Samsung Q1 17 – Roaring 40s

Reply to this post

RFM AvatarSmall

 

 

 

 

 

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.

Juicero – Cautionary tale.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

A cautionary tale for budding entrepreneurs.

  • While Juicero is no Theranos, it has got itself into a life-threatening mess that I suspect has come about solely because it got its business model wrong.
  • Juicero is a Silicon Valley company that claims to offer the kind of juice purchased in a store but prepared freshly at home and is totally mess-free.
  • This works through a cold press that can deliver up to 4 tons of force to squeeze the liquid from pre-prepared pouches of fruits and vegetables that the company also sells.
  • The press can only make juice from the pouches which combined with an app and a database, is able to keep track of the produce the user has, when it will expire and send alerts and so on.
  • The juicer is priced at a pretty punchy $400 (reduced from an eyewatering $700) with each pouch selling for $5-$8 meaning that each glass of juice is going to cost somewhere in the region of $7-$8 depending on how long the machine lasts.
  • With each pouch delivering about 9oz of juice, this adds up to $0.83 per ounce which is broadly in line with the top-of-the-line juice companies in Silicon Valley (see here) which charge around $0.86 per oz.
  • I think that the business model is based around breaking even on the pouches and the service with most of the margin coming from the machine.
  • This explains why the company will only sell the pouches to owners of the machine as without it, the business model would collapse.
  • This is where the problems really begin because it turns out that it is possible to produce a perfectly good glass of juice using nothing but bare hands (see here).
  • A female reporter was able to extract 8.5oz of juice from one of the pouches faster than the machine could produce 9.0oz
  • NASA has measured that the human hands of the average male are capable of producing around 90Kg of force (see here).
  • This means that the other 3.5 tons of force that the machine can produce only increases production by 6% demonstrating that Juicero is massively over specified for the task for which it has been designed.
  • Furthermore, if there is a power cut or the Internet is down, no juice is produced whereas hands work all the time and can even offer juicing on the move with limitless battery life.
  • This is where I think the company has gotten its business model wrong.
  • I think it should have followed the tried and tested printer and cartridge model where the printer is sold at break even or a loss and the money is made on the cartridges.
  • I suspect Juicero could have designed the press to deliver 200Kg of force rather than 4 tons with no perceptible difference in performance other than a much cheaper price.
  • If the company had then sold the device for $50 rather than its starting price of $700, I doubt whether anyone would have even bothered to try and squeeze the pouches by hand.
  • This way the company could have hoped to have achieved much greater volume and in doing so it would have been able to get better prices from its suppliers and make good margins on the pouches.
  • The problem now is that everybody knows that the Juicero machine is surplus to requirements for everyone who can read an expiry date.
  • Hence, a change in strategy is urgently required.
  • Juicero offers convenience and in that regard it may have a future as a subscription service for very high quality juice that one prepares at home.
  • However, it will have to confess its shortcomings, ditch the expensive machine and reorient itself around the printer / cartridge model with something much cheaper.
  • On its current trajectory, it is likely to be squeezed out of existence.

 

Microsoft – An Office education.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Office in education sets up the future.

