Apple vs. Spotify – Duck lines

Reply to this post

 

 

 

 

 

Two lines of ducks are forming.

  • With a new alliance between Spotify and Tencent and the acquisition of Shazam by Apple, the big players are getting their ducks in a row to dominate the global music industry.

Spotify and Tencent

  • Following on from Tencent’s failure to acquire the company (see here), a compromise has been reached where the two companies will acquire a cross holding in each other and “explore collaboration opportunities”.
  • To me this means two things:
    • First: Tencent will be able to integrate the Spotify service into the ecosystem experience that it assembles to enable it to address developed markets.
    • This could form part of an offering that also has a gaming offering using Supercell and an instant messaging offering using Snapchat.
    • Second: I expect that Tencent will get access to Spotify’s best in class music categorisation and recommendation system for use in making its Chinese service better.
    • For this I expect that Spotify will receive a revenue share from Tencent as I think it very unlikely that Spotify has any real chance of succeeding in China on its own.
    • This is because Tencent’s QQ music is already the leader with 41% share and because like everything else, China’s music market is predominantly about Chinese music for Chinese users.
    • The Chinese music market has been tiny historically, but this is beginning to change as the more affluent end of the market is beginning to pay for streaming services.
    • Consequently, the Chinese market is almost all digital with only a tiny physical presence.
    • It is this change that I think has interested Tencent in Spotify’s technology as technology is what I have long believed underpins Spotify’s superior performance relative to Apple Music enabling it to keep Apple at bay.
  • A close collaboration between Spotify and Tencent could mean a fully global offering with the exception of India which would probably require an acquisition to get a foothold.

Apple

  • At the same time, it seems likely that Apple has reached a deal to acquire Shazam, the music recognition company, for $400m.
  • This is well below the $1bn valuation at which Shazam raised money in 2015 but in 2015, there was a much greater supply of belief.
  • The issue that Shazam has had is that it has had great difficulty in making money as 2016 revenues appear to have been around $50m with the company hovering around break-even.
  • I suspect that the company has not grown nearly as quickly as it expected which has meant that profits expected by investors have not materialised making them willing to consider a lower offer.
  • From Apple’s perspective, I do not see this as an acquisition of a service but much more a technology.
  • Shazam has been analysing and recognising music for nearly 20 years and as a result is pretty good at characterising, recognising and understanding music.
  • This is one of the traits that makes Spotify’s service so good as it is able to take that and match it to users’ tastes.
  • Consequently, I see Apple taking Shazam’s technology and incorporating it into Apple Music in a bid to improve its service and compete more aggressively with Spotify.
  • I continue to believe that the best way for Apple to do that would be to introduce a free tier, but that is a whole other discussion (see here).
  • This is great news for SoundHound as the loss of independence of its major rival will make it far more appealing to anyone who competes with Apple at any level.

Take Home Message

  • Streaming has reversed a long decline in music industry revenues and consequently is widely considered likely to become the standard way to distribute music.
  • I still think that the market is big enough for two players to thrive and Apple and Spotify remain at the top and look unlikely to be seriously challenged.
  • Hence, these recent moves look to be aimed at cementing the position of the two leaders ensuring that streaming remains a duopoly outside of China and India.

Xiaomi – Market timing

Reply to this post

 

 

 

 

 

Xiaomi considers a big equity event just as growth peaks again.

