Firefox OS – Soggy matches.

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Ignite initiative has far to go before it catches fire.

  • Mozilla has done a complete about face in ditching its cheap smartphone strategy and deciding instead to focus on an experience that users might actually want.
  • Ex-Mozilla CMO Chris Beard has been running the show since July 2014 and last week saw the launch of a new strategy to tackle the smartphone market.
  • In an e-email sent to staff, Mozilla has launched its new initiative called Ignite that throws away many of the old strategies of Firefox OS and takes the OS in a new direction.
  • The main strategies are:
    • First. Cheap smartphones have not worked for Mozilla and from now on the focus will be on quality rather than cost.
    • Mozilla is aiming to build smartphones that users actually want rather than one that they buy because it’s the cheapest.
    • I think that cheap has failed because none of its partners have ever came close to the mythical $25 price point and by the time devices came to market, Android had already beaten Firefox OS to it.
    • Second. Android app compatibility will be included.
    • Mozilla has not said whether this will be done through emulation (most likely) or through porting, but either method is going to be fraught with problems especially when competing with Android apps on Android devices at the same price point.
    • Mozilla will also have to overcome its lack of an app. store, but given I think that Amazon app store would make a reasonable substitute given its 74% score in RFM app store equivalency tests (see here).
    • Third. The software will always be open source and focused on bringing the web more effectively to the mobile device.
  • Offering the cheapest smartphones and reference designs certainly did not work for Mozilla but I am not sure that this will either.
  • Android is currently shipping over a billion units per year, and against this kind of volume Mozilla is likely to really struggle.
  • This is because at any price point, there is likely to be an Android device available with a better specification thanks to the huge volumes in which the platform ships.
  • This leaves Mozilla with the task of making its user experience so compelling that users won’t mind buying a lower specification of device in order to get access to its user experience.
  • This leads Mozilla straight back to the ecosystem where its 22% score on the Digital Life pie (see here) leaves it with a huge hill to climb.
  • Furthermore, when it has a great Digital Life offering that easy and fun to use, it will then have to convince users to adopt it.
  • This is a very difficult feat and one with which even Microsoft is really struggling despite its $17bn in sales and marketing spending.
  • The new CEO of Mozilla has a marketing background and so I hope that he will have a good idea how to market the proposition but before that he has a huge hill to climb in making the Firefox OS ecosystem appealing.
  • I the best instance, it will be sometime and a lot of investment before Mozilla is close to presenting any kind of threat to the status quo.
  • Hence, Apple and Google will not be losing any sleep over this and the opportunity for Microsoft remains open for now.
  • Microsoft and Google remain my favourite plays in the digital mobile ecosystem.

Google vs. Operators – Storm in a teacup.

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Rebellion against Google’s dominance likely to fail.

  • Between them Google and Apple have the mobile operators in a tight grip.
  • The operators’ failure to develop any kind of services (other than voice and data packets) that users like has meant that they are fully on track to become commoditised bit pipes.
  • The phones and services that users choose are freely available on every network meaning that all an operator can really compete with is price.
  • This has led to a situation where the real profits in the mobile industry are earned by Apple through premium device pricing and Google through mobile advertising.
  • There is very little that the operators can do about Apple, but there is a move afoot to try and wrest some concessions from Google.
  • Operators in Europe are considering doing this by installing ad blocking software in their networks which would prevent the likes of Google, Yahoo! and AOL from monetising their services through advertising.
  • If all the operators in every territory install this software and all turn it on at the same time, then Google will have a problem, however this is exceedingly unlikely to happen.
  • The problem they face is that users want Google services and I strongly suspect that this gives Google the advantage.
  • If a user is faced with either paying a small subscription for the services or allowing himself to be tracked then I suspect that almost all users will allow themselves to be tracked and advertised to.
  • Consequently, Google could reasonably react to ad blocking by turning off its services on networks where its advertisements are blocked.
  • There is no such thing as free internet.
  • Users either pay for services with cash or with personal data and if a user stops paying then the provider of the service has every right to cut the service.
  • I think that the problem here is that users will not take well to having their services cut and will look to switch networks to get their services back.
  • Operators will do anything to avoid losing subscribers and are consequently very unlikely to present users with a united front when it comes to ad blocking.
  • One of them is very likely to break ranks, and when it does, the entire proposition on ad blocking will come tumbling down.
  • I have seen this happen time and again with operators and suspect that this move to block advertisements on their networks will amount to very little.
  • Hence, I see no change to the status quo and think that Google and Apple will continue to earn most of the industry’s profits for some time to come.
  • This move would be a boon to Microsoft which is well set up to monetise its ecosystem through subscription and can easily play the “advertising-free” marketing card.
  • However, before it does that it must bring its ecosystem to life and fix its marketing message and there remains a long way to go on both of these missions.
  • Microsoft and Google remain my favourite ways to play the digital mobile ecosystem.

