Huawei – The AI of others

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Huawei needs its own algorithms to succeed in AI.

  • Huawei abandoned its habit of launching a new phone at IFA 2017 and instead focused on a new chipset called the Kirin 970 that promises all usual the bells and whistles as well as artificial intelligence.
  • Huawei made some bold claims regarding its hardware performance as well as power efficiency thanks to its 10nm geometry but I get the impression that it intends to drive differentiation through its embedded neural processing unit (NPU).
  • This is a part of the chipset that has been specifically designed to run AI algorithms more quickly and more efficiently than running them on the CPU or in the cloud.
  • The result should be faster processing of AI tasks resulting in better services that drain the battery less.
  • This is all well and good but what really matters is what users of Huawei devices will notice, to whom they will attribute the value created and for what they will pay.
  • The Kirin 970 NPU supports Huawei’s own APIs as well as Google’s TensorFlow and Facebook’s Caffe 2 meaning that AI created by these two ecosystems will also run optimally on the NPU.
  • The idea is that the algorithms are created in the cloud, downloaded to the device where they run locally improving both speed as well as privacy as the data will not leave the device.
  • I have long believed that this type of AI will be limited to functions where the algorithms are very well established.
  • In the early days this is likely to be image processing such as facial recognition or computer vision.
  • This is where I think Huawei will begin to struggle as I believe that it has very little AI of its own meaning that the Kirin 970 will spend almost all of its time processing the AI of others.
  • The AI of others will be running on the devices of all of Huawei’s competitors meaning that Huawei will be competing purely in hardware performance.
  • When other chipmakers come to market with their own NPUs, it will then be a straight fight based on hardware performance.
  • When it comes to AI, users are going to place value of the depth, richness and intuitiveness of the services themselves meaning that to improve its differentiation, this is where Huawei needs to compete.
  • Of this there is no sign meaning that while the Kirin 970 may help Huawei increase market share, it will do nothing to enable it to increase the prices of its phones.
  • The net result is that until Huawei can outsell Samsung by a factor of 2 to 1 in terms of volume, it will really struggle to increase its margins beyond the 2-4% that everyone else (except Samsung) is stuck with.
  • Google is the only company that really makes money from Android but I continue to be cautious as its valuation is already pretty full.
  • Tencent, Baidu and Microsoft remain my top choices.

 

Qualcomm FQ3 17 – Strong stomach

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Qualcomm has the stomach for a fight.

