CES Day 2 – Similar stories.

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Google shows the most progress at CES.

  • Apart from automobiles, the prevailing theme at CES is one of boredom.
  • Those looking for new trends have instead found the same stories as last year, albeit a bit more advanced than the last time that they were told.
  • This steady progress is the real theme of CES as hype has been wound up to fever pitch levels over the last few years and now the time has come to begin delivering.
  • The result is likely to be a steady year where autonomous vehicles inch closer to reality, where AR penetrates deeper into the enterprise but not where new trends rock the industry to its core.
  • AI is going to continue to be a theme, but I think that 2018 will be another year of very slow development.
  • Contrary to popular belief, RFM research has concluded that there has been very little progress in breaking down the really big problems of AI and without a new approach not much is going to change.
  • The current favoured technique, backpropagation, was discovered in 1986 and took 26 years to start producing decent results.
  • There are plenty of new techniques being worked on, but none of them have produced any results.
  • Consequently, I am pretty certain that 2018 will be another year of small increments dressed up as a big advance.
  • The one area where I have seen movement is in the smart home which I have discussed below.

Smart Home

  • Developments within the smart home have been steady but the options for developers and functionality has improved markedly.
  • This is because in addition to splashing Google Assistant over every available surface in Las Vegas, Google has been putting a lot of effort into pushing the assistant to developers.
  • Over the last 3 days I have spoken with or passed by the stalls of over 100 companies making a smart gadget of some description.
  • When I carried out this exercise last year everyone was supporting Amazon Alexa and almost no-one was supporting Google Assistant.
  • This year, everyone is still supporting Alexa but they have also either already included Google Assistant or have put it on the immediate roadmap.
  • This is a big change from 2017 and I think it substantially reduces the appeal of Amazon Alexa as Google Assistant remains a far better service.
  • The one exception is shopping and in this function Google is hopelessly outclassed.
  • However, Amazon is giving away the Dash Wand and I can see a scenario where users keep that stuck to the fridge for groceries and use Google Assistant for everything else.
  • Google’s position in the smart home has not improved quite as much as I was expecting, but its improvement combined with the way that users are interacting with digital assistants, leads me to change my position.
  • I think that Google now has the edge over Amazon is it has by far the better product and its native presence on smartphones means that it is dealing with far more inquiries than Amazon.
  • Hence, I think that Google should be able to continue to improve the assistant relative to Amazon thereby steadily increasing its relative appeal over time.
  • Furthermore, with a multitude of 3rd party products coming to market, this will no longer be a battle over hardware and sound quality but will become one fought in the ecosystem.
  • Here, I continue to think that Google has Amazon soundly beaten, the results of which I expect to see over the coming 24 months.

CES Day 1 – From hard to soft.

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Samsung and GoPro suffer from software shortages.

 Samsung

  • The best news for Samsung at CES was the failure by Huawei to close its deal with AT&T that would have seen its handsets sold by a major US operator for the first time.
  • Huawei’s absence from the US market is a major boon to Samsung and undoubtedly has been helping its market share as well as its pricing.
  • AT&T appears to have pulled its deal with Huawei after members of congress raised concerns to the FCC with regard to the security of Chinese manufactured devices running on US networks.
  • This has been a bugbear that Huawei has been unable to shake for many years and it looks like 2018 will be no different.
  • This good news was tempered with disappointment as Samsung’s guidance for Q4 17 missed expectations on both the top and bottom lines.
  • I suspect that most of this has been due to the very strong Korean Won which appreciated by 7% in Q4 17 against the USD.
  • Samsung’ agenda for 2018 is to bring intelligence into all of its devices such that they offer a deeper and richer user experience.
  • Unfortunately, this means Bixby which offers very little intelligence and is most kindly described as a voice control system for an electronic device.
  • Hence, I do not see this a mechanism of differentiation for Samsung and it’s position in consumer electronics is likely to continue being good profitability predicated on selling commodity devices in huge volumes.

GoPro.

