphone market, is not unfeasible.
  • However, it appears that Cyanogen has much bigger ambitions as it intends to go beyond the OS and to begin developing some of the services itself for customers to implement.
  • Furthermore, as Google, takes more and more of the functionality of Android within its own Google Mobile Services (GMS) software, Cyanogen will have to write more code of its own to fill the gap.
  • This combined with the desire to do far more than just deliver the OS is what I think is behind Cyanogen’s raising of $100m in fresh funding.
  • At its current size, this would be enough to fund the company for 5 years and consequently, I think that this signals a significant ramp up in its size.
  • Cyanogen has already stated that it will have its own app store within 18 months and I suspect that many other Digital Life services are likely to follow.
  • This will increase the price that it can charge as a per handset royalty, but at the same time costs are going to increase materially.
  • If Cyanogen can offer a complete suite of software that allows an ecosystem company to roll out its Digital Life services on mobile and still maintain its differentiation, then it has a reasonable chance of success.
  • On the other hand, the software will have to be very flexible and completely invisible to the user in order to appeal to customers.
  • This is harder than it sounds to achieve, and Cyanogen will have to build its software suite with great care to ensure that it can be all things to all customers.
  • I suspect that the appeal of this offering will be most prevalent in China and India where ecosystem development is just getting underway and where most vendors are very keen to get out from underneath Google skirts.
  • This will work in emerging markets as most users are unfamiliar with Google’s services and do not demand them meaning that they can be successfully offered something else.
  • Cyanogen biggest targets should be Baidu, Tencent, Alibaba and China Mobile all of whom are intent on creating their own ecosystems but are having some difficulty in doing so on their own.
  • These 4 are already engaged in building their own ecosystems based on Android but seem to be having great difficulty getting something workable off the ground.
  • The biggest issue here is control as I suspect that all four of these are very keen on having complete control of the software internally.
  • This is why, I think that these companies will buy rather than rent making Cyanogen and Ubuntu less attractive as an option to escape from Google.

 

Alibaba – Chop and change

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Corrects yesterday’s post regarding Alibaba’s Yun OS.

  • Yesterday’s Radio Free Mobile blog post incorrectly claimed that Alibaba had stated that it had ceased updating its user experience on Android.
  • Both Baidu and Alibaba have an in house Android development now referred to as Yun OS.
  • It is Baidu that has stated that it has ceased development of its user experience and not Alibaba.
  • Unfortunately, the similarity in the names caused RFM and a number of other commentators to mix them up.
  • RFM apologies to its readers for any inconvenience caused.
  • This does not change RFM’s opinion that Yun OS is not going to fulfil Alibaba’s requirements and that Alibaba is already considering options to replace Yun OS with something else.
  • In that regard, the opinions expressed in Alibaba – Chop and change (see below) remain unchanged.

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Ubuntu and Sailfish are Alibaba’s most realistic options.