  • Despite the seemingly challenging situation the company is currently experiencing, I think the company has a better chance of beating Apple than it did of beating Nokia back in 2006.
  • FQ3 17A revenues / Adj-EPS were $5.3bn / $0.83 compared to consensus at $5.3bn / $0.85.
  • This was in line with consensus which has now been adjusted to account for the fact that royalties from the iPhone are no longer forthcoming.
  • Technology licencing revenues (QTL) fell by 42% YoY and 48% QoQ while QTL EBIT fell by 51% YoY and 56% QoQ highlighting just how significant the revenue generated by the iOS ecosystem is to Qualcomm.
  • Guidance for fiscal FQ4 2017 will be similarly impacted with revenues / Adj-EPS of $5.4bn – $6.2bn / $0.75 – $0.85 compared to consensus $5.6bn / $0.95.
  • While, Qualcomm has been transparent for many years about how QTL generates a disproportionately high share of profits, the market appears to have got its spreadsheets in a muddle and misread the impact of the lower revenues on QTL EBT margins.
  • These are expected to be around 66% which is the main reason why the EPS guidance is below consensus.
  • Included in this are the legal expenses that are being incurred to defend its business model, which I think in the long-run will be money well spent.
  • Most of the arguments that Apple is making to explain why it has an issue with Qualcomm’s business model have been made off and on for the last 15 years so the case it is bringing is nothing new.
  • These arguments were made most vocally by Nokia in 2006 and while the companies did come an eventual settlement, this time around the situation is quite different.
  • I think that these differences strengthen Qualcomm’s hand as:
    • First Contract validity: The dispute that arose between Nokia and Qualcomm in 2006 occurred because Nokia’s contract had come to an end and the companies were unable to reach agreement on terms for the renewal.
    • Nokia stopped paying Qualcomm as it had no idea how much to pay and instead accrued an estimate of the cost in its balance sheet.
    • The contracts upon which Apple has ceased payment have not expired and I can’t see any contractual grounds upon which to cease making payments.
    • As a result, I do not think that it will not be difficult to show to a court that Apple is acting in bad faith and to win an enforcement order.
    • Second: Third party suppliers. Apple does not pay Qualcomm directly as the payment is made by its manufacturing partners who make its products.
    • This means that Apple is getting involved in contracts that are in place between entities that have nothing to do with Apple other than it being the end buyer.
    • I do not think it will be difficult to argue that Apple has no real grounds to be involved in these contracts and is acting in bad faith.
    • Third: Non-standard essential patents. As Apple is no longer paying Qualcomm for its IP, it is not unreasonable for Qualcomm to sue Apple and its contract manufacturers for patent infringement.
    • Standard Essential Patents (SEPs) are those patents that have to be used to get a standard (like LTE) to work properly. One cannot design around them.
    • It is easy to prove infringement of a SEP (assuming that its valid) but patent holders are not allowed to be nasty when it comes to licensing terms.
    • When one contributes standard essential IPR, one agrees to license the technology to anyone who wants it.
    • This has to be done at a fair price and one agrees not to seek injunctions.
    • Historically, Qualcomm has tended to assert SEPs but this time it is asserting implementation patents against Apple and its manufacturers.
    • Implementation IPR is another kettle of fish entirely.
    • It is much more difficult to prove infringement as this IPR can be designed around, but when infringement is proved, the holder can pretty much do what it likes.
    • There is no limit to the royalties that can be charged, injunctions can be sought and the holder can force the infringer to redesign his product to get around the innovation.
    • If there is one thing that Qualcomm knows it is patents and I am certain that it has asserted implementation IPR that Apple is most likely to have infringed as well as patents that are fiendishly difficult to design around.
    • However, I am pretty sure that the engineers at Apple are now beavering away to work out how to do just that.
  • The net result is that I think of all the battles that Qualcomm has fought in the past (and there have been many), it has the best chance of winning this one.
  • However, to slug it out is going to take a long time it could easily be 2020 before this issue is fully resolved.
  • I think that this creates an excellent long-term investment opportunity in the stock but timing of entry is difficult to gauge and it is going to be a bumpy ride.

Samsung Q2 17A – Just chipper.

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Samsung heading for No. 1.

  • A truly mighty performance from Samsung puts it well on track to promoted to being the largest semiconductor company in the world by revenues this year.
  • Samsung has reported preliminary results for Q2 17 with revenues / EBIT expected at KRW 60tn / KRW 14tn nicely ahead of consensus of KRW 58.4tn / KRW 13.0tn respectively.
  • As always with Samsung, the market has already taken into account the discrepancy between published expectations and the real figures, resulting in no meaning movement in the shares after the announcement.
  • Despite the recovery of the handset business following the Note 7 disaster, these results are primarily driven by semiconductors where Samsung is extending its dominance while its competitors flounder.
  • The difficulties that Toshiba is going through and the uncertainty surrounding the future of its flash memory business has certainly done Samsung no harm so far this year.
  • This combined with a rapid move away from magnetic hard drives to solid state storage has meant that demand has been so strong that both volumes are growing very quickly and price declines have slowed.
  • I suspect that around 50% (if not more) of EBIT has been derived from the semiconductor business while the handset business has remained solid but much more pedestrian.
  • The outlook remains very strong as the smartphone market is seeing a temporary blip in growth while the trend towards solid state storage looks set to continue for some time to come.
  • Consequently, it looks pretty certain that the next two quarters are likely to see Samsung post two more record levels of profit and cash generation.
  • However, this has been widely flagged already and with the shares at KRW2.4m, the valuation argument for holding a big position it not nearly as great as it was.
  • Consequently, I remain pretty ambivalent to Samsung, preferring Tencent, Baidu and Microsoft.