  • Xiaomi’s genius for timing is confirmed as talk of an IPO is beginning to ramp up just as its recovery growth rates are about to peak.
  • However, this time around, profitability will be open and clear for all to see and it is here where I think the problems will arise.
  • To be fair to Xiaomi, it has executed extremely well and has been rewarded with a period of very rapid growth as its strategy to distribute through methods other than the Internet and to focus on India has paid off in spades.
  • According to Counterpoint, Xiaomi’s performance really turned around in Q2 17A where YoY growth in smartphone shipments went from -8% in Q1 17A to 59% YoY in Q2 17A.
  • This was a result of three big changes implemented by Xiaomi.
    • First: new products. The new flagship Mi 6 launched at the beginning of the quarter was well received and looks to have been the backbone of the recovery.
    • Second: retail channel. I have long been of the opinion that Xiaomi ground to halt because it had fully exhausted the capacity of selling devices over the internet.
    • In order to address a wider slice of the market, Xiaomi has invested heavily in retail with 123 MI stores opened across China and the first results from this push are now being seen in the numbers.
    • Third: India and overseas: Investments in India are beginning to pay off with the Redmi Note 4 becoming the biggest volume smartphone in Q2 17, elevating Xiaomi to No. 2 in India.
    • By far the largest part of Xiaomi’s overseas fan base is to be found in India and this should help the fan base to grow further.
    • However, India can be one of the most fickle markets as it is so price driven and as many Indian brands have found, success can be all too brief.
  • While growth is clearly back at Xiaomi, the comparisons to the torrid time it had in 2016 are really easy as after Q2 2018, growth is likely to slow substantially as the comparisons to the previous year will become much more challenging.
  • Consequently, sometime in H1 2018 is the perfect time to achieve the best possible IPO price as growth will then be at its highest.
  • However, the big question mark for me is profit, as it is through profit alone that an equity based investment can have any value at all.
  • Here, I am still very cautious as Xiaomi’s strategy is based on providing good quality hardware at a great price.
  • This combined with the fact that it does not have Samsung’s scale in handsets means that it is very unlikely to make more than a commodity margin.
  • When I am as kind as I can be to Xiaomi, I can assume that its smartphone ASP is $270 on 118m units shipped in 2018 with $5.4bn in revenues from smart home products.
  • Assuming an EBIT margin of 5%, this gives me 2018 revenues / EBIT of $37.31bn / $1.87bn implying an EV / Sales multiple of 1.3x and EV / EBIT of 26.7x if the company is valued at $50bn.
  • For an EV / Sales valuation, this is not difficult to reach as Apple is trading on 2018 EV / Sales of 2.7x and Xiaomi is growing faster.
  • However, as I have said above, equity valuation is about profit with revenues being used as proxy when there are no profits.
  • Using EBIT, a very different picture emerges as Apple is trading on 8.4x EV / EBIT and at $50bn, Xiaomi would be on 26.7x.
  • Xiaomi is growing faster than Apple but this is unlikely to last very long and its efforts to build a software ecosystem have been crushed by the BATmen at home and are irrelevant overseas.
  • Hence, it has very little with which to differentiate its wares meaning that it has to compete almost entirely on price.
  • Consequently, the most I would be willing to even remotely consider paying for Xiaomi would be double Apple’s EV / EBIT multiple which would give a valuation of $31.3bn, some 37% below the mooted $50bn.
  • To get to $50bn, Xiaomi would need to put up EBIT margins of at least 8.0% which I think is a stretch given the company’s strategy of selling great hardware at good prices.
  • The advantage of an IPO is that these facts will all be laid bare long before investors have to commit to buying the shares.
  • I suspect that its lack of profitability will keep it from going public until it is capable of putting up much bigger profit numbers.

 

 

Google – Brain game pt. II.

Reply to this post

 

 

 

 

 

Google remains out front in AI but Baidu most interesting. 

