Leap Motion – Second lap

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This reinvention makes more sense 

  • Following on from the mess of its first launch in 2013 (see here), Leap Motion has now shifted its focus from PCs to Virtual Reality (VR) which is a use case that makes far more sense.
  • The original idea was to use the Leap Motion controller to turn any PC into a touch enabled device but adding it into VR makes far better use of the technology that has been developed.
  • The beauty of the Leap Motion device has always been its ability to faithfully recreate a pair of fully functional hands in 3-dimensional virtual space.
  • In PCs, this is a nice to have but in VR it obviates the need to have any hand controllers which is a problem that I think has not been adequately solved to date.
  • The weakness of the Leap Motion offering is that offers no haptic at all.
  • While this was not a problem in PCs, I think in VR haptics are going to be increasingly important as the experience aims to be as close to real life as possible.
  • How Leap Motion aims to solve this problem is unclear and looking at the products that it has available today, not much seems to have changed over the last three years.
  • This brings me back to the botched launch in 2013, which I have long believed was due in no small part to management execution issues.
  • However, I also believe that management was under intense pressure from its investors to get to market which resulted in good hardware but less than perfect software which meant that the user experience was far from great.
  • The result was a device that users played with a few hours and then threw in a desk draw and forgot about.
  • However, with VR the use case is far more compelling.
  • Leap Motion can detect movement in all joints of all fingers and thumbs which in a virtual 3D environment has far more applications.
  • Furthermore, the device is small enough to mount on the front of a VR headset without meaningfully increasing its weight.
  • The obvious target for Leap Motion has to be integration as the solution would be much less cumbersome with the sensor integrated into the headset.
  • I think that the combination of Leap Motion with a solution to provide haptic feedback (a pair of gloves?) could provide a compelling offering for VR.
  • I still think that Augmented Reality (AR) is the future (see here) but it is far more difficult to implement, meaning that it won’t hit the big time for some years to come.
  • In the meantime, I think that the VR solution with the most promise is Sony, as it is one of the cheapest, already has an installed base of 100m devices that can run it as well as a thriving developer community.
  • However, Sony’s has a legendary ability to surrender dominant market positions with barely a whimper so whether it can hold onto any success it has in VR is questionable.
  • I suspect that Leap Motion will end up being acquired by one of the VR players which I think will be welcomed by its long suffering investors.

Facebook & HTC – Collateral Damage. Pt II.

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Oculus is back on the HTC Vive, but it won’t save HTC.

  • Oculus Rift apps are once again running on the HTC Vive but I do not think that this will save the Vive or HTC as the road for its VR hardware is pointing to commoditisation.
  • A firmware update for the Oculus Rift prevented its apps from running on the Vive which to me made no sense as Facebook is not pursuing a hardware monetisation strategy when it comes to VR.
  • I think that, for Facebook, VR is about entering a new Digital Life segment (gaming) as well as being present just in case its core social networking functions become very relevant on this form factor.
  • Monetisation from understanding the data is the main point of this strategy with perhaps the sale of content and games being a nice extra.
  • Hence, as Facebook does not intend to make a high margin from selling Oculus Rift hardware, it makes sense to incentivise the spread of the platform as widely as possible.
  • From Facebook’s perspective, HTC is not the competition.
  • Steam, Microsoft, Google, Meta Vision, Atheer Labs and Magic Leap are, as these are the platform owners.
  • Consequently, the more devices that Facebook can get running Oculus, the better chance it will have at emerging as the dominant force in VR.
  • This is why I believe that HTC was simply collateral damage from a software update which has now been rectified.
  • However, I do not think that this will save HTC’s long lost profitability for two reasons:
    • First: I am concerned that the demand for VR units has been substantially over-estimated in the short-term.
    • Many of the usability issues with VR have yet to be overcome and I think that completely closing one-self from the real world will make most users very uncomfortable.
    • Hence, I only see it being relevant for a niche of console gamers and hard core movie fans for some time to come.
    • Second: RFM research indicates that HTC does not own the IP behind its Vive VR system.
    • Furthermore, I believe that the deal that it has signed with Steam is non-exclusive meaning that anyone can make the same product.
    • Hence, none of the games or the user experience will be exclusive to HTC, meaning that it could easily fall victim to the same commoditisation that has destroyed its Android handset business.
  • HTC competitors in VR are bigger, better financed and in many cases they also own the platform.
  • Should VR become really popular then every Chinese Internet and consumer electronics company is likely to jump on the band wagon and make a device indistinguishable from the Vive.
  • This means rapid commoditisation with 2-4% operating margins in the best instance.
  • This outcome is clearly way below what market is hoping for as HTC has enjoyed a substantial rally in the share price driven by VR hopes and market hype.
  • I continue to believe that a fair value for HTC is to be found around its net cash balance which currently stands at NT39bn.
  • With its market capitalisation currently at NT79bn, I think that there is substantial downside in HTC and would use the current hopes to exit.
  • Facebook, on the other hand, is building what could be the biggest ecosystem of them all but I think that the shares could trade lower (see here) before any of this long term upside is realised.