 

Smartphone hardware – Sticky fingers.

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Fingerprint sensors define the market this year.

  • The problem with covering the whole of the front of a smartphone with glass is that it creates a problem for fingerprint ID on the home button.
  • Samsung got around this by inconveniently locating fingerprint ID on the back of the device ensuring that it gets used much less than it otherwise would.
  • Another option is to put the fingerprint ID sensor on the power button which can be used to turn the screen on.
  • I think that this is currently the lead contender for the iPhone 8 as I have seen no indication that Apple has cracked the problem of putting the sensor under thick protective glass and still have it working reliably.
  • Qualcomm has just announced a solution that uses ultrasound that is capable of reading a fingerprint beneath an OLED display with a thickness up to 1.2mm as well as up to 0.8mm of glass.
  • Assuming the sensor is reliable, this specification should be more than enough to offer fingerprint recognition on any smartphone regardless of whether it uses the Snapdragon chipset.
  • Qualcomm is demonstrating the technology on a retrofitted Vivo smartphone and I suspect that Vivo will be the first to deploy it in a commercial device.
  • Apple and Samsung are working on their own solutions but I do not believe that they have solved the problems created by placing the sensor under the glass.
  • Fingerprint sensors have become part of everyday life on smartphones and with Samsung, Xiaomi and Essential Products setting the standard when it comes to screens, Apple has little choice but to follow.
  • Hence, with the upper and lower bezels of the device being no longer available, by far the best solution remains to place it under the screen on the virtual home button.
  • I think that anything else, including the power button, diminishes its usability and therefor its overall appeal.
  • Fortunately for Apple, the draw of its ecosystem is still very strong meaning that even if the sensor is on the power button or even the back, it is unlikely to meaningfully impact demand for the device.
  • This is because despite improvements, the user experience on Android remains meaningfully adrift of that on iOS which is so far keeping users very loyal to iOS.
  • Hence, I don’t see Apple rolling out this technology until it is rock solid in terms of reliability.
  • I think that the availability of under screen fingerprint sensors will have a significant impact on the handset market in Q4 17 as they enable an optimal user experience.
  • Anyone who can bring this to market by Q4 17 is likely to enjoy a temporary gain in market share, most likely over Samsung, but even the Qualcomm solution will not really be available until next year.
  • Consequently, I see Q4 17 continuing to be dominated by Samsung and Apple once again.
  • Samsung’s shares continue to be very strong, but I think that the valuation opportunity has now passed.
  • Consequently, I still prefer Tencent, Baidu and Microsoft.

ARM vs. Intel – Pause for thought.

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Intel shoots at Asia rather than at home.