  • The first results from Google’s AutoML project are beginning to surface and are implying once again (see here) that machines may end up being better coders than humans.
  • AutoML was announced at Google i/o in May 2017 and failed to attract much attention mainly because I suspect that most commentators did not grasp the significance of the concept.
  • AutoML is neural network that is capable selecting the best from a large group neural networks that are all being trained for a specific task
  • This is potentially a hugely important development as it marks a step forward in the quest to enable the machines to build their own AI models (challenge no. 3 (see below)).
  • Building models today is still a massively time and processor intensive task which is mostly done manually and is very expensive.
  • If machines can build and train their own models, a whole new range of possibilities is opened-up in terms of speed of development as well as the scope tasks that AI can be asked to perform.
  • RFM has highlighted automated model building as one of the major challenges (see here) of AI and if Google is starting to make progress here, it represents a further distancing of Google from its competitors when it comes to AI.
  • In the subsequent months since launch, AutoML has been used to build and manage a computer vision algorithm called NASNet.
  • AutoML has implemented reinforcement learning on NASNet to improve its ability to recognise objects in video streams in real time.
  • When this was tested against industry standards to compare it against other systems, NASNet outperformed every other system available and was marginally better than the best of the rest.
  • I think that this is significant because it is another example of when humans are absent from the training process, the algorithm demonstrates better performance compared to those trained by humans.
  • The previous example is AlphaGo Zero (see here).
  • I see this as a step forward in addressing RFM’s three big challenges of AI (see here) but there remains a very long way to go.
  • These problems are:
    • First: the ability to train AIs using much less data than today,
    • Second: the creation of an AI that can take what it has learned from one task and apply it to another and
    • Third: the creation of AI that can build its own models rather than relying on humans to do it.
  • When I look at the progress that has been made over the last year in AI, I think that Google has continued to distance itself from its competition.
  • Facebook had made some improvements around computer vision, but its overall AI remains so weak that it is being forced to hire 10,000 more humans because its machines are not up to the task (see here).
  • Consequently, I continue to see Google out front followed by Baidu and Yandex with Microsoft, Apple and Amazon making up the middle ground.
  • Facebook remains at the back of the pack and its financial performance next year is going to be hit by its inability to harness machine power.
  • For those looking to invest in AI excellence, Baidu is the place to look as its search business and valuation has been hard hit by Chinese regulation but is now starting to recover.
  • Baidu represents one of the cheapest ways to invest in AI available.

E-commerce – Look East.

Reply to this post

 

 

 

 

 

In mobile, China is more developed than USA.

  • Comparing China’s Singles Day against Brown Thursday, Black Friday and Cyber Monday in USA reveals just how much more advanced the development of the mobile online consumer economy is in China.
  • The first figures for Brown Thursday Black Friday are coming in with Adobe estimating that $7.90bn (Gross Merchandise Value, (GMV)) was spent online with another $6.6bn expected to come on Cyber Monday.
  • Of the $7.90bn, 37% of the revenue was produced by a mobile device of which 70% was transacted via a smartphone (26% total turnover).
  • While these figures are the best ever for the USA in terms of total turnover and smartphone share, they pale into insignificance when compared to Singles Day in China.
  • Between them, Alibaba and JD.com make up 87.2% of all B2C e-commerce in China and on Singles Day they racked up $44.7bn in GMV.
  • In just one day Chinese e-commerce turned over 5.7x in GMV than the two US days put together.
  • If one includes the expectations for Cyber Monday, then the total US holiday shopping period is dwarfed by a factor of 3 to 1.
  • Furthermore, 90% of all of Alibaba’s GMV was transacted on a mobile device and AliPay handled a total of 1.5bn transactions.
  • It is clear that a big discrepancy here is that Singles Day a recently created, online-only event whereas Black Friday has been going since 1952 and remains mostly an offline event that’s is slowly migrating to online
  • However, the scale of the difference between the two clearly demonstrates that when it comes to online transactions and mobile, China is far more developed than USA or other developed markets.
  • I have long believed that there are two main reasons for this:
    • First: the offline experience in China is very poor.
    • This is the case for many sectors but particularly in retail.
    • Chinese offline retail is a fragmented and frustrating experience where decent service and information with regards to inventory, product lines and so on is routinely not available.
    • When an online offering appears where this information is clear and one is able to easily purchase goods and know when they will be delivered, shoppers quickly adapt.
    • Hence, Chinese consumers have very quickly adapted to online shopping as the experience and ease of use is far superior to offline.
    • Second: China is a mobile first market.
    • Cellular connectivity in China has better penetration of broadband connections, higher throughput and lower latency than fixed Internet (see here).
    • Consequently, mobile is the first choice for Chinese users as it almost always offers a better user experience.
  • This is also why we have begun to see reversal of the direction of innovation in mobile services.
  • Historically, Chinese companies have copied ideas pioneered in Developed Markets, but this hs changed meaningfully.
  • For example, many of the innovations that are being put into instant messaging platforms by Facebook, Snapchat, Apple and so on are already available in WeChat, LINE, Kakao-Talk etc.
  • This is a trend I expect to continue going forward.
  • China remains dominated by the BATmen of whom I have preferred Tencent for the last 15 months.
  • However, given its rally and its apparent slowness to monetise its ecosystem fully, I am beginning about switching into Alibaba.