  • While the education segment is still relatively small when it comes to computing, the opportunity to influence preferences of future content creators makes it a market worth putting considerable effort into.
  • Microsoft appears to be taking 2 more steps in that direction with the launch of Windows 10 Cloud expected on May 2 at an education related event and another try at Windows on ARM at the end of the year (see here).
  • I think that the May 2 event is likely to centre around a new SKU of Windows 10 called Windows 10 Cloud that is a stripped-down version of Windows not unlike Google’s Chromebook OS.
  • This brings back the bad memory of Windows RT but I suspect that this time, Microsoft will be sticking with Intel.
  • By stripping the product down and only running software from the Windows Store, Microsoft can really bring the price of the devices down significantly but this will also ensure that appeal will be limited.
  • For example, Windows 10 Cloud will be useless for every corporation that has its own software as well as being underpowered and limited for many power users.
  • However, for education this could work well as cheap yet reliable devices are required to distribute to students.
  • Furthermore, this would work well with Microsoft’s move to make full-fat Office free for education obviating the necessity to use the inferior Google Docs.
  • I suspect that this strategy is most likely to succeed outside the US where Microsoft already has a strong and growing position.
  • Windows 10 Cloud could do well in protecting and expanding that position keeping Chromebooks out.
  • Inside the US, Google with its Chromebooks has gone from 38% share in 2014 to 58% in 2016, mostly at the expense of Apple’s Mac OSX and iOS (Futuresource Consulting).
  • Here, Microsoft’s task will be much more difficult as many establishments have only recently moved to Chrome but critically, Office is available on Chrome giving it a fighting chance.
  • As far as Microsoft is concerned, I think that in the long-run the OS and chipset are almost irrelevant with Office being the only asset that really matters.
  • This is because I think that Office is the only reason why the majority of content creators and corporations choose use PCs and hence represents a large part of Microsoft’s differentiation.
  • If it can increase its penetration in education through Windows 10 Cloud as well as through Chrome, then there should be a strong preference for Office as students enter the workforce.
  • This is why I think the focus of Microsoft is to bring down the cost and increase the options for hardware that can be used to access Office rather than at the high end where it is already strong.
  • If Microsoft can win in education then the legacy of Office should be far more secure going forward.
  • I think it has a very good chance as its product is far superior, and used by more people globally than anything else.
  • Microsoft continues to offer steady value and hence I still like it alongside Tencent and Baidu.

 

Google – From Russia with love pt. III

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Google escapes to fight another day.

  • Google has settled its dispute with the Russian regulator but I suspect that Google has managed to avoid having to give away its crown jewel: Google Play.
  • According to the FAS Russia (see here), Google has agreed to:
    • First: Google will no longer prevent the pre-installation of competing search engines or apps on Russian GMS-compliant Android devices or their presence on the home screen.
    • There is no mention of which services will be set as default when the user turns on the phone for the first time.
    • Second: Google will no longer enforce the parts of the previously signed agreements that contradict the terms of the settlement.
    • As the terms of the settlement have not been made public, it is not clear exactly what this entails but I suspect that it refers primarily to point 1 above.
    • Third: Google will ensure that users of Android devices already present in the market will be given the option to change their default search provider via a software update and pop up.
    • Fourth: Google will pay a fine of $7.8m which I calculate is equivalent to around 100 minutes of Alphabet’s cash flow and consequently, is completely irrelevant.
  • This settlement ensures that competing apps can be on the home screen but it appears to do nothing about the requirement to bundle the Google Apps with Google Play nor the fact that they are set by default, albeit, now changeable.
  • The settlement was proposed by Google and accepted by the FAS which admitted that it was under some pressure to have this two-year dispute resolved.
  • This is why I believe that this crucial element was left out if the agreement as I think that it is the unbundling of Google Play from Google’s Digital Life services that could do the real damage.
  • This is because it is widely accepted that in most markets outside of China, it is almost impossible to sell an Android Device that does not have Google Play installed because this is what users demand.
  • This gives Google the power to force handset makers and operators to install the services from which it makes almost all of its Android mobile revenues front and centre on the device and to set them as default.
  • Research has shown many times that installation at the factory and being set as default are big drivers of usage, even if the service in question is considered to be inferior (Apple Maps).
  • This is why I have long believed that Google Play is so important to Google’s Android revenues and that unbundling Google Play could be highly detrimental to its long-term outlook.
  • The good news for Google is that it has now set a precedent with which it may be able to more easily settle its outstanding dispute with the EU.
  • The net result is that I think that while Google has given up a little ground, the fortress of Google Play remains intact and with it its ability to continue dominating the Android landscape.
  • However, this dominance is not enough to make me think that the shares are attractive and I continue to prefer the shares of Baidu, Tencent and Microsoft.

Samsung – Fall before the first

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Bixby falls even before its first hurdle.