  • With another attempt to replace Intel chips in PCs on the cards, Intel has moved to protect its position with a not so subtle reminder that its instruction set is covered by a large number of patents.
  • The 40th anniversary of the x86 processor is approaching and to celebrate, Intel has published an editorial extolling the innovation that has made x86 by far the dominant processor in both PCs and servers.
  • The problem has always been that the x86 was never designed to run on battery powered devices meaning that it consumes meaningfully more power than its ARM equivalent.
  • Consequently, there has always been a desire to allow battery powered PCs (laptops) to use the ARM processor as this would, in theory, meaningfully extend their battery life.
  • The first attempt to do this was Windows RT which involved adapting the Windows software to run on the ARM instruction set which failed miserably.
  • The current effort involves an emulator which takes the ARM instruction set and translates it into x86 so that the regular Windows software and applications can run with no modification.
  • However, this proposition already has question marks around implementation and performance (see here) and now Intel is muddying the waters further with its patent pool.
  • Intel has filed around 1,600 patents (533 families) on its x86 instruction set of which around 1,000 (333 families) I estimate are still enforceable.
  • It seems pretty likely that an emulator that makes use of the x86 instruction set will infringe these patents and hence would need a licence from Intel to operate.
  • There are two reasons why I think this warning is not aimed Qualcomm and Microsoft but rather others who may be considering taking a similar route.
    • First: Qualcomm knows and understands more about IP licencing than almost anybody and consequently I think that it will have foreseen this issue.
    • Hence, I think that, together with Microsoft, it will have sorted these issues out with Intel before officially announce its progress down this route.
    • Second: in its 8th June comment, Intel states that “there have been reports that some companies may try to emulate Intel’s proprietary x86 ISA without Intel’s authorization”.
    • At the time of writing, the co-operation between Microsoft and Qualcomm to use an emulator to get Windows running on x86 was not a report, it was an announced fact.
  • This combined with my view that Qualcomm is likely to have sorted the IP issues out in advance, leads me to believe that this warning is targeted elsewhere.
  • Hence, I do not think that this will impact the effort by Qualcomm and Microsoft which, in my opinion, remains completely dependent on the implementation.
  • Emulators have a very bad track record in terms of consuming extra resources which to date, has rarely resulted in any real benefit accruing to the user.
  • I still think that to succeed, these devices must perform at least as well as an Intel powered device at the same price point and have better battery life.
  • I think that this is the minimum requirement as without this, there is no incentive for a user or an institution to purchase the device.
  • This is what I think Microsoft and Qualcomm will be most concenred about but for the other chipmakers in Asia Intel’s comments will have given them pause for thought.

ARM vs. Intel – Silver bullet pt. II

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Implementation and performance will be everything.

  • The second lap of trying to get Windows to work on ARM processors is in full swing but the key to success will be the performance of the devices.
  • At the Computex trade show in Taipei, ASUS, Lenovo and HP have all announced that they will be producing Windows 10 devices that are powered by Qualcomm’s Snapdragon 835.
  • This is the final piece of the puzzle to get devices into the hands of users after Qualcomm and Microsoft announced that they would be giving Windows on ARM another try (see here).
  • ASUS, Lenovo and HP will be using Qualcomm’s Snapdragon 835 to provide both the horsepower to run the device as well connectivity to ensure and always on experience.
  • With its first attempt, Microsoft modified Windows 8 such that it would work on an ARM processor and in the process killed flexibility and backwards compatibility to legacy software.
  • The result was a platform that was shunned by both developers and users, completely killing any hope that ARM would gain penetration in Intel’s home turf of PCs.
  • This time the approach is completely different as Qualcomm and Microsoft have produced an x86 emulator that fools the software into thinking that there is an x86 chip present.
  • The net result is that any Win32 and Universal Windows Apps (UWP) will run on the device with no modifications being required by the developer.
  • I understand that UWP apps will run natively on the Snapdragon 835 but the emulator will be required for everything else.
  • This is where the success or failure of this venture will be determined.
  • The computing devices will lightweight, low cost with a long battery life making them ideal candidates to run Windows 10S (see here).
  • This device category is ideally suited for schools but for students who have their own devices, the appeal is less clear.
  • This is because the majority of the kind of apps that I think students will want on their PCs are not available as UWPs.
  • Students tend not to have a lot of spare cash and therefore will rely heavily on free software which if they are using Windows 10S needs to be on the store.
  • Taking the top free PC software as recommended by TechRadar, I found that 3 apps were available as UWPs compared to 10 that were not but of which, for 2 or 3 there was something similar.
  • Google Chrome, iTunes, Google Drive or any BitTorrent clients are available as UWPs, all which I suspect are pretty important for cash strapped students.
  • Therefore, the performance of the emulator will be critical as I think it will be heavily used in these devices.
  • On bench tests, the Snapdragon 835 is perfectly capable of running Windows 10, but there is a huge difference between performance in the lab and performance in the hands of real world consumer.
  • Furthermore, emulators always incur a performance overhead meaning that apps running via the emulator can never perform as well as those running natively.
  • The key questions are:
    • First: How well will Windows 10 be implemented on the ASUS, HP and Lenovo hardware to ensure the Snapdragon 835 can perform to the best of its ability.
    • Second: How much performance drag will the emulator incur?
  • The answers to these questions will only be apparent once the devices are available but I think it is quite easy to draw a line in the sand.
  • To succeed, I think these devices must perform at least as well as an Intel powered device at the same price point and have better battery life.
  • I think that this is the minimum requirement as without this, there is no incentive for a user or an institution to purchase the device.
  • I also think that always on connectivity is not a requirement for a Windows 10 device because all of the Digital Life activities that require this kind of connectivity have long since moved to smartphones.
  • Hence, I do not consider it to be a valid selling point of the devices.
  • The launch of these devices is obviously a negative for Intel but it is worth remembering that every attempt to dislodge Intel to date has been a miserable failure.