 

Alibaba – Offline grab.

Reply to this post

 

 

 

 

 

Alibaba is very different to Amazon.

  • I think Alibaba’s investment in Sun Art has nothing to do with Amazon’s strategy with Whole Foods, and everything to do with the woeful state of the offline transaction experience in China.
  • Alibaba intends to invest $2.9bn in Sun Art, a hypermarket operator which has 446 stores in 224 cities across China and turnover of around $16bn.
  • Alibaba will acquire a 36.2% stake in the company which to date has operated as a j.v. between French retailer Auchan and Taiwanese conglomerate Ruentex Group.
  • Offline retail in China is still massive at $4.5tn despite the rapid expansion of e-commerce and is a great example of why online and mobile have been so successful in the Chinese market.
  • Chinese offline retail is a fragmented and frustrating experience where decent service and information with regards to inventory, product lines and so on is routinely not available.
  • Consequently, when an online offering appears where this information is clear and one is able to easily purchase goods and know when they will be delivered, shoppers quickly adapt.
  • It is the terrible offline experience with regards to almost everything that has allowed so many other goods, services and activities in China to rapidly migrate from offline to mobile.
  • I think that Alibaba’s strategy with Sun Art is all about turning it into a high quality and efficient retailer using the technologies and logistics expertise that it has gained with the development of its e-commerce business.
  • This is very different to Amazon and Whole Foods as Whole Foods already provides a pretty good and reliable retail experience with good logistics.
  • I think that Amazon’s interest in Whole Foods is about ensuring that there will be enough volume in perishable items to give it the scale to push more and more groceries through its site.
  • In effect, Amazon has acquired a huge customer for that business to give it critical mass so it can economically expand groceries to its online customer base.
  • In contrast, I think Alibaba is doing something very different in making a play to take a big piece of the Chinese offline market.
  • If Alibaba can make Sun Art and its other partners like In Time and Lianhua Supermarket superior to then these stores should begin to gain market share over their rivals.
  • Given that Chinese retail is such a vast market, steady market share gains here has the scope to keep growth going at Alibaba (albeit at lower margins) once e-commerce begins to slow down.
  • It also offers Alibaba the opportunity to move other sectors of retail online once it has licked them into shape.
  • Hence, I think this move makes complete sense for Alibaba as there is a very clear opportunity for it in China which is completely different to that being followed by Amazon.
  • I am warming up to Alibaba as it is beginning to understand the importance and opportunity presented by the data its digitall assets generate.
  • While it is behind Tencent in Digital Life coverage, I am increasingly of the opinion that it is moving more quickly to understand the opportunity offered by the digital ecosystem.
  • Hence, when Tencent runs out of steam, I will be considering this one very carefully as a possible switch.

Tencent Q3 17 – Time purchase

Reply to this post

 

 

 

 

 

Mighty core business buys time.

