Google & Microsoft – Worlds apart

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Google and Microsoft go their separate ways.

  • With every quarter that passes, Google and Microsoft move further and further apart to the point where I don’t really seem them as competitors any more. (Google drive and docs excepted).
  • The contrast between the two companies is now so stark that they are able to schedule their developer conferences at the same time and not worry about double booking developers.
  • Microsoft Build 2018 will run from Monday 7th May to Wednesday 9th May while Google i/o 2018 will run from Tuesday 8th May to Thursday 10th
  • With 2 out of 3 days overlapping, it will be almost impossible for a developer to attend both meaning that it is either one or the other.
  • Historically, all of the big digital ecosystem have been at pains to ensure no overlap in order to be able to draw the maximum number of developers.
  • The conflict this year is a first and underlines even further Microsoft’s ongoing shift away from the consumer towards the enterprise.
  • However, the conflict no longer matters as enterprise developers will be heading to Seattle while consumer developers will turn up in Mountain View.
  • There have been signs of this drift everywhere but this was brought into laser focus at the last set of results where Microsoft’s enterprise products handsomely beat expectations while consumer chugged along almost as an afterthought (see here).
  • With the exception of Bing and Xbox (including Minecraft), which also have very little to do with each other, Microsoft’s consumer assets are in structural decline and I find it not difficult to make a case as to why Microsoft should divest Xbox.
  • This would leave Bing which, although far weaker than Google, does have the added advantage of providing a search graph for Cortana as well as data which can be used to train Microsoft’s AI algorithms.
  • From Google’s perspective its main rivals are now Facebook (video, chat and media consumption), Amazon (gaming, shopping, digital assistants and media consumption) and, over the next few years, possibly Tencent.
  • This also explains the signs I have been seeing of Facebook and Microsoft creeping quietly closer and closer together.
  • There is very little overlap between the two and I can see their current areas of co-operation expanding into AI which is an area where Microsoft is not the best (see here) but it is far, far better than Facebook.
  • This would alleviate Microsoft of the need to own Bing as Facebook is the global No. 3 in terms of data generation even if it has very little clue of what any of its data is or what it means.
  • The need for another highly entertaining Scroogled campaign have long since passed.

Didi & OEMs– Bikes to cars

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Data will be the key to differentiation.

  • If Didi does to automobiles what it has done to bikes, then the outlook for the car makers in their new alliance with Didi is grim indeed.
  • Didi, the dominant Chinese ride-hailing company has announced a broad alliance with 12 car makers to create a China-wide electric car sharing network.
  • The main partners are the Renault-Nissan-Mitsubishi alliance, Geely Auto and BAIC.
  • The initial plan is to create a car rental network where drivers can rent an EV for any amount of time directly through the Didi app.
  • I presume that as autonomy becomes a reality, that this will end up merging with Didi’s core business of ride-hailing as the two services will become indistinguishable from one another.
  • The alliance would be a combination of Didi buying a number of vehicles from the 12 car makers as well as allowing the car makers themselves to make their own rental schemes available through the Didi app.
  • This is where it gets very murky, as the details of how this service will work is likely to determine whether the vehicle makers retain some brand or are commoditised into metal-box-on-wheels-manufacturers.
  • Car makers today have 4 points of differentiation which are:
    • First: Performance which relates to the power and quality of the engine and drivetrain.
    • In an electric vehicle, all the IP and differentiation the vehicle makers has in this area becomes virtually irrelevant.
    • Second: Form factor which is the look at feel of the vehicle as well as the design and luxury of the interior.
    • When it comes to renting vehicles, this is also unimportant as vehicles are rented in categories where form factor differences within a category are not very relevant.
    • Third: Brand which is almost always about ownership of a vehicle and is therefore much less relevant in rental.
    • Fourth: the Digital Sensor Pie which refers to the data that the car generates.
    • RFM research has found this data offers a substantial potential revenue opportunity (see here).
    • This will require the car maker to maintain complete control over the data that their vehicles generate as well as have a direct relationship with the driver of that vehicle.
  • In an electric vehicle rental system managed by Didi, it is quite possible that each one of these four points of differentiation will no longer apply, leaving the car makers as pure commodities.
  • This is exactly what Didi has done to the bike sharing start-ups Ofo and Bluegogo (see here) and should Didi manage the service entirely under its own brand (as it does with bikes), then there will be nothing to distinguish one vehicle from another.
  • Didi already has a very strong grasp of the value of data and so I suspect that it will be pushing to retain the data generated by the driver and vehicle.
  • Hence it will be Didi that sells any subsequent services or follow-on products to its users renting vehicles from its app rather than the car makers.
  • I continue to think that the future looks pretty bleak for the car makers unless they can figure out how to entice users of their vehicles to engage with their digital services.
  • Time is fast running out as the digital ecosystems are also keen to engage car users and so far, have a far better idea of how to achieve that despite still being completely locked out of the data the vehicles generate.
  • This is the one ace that the car makers have, and it needs to be aggressively played if they wish to retain a seat at the table in their industry as it rapidly digitises.