 

Samsung Q1 17 – Roaring 40s

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Semis is a powerhouse with growth and margins in the 40s.  

  • Samsung reported a superb set of results driven largely by semiconductors but announced that it would not be re-organising into a holding company much to the dismay of some activists.
  • Q1 17 revenues / EBIT were KRW50.6tn / KRW9.9tn compared to consensus forecasts at KRW49.5tn / KRW9.18tn.
  • At the same time Samsung announced its first ever dividend of KRW28,000 (annualised) giving a yield of around 1.4%.
  • It also announced that it would keep its promise to cancel all of the treasury shares that it has bought resulting in a further return to shareholders of KRW40tn.
  • This is a promise that many US and European companies implicitly make when they ask s for permission to buy back shares but in practice, rarely keep.
  • For me, this is far more important to shareholder value than re-organising into a holding company.
  • I view holding companies as conglomerates where good intentions are, more often than not, ground down into inefficiency, bureaucracy and slowness.
  • Consequently, I do not see Samsung’s reticence to become a holding company as a bad thing for shareholders.
  • Semiconductors was the powerhouse of these results posting 40% YoY growth with EBIT margins of 40% making up 63% of total profits.
  • The handset business was much less exciting with a 17% YoY decline in revenues and EBIT margins of 9.2%.
  • Even if I reverse out the KRW1.0bn hit that was taken during Q1 17 in the handset business for the Note 7 disaster, I still have only 14% EBIT margins.
  • While Samsung’s margins in Android are exemplary compared to its Android competitors, its semiconductor margins are industry leading, handsomely beating even Intel at the operating level.
  • Consequently, I think that it is this business that will be the main driver of performance for the balance of 2017.
  • In that regard, the outlook remains good with steady demand coming from servers and handsets and no imminent threat to its domination of the memory industry.
  • The implosion of Toshiba and potential change in ownership can only continue to benefit Samsung Semi in 2017.
  • This could be further enhanced should Apple decide to move to OLED in its next iPhone generation for which Samsung is the most likely supplier.
  • This should help provide some stability to the display business which is notorious for its wild swings between profit and loss.
  • The net result is that the outlook for Samsung this year remains very healthy with only one uncertainty on the horizon.
  • This is the unquantified damage that has been done to the brand following the Note 7 disaster raising questions with regard to shipments of the Galaxy s8.
  • Despite this, the initial signs are good as the reviews of the device are overwhelmingly positive despite the software shortcomings (see here) and pre-orders are pointing to no lasting damage having been done.
  • Admittedly, I put the brakes on this one too early by deciding to call time in Q4 16 when the scale of the Note 7 disaster became apparent.
  • Now with the share price above KRW2m, the opportunity for further upside is less obvious leaving me to continue preferring Microsoft, Tencent and Baidu.

Intel vs. ARM – Juicy target.

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Intel’s 60%+ gross margins are a juicy target.