  • Tencent reported strong results driven mostly by its content offerings which gives the company time to work out how to fully monetise the vast the community it has created.
  • Q3 17 revenues / net income RMB65.2bn ($9.8bn) / RMB18.0bn ($2.7bn) nicely ahead of estimates of RMB61.0bn / RMB15.8bn.
  • Tencent called out smartphone games (especially Honour of Kings) and its online video platform (which it now believes has overtaken Alibaba and Baidu to become China’s No. 1 place for video streaming) as top performers during the quarter.
  • Most revenue streams grew between 45% and 50% YoY but it was the contribution from other businesses such as first-time monetisation of WeChat Pay and cloud services that really drove the numbers above expectations.
  • Overall, these revenues grew by 143% to RMB12.0bn which pushed the corporate average revenue growth rate to a 7 year high of 61% YoY.
  • While the core businesses continue to defy the slowdown I have been expecting, the laggard in the company remains the monetisation of the ecosystem that it has created.
  • This is what Baidu and Google are really good at and what Alibaba has been showing increasing signs of getting to grips with.
  • The vast majority of Tencent’s revenues come from selling content like games, in app purchases or streaming subscriptions making it more like Netflix and Amazon rather than Google or Facebook.
  • Tencent has created a community of 980m users at least half of whom regularly interact with Tencent in multiple Digital Life segments.
  • This creates a substantial revenue opportunity for Tencent but one I think that it has struggled to really get to grips with.
  • Online advertising is still just 18% of revenues which I calculate is between one third to one half of what it should be for an ecosystem with 980m active users.
  • It is here that I still see the real upside for Tencent as it has done little in the last 15 months to address this opportunity.
  • To be fair to the company, management time has been very successfully invested in growing the existing businesses but the time will come when it will need to monetise this opportunity to keep growth going.
  • Here, I think that Tencent has a lot of work to do as its score on RFM’s 8 Laws of Robotics is pretty low, particularly against Laws 5 and 6 which focus on the integration of services and user data.
  • To monetise the ecosystem effectively, I think a good score against these measures is required and Tencent has so far shown little sign of grasping the importance of integration.
  • However, while the core business continues to defy expectations, this is not a problem from a share price perspective and buys management time to get to grips with integrating its assets into a single place where users can live their Digital Lives.
  • This is how I can continue to like Tencent as an investment despite its apparent slowness to move onto the next stage of its development.
  • While the core business continues to deliver, the valuation remains underpinned with the potential further upside coming from monetisation of the ecosystem.
  • This is why Tencent remains my preferred pick globally.

Tencent – Digital circumnavigation.

Reply to this post

 

 

 

 

 

Tencent begins to build on Supercell.