  • The best time to announce bad news is when the cycle is jammed packed and I suspect that for many attendees at CES, GoPro’s surrender will have gone unnoticed.
  • GoPro has announced that it will exit the drone business effectively putting an end to the remote hope that it would be able to find a recovery in another consumer electronics segment.
  • The problem is that its chief competitor, DJI, has a better product at a competitive price with greater volumes and market share.
  • I have long believed that the battery issue that the Karma Drone suffered right after launch killed its chances of ever catching DJI meaning that an ignominious exit was inevitable.
  • GoPro may also have put itself up for sale which makes complete sense as I have long believed that acquisition was the most likely end game (see here).
  • This is a result of GoPro’s failure to develop software and services around its core proposition which should have created the desperately needed differentiation to fend off Chinese copycats.
  • As it is, Yi Technology and others now make cameras that are practically as good as GoPro’s but for half the price.
  • This combined with a flattish market spells real trouble for GoPro in 2018.I still think that both GoPro and Fitbit (see here) will make reasonable tuck in acquisitions (see here) for the larger ecosystems looking to extend their services or market position into new digital devices.I suspect that GoPro shares will continue to be weak but the timing looks right for potential buyers to take a serious look.I doubt that GoPro will exit 2018 as an independent entity.

RFM 2018 – Top 5 at CES.

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RFM’s top 5 issues likely to prevail at CES and 2018.

Artificial Intelligence

  • I expect Artificial Intelligence to get top billing again this year as the both the hype and the flow of capital show no sign of abating.
  • Consequently, 2018 is likely to be a year of more feverish investment and hype making it more important than ever to separate real AI from those that are simply using statistics.
  • The three big AI problems remain mainly unsolved (see here) and RFM has concluded that progress in 2017 was very slow despite plenty of noise being made to the contrary.
  • I have no doubt that AI will become crucial for ecosystems trying to differentiate their Digital Life services from one another and the gap between the haves and the have nots is widening.
  • Google has distanced itself further from its competitors and in my opinion remains by far the leader in this field.

Google vs. Amazon

  • The battle of the digital assistants is likely to heat up this year and Google is clearly determined not to repeat the own goals of 2017 that allowed Amazon to dominate the market with an inferior product.
  • Signs of this are everywhere at CES with the Las Vegas Conference Center and the casino monorail fully decked out with entreaties to use Google Assistant.
  • Last year Google was nowhere to be seen at CES but this year I am hoping to see the results of its H2 2017 efforts through the inclusion of Google Assistant support by smaller developers in their smart home products and services.
  • Although, Amazon dominates the market for devices it is capturing only a tiny fraction of the voice requests as 91% of users that interact via voice use a smartphone compared to 17% that use smart speakers (see here).
  • Data is the life blood of AI and the data strongly suggests that Google is collecting far more than Amazon thereby ensuring that Google Assistant will continue to distance itself from Amazon Alexa in terms of ability.
  • If Google manages to close the gap in smart home this year, I think that this will put Amazon on the back foot and on a trajectory towards losing the smart home to Google.

Smartphones – Bezels, folds and the race to the bottom.

  • Bezel-less screens have become table stakes at the high end of the smartphone market meaning that 2018 will see this feature increasingly moving into the mid-range.
  • Samsung created the bezel-less market just like it did for large screens and now it must now look for something else.
  • The issue is that the Android user experience suffers from serious shortcomings compared to iOS meaning that it must offer othe features to compete at the iPhone price point.
  • Samsung has had foldable screens for some considerable time but poor yield and a lack of interest has meant that they have never been launched.
  • I have long seen the potential for foldable screens as a tablet form factor that can be folded away and slid into a pocket has the capacity to fundamentally alter both the tablet and laptop markets.
  • 2018 may be the year that Samsung feels ready to finally launch this as its options in terms of maintaining differentiation in an increasingly crowded bezel-less market are looking thin.

Automotive

  • The theme of digitisation in the automobile is in full swing but 2018 is likely to be another year where hopes and dreams substantially outstrip reality.
  • RFM’s analysis has shown (see here) that OEMs and tier 1s have not really digested the degree of change that is required for them to remain major players in their own industry.
  • For example, by locking the development cycle of the infotainment unit to the rest of the vehicle, the industry has ensured that units for which users pay thousands of dollars for, are four to five years out of date and hopelessly outclassed by $150 smartphones.
  • This combined with the almost universally awful user experience offered by automotive infotainment units puts the OEMs at risk of becoming also-rans in their own industry.
  • It also leaves the door wide open for ambitious new-comers like Byton which has launched an EV and Digital Life experience which shows some signs of having been given a lot of thought to the experience issues plaguing the vehicle.