Facebook & HTC – Collateral Damage.

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It makes no sense for Facebook to deliberately lock HTC out.

  • Facebook has updated the firmware for the Oculus Rift that has prevented the HTC Vive from running the Oculus Rift apps.
  • The new firmware now performs a platform integrity check to ensure that the Oculus Rift hardware is present before it will allow apps to run.
  • This is a pretty standard copyright mechanism used by many platforms to try and fight piracy.
  • This test is not trivial to circumvent (and it is illegal to circumvent copy protection in US) meaning that the Vive is now very unlikely to able to run Oculus Vive apps.
  • Prior to this an un-official tool called Revive was allowing Rift apps run on the Vive by tricking them into thinking that the Rift hardware was present.
  • However, in version 1.4, this test has become more robust and the check is now performed by the Oculus Rift DRM meaning that Revive no longer works.
  • For once, I think that this is not a deliberate ploy to lock HTC out of the Oculus Rift platform because strategically it makes no sense.
  • I don’t think that HTC is in a very strong position with the Vive because RFM research indicates that HTC does not own the IP for this device and furthermore that it’s licence with Steam is non-exclusive.
  • Hence, while HTC has a lead in terms of controllers and the user being able to move around, I don’t think that this will last long nor will it be exclusive to HTC.
  • From Facebook’s perspective, HTC is not the competition.
  • Steam, Microsoft, Google, Meta Vision, Atheer Labs and Magic Leap are, as these are the platform owners.
  • Consequently, the more devices that Facebook can get running Oculus, the better chance it will have at emerging as the dominant force in VR.
  • At the end of the day, I don’t think that Facebook is very interested in hardware as a profit centre.
  • I think Facebook is much more interested in the data that Oculus generates and how Oculus could be used to migrate the fledging Facebook ecosystem into the all-important gaming segment.
  • Hence, it makes complete sense for Facebook to work with the creators of Revive and get it running again on HTC’s VR.
  • This is why I think that HTC & revive are collateral damage as a result of this update and I would not be surprised to see revive up and running again sometime soon.
  • Neither Facebook nor HTC (see here) shares are in my short-term good books but once Facebook has navigated the heavy expectations the market is placing on it for H2 2016 (see here), there could be real long term upside.

HTC Q1 16A – Family silver.

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HTC is selling the family silver to stay alive.