  • Following the most difficult set of results after its IPO, Snap has conveniently announced that Tencent has taken a 12% stake in the company.
  • This has awoken take-over speculation that I thought would not really emerge before the shares dropped below $10 and should provide a badly needed boost to sentiment.
  • In its 10Q Snap stated that it had been notified by Tencent that it has purchased 145.8m shares representing a holding of 12% in Snap Inc.
  • If this had been purchased purely through the exchange it would have consumed 25% of the free float which I think would have been noticed triggering a rally and speculation.
  • Consequently, I suspect that the majority of this stake was accumulated by approaching existing holders directly whom I suspect were only too happy to sell.
  • I do not think that this transaction has anything to do with Tencent’s China business but instead is more about Tencent looking at ways of spreading its wings overseas.
  • RFM research (see here) has concluded that Digital Life services in developed markets do not work well in China (mostly because they are blocked) while Chinese Digital Life services do not work well in developed markets as they do not fit culturally and also are predominantly in Chinese.
  • Consequently, the BATmen have had to seek other ways to develop overseas other than just spreading their Chinese services into developed markets.
  • Alibaba is approaching this using the Trojan horse of Alipay (see here), while Tencent is showing signs of assembling a range of assets that would give it good coverage of Digital Life in developed markets (see here).
  • This process began with the acquisition of Supercell in June 2016 (see here), continued with an attempt on Spotify that failed (see here) and now it seems to be latching onto Snapchat.
  • Tencent is the global market leader when it comes to Digital Life coverage with 77% of the Chinese pie covered and 30% of the developed market pie covered with its position in Supercell.
  • Adding Snapchat would take this coverage to 44% ahead of both Google and Apple (who have 40% each).
  • However, it is one thing to have good Digital Life coverage and quite another to create a vibrant ecosystem that one can effectively monetise.
  • The Digital Life measure is only a measure of opportunity which is why RFM uses its 8 Laws of Robotics to assess the quality of the proposition being made to users.
  • Against these tests both inside China and overseas, Tencent does not score well (see here) which explains why the vast majority of its revenue comes from selling content and games rather than from monetising its community.
  • It increasingly looks as if Tencent is embarking on a circumnavigation of the Digital Life pie in order to build an ecosystem to challenge the established Google, Apple, Amazon, Facebook dominance of consumer digital services.
  • Consequently, I expect Tencent to actively seek investments or acquisitions in Media Consumption, Search, Social Networking and so on in order to build its coverage.
  • This is likely to prove to be expensive and in my opinion the real challenge for Tencent lies ahead.
  • This will be to assemble and integrate these assets into a vibrant and consistent community which is something is has yet to do with the majority of its assets in China.
  • It is at this time that its score against RFM’s 8 Laws of Robotics will begin to improve but so far there is not that much sign of it.
  • I continue to like Tencent as it is the strongest of all the Chinese ecosystems and the share price still does not reflect all of the potential upside.
  • Hence, there is still not much very downside in Tencent if it fails to integrate its assets and improve its score on the 8 Laws.
  • However, should it do so, there is plenty of further upside from here.
  • Tencent, along with Baidu and Microsoft remain my top picks.

 

Alphabet, Baidu & Amazon – West vs. East.

Reply to this post

 

 

 

 

 

US fares far better than China.

  • Alphabet and Amazon reported very strong results while Baidu struggled to deal with the shift in advertising from search to social media.

Alphabet.

  • Alphabet reported another very strong quarter but the requirement to share some of the spoils with its partners is putting upward pressure on costs.
  • Q3 17A revenue-ex TAC / EPS were $22.3bn / $9.57 compared to consensus at $22.1bn / $8.32.
  • The better than expected profitability was largely driven by the reduction of losses at Other Bets as costs at the fibre init were cut and other investments were more fiscally prudent.
  • Revenues were once again mainly driven by mobile advertising which carries a much higher traffic acquisition cost (TAC) as Google has to share revenue with its partners.
  • This climbed to 23% of revenues up from 21% a year ago.
  • This combined with many fewer rumblings of dissent coming from Android handset makers these days and automakers saying that Google is being nicer to them, leads me to believe that Google is sharing more of the spoils with its long-suffering partners.
  • Alphabet admitted as much on the call mentioning that some of the agreements with its partners had been changed.
  • I suspect that this also has something to do with the prospect of the EU forcing Google to change its business model which is likely to be less severe if its partners are happy.
  • I suspect that this trend is likely to continue and the outlook for Alphabet going into Q4 17 and 2018 remains healthy.
  • That being said, the valuation has kept largely in step with the fundamental improvement in its business leaving me indifferent to the shares.

Amazon.