VR/AR/Wearables.

  • With the exception of AR, very little is likely to change for both virtual reality and wearables in 2018 as the issues that hold them back remain unresolved.
  • Wearables are still a solution looking for a problem while the health use case continues to be limited by the quality and reliability of the sensors that they use.
  • Hence wearables will still be a recreational health and fitness market where users soon tire of their devices and consign them to cluttered junk drawers.
  • I would still be placing all of my attention on the companies that are working on making medical grade sensors that are both cheap and reliable to wake this segment from its slumbers.
  • I still see no real use case for VR beyond high-end gaming and events as the technical issues of cables, nausea and so on are still being worked on.
  • This leaves AR which I think is going to have a good year in the enterprise.
  • In the enterprise, the user experience matters less and the productivity use cases for AR in particular functions are numerous and demonstrable.
  • This is why many AR companies have pivoted towards the enterprise leaving Magic Leap as one of the few that is left struggling along in consumer AR.

Google & Amazon – Second blood.

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Second blood goes to Google.

  • Google has scored a badly needed win over Amazon as Amazon has said it will start selling Google’s Chromecast devices once again which is almost certainly a bid to get YouTube back on its devices.
  • This is a sure sign that Amazon needs Google more than Google needs Amazon and further underpins how important the ecosystem is.
  • When I compare Google’s digital ecosystem against Amazon’s the results are night and day.
    • First, Digital Life: On RFM’s Digital Life analysis Google scores 40% while Amazon is on 30%.
    • However, if I look at the services that have hundreds of millions of users, then Google is miles ahead as outside of shopping the only service where Amazon has traction is Media Consumption (Amazon Prime Video).
    • It is clear that Google’s ecosystem is far more developed and more complete than Amazon’s.
    • Second, RFM 8 Laws of Robotics: These are the measures that asses the quality of these services and here the contrast is even more stark.
    • Google has problems around the user experience on Android driven mostly by software fragmentation and an inability to update software but outside of that it gets top scores across the board.
    • Amazon’s score indicates quite clearly that it has no real understanding of what is required to build a thriving ecosystem that users love and demand.
  • The result is that users of Amazon devices are likely to demand that Google services are made available on them with a good user experience and are less concerned with Amazon’s own services outside of shopping.
  • Failure to provide this could easily drive those users to buy other products as Amazon’s one Digital Life service that has some traction (Amazon Prime Video) is widely available on most streaming devices and smart TVs.
  • This is what has given Google the upper hand in this latest spat and I am certain that this is why Amazon has backed down.
  • This is a badly needed win for Google as in the smart home its digital assistant remains way behind Amazon’s Alexa despite being a superior product.
  • I still see Google as being on the backfoot when it comes to the smart home, but it has closed some of the gap to Amazon in terms of third party developer support and it remains a superior product.
  • This will be a key battle that is played out in 2018 and the level of support offered by device and service developers when they show their wares at CES in January will be a key indicator.
  • Market penetration remains very low and so there is still everything to play for but I still think that in the long-run Google should win as it has the better product.

Apple – Super cycle blues.

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Early data indicates that there is no super cycle