Samsung – Back to basics.

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Launch of IoT modules returns Samsung to its roots

  • Samsung has launched a range of modules aimed at Internet of Things (IoT) devices at an event in San Francisco.
  • The new platform is called ARTIK and will initially consist of three modules.
    • First. ARTIK 1, a ladybird sized module with a very low power 250MhZ microprocessor from Ineda with basic motion sensors. This could have battery life of around one month.
    • Second. ARTIK 5, a 29mm x 25mm module with a 1Ghz Samsung processor and memory aimed at home hubs, drones and IP cameras.
    • Third. ARTIK 10, a 29mm square with a 1.3Ghz Samsung processor, 32GB of on board storage aimed at more advanced devices where more processing and data storage is needed.
  • This is just the initial launch and I suspect that the range will be deepened as the IoT market develops and new use cases and requirements emerge.
  • This launch brings Samsung into line with Intel, Broadcom and Freescale who already have products in the market but Samsung has an advantage.
  • Samsung’s position in consumer electronics and white goods ensures that there will be a high volume, tier-1 customer for these modules and Samsung intends to put this in almost everything it makes.
  • This is important because ensuring that there are a lot of devices in the market will mean that developers and other hardware makers will be interested in ensuring that their products work with this platform.
  • Furthermore, as Samsung also makes many of the components that go into these devices, it can ensure optimal component design as well as cost effective volume manufacturing.
  • These modules will be the nerve centre of the devices that use them meaning that they will automatically be part of Samsung’s cross-device strategy.
  • This aims to ensure that all of Samsung’s devices can seamlessly communicate with each other thereby incentivising a user who has one Samsung device to buy another.
  • Following Samsung’s exit from the ecosystem, this is one of the few avenues left open to Samsung to differentiate its hardware and achieve some degree of premium pricing and margin.
  • Allowing others into this group could diminish that effect as they too will also communicate seamlessly but having many more devices as part of this group makes the proposition more appealing for users.
  • I think that this will far outweigh any disadvantage from users being able to choose competing devices as it will vastly increase the number and range of devices available.
  • This is a similar strategy to what Xiaomi is doing to grow its ecosystem beyond phones, phablets and TVs.
  • This is exactly the area where Samsung should be competing as making things smaller, better and cheaper is what it is really good at.
  • However in the short term, I still think that Samsung will struggle with earnings growth and I prefer Microsoft and Google for the ecosystem.

 

Apple and Microsoft – Silver linings.

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The iPad Plus could help Microsoft more than it hinders it.

  • Apple’s launch of the iPad Plus might just create the user excitement that Microsoft seems unable to create for itself.
  • Apple looks set to launch the iPad plus towards the end of this year or early in 2016E.
  • This will be a 12” device with a very large battery equipped with technology that is capable of sensing the pressure exerted when the screen is touched.
  • This technology is used on the Apple Watch but on a tablet it enables a much more interesting use case to come to life which is the use of a stylus.
  • Including pressure sensitivity allows a tablet to offer a far more realistic pen-based experience and opens the iPad to many use more cases including coming closer to a laptop replacement.
  • The inclusion or support of a stylus on the iPad Plus is looking increasingly likely.
  • The iPad Plus will still be running iOS, but adding all this up leaves the specification of the iPad Plus looking more and more like the Surface 3 and Surface Pro 3.
  • This might be a nightmare for the hardware business inside Microsoft, but I suspect there is a silver lining.
  • I am certain that one of the first developers to ensure its apps. are upgraded to take full advantage of these new features will be Microsoft.
  • With the basic versions of Office 365 being free on iOS and Android there is no reason to use anything else and the iPad Plus will be a better hardware specification on which to use Office.
  • This could have a positive effect on Microsoft’s presence on the iPad and support the growth of Office 365 which RFM calculates is one of Microsoft’s most important profit drivers in the long term.
  • Furthermore, this device may begin to make users understand that a tablet form factor (with a keyboard, mouse and sometimes a stylus) offers a vastly better computing experience than a laptop.
  • Microsoft and Intel have been incapable of creating any real user interest around this form factor and instead have concentrated on selling them as laptops lookalikes.
  • Hence, it is quite possible that Apple’s product will kick-start the much needed laptop replacement cycle as users realise that there is a much better, much healthier option available for portable computing.
  • The risk, of course, is that Apple steals a significant slice of market share from Microsoft but the fact that the iPad Plus is using iOS is likely to keep Microsoft safe.
  • iOS devices are not capable of offering a full laptop experience and the majority of users that don’t need this level of performance have already deserted the laptop in favour of a smartphone or a tablet.
  • Hence I think it unlikely that the iPad Plus will be enough for the remaining users to switch but it may be enough to get them thinking about what else is on offer.
  • This will lead them to the Surface as well as other similar products which I am hopeful will be in the market by the beginning of 2016E.
  • Hence, I don’t see the iPad Plus as a negative for Microsoft.
  • In fact it could well be the catalyst that kick-starts a replacement cycle that benefits Microsoft that it has incapable of doing for itself.
  • Microsoft remains one of my top choices in the ecosystem where I think that the shares are worth around $61 even if it does a poor job on the ecosystem.