  • Amazon’s haphazard approach to making money surprised the market once again but I suspect that investments in Q4 17 will once again depress earnings.
  • Q3 17 revenues / EBIT were $43.7bn / $347m compared to estimates of $41.3bn / $223m.
  • It was the unexpected profit that once again lifted hopes that Amazon has become sustainably profitable.
  • As usual it was AWS that drove profits with revenues of $4.6bn and margins of 25.5%.
  • This masked ongoing massive investments outside of the US where losses mounted to $936m (6.8%) from $541m (5.1%) one year ago.
  • I suspect that the vast majority of this is being spent in India where Amazon is absolutely determined not to lose out to local players following its ignominious defeat at the hands of Alibaba in China.
  • This is why I am extremely cautious on the outlook for Flipkart and Snapdeal as Amazon has the financial resources that its rivals lack despite huge investments from Softbank.
  • Amazon is guiding for strong sales in Q4 17 but I think that it could easily miss its profitability forecasts as has become customary.
  • Q4 17 revenues / EBIT are expected to be $56.0bn – $60.5bn / $300m – $1.65bn slightly ahead of consensus at $55.5bn / $1.5bn.
  • Amazon is continuing to grow its revenue base very successfully but I still can’t get comfortable with investing in shares where one is already paying for profitability that remains random and illusive.

Baidu.

  • Baidu reported poor results that triggered a big sell off creating what is probably the cheapest AI investment on the planet.
  • Q3 17 revenues / net income were RMB23.5bn / RMB7.9bn beating estimates of RMB23.5bn / RMB4.4bn but the better than expected profits were driven by a non-operating gain of RMB4.2bn.
  • Removing this and adjusting for tax reveals a much more sombre picture and the reality that R&D spending is outstripping sales growth as these investments have yet to bear fruit.
  • At the same time, the company guided weakly for Q4 17 with RMB22.2bn – RMB23.4bn of revenues expected, again missing estimates of RMB25.0bn.
  • This weak performance came on top of a 7% fall in the total number of advertisers using Baidu to 486,000 raising legitimate concerns around long-term growth.
  • These advertisers are becoming more interested in spending their money on social networking platforms where the likes of Tencent have woken up to the revenue potential that their services create.
  • Consequently, the short to medium term outlook for Baidu remains uncertain which resulted in the big sell off seen following the numbers.
  • However, it is not all bad news as RFM ranks Baidu as No. 2 globally in AI which is currently the most sort after (and hence the most expensive) skillset in the technology industry today.
  • This capability has been created from 20 years of crunching data which has allowed Baidu to create the best digital assistant in China (Duer) as well as the most advanced Chinese autonomous driving offering.
  • Unfortunately, all of these investments have yet to bear fruit in terms of tangible revenues meaning that short-term minded investors will continue to ignore them.
  • This creates an opportunity for those wanting to invest in AI to get into something at a very reasonable price.
  • The issue is that without any visibility on when these investments will bear fruit and the uncertainty around the core business, the right time to make this investment is clearly not now.
  • I have liked Baidu given is relative valuation to its Chinese peers and leadership in AI but these results indicate that it is likely to be very volatile for the next few quarters.
  • Tencent looks like a safer place to be for now.

OnePlus – Learning curve

Reply to this post

 

 

 

 

 

OnePlus’ slip serves as a warning.

  • BBK Electronics is fortunate that OnePlus is one of its marginal brands as a gaffe of this size at Oppo or Vivo could have done real damage.
  • OnePlus is a subsidiary of Oppo which in turn is owned by BBK Electronics (like Vivo) and has its own favour of Android (GMS compliant) called OxygenOS.
  • Unfortunately, OnePlus decided to include code in OxygenOS that captured and uploaded: IMEI, serial number, MAC addresses, IMSI and WiFi network data in addition to which apps were being opened and what the user was doing in those apps.
  • This data was being uploaded and analysed by OnePlus without either the knowledge or consent of its users.
  • OnePlus claims that the data was only being used to improve the user experience but that has not earned the company a free pass.
  • However, once the company had been rumbled it was reasonably quick to react explaining how users can turn off usage data collection but for the other data it stopped short of saying that it would cease collecting it.
  • I suspect the real problem here lies in the cultural difference between China and developed markets.
  • RFM research (see here) has concluded that in China, privacy is much less of an issue where almost all services collect and use data without the user’s permission.
  • Critically, the users do not seem to mind.
  • However, in developed markets, a flagrant disregard for the users’ privacy can sink a product or service.
  • I suspect that the code used in China was simply translated into English and launched into developed markets without a second thought.
  • This is not the first time that this has happened nor, I suspect, will it be the last as smaller Chinese brands try and leave the home market.
  • Fortunately, it appears that this lapse has not also occurred at Oppo which ships a third of its volume overseas (10m units Q2 17) which would be at risk of losing a substantial part of its business as a result.
  • OnePlus is too small for anyone to really notice or care but it serves as a warning to other companies.
  • Being aware of the differences between China and the rest of the world may make the difference between success and failure.