  • To date, Intel has been able to brush aside any threat to its dominance in processors for the data centre, but with Microsoft deciding to port Windows Server and Azure to ARM, the threat is back.
  • The data centre has long been the saviour of Intel’s financial performance as it has been supporting the company as the legacy PC business has been going through its rough patch.
  • ARM has taken pot shots at the data centre before with semiconductor makers announcing chips, but this has never gotten off the ground.
  • I have long been convinced that the main reason for this is software as many servers run huge amounts of legacy software that will need to be ported in order for an ARM based server to work.
  • Until now, no one has been willing to do this.
  • This is why the demonstration of Windows Server running on the ARM based Qualcomm Centriq 2400 is so significant.
  • If this can shown to run with similar performance characteristics to Intel, then it would make a lot of sense for Microsoft to begin migrating its servers over.
  • There are some signs of this already and Hewlett Packard mentioned weakness in a large customer on its most recent earnings call which is widely believed to have been Microsoft.
  • However, this solution is still internal only to Microsoft and I doubt that it will be willing to take any risks until it is sure that it can work just as well as Intel.
  • The key to this is performance and here Intel has historically beaten ARM-based processors hands down time and again.
  • This is not because ARM processors are weaker than Intel per se, but because the implementation of x86-based software on ARM involves a translation step to convert x86 instructions to ARM instructions.
  • This translation step adds complexity to an implementation meaning that substantial performance overheads often result leading to a poor user experience.
  • In the data centre, performance is critical and so it is a very big stretch to say that Intel is beaten.
  • In fact, I think that there is a very long road ahead for ARM to make a real impact in servers but with the company now privately owned, there is plenty of money for investment.
  • I think the real risk for Intel here is not so much market share but margins.
  • Group gross margins are still way above the industry average at over 60% and if real competition comes into the server market, these are going to come under real pressure.
  • I think that Qualcomm is highly motivated to make this work as its core markets are now saturated leaving it needing other avenues with which to pursue further growth.
  • This is what lies behind its acquisition of NXP as well as its aggressive push into other areas such as automotive.
  • As always, the outcome of this battle for the data centre will be determined by execution and while I see no immediate threat to Intel, Qualcomm and Microsoft represent its greatest threat to date.

ARM vs. Intel – Silver bullet?

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Last time it was software. This time its emulators 

  • Qualcomm and Microsoft have announced that Windows is once again coming to the ARM processor but this time the approach is completely different to the disaster that was Windows RT.
  • In Windows RT, Microsoft modified Windows 8 such that it would work on an ARM processor and in the process killed flexibility and backwards compatibility to legacy software.
  • The result was a platform that was shunned by both developers and users, completely killing any hope that ARM would gain penetration in Intel’s home turf of PCs.
  • The fact that Intel has cut its lower end Atom line of products that aimed to compete with ARM in Android tablets has left space in the market for these products to grow into.
  • This time the approach is completely different as Qualcomm and Microsoft have produced an x86 emulator that fools the software into thinking that there is an x86 chip present.
  • The net result is that any Win32 and universal Windows app will run on the device with no modifications being required by the developer.
  • The net result is hoped to be cheaper, fan-less, always-on, mid to low end PCs that have longer battery life than their counterparts powered by Intel.
  • Qualcomm and Microsoft have also promised that Adobe Photoshop, Microsoft Office and Windows 10 games will all run on these products and it is here that I find the big caveat in this strategy.
  • This caveat is performance.
  • Intel processors may be power hogs but they offer blistering performance in real world devices as well as in benchmark tests.
  • ARM has been able to match some of the benchmarks but has never been able to come close to Intel in real devices.
  • This is why the mention of Photoshop, Office and games is so important as these three are well known to be very processor intensive.
  • Their requirements are so high that the software is written directly to the processor (written to the metal) to avoid any lags created by going to the processor via the operating system.
  • This is where the problem will occur as processor heavy apps will no longer be written directly to the metal but instead will be going through the emulator.
  • The emulator process is as follows:
    1. Translate requests from the x86 programs sitting on top of it into the RISC instruction set that ARM understands.
    2. Execute the request on the ARM processor.
    3. Translate the results back into the x86 instruction set so that the app can run.
  • Consequently, the emulator will incur additional processing overhead as well as consume power.
  • The big questions are how much will it consume and will it have an impact on the overall user experience?
  • For Intel, this is a critical question because if there is no impact it could see its market share in the mid-range PC market (most of the volume) come under serious threat.
  • In Q3 16A Intel reported non-GAAP gross margin of 64.8% compared to Qualcomm at 58.9% but if I remove the profits from licencing, I estimate that Qualcomm’s chip gross margin is around 40%.
  • Consequently, if Qualcomm’s Snapdragon chipset plus the emulator can match Intel’s performance, Intel will have to cut its prices to stay in contention.
  • This could see its gross margin come under sustained pressure as the first real challenge to its monopoly finally hits home.
  • History is on Intel’s side as emulators on battery powered devices have always impacted the user experience so much that the experience failed to win over users.
  • In order to put pressure on Intel, the Qualcomm powered Windows 10 devices will have offer the same level of functionality and performance, better battery life as well as a cheaper price.
  • These are my three criteria for Qualcomm to really challenge Intel and success will come down to the quality of the emulator that it has created.
  • Qualcomm will also need to work closely with the device makers as there are endless hardware configurations for Windows 10 PCs and clumsy integration could easily make a complete mess of the elegant product that Qualcomm and Microsoft have created.
  • The first devices will be available early 2017 (launch at CES 2017 looks likely) and it is by these that Intel’s outlook will be judged.
  • This is obviously negative for Intel but it is worth remembering that every attempt to dislodge Intel to date has been a miserable failure.