Research Publication – Microsoft – Mission Impossible

May 11th 2015:  Radio Free Mobile deepens its flagship research product with the publication of: Microsoft – Mission Impossible – An in depth analysis of the Microsoft ecosystem

Microsoft – Mission Impossible  –  (Click here for details and purchase options). RFM corporate subscribers will receive their copy directly by email. 

Cover

Microsoft’s position is difficult but not impossible. Nadella’s mission, which he has decided to accept, is three fold. 1) Control legacy, 2) Bring the ecosystem to life and 3) Merge Digital Work and Digital Life. Microsoft must reverse its share declines in mobile, make its ecosystems delightful and fix its marketing in order to succeed. Fortunately, the shares of Microsoft are attractive even it blows Missions 2 and 3.

  • Opening act: Nadella has already achieved what many thought was impossible in flipping the culture of Microsoft on its head. From boardroom to water cooler, the company is aligned in realising that things have to be very different going forward.
  • Mission 1: Control legacy. RFM calculates that Microsoft has snuffed out the PC revenue time bomb by moving to business subscriptions. There is a long pay-back period but there will be more profit generated in the long run. RFM thinks that Microsoft has succeeded in this mission, moving the focus onto Missions 2 and 3.
  • Mission 2: Ecosystem. Microsoft’s position in Digital Work is very strong and it has a good portfolio of Digital Life services. However, the services need to be properly integrated in order to offer the seamlessness user experience that will win the hearts and minds of users. Microsoft must also reverse its market share losses in mobile as this is having a seriously negative impact upon its credibility in mobile. Progress so far in fiscal 2015E has been disappointing.
  • Mission 3: Digital Life and Work. Merging Digital Life and Digital Work seamlessly in a way that is both easy and fun to use is something that only Microsoft has a real hope of achieving. This will create differentiation allowing the company to monetise and improve profit growth. To succeed here requires Mission 2 to work, service integration at least as good as Google’s, and a turnaround in marketing.
  • Marketing. RFM thinks that Microsoft’s marketing is not nearly as effective as it should be. In the ecosystem, Microsoft is the challenger and hence it must explain to users why they should live their Digital Lives and Work with Microsoft. Simply telling users that it exists may have worked 20 years ago. It no longer does today.
  • Safe to live in hope. The good news is that Microsoft’s valuation is undemanding even if it fails to execute on Missions 2 and 3. RFM has used a combination of comparative valuation and DCF to arrive at a valuation of $61.0 per share. This makes Microsoft is attractive just on the basis of the success Mission 1 where it is already showing excellent progress.

Fitbit – Market timing.

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Perfect timing gives Fitbit its best chance of making it.