Tencent – Tale of two pies.

Reply to this post

 

 

 

 

 

Tencent dominates but still has much more to do. 

  • Tencent already dominates Digital Life in China and now it is increasingly turning its attention to the opportunity overseas.
  • This makes sense as China is starting to show signs of maturity meaning that the recent breakneck pace of growth will inevitably slow down forcing the BATmen to look overseas for more growth.
  • RFM has long identified that ecosystems and smartphone usage in China and developed markets are very different (see here).
  • This means that Chinese Digital Life services are not really relevant in developed markets and visa versa.
  • This means that overseas expansion for the BATmen has to be much more than just attempting to offer their Chinese services overseas.
  • While Alibaba is looking to grow overseas using AliPay (see here), Tencent is focused on adding relevant developed market assets to improve its coverage of Digital Life in developed markets.
  • This strategy has begun with the purchase of Supercell giving Tencent coverage of Gaming but it looks as if Tencent is keen on acquiring other segments of the Digital Life Pie also.
  • Most recently, Tencent appears to have made a move on Spotify that would have given Tencent a very strong position in Media Consumption.
  • Combined with Gaming, this would have given Tencent 40% coverage of the Digital Life pie in developed markets along with the 77% that it already has at home.
  • Spotify appears to have spurned Tencent’s advances, but I suspect that Tencent will continue to look for key strategic assets to improve its position in Digital Life in overseas markets.
  • Currently, Tencent has 30% coverage with Supercell but there is far more to creating a vibrant ecosystem than just gathering assets which provide coverage of Digital Life.
  • The trials and tribulations of Yahoo are all the evidence that one needs to conclude that one cannot succeed by coverage alone.
  • In 2014, Yahoo had 73% (more than anyone else at the time) of Digital Life covered but failed to create any meaningful traction on mobile devices.
  • This is because it was unable to take what were essentially fixed services and successfully leverage them into mobile.
  • Tencent does not have this problem as its traction in mobile is already strong but what it is missing is an understanding of the importance of integration.
  • I have long believed that to be really successful, the different services across Digital Life need to be integrated such that usage can be understood as a profile rather than a series of discrete and independent services.
  • This is one of the key ingredients of Google’s success and is something that Baidu and, increasingly Alibaba, are beginning to get to grips with.
  • Tencent on the hand, appears to be quite far behind in terms of grasping the importance of integration as I still see no signs of this happening.
  • In the short-term this is not a big problem but as Tencent’s valuation continues to rise, it will become an increasingly necessary for Tencent to bring its assets together in a cohesive way to justify its share price.
  • This is how Tencent can really begin to monetise its ecosystem beyond the sale of content and games and become a place where users spend their Digital Lives.
  • In China, some of this is coming through the rapid expansion of WeChat from a place to exchange messages to a place where all sorts of transactions can be executed.
  • However, in the long-term Tencent needs to have all of its services integrated and in that regard, there is quite some way to go.
  • I continue to like Tencent as it is the strongest of all the Chinese ecosystems and the share price still does not reflect all of the potential upside.
  • Hence, there is still not much very downside in Tencent if it fails to integrate its assets.
  • At the same time there is the promise of further improvement in the long-term if it begins to develop its ecosystem beyond a series of very successful but discrete services.
  • Tencent, along with Baidu and Microsoft remain my top picks.