Lenovo – All mod cons

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Motorola is the only one with a chance of succeeding with modularity. 

  • Lenovo’s Motorola is increasing its commitment to its modular mobile phones with the promise of more mods and remains the only one with a chance of making this strategy work.
  • Modular mobile devices are nothing new and the mobile phone graveyard is littered with various attempts that have been made over the last 15 years.
  • The latest to be interred is Google’s Project Ara which was closed down a couple of months ago.
  • On the surface, a modular mobile phone is a great idea as it gives users flexibility to specify the exact device that they want or to swap components in and out based on their requirements.
  • However, this comes at the cost of complexity and history has shown that making modular devices is extremely difficult.
  • This is because there are fundamental limitations inherent to the design that must be overcome.
  • These are:
    • First: Each module requires an individual case and a connector. These take up space, making the resulting device bulkier and less sleek-looking than a normal device.
    • Second: Each swappable component has to remain distinct from all the others. Integrating components together is a tried and tested method of cost and size reduction meaning that a modular device has always been more expensive to make.
    • Third: Every swappable component has to be tested with every other in every possible configuration to ensure that they all work together properly. This means that testing and certification is much more onerous meaningfully increasing development costs.
  • Motorola has overcome many of these limitations by designing a very thin mobile phone that uses a single magnetic connector on its back to communicate with any other component that is connected to it.
  • Only one mod can be attached at a time greatly simplifying the solution to the above problems.
  • The end result is that the Moto Z, Moto Z Force and Moto Z Play come by far the closest to meeting my rules of the road for a modular device to succeed.
  • These are:
    • First: It must be the same size and weight as competing products.
    • Second: It must make no compromises in terms of styling,
    • Third: It must offer the same functionality as competing products.
    • Fourth: It must come at the same price point as non-modular variants.
  • With mods added the device can become thicker than one would expect for a mobile device and once mods are included in the price, it also becomes more expensive.
  • However, these compromises are compensated for with excellent functionality including creating a great point and shoot camera from Hasselblad as well as audio speakers from JBL.
  • I think that the key to real success for this strategy will be the creation of many more mods by third parties and here Motorola is working hard to create a third-party ecosystem around its connector.
  • If Motorola can increase the traction around this device category then it will be able to create device preference which in turn will lead to better margins which are badly needed by Lenovo’s mobile unit.
  • I suspect that 2017 will be a make or break for this strategy.
  • Overall, Lenovo remains my favourite PC makers as it is the market leader, has a good grasp of what it needs to do to thrive and a pretty good track record in execution.
  • I would prefer this over all of the other PC makers.