  • HTC reported dreadful Q1 16A results as EBIT losses ballooned to 32% of sales while revenues fell 36% YoY and NT$5.1bn (37% of sales) of cash from operations was burned.
  • HTC has continued to lose market share triggering the classic handset death spiral.
  • This means that HTC has to continue cutting costs which means its devices become less appealing so market share falls again and so on.
  • The market (and increasingly the company) has written off the handset business and is pinning all of its hopes on the Vive, HTC’s virtual reality product.
  • This product has received good early reviews and its early move to support VR in a mobile environment and provide hand controllers puts it in a good position should this market take off.
  • However, its competitors Facebook, Sony, Microsoft, Samsung and so on are also looking to sell their VR products and aim integrate these products into their existing platforms which already have millions of users.
  • This is where HTC has is at a disadvantage as when it comes to users, it will be almost starting from scratch although it will have some help through its association with Steam.
  • To make matters worse, HTC’s war chest is diminishing fast and it is quickly selling the family silver in order to support the substantial cash burn.
  • During Q1 16A HTC recognised cash gains of NT$2.1bn from selling fixed assets, NT$6.1bn from selling non-current financial investments and NT$1.4bn from selling current financial assets.
  • This is how HTC managed to show an increase in cash and cash equivalents (compared to Q4 15A) of NT$3.7bn.
  • These sales are very likely to be one time in nature meaning that, in reality, HTC is draining its reserves by NT$5.9bn every quarter.
  • These asset sales have masked what was a dreadful 3 months for HTC and I am concerned that the Vive will not take off in the kind of volumes or soon enough to keep HTC from real trouble.
  • Consequently, 2016 is likely to be dominated by the agonising decline of its handset business raising the high likelihood of further substantial cash outflows.
  • Consequently, the most I would pay for HTC would be 1 times its cash balance as I view the Vive as a long shot to rescue the company and it is very likely that the cash balance will continue declining.
  • This would put the shares at NT$47.1 some 32% below where they are today.
  • Current holders have the opportunity to cash in on expectations of the Vive long before those expectations ever have to be met.
  • I would be taking that opportunity.

RFM 2016 – Top 5.

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CES likely to focus on dreams rather than reality

  • The CES bandwagon kicks-off on 6th January and I suspect that autonomous transport, virtual reality and wearables will grab most of the attention.
  • I think that these themes are pretty far from the mass market meaning that the reality of the technology sector in 2016 is likely to be one of steady progress rather than revolutions and hyper-growth.

Autonomous Everything

  • CES is likely to see great attention being placed on the race to produce autonomous cars, drones and so on.
  • This will set the tone for 2016 where just as everyone rushed to create an app. store when they were all the rage, everyone is now rushing to create an autonomous driving system for all types of vehicles.
  • Google and Ford are likely to dominate the headlines at CES with Ford taking the very dangerous step of allowing Google fully into its vehicles.
  • This could allow Ford to be first to market with technology that really works but comes at the very real probability of Ford being commoditised by Google.
  • Just as handset makers are merely conduits for Google services, car makers run exactly the same risk by allowing Apple and Google to come in and take over what is likely to become the most important part of their vehicles in the future.
  • I continue to believe that being first to market with this technology will not matter because the legal and regulatory hurdles will mean that the technology is ready long before the market (see here).


  • I think that 2016 will prove to be a critical year for internet start-ups that depend on the networked economy.
  • The focus to date has been to grow the user base as quickly as possible and vast sums have been invested to achieve that end.
  • However, I think that 2016, will see growth slow and the hype that fuels valuation continue to cool markedly.
  • This means that the focus will have to switch from user growth towards monetisation.
  • This is much harder than it sounds and I suspect that 2016 will see a clear division in performance between the unicorns and the donkeys. (see here and here)

Handset Crunch Time

  • Growth in the smartphone market is likely to slow to well below 10% in 2016, meaning that those struggling for relevance will be forced to ask themselves some very hard questions.
  • Most at risk are BlackBerry, Sony and HTC all of which have been struggling for some time to rediscover their place in the market.
  • HTC has decided to turn to virtual reality (see below) while BlackBerry has decided to try its hand in Android.
  • The essential problem is that almost every handset maker out there has very little to which users attach any value.
  • This value remains in the ecosystem where Apple, Google, Alibaba, Tencent, Baidu and Facebook remain the biggest and strongest.
  • Samsung is the one standout as its history as a shipper of commodity of products in huge volumes puts it in a good position to fare far better than anyone else.
  • Meizu is already cutting staff and I suspect that this year could see the end of both HTC and BlackBerry in the handset market.

Weary Wearables

  • 2015 was a disappointing year for wearables where even the mighty Apple was unable to really spark the market to life.
  • I continue to believe that this is because no one has thought of a use for wearables that is so compelling that they become a must have.
  • Furthermore, I still believe that health sensing and battery life are still not good enough to ensure that the few users that do purchase a device, stick with it.
  • I think that 2016 will see steady progress in improving, health sensing, the user experience and battery life but without a spark of genius there will be no inflection point.
  • I see nothing to change my view that wearables will remain a solution looking for a problem in 2016.