  • Wearables maker Fitbit has timed the market perfectly, in announcing that it will raise $100m in an IPO.
  • From its IPO documents it is also pretty clear that Fitbit is pinning its long-term future on building an ecosystem around its devices that will keep users choosing to use a Fitbit device.
  • The good news is that there is money to invest in this strategy as the documents also reveal that the company is more profitable than I had given it credit for.
  • In 2014A revenues / EBIT were $745m / $158m representing over 174% growth in revenues and 21.2% EBIT margins.
  • 9m devices were sold with an ASP of $68 and the company reported that it has 9.5m active users.
  • This is somewhat lower than I would have expected given that the company has cumulatively shipped 17.0m devices in the last few years and the fact that it is by far the stickiest wearable product on the market. (No data yet for Apple Watch).
  • This points to a higher replacement rate than I expected and also raises question marks about the long term strategy.
  • Fitbit needs to create an ecosystem around its devices in order to maintain long term profitability, but the number of users is not nearly enough.
  • Furthermore, this is an ecosystem created around health and fitness which is both a crowded and competitive space where the juggernaut of the sector has just entered.
  • However, Fitbit’s devices are just a fraction of the price of the Apple Watch and so the focus must now be on growing the user base as quickly as it can.
  • With all networks and ecosystems, their value or utility increases by the square of the number of users or devices that are attached to them.
  • Consequently, if Fitbit can grow a large and loyal user base, then it should survive the worst that the market can throw at it.
  • This would even include my bearish prediction (see here) that, like digital cameras, the demand for pedometers will be eaten up by smartphones as their ability to track physical movements continues to improve.
  • This is why outside of the quarterly twists and turns in the fortunes of Fitbit, the most important number to watch will be how many active users the company has.
  • In the grand scheme of things, the numbers are tiny as RFM believes that 100m users are needed to make an ecosystem viable and 300m to make it very successful.
  • However, health and fitness is a focused area this means that less investment is required to offer users a great service.
  • Therefore a lower total number of users is needed to be successful.
  • However, Fitbit will be open to the risk that one of the bigger players makes a realistic play for the segment and uses its scale to push Fitbit out of the market.
  • With positive cash flow, despite heavy capex and working capital requirements, there is $200m in the bank which gives Fitbit the ability to invest and grow its ecosystem.
  • Fitbit has timed its IPO beautifully which is likely to mean strong demand and a successful debut.
  • This combined with the cash reserve gives it a fighting chance but it must focus on delighting users and keeping them within its ecosystem otherwise, it too, will eventually fall by the wayside.

 

Sony FY 15A – Expectations management.

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Hirai gives himself some breathing space for FY16E.

  • Sony reported FY 15A results that were in line with revised expectations but guided weakly as it is clear that there are still uncertainties with regards to the timing and extent of the recovery.
  • FY 15A Revenues and EBIT were JPY8,215bn / JPY68.5bn which was in line with consensus given that Sony had already pre-announced its figures on 22nd April 2015.
  • As expected the imaging sensors, Sony Financial Services and PlayStation have underpinned the improvements that have been seen during the year.
  • However, guidance for the coming year was softer than expected with FY 16E revenues and EBIT expected to come in at JPY7,900bn / JPY320bn which compares unfavourably to consensus at JPY8,236bn / JPY427bn.
  • Part of the lower guidance is due to FX fluctuations but also Sony is giving itself room to breathe.
  • PlayStation is expected to see no growth despite beating the Xbox hands down on unit shipments while TVs and cameras are expected to see declines.
  • Sony has had 15 profit warnings in the last 7 years and it is looking to have its first trouble free year for a long time.
  • Consequently, Sony is keen to set targets that it hopes can be beaten should things go well but also to have room left to deal with adversity.
  • I am comfortable that Sony will have a reasonably trouble free year but there is far more at stake than just its FY16E goals.
  • Sony has a very strong position in gaming which is the single most important Digital Life service.
  • This position is under threat from Microsoft which has a vastly superior user experience and a whole ecosystem of Digital Life services to draw users in.
  • Sony has the potential stave off this threat by building an ecosystem using its existing hardware and media assets and tying them all together.
  • If this is successful, users will want to own a Sony device meaning that it can, once again, charge a premium and earn a decent return.
  • However, this approach requires a strategy that looks at the assets as a portfolio rather than a group of separate businesses.
  • Here, I worry that Sony is going backwards.
  • It recently (see here) decided to make its units more autonomous so that they can react more quickly to execute their strategies, but this is fraught with peril.
  • Profits from the ecosystem can come from anywhere and it is not impossible that a great user experience created by PlayStation could one day drive higher TV margins.
  • With this new structure I can see PlayStation fighting with the TV division for a share of the profits and the whole strategy breaking down.
  • Sony thinks that it can manage this problem but history is not on its side and there is a big risk of returning to the old silo mentality.
  • This will be disastrous for any recovery and could lead to Sony failing to attain its lofty ambitions.
  • I still think that Sony is the only Japanese consumer electronics maker in with a chance but in the meantime Microsoft and Google are better places to be in the ecosystem.

Google – Law of small numbers.