  • While it is too early to say for sure, the initial data suggests that the super cycle that the market is looking for to underpin the valuation of the shares is not occurring.
  • Mixpanel is an analytics company that tracks user interactions for the providers of apps and services on the web as well as mobile devices.
  • With 20,000 customers and 7tn data points collected every year, I think it is fair to say that Mixpanel is quite capable of collecting a data sample that is a good representation of reality.
  • The latest data from Mixpanel tracks the appearance of iPhone 8/8+/X devices in the data that it collects, giving an idea of how quickly the user base is switching to the new models.
  • In the two months since release (iPhone X one month only), the three devices have racked up the following share of the user base:
    • iPhone 8: 2.79%
    • iPhone 8+: 3.68%
    • iPhone X: 4.91%
    • This gives total penetration of the new generation of iPhones in the first two months of availability of 11.3% of the user base.
  • In comparison, the iPhone 7 and 7+ penetrated 23.5% of the user base within the first two months of availability.
  • This strongly suggests that the latest generation of devices is not generating the kind of super cycle that the market is looking.
  • I do not think that supply is an issue as I can order an iPhone X 64GB today and pick it up from the Apple Store in New York City or Palo Alto tomorrow. The iPhone X 256GB wait is four days.
  • To be as consistent as possible, it is necessary to adjust the data to reflect the fact that the iPhone X has only been available for a month.
  • If I take the penetration achieved in the first month by each model in the new generation, I end up with a total user base penetration of 8.8% after one month of availability.
  • By contrast after one month the iPhone 7/7+ had achieved 11.5% penetration of the iOS user base.
  • This is a strong indication that uptake by users of the new generation of devices is actually slower than it was for the iPhone 7.
  • It is important to remember that this is going to be offset by price as the data clearly shows that the iPhone X is much more popular than the iPhone 8, despite being 30% more expensive.
  • Hence, softness in unit shipment numbers could easily be compensated by the higher price being paid for the iPhone X.
  • However, I think that expectations for Apple for FY2018 are including both a strong replacement cycle and higher prices which is why I fear disappointment in the short term.
  • The caveats to this analysis are:
    • First, data: I have assumed that Mixpanel is a statistically significant representation of reality.
    • While the data quantity suggests that this should be the case, I have no hard data to prove it.
    • Second, availability: I have tested availability in NYC and California as they are places with the highest demand, but this may not be a true representation of supply.
    • Third, user base: The user base of iOS devices is larger this year than it was last year.
    • Consequently, it will require more devices to be sold in order to achieve that same level of penetration as the iPhone 7.
    • However, I do not think that differences in the size of the user base is enough to account for this discrepancy.
  • When I weigh up the findings of this analysis and take into account the caveats, I conclude the following:
    • First: uptake of the new generation of iPhone is slower than last year and there is no sign of the much hoped for super cycle.
    • I think this is mainly driven by the very high price of the most desirable product which will lead to many users waiting until the full screen penetrates to the lower priced segments.
    • Second: the higher price of the iPhone X will offset the impact on Apple’s revenues of a slower uptake compared to the iPhone 7, but it will not enable the company to soundly beat market expectations.
  • Consequently, I think that while demand for the iPhone X is clearly quite high, it is not high enough to allow Apple to beat the already very high financial expectations that have been set for it.
  • Hence, I can see disappointment coming through in Apple’s next few sets of earnings releases and think that the time has come to take some money off the table.
  • Tencent, Baidu and Microsoft are worthy candidates for consideration.

Google & Amazon – Battle for the smart home pt. V.

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Google has a chance to displace Amazon.

  • I don’t think Google will go out of its way to patch things up with Amazon as having YouTube absent from Amazon devices could disincentivise users from going with Echo products giving Google Home a badly needed boost.
  • Google and Amazon have been sparring for several months but I think that the move by Google to pull YouTube off Amazon ecosystem devices may bring this issue to a head.
  • It is also a demonstration that content is king and as of today, YouTube is amore important platform than Amazon Prime Video.
  • Consequently, I think that Amazon needs YouTube on its devices more than Google does as users will simply go elsewhere to get it.
  • This sparring began three months ago when YouTube pulled its native support from the Amazon Echo Show.
  • This was followed by the removal of Nest products from the Amazon website and the implementation of a clumsy and far from ideal workaround to get YouTube content back on the Echo Show.
  • Google has closed this loophole as of today and will also pull support from Fire TV from Jan 1st
  • This battle between Amazon and Google is peripheral to their core businesses as even in video, they do not really compete directly.
  • YouTube is an encyclopaedia of user generated content while Amazon Prime Video is just like Netflix.
  • Google does have YouTube Red but this is a tiny part of YouTube overall.
  • Consequently, I think this fight is all about the home and here Google is way behind Amazon despite having the better product (see here).
  • This is because Amazon has been much better showing developers love and as a result they have preferred to develop their smart home products for Amazon Alexa.
  • The result has been that almost every device sold will work with Alexa with only a few working with Google.
  • This has changed over the last 6 months but Amazon’s ability to advertise its products on its website as well as giving its cheapest product away for free has allowed it to maintain its lead.
  • With the critical holiday selling season upon us, this is a great time to throw a spanner into Amazon’s works as not working with Google services is going to be a problem for the vast majority of users and may push them to consider Google Home.
  • I still see Google as being on the backfoot when it comes to the smart home but it has closed some of the gap to Amazon in terms of third parties and it remains a superior product.
  • This will be a key battle that is played out in 2018 and the level of support offered by device and service developers when they show their wares at CES in January will be a key indicator.
  • The market remains very lowly penetrated and so there is everything to play for but I still think that in the long-run Google should win as it has the better product.
  • I will revisit this position again once it becomes clear which way smart home developers are inclining for their 2018 product launches.