  • Samsung’s delay in the roll-out of Bixby is a strong indication of just how far behind Samsung is when it comes to artificial intelligence reinforcing my view that the investment case still lives and dies with hardware.
  • Despite much fanfare at the launch of the Galaxy s8 just a few weeks ago, it turns out that Bixby’s functionality at launch will be greatly curtailed as Samsung can’t get it to work properly.
  • Some of the features such as Vision, Home and Reminder will be available but the key piece that ties it all together which is Bixby Voice will not be available in US until later in the spring.
  • The reason for the delay is that the voice recognition system in English is not nearly good enough and substantially lags behind Bixby’s performance in Korean.
  • This is a significant blunder on Samsung’s part as:
    • First: it appears that Samsung has put more effort into making Bixby work in Korean than English.
    • I think that this was not a very sensible choice as the vast majority of Samsung Galaxy s8 devices will sell to users for whom Korean is not a language they speak.
    • Second: it is a sure indicator of just how far behind Samsung is compared to everyone else when it comes to developing intelligent services.
    • RFM research (see here) has identified three stages of voice recognition of which the first and by far the most simple is the accurate conversion of voice to text.
    • Almost everyone, even Facebook, has pretty much cleared this hurdle but it appears that Bixby has not.
  • Digital assistants face a critical chicken and egg problem.
  • This is that to improve, they need data but if they are no good, no one will use them thereby depriving them of the data they need to get better.
  • At this rate, users will try Bixby once or twice and quickly give up preferring instead to use touch based input and other digital assistants.
  • To make matters even more difficult, Bixby will be competing on its own device with the best in class Google Assistant which will be set by default and will sit on the home button.
  • The net result is that I see the Galaxy s8 competing on the basis of its superb screen, high quality camera and best in class components that together will enhance the Digital Life services provided by others.
  • I do not expect users to pay much attention to any of Samsung’s software innovations as I see them as either not useful (Samsung Dex) or not good enough (Bixby).
  • This leaves Samsung exactly where I left it as a vendor of commodity hardware that makes excellent returns by out shipping its nearest rivals by more than 2 units to 1.
  • As long as it can maintain that gap, I have no fear for its profitability or its outlook but Huawei is keen to capitalise on Samsung’s woes and remains a constant threat.
  • Samsung’s brand has also taken a hit as a result of the Note 7 disaster, leaving the Galaxy s8 as the first real test of how much damage has been done.
  • This combined with the recent very strong rally, is why I still don’t want to get involved.
  • I prefer Tencent, Baidu and Microsoft.

Xiaomi – No favours

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Xiaomi’s ecosystem remains its biggest weakness.

  • Comparing itself to Costco helps Xiaomi’s valuation somewhat but does no favours when it comes to its business model.
  • In a recent interview, Xiaomi founder said that he sees his company more like Costco than Apple which does make some sense.
  • Xiaomi has pursued a typical Internet economy model which is to gather users as quickly as it can and then monetise when their numbers hit critical mass.
  • It has done this by selling nice looking devices at very low margins and then hoping to monetise users through its ecosystem of services.
  • What Costco does is similar in that it sells groceries at wafer thin margins and makes good margins on the subscription that it charges for membership.
  • However, where Costco and Xiaomi differ is that Costco has a service that users are clearly willing to pay for but I am not convinced that Xiaomi does.
  • Around 15% of all Chinese users have a Xiaomi phone but RFM research indicates that it is the ecosystems of the BATmen (see here) that Xiaomi’s users predominantly use.
  • This strongly implies that users are buying Xiaomi phones due to attractive prices and form factor but do not care about the ecosystem that Xiaomi offers.
  • Overseas the situation is even worse because outside of China, Xiaomi sells its devices with the Google ecosystem installed because its own ecosystem is irrelevant.
  • This is the critical difference between Xiaomi and Costco.
  • I have previously estimated that Xiaomi does make some money from selling content and games ($100m in 2016 (see here)) but this is very far from Xiaomi successfully monetising its ecosystem in China.
  • To try and restore growth, Xiaomi is going into retail and plans to open 1,000 stores in China as well as a good number in India with revenues of $10bn targeted within the next three years.
  • This is the right strategy to break out of the limitations of Internet-only sales, but will have the impact of increasing costs.
  • Consequently, I am comfortable that Xiaomi could hit its RMB100bn ($14.4bn) sales target for 2017, but I am certain that margins will not be going up.
  • If I take this outlook and compare it to Costco rather than Apple, I do get a slightly better valuation but not one that would make Xiaomi’s current shareholders very happy.
  • Using Costco’s 2017 EV/Sales and EV/EBIT multiples and applying them to my estimates for 2017 Xiaomi (see here), I end up with valuations of $8.6bn / $8.3bn respectively.
  • However, in using this methodology, the question needs to be asked should Xiaomi trade at a discount because Costco has already established the service it sells whereas Xiaomi has not?
  • This is somewhat higher than my current $5bn valuation using Apple, but still way below the last raise at $45bn and the $20bn or so where I understand that the shares are changing hands.
  • I do not see any threats to Xiaomi’s viability as a company but I still think it would make a good acquisition for one of the BATmen that I think will need to become more vertically integrated to continue growing in the home market.