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Google must take control of software distribution.

  • The headlines are touting 80% growth in share for Android 5.0 (Lollipop) but that is only because it is coming from a tiny base.
  • The reality is that Android 5.0 (Lollipop) is still used on less than 10% of Google Android devices that are in the world today.
  • If all Android devices are included, then RFM estimates that the number is more like 4% as Google compliant Android makes up only 43% of the entire base of Android devices in the world.
  • In contrast iOS8 made it onto over 30% of devices within 2 days and over 70% of devices within 3 months.
  • Lollipop was launched with great fanfare almost a year ago at Google i/o 2014 and it represents a great improvement over KitKat.
  • However, as only 4% of all Android devices are using it after one year, in reality it has no impact on the overall user experience and makes Google a laughingstock.
  • This problem exists because Android distribution is controlled by the handset makers and operators who have declined to upgrade their devices.
  • Google’s inability to roll out its software onto its devices is now the biggest problem that Google has.
  • Fragmentation, malware and so on can be dealt with but getting its software onto the devices that run its services is the most basic and fundamental requirement to have a thriving ecosystem.
  • Without it, there is no point in upgrading the user experience and the ecosystem because the users will never experience it.
  • The worst part of it is that the software has been widely available and documented for a year which has allowed its competitors to copy its innovations and get them to market while Google’s software sits on the shelf.
  • While this state persists Google’s Digital Life services, upon which $8bn of its advertising revenue depends, will become less attractive and less engaging because almost all users will be running older code.
  • This gives Apple plenty of space to distance itself from Google in terms of the quality of the experience and Microsoft the opportunity to break in.
  • This is why Google’s priority must be to take control of software distribution.
  • The problem here is warranty liability as the distributor of the software has to be responsible should the distributed software brick the device.
  • Currently, it’s the handset makers and the mobile operators that take this liability but I think Google will have to take it over.
  • This means extra risk for Google but it will provide a further incentive to ensure that the software is much more consistent and of very high quality before distribution.
  • For me, this is the single most important issue that Google needs to address at its developer conference (Google i/o) which will be held on 28th and 29th of May in San Francisco.
  • Without addressing this issue, most of the conference will be irrelevant as great innovations that sit on the shelf rather in the hands of users benefit only competitors.
  • Lollipop is a great upgrade for Android and improves the user experience significantly, but while it sits on the shelf, only a sucker will think that it makes a difference to the Google ecosystem.
  • Microsoft remains my top choice for the ecosystem but there is still some upside in Google even if it fails to fix this thorny issue.

 

Facebook and Nokia – Value in patience.

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Facebook deal underlines that it is too early to sell Here.

  • It looks very likely that Facebook has already or is about to sign up to use Here as the source of location data for its services.
  • Here is a global mapping company owned by Nokia that is one of only two high quality maps that are available on the open market.
  • The other is Google and to date, Facebook has used a combination of Google or Apple maps for its location data.
  • RFM research has found that Here’s map is just as good as Google’s but where it is less good is on points of interest and searching for places.
  • However, Here’s great redeeming feature is its neutrality.
  • Since the sale of Devices and Services to Microsoft, Nokia has no skin in the digital ecosystem making it far more attractive as a supplier of mission critical data.
  • In many ways both Google and Apple are competitors of Facebook and clearly it feels uncomfortable relying on a competitor for such important data.
  • All of the old concerns of being suddenly switched off or treated unfairly will be at the forefront of Facebook’s mind.
  • Consequently, as long as the mapping data is of good enough quality (which it is), Here is the best option for Facebook as it knows that it will be treated fairly and that Nokia has no incentive to suddenly terminate its contract.
  • I think that this is a classic example of the opportunity that still lies ahead of Here.
  • When many of the contracts were struck with Google, its ecosystem ambitions were much less defined and consequently it was not seen as a threat by its customers.
  • A lot has changed in a few years and just as Google is losing the default search provider position with Firefox, and probably now Safari, the same is happening in maps.
  • Consequently, I think that Here is in pole position to gain a meaningful amount of market share over the next year or two as Google Maps contracts come up for renewal.
  • This is why it is much too early to sell Here.
  • If Here can meaningfully increase its market share before it comes to a sale, it will be able to command a much higher valuation.
  • The market chatter is looking for a price tag of around €2bn but I think that if Nokia is patient and grows market share, it could get €4bn or more.
  • This combined with a strategic sale of the patent portfolio at some point could allow investors to realise significantly more value than they do today.