Virtual and Augmented Unreality

  • With numerous developer kits coming to market in Q1 2016, virtual reality and augmented reality AR) are likely to be major buzzwords in the first half of the year.
  • However, like autonomous vehicles, I think that the limitations of the technology will keep it from the mainstream for some time.
  • The bulky, uncomfortable form factor combined with the limitations of AR (see here) and high costs are likely to keep both user appeal and volumes low.
  • For situations where there are real productivity gains in the enterprise, I can see this taking-off now but for everyone else, it is going to be a question of the waiting game.

RFM Preferences going into 2016

  • Thumbs up: Samsung, Microsoft, Lenovo and Facebook.
  • Thumbs sideways: Apple, Amazon, Huawei.
  • Thumbs down: Google, Twitter, Xiaomi, Yahoo, Sony


Magic Leap – Field of dreams

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I think that Magic Leap has solved the field of view problem in AR.

  • There are many augmented reality (AR) companies out there but the best financed is almost certainly Magic Leap.
  • AR is very different from virtual reality as VR creates an entirely artificial world while AR superimposes virtual objects on top of what one can already see.
  • When I think about use cases, AR has far more applications that users are going to be willing to pay for in contrast to VR which looks to me to be limited to high end games and media.
  • On top of a massive $542m round in October 2014 led by Google Ventures, the company is raising another $827m with a post money valuation of around $4bn.
  • I assume that this round will also be led by Google which I suspect wants the right of first refusal on acquisition should the technology prove to be commercially viable.
  • Although I think AR has much greater commercial potential, it is much more difficult to get right and I think that it is here where the vast sums are being invested.
  • Every demonstration that I have seen is using the same basic idea to superimpose virtual objects upon the real world.
  • From the patent applications of Magic Leap and commentary from those who have been able to have a demonstration, I believe that Magic Leap is doing the same.
  • The user wears headgear through which he has normal vision of his immediate surroundings.
  • On each side there is a projector (one for each eye) which shines the virtual image across the front of the lenses through which the user sees the real world.
  • In those lenses are waveguides which pick up the light being shone across the lenses and direct it into the user’s eye giving the desired superimposition.
  • The problem is that today, limitations in the technology mean that the virtual world can only be superimposed on a portion of the user’s field of vision.
  • Effectively there is a letter box within which the virtual world exits and from which it cannot escape.
  • For many commercial and medical purposes, I don’t think that this is a problem but for the consumer it’s a deal breaker.
  • This is why I suspect that the first applications of offerings like Microsoft HoloLens and Atheer Air are likely to be focused on commercial, medical and educational use long before consumer.
  • I think that Magic Leap is going after the consumer and on that basis, I think it has found a way to fix the limited field of view problem.
  • This would also explain why its hardware is still much bigger than its competition are and why it could still be another 2 years before there is a product.
  • Developer units of Hololens and Atheer Air are shipping in early 2016.
  • Furthermore, I think it is looking to create a much more intuitive and immersive experience and consequently the system needs to track things like eye and body movements and be able to properly understand them.
  • For the consumer I still think that there are three key criteria that need to be met before real traction will result.
  • These are hardware, user experience and ecosystem and these are discussed in more detail here.
  • Hardware and user experience will be critical to getting in the game but I strongly suspect that it will be the ecosystem that wins it.
  • Here, having Google on board will be a major help but it will need a much wider base of third party developers if it ever wants to hit the mainstream.
  • With a valuation already at $4bn and the probability that more will be needed, massive success is already being assumed.
  • This is very far from guaranteed and I suspect that as Magic Leap endeavours to meet the hardware criteria (see here), the size of the technical challenge will become exponentially larger.
  • This is the biggest challenge that Magic Leap faces as I think that it is already aware of and has dealt with the user experience and is planning for the ecosystem.
  • In any event it is going to have to sell huge volumes of what is initially going to be a niche product just to keep its investors happy.