Huawei – Rivers of blood pt. IV

Reply to this post

RFM AvatarSmall

 

 

 

 

 

I am pretty sure Huawei lost money in handsets last year.

  • Huawei reported strong growth in revenues in 2016 but that growth cost it dearly as I think that the handset business lost money as it slashed prices and ramped up spending to gain market share.
  • FY 2016 revenues grew 32% to RMB523bn ($75.1bn) but gross margin fell 114bp to 40.3% and operating margin fell by 205bp to 9.1%.
  • Huawei entered 2016 in a buoyant mood confidently stating that it would become the Number 1 seller of smartphones within 5 years.
  • In line with that goal it massively ramped up spending and cut the prices of its devices in order to close the gap to the global No. 1 smartphone maker: Samsung.
  • Unfortunately, while it was focused on Samsung, Oppo and Vivo really turned on the juice at home, costing Huawei 190bp of local market share in H2 2016.
  • The net result was lower than expected global market share gains for the full year.
  • This was a problem, because Huawei had planned for higher volumes in 2016, meaning that its OPEX budget for the year was too high.
  • Consequently, I am pretty sure that the consumer business entered negative territory which has resulted in a much more measured approach to 2017.
  • RFM research indicates that the focus of 2017 is the generation of profit, which given that Samsung still meaningfully outsells Huawei in terms of volume will require much greater austerity when it comes to OPEX.
  • Huawei is now a comfortable No. 2 in Android but because Android devices are commoditised, that means that I still see it making margins of just 2-4% in the best instance.
  • In order to earn better margin, it must become the No. 1 in terms of volume and outsell its closest rival by a factor of more than 2 to 1.
  • It is this volume advantage that allows Samsung to earn 10-12% margins on Android devices which I think is sustainable for as long as it can maintain that volume advantage.
  • This advantage closed somewhat in Q4 16A but I suspect it will widen once again in Q1 17 as Samsung recovers from the Note 7 disaster.
  • Because of these economics, Huawei has got to do far more than just catch Samsung; it must outsell it by more than 2 to 1.
  • This will be very difficult to achieve which is why I think that Huawei is also working on differentiating its products through software and services.
  • If it can create a good user experience and services that users are prepared to pay something to have access to, then it should be able to make better than commodity margins.
  • However, this is easier said than done and I think that Huawei has a lot of work to do before it will be in this position.
  • This is why, I continue to believe that its best chance of success remains in China where a tie up with Baidu or Tencent could help it plug the service gap it currently has.
  • However, this won’t help in developed markets and here Huawei must do everything that it can to develop the appeal and attractiveness of its Honor brand.
  • This will be difficult given the dominance of the Google ecosystem in these markets but there are cracks in Google’s position that might just give Huawei a chance.
  • In the meantime, I remain unconvinced that Huawei does not have the stomach or the resources to wade through the rivers of red ink that it will take to knock Samsung off its perch.
  • Consequently, I see 2017 as a consolidation year for Huawei, holding share steady and focusing on a return to profit before it considers its next move.
  • I would continue to be wary of any of the Android handset makers whose outlook is increasingly difficult as the market for devices continues to slow.
  • Apple is the only handset maker I would touch at the moment.

Samsung – Still in the box

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Bezels break the box but Bixby stays inside.