  • It looks very much as if Alibaba’s attempt to build its ecosystem on top of Android has been laid to rest, opening the door to one of the alternative offerings.
  • YunOS is Alibaba’s ecosystem built on top of AOSP (Android Open Source Package) that was launched late in 2011.
  • Originally Acer was going to launch a device, but Google managed to put a stop to that by reminding it that as a Google Mobile Services (GMS) vendor, it had signed an Anti-Fragmentation Agreement (AFA) that prevented it from doing other types of Android.
  • This is a grey area as technically, handset makers are allowed to make other types of Android devices as long as they don’t call them Android.
  • In practice, handset makers who make GMS compliant devices for developed markets are going to have a very hard time making other types of Android devices for the Chinese market.
  • This combined with the inherent difficulties that Alibaba has experienced with Yun OS looks to have forced it to abandon the platform all together.
  • Alibaba has stated that it will stop updating its Android skin for YunOS and that the project is now suspended.
  • The skin is the part of the software that the users see most and stopping its development is a very strong sign that Alibaba has given up on YunOS altogether.
  • I do not for one minute think that Alibaba has given up on the idea of having its own ecosystem but has decided to pursue another strategy.
  • Alibaba has four options in my opinion.
    • First. Make another attempt at creating an ecosystem on Android. Alibaba is likely to encounter all of the same problems again so I can’t see it going here again.
    • Second. Pay Canonical to build an Alibaba ecosystem based on Ubuntu. This is a realistic option and I think that Meizu is already hard at work creating an Ubuntu based device.
    • (RFM thinks that Meizu is now effectively controlled by Alibaba and will be the focal point for Alibaba’s attempts to get its ecosystem on mobile up and running (see here)).
    • This is a viable option but the third party app. ecosystem will have to be built from scratch and if the volumes are huge the fees to Canonical will also be very significant.
    • Third. Sailfish. This is the user experience created by Jolla which came from the Meego development inside of Nokia.
    • This is also a viable option but Alibaba would probably need to buy the company and bring all of the community software development in house.
    • The Alien emulator from Myriad enables Android apps to run on Sailfish but how well it does this in the wild is yet to be seen.
    • Fourth. Tizen. This is the linux based smartphone OS that is championed and effectively controlled by Samsung.
    • The device that Samsung has released has been badly reviewed and I suspect that Alibaba is as keen to avoid Samsung as it is to avoid Google.
  • Firefox from Mozilla is not really an option for Alibaba as it is too low end and Alibaba will never be able to have the control over the code that it needs.
  • This leaves either Sailfish or Ubuntu as the front runners to replace YunOS as Alibaba’s mechanism to distribute its ecosystem through mobile.
  • I suspect that an exclusive alliance with Xiaomi could be a winning strategy but at the moment neither Xiaomi nor Alibaba think that they need each other.
  • With the Chinese ecosystem market likely to stabilise at around 900m users, there is plenty of space for three large ecosystems.
  • However, there are already 5 contenders (Baidu, Alibaba, Tencent, China Mobile and Xiaomi) meaning that at least two are likely to fall by the wayside.
  • I very much doubt that the developed market internet brands (outside of Apple) will get a meaningful foothold in China.
  • China is big enough for Chinese ecosystems to flourish there and not need to go anywhere else.

Intel and PCs – Soggy in the middle

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A new PC cycle depends on marketing.

  • Intel warned on Q1 revenues as the corporate refresh cycle has come to a more abrupt end than expected.
  • This combined with a poor macro outlook for Europe caused Intel to warn that revenues would be about $900m lower than expected.
  • Q1 15E revenues will now be $12.5bn-$13.1bn ($12.8bn) compared to previous guidance of $13.2bn-$14.2 ($13.7bn) which represents a miss of 6.5%.
  • 2014A PC shipments stabilised as the end of Windows XP support by Microsoft forced many corporations to upgrade their PCs.
  • This offset the ongoing weakness in the consumer PC market.
  • This was expected to filter down into small and mid-size corporations but this has not happened.
  • Adding in the extra weakness triggered by instability in the Eurozone caused a meaningfully weaker revenue picture to emerge.
  • The server business continued to be strong but with corporates falling off, it was unable offset the long-term trend of consumers moving to smartphones and tablets.
  • It is clear that users who only use a PC for content consumption are better served by using a smartphone or a tablet.
  • RFM research indicates that a large proportion of content consumers have already deserted the PC but there are still enough of them still leaving the platform to keep PC numbers heading slightly south.
  • Many commentators will see this news as another nail in the coffin of the PC but I don’t believe that this is the case.
  • Content consumers no longer have a reason to own a PC but content creators and companies need the extra power and input systems that the platform offers and I don’t see this going away.
  • Furthermore, RFM estimates that content creators and corporations make up more than 75% of all PC users.
  • Consequently, once the content consumers have all left the platform, the market should grow slowly, albeit from a lower level.
  • Finally, I think that when Intel, Microsoft and the PC makers finally realise that the laptop is an obsolete form factor and start properly pushing the tablet PC as a laptop replacement, then a product cycle will kick in.
  • The tablet form factor offers far better flexibility, functionality and ergonomics to the user than the laptop and with the specification of the Surface Pro 3, it can be a true portable desktop (see here).
  • If these companies get behind a marketing message that educates the users with regard to what is really on offer, then I can see laptop form factor being replaced with the tablet.
  • This would be enough to drive the PC market back to growth and underpin a big rally in all the PC names including Intel and Microsoft.
  • However, this requires dusty old marketing departments to ditch the sales tactics they have been using for 30 years and embrace a new paradigm.
  • Of this there is no sign and until there is, profit warnings and slip ups of this nature are likely to re-occur.
  • Weakness in Microsoft represents an opportunity to pick-up exposure to the larger ecosystem theme.