Xiaomi – Market timing

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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.

 

 

Digital sensors – Heart of the matter.

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Apple is creeping up on the medical devices industry. 

  • Apple has taken wearables a step closer to replacing medical devices, but the user experience is still so limited that the immediate term for the medical, devices industry still looks secure.
  • KardiaBand (AliveCor) is a strap for the Apple Watch which incorporates in it a sensor that is capable of producing a full electro cardiogram (ECG).
  • Critically this accessory has been approved by the FDA meaning that it is good enough to be a medical device producing medical data that can be relied on by a doctor.
  • The Apple Watch app that comes with KardiaBand can use the heart rate sensor on the Apple Watch to detect abnormalities and recommend to the user that he records his ECG.
  • Atrial fibrillation is a leading cause of stroke and it is thought that 66% of strokes could be prevented with early detection.
  • It is the signs of this that the KardiaBand app is looking for via the Apple Watch sensor which can then be confirmed through the recording of an ECG.
  • This does not come cheap at $199 for the band and $99 per year for the monitoring service, but if it works as advertised, I think it is a tiny price to pay for avoiding a stroke.
  • However, the use case is not ideal requiring a large metal plate to be present in the device’s strap and it does not offer always on monitoring.
  • This combined with its price means that it will only really appeal to users who are known to be at risk from stroke and it does not enable the replacement of an existing medical device.
  • I see the combination of Apple Watch and KardiaBand as a halfway house as it does not really offer real time monitoring to a medical grade, but it is a step in the right direction.
  • Sensors are becoming the eyes and ears of AI (see here), but almost all sensors are not nearly good enough to produce data that can be used in critical applications.
  • Nowhere is this more true than in eHealth where inaccurate data is useless at best and deadly at worst.
  • This is why there is still a big market for extremely expensive medical monitoring equipment, but I see signs everywhere that this will eventually come to an end.
  • This also explains the problems that the likes of Fitbit, Xiaomi, Garmin and others are having as the data they generate is of such low quality that it can really only be used for recreational fitness.
  • eHealth is where the quest for accurate data begins but I see this quickly spreading to other industry verticals.
  • Accurate sensors are one way to attack this problem but the other is to use better software to clean up and improve less-than-perfect data sources.
  • Google is a good example of this as it can use software to produce better imaging effects in portrait mode with one camera than Apple can with two (see here).
  • Given the substantial rewards that are on offer, I think that investment in improving the quality and accuracy of sensors will only continue to increase in the coming years.
  • This is an area where I would want to be involved.
  • The issue, of course, is to separate the solutions that have real prospects from those that are merely riding the wave of hype and easy investment.

Apple – No Nirvana

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Vrvana unlikely to accelerate Apple’s AR.