  • While Samsung is bursting out of the box in pushing the limits of screen real estate, its voyage into the increasingly crucial user experience shows that it remains boxed in by smarter and better alternatives.
  • Samsung finally launched the Samsung Galaxy s8 / s8+ whose main features include:
    • First: A big improvement in screen real estate with the home button now being under the glass as well as improvements in colour, contrast and brightness.
    • Second: A digital assistant called Bixby (see here) that aims to be much more than an easy way to find stuff out (see below).
    • Third: Samsung Dex which allows the Galaxy s8 to work with an external monitor, mouse and keyboard to give a desktop like experience.
    • Samsung demonstrated very basic PowerPoint editing features confirming to me that the Galaxy s8 will be capable of running the stripped-down Office apps rather than the full fat versions.
    • I still think that without full fat Office, Photoshop etc, there is not much point in this functionality as content consumption has largely already moved off form factors that use a mouse and keyboard and onto touch.
  • The net result is that Samsung is continuing to almost entirely differentiate in hardware as this device is still first and foremost a Google ecosystem device.
  • This is just one area where Bixby will run into problems as it will be the best-in-class Google Assistant that sits on the home button meaning that Bixby has a fearsome competitor even on its own flagship device.
  • To counteract this, Bixby is trying to do things a little differently but careful assessment of what Samsung demonstrated shows a service that has very little intelligence at all.
  • Bixby is a very far cry from what Viv demonstrated would be possible with its assistant prior to the Samsung acquisition, making me suspect that Viv has not proved to be nearly as clever as promised.
  • Bixby is activated with a side key (to get around the problem of Google sitting on the home button) and aims to get stuff done rather than just finding stuff out.
  • Consequently, Samsung has taught Bixby a range of skills such as screen capture and image recognition and plugged that functionality into a select number of apps.
  • By keeping the number of apps that use it limited, Samsung limits the number of possibilities that has to program further highlighting that Bixby is probably incapable doing very much outside of the box.
  • This appears to be contrary to how Viv marketed its capabilities (see here) before it was owned by Samsung, again making me wonder about the true capability of Viv / Bixby.
  • Bixby offers a series of cards (left swipe from home screen) that adjust based on usage and the time of day as the system learns what apps and services the user uses most and when.
  • This is merely clever statistics but if this proves to be a useful tool, then Samsung will achieved some much needed differentiation outside of hardware.
  • Although I have suspicions about the lack of intelligence in Bixby, I cannot be 100% certain of this opinion until I have tested it to destruction.
  • The net result is a very nice looking device that Samsung has made huge efforts to show is both high quality and extremely safe.
  • Most importantly this device is also the first real test that Samsung has had since the Note 7 disaster which is why the s8 needs to sell very well, confounding the big fall in trust that Samsung has suffered over the last 6 months (see here).
  • I think that Samsung has produced the device that it needs to cement its recovery but now it comes down to consumers, a number of whom have already switched to iOS (see here).
  • With Samsung’s share price very close to its all time high, a lot of recovery is already priced in which is why I remain a little nervous.
  • Hence, I prefer Microsoft, Tencent or Baidu.

Samsung – Edge dancer pt. II

Reply to this post

RFM AvatarSmall

 

 

 

 

 

I think Bixby will struggle against Google Assistant.

  • Samsung has launched its offensive on the digital assistant market but I think it will still be dancing around the edge of the main act on the Galaxy s8: Google Assistant.
  • Samsung has announced that its new digital assistant, Bixby will be present on the Samsung Galaxy 8 with its own dedicated key on the side of the device.
  • Bixby promises to offer:
    • First, completeness: This promises to give users complete control of enabled apps rather than the few tasks offered by other assistants.
    • Second contextual awareness: Samsung is promising that Bixby will be aware of the context within which it has been triggered, making it more relevant and useful.
    • I suspect that it will do this using the hooks in Android that Google wrote to enable Google Assistant to do the same thing.
    • Third natural language recognition: Bixby should be able to understand complex, multi-part questions as well as prompt the user to clarify the pieces that it does not understand.
  • These features are very similar to those promised by Viv, the artificial intelligence company that Samsung purchased in October 2016 which is clearly the source of this product.
  • If Bixby can truly fulfil the promises that it is making, then it will almost certainly will be better than Google Assistant.
  • However, I think that this is a very big ask given that RFM research has found that AI excellence to date has been a factor of time and data volume.
  • Viv was founded in 2012 and has no data from commercial products while Google has been crunching data for 20 years and has orders of magnitude more data than its nearest rival.
  • Consequently, I think that compared to this highly ambitious billing, Bixby is going to fall very far short of the promises that it has made.
  • Furthermore, Samsung’s delivery of Bixby is going to be hobbled by the 2014 agreement that it made with Google where it agreed not to compete in the ecosystem (see here).
  • This is why I suspect that Bixby has been relegated to a button on the side of the device whereas it will be Google Assistant that is sitting on the all-important home button.
  • As a result I think on the smartphone, Bixby will lose out to Google Assistant but on other devices it has some chance.
  • Samsung has a good portfolio of other electronic devices, which combined with its SmartThings offering, could allow Bixby to offer intelligent and intuitive control of other Samsung devices.
  • This could help Samsung to encourage greater ownership of Samsung devices across its range but again this will depend on how good Bixby really is.
  • Over 20% of all Google mobile searches are already done using voice meaning that many users are already conditioned to pressing the home button and asking as well as being used to Google’s quality of service.
  • Consequently, I think that the odds are heavily stacked against Samsung having much success with Bixby but as long as it can continue to outsell Huawei by more than 2 phones to 1, the profitability of its handset business should remain intact.
  • I still pretty cautious on Samsung as I am not convinced that the full fall-out from the Note 7 disaster has been felt in terms of market share, which is what makes the Galaxy s8 launch so important.
  • I prefer Baidu, Tencent and Microsoft.

 

Amazon vs. Google – Homefront pt. II.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Amazon is pre-emptively moving to keep Google out.

  • Amazon is pulling out all of the stops to ensure that it is Alexa, rather than Google Assistant, that ends up becoming the nerve centre for controlling the smart home.
  • In its latest move, Amazon is offering credits for AWS that are likely to ensure that connecting one’s smart home device to Alexa remains free in almost every circumstance.
  • As the scope of Alexa improves and users can do more with Alexa, it is likely that creators of smart home devices will require more space on AWS that will require them to start paying Amazon.
  • Most device developers are small start-ups with very limited funds meaning that this will be a big incentive to do more with Alexa.
  • At the moment, the free tier gives developers 1m AWS Lamda requests and 750 hours of EC2 compute time per month.
  • Beyond that, developers end up incurring a monthly charge which is something that Amazon is wisely keen to avoid.
  • With this new program, Amazon is offering a one-time credit of $100 as well as $100 per month towards any charges that they incur as a result of usage of their devices.
  • This is likely to ensure that almost all developers of smart home devices will not have to pay anything to Amazon until they are generating so much usage that they are making plenty of money themselves.
  • I think that this is a very shrewd move as it encourages more developers to sign up to make their devices work with Alexa and also encourages them to make the skills deeper and more intuitive.
  • Currently, most skills are very basic and as a result they suffer from usability problems which in most cases makes it easier to turn the device on manually rather than using Alexa.
  • This looks like a pre-emptive move to keep Google at bay as I see Google making rapid moves to improve its Google Home developer program after being all but wiped out at CES 2017.
  • Even though Amazon has close to 10m devices installed in the houses of users compared to Google at 0.5m – 1m, the Google Home experience is so superior to Alexa that I still see a risk of Amazon losing this race (see here).
  • This is why I see Amazon doing everything that it can to show developers love and support which is something that to date, Google has badly neglected.
  • The result is that very few of the smart home device developers are making sure that their devices works with Google Home giving many users more reason go with Amazon’s Echo devices rather than Google.
  • Amazon is also very fortunate that the market’s view of Alexa is so positive as a side by side test of the Amazon Echo against Google Home shows how inferior Amazon is compared to Google.
  • This is why it is still Google’s battle to lose but Amazon is clearly doing everything that it can to ensure that it is Alexa rather than Google that dominates the potentially extremely lucrative market for intelligent home automation.
  • From an investment perspective, neither of these two companies are desperately appealing leaving me preferring Baidu, Microsoft and Tencent with Apple for long-term income based investors.