  • Apple’s acquisition of Vrvana is the best sign yet that it is intending to get involved in hardware for augmented and virtual reality, but Vrvana is extremely unlikely to be able to accelerate its time to market.
  • Vrvana is a start-up based in Canada that launched a headset called the Totem which received good reviews but never shipped.
  • I suspect that the device never shipped because the company could get its headset to a high-enough level of quality and reliability to make it in the marketplace.
  • Its Kickstarter campaign was pulled as the company realised that its product would never meet the funding goals.
  • Furthermore, the Totem headset itself looks like a lot like a DIY project and is nothing that I would ever expect Apple to ship.
  • Hence, I suspect that Apple’s interest in Vrvana is more about the technology that Vrvana has used to create the Totem which includes:
    • First: the Vrvana Totem is capable of both AR and VR in the same unit.
    • It is able to do this by superimposing the real word onto the virtual which is the opposite of how almost everyone else does it.
    • Instead of having transparent lenses through which the real world can be viewed, it uses cameras to record the real world and superimpose them onto the virtual.
    • There is one camera for each eye such that depth perception of the real world can be maintained through standard stereopsis techniques.
    • Second: because the real-world images are being digitised before being mixed in with virtual images, the virtual images can be completely opaque.
    • In every other AR system I have seen, the virtual images are always somewhat translucent which reduces their ability to appear real as one can always see the real world behind them.
    • Consequently, using this set-up there is scope to mix the virtual and the real world more realistically.
  • This is what I think has interested Apple as the hardware itself is clunky, cumbersome and unattractive to look at.
  • The issue with implementing AR this way around, is that the user is still completely closing himself off from the real world and the head unit used is likely to be far more obstructive than a simple pair of glasses.
  • Consequently, I see this acquisition as highly speculative on Apple’s part with a high probability that this technique for AR ends up being discarded.
  • Given the difficulties being faced by everyone in the AR field (see here), I do not see Apple being ahead of the field nor do I think that this acquisition will accelerate its time to market.
  • The net result is that while Apple is right to explore the possibilities of AR, I suspect that there is no concrete intention to launch a unit.
  • I see this activity much like the vehicle or the television which were experiments that failed to stand up to the scrutiny of market reality.
  • Consumer AR is likely to remain a prisoner on the smartphone for the foreseeable future where no one looks capable of effecting a prison break any time soon.

Sonos – Sounds of sameness pt. III.

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Sonos is now just another speaker maker.

  • Sonos has finally enabled Alexa voice control and Spotify support in its speaker systems thereby ensuring that it will now be competing purely on the quality of its hardware.
  • The Sonos One is Sonos’ first voice-activated speaker which has received rave reviews for its sound quality, but very little else.
  • This is because this device uses Amazon’s Alexa to control its functions and is adding support for streaming services like Spotify and Tidal with increasing regularity.
  • While this is exactly what is required to sell speakers in this day and age, it is confirmation to me that Sonos has completely lost its mojo.
  • Sonos was very early into digital music streaming around the house and developed a suite of software that made multiroom music possible.
  • While this was a novelty, Sonos achieved differentiation and was able to charge a premium price for its high-quality audio products with this functionality.
  • Unfortunately, Sonos has squandered the lead that it had and instead of using its lead to maintain its differentiation, it focused on trying to lock users into its products.
  • It tried to do this by only allowing users to access popular services such as Spotify, Amazon and so on via its own app.
  • The idea was to create a compelling user experience such that users would choose a Sonos even if something of equivalent quality was available at the same price point.
  • Unfortunately, this is where it has all come unstuck as Sonos’ ecosystem delivers a frustrating, buggy and substandard user experience that I think users would not use if they had a choice.
  • By enabling both Spotify Connect and Amazon Echo, Sonos has removed the requirement for users to use its software which I think is a sign that it is giving up on trying to create user preference around an ecosystem.
  • Because Amazon Echo and Spotify Connect are keen to work with any speaker on the market, Sonos’ differentiation now becomes: audio quality and design.
  • Multiroom functionality is now table stakes in the home speaker game.
  • Hence, I see Sonos’ only chance is to either
    • First: invest in cool new hardware features and stay ahead of its competition to maintain its price premium or
    • Second: to go for volume and gain scale advantages by significantly outselling its rivals.
  • Both of these will be extremely difficult to achieve as much bigger and stronger rivals are all investing in producing great audio quality in a small package and the market is rapidly fragmenting given the low barriers to entry.
  • Given Sonos’ current position, I think that both of these options would have required a bold strategic move from Sonos that would probably have had the most chance of success if it had appointed an outsider as CEO rather than its COO.
  • Hence, I think Sonos now has nothing to differentiate it from Apple HomePod, Google Home Max and so on meaning that its only weapon will become price.
  • I think that this is big problem because its larger and more powerful rivals are more than capable of subsidising these products in order to push their ecosystems deeper into the home.
  • The net result of this is likely to be a weakening of Sonos’ financial position to the point where one of the larger players is able to buy it at a discounted valuation.
  • I see Samsung, Apple, Sony, Tencent and Amazon as potential acquirers.