Snap Q4 17 – Free parking

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Snap’s problems parked for 9 months.

  • Snap has finally managed to reap the benefits of its efforts to turn around the company and while these will help it to fulfil its short-term potential, the long-term and its valuation remain issues.
  • Q4 17 revenues / adj-EPS were $285.7m / LOSS$0.13 which was nicely ahead of consensus at $252.8M / LOSS$0.16.
  • User numbers also continued their slow but steady increase growing to 187m up 18% YoY and ahead of estimates at 184m.
  • It is worth noting that this performance is still way below what was expected at the IPO, as FY17 revenues came in at $825m compared to over $1bn which was forecasted at the time of the IPO.
  • Despite the much lower bar, these results testify to Snap knuckling down under very tough conditions and producing some results.
  • This is particularly the case as Instagram has been aggressively copying all of Snap’s innovations and offering these features to its much larger and much more valuable network of users.
  • I have long believed that one of the reasons why Snap’s user base has been sluggish is that Instagram is now such a good service that users have little incentive to leave that network.
  • However, even with its current users and without expanding its coverage of the Digital Life pie, Snap does still have potential to grow its revenues in 2018.
  • Q4 17 saw Snap significantly improve the monetisation of the traffic that it already has which bodes well for YoY growth in Q1 – Q3 2018.
  • After that it is likely to return to the sector average which is where the trouble will begin as its valuation still implies that it will grow faster than its peers for a significantly greater period of time.
  • Hence, I think that the first three quarters of 2018 should see good growth giving Snap nine months to either grow its user base much more quickly or increase its coverage of the Digital Life Pie.
  • Failure to achieve either of these will once again lead to disappointment and the realisation that the problems that the market is hoping are now dispensed with have merely been parked for 9 months.
  • Snap still looks expensive despite the better short-term fundamentals and stragglers still holding onto the shares have been given an opportunity to mitigate some of their losses from the IPO.

 

Autonomous Autos – Dark horses.

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Waymo’s lead shrinks to 5 to 1.

  • Analysis of autonomous testing data submitted to the California DMV for 2017, reveals that Waymo is still out front, but GM Cruise has improved massively with Nissan holding onto its No.3 position.
  • The best measure of an autonomous driving solution remains how often the driver has to take over to correct shortcomings in the autonomous driving software.
  • Regulations in California require those that test in the state to submit this data but typically, they all submit it in different ways (see here).
  • There are also different types of disengagement such as when the car is going to hit something (critical) or when the safety driver feels uncomfortable (ordinary).
  • Furthermore, companies test their cars in different conditions meaning that the data can really only be used as indication.
  • However, the contrast between the have’s and have-nots is so stark that meaningful conclusions can still be drawn by parsing the data submitted.
  • In order of performance the data for 2017 shows:
    • No. 1 Waymo (Google) is now only 5x better than its nearest rival compared to 8x in 2016.
    • However, Waymo’s performance has only improved marginally with 5,596 miles per disengagement in 2017 compared to 5,128 in 2016.
    • Waymo has still driven more miles than anyone else but its lead in miles driven has dropped from 155x its next rival to 2.8x.
    • Curiously, Waymo drove 45% fewer miles in 2017 (353K) compared to 2016 (636K).
    • No. 2 GM Cruise comes from nowhere to comfortably take the no.2 position with 125K miles driven with 105 disengagements (1190 miles / disengagement).
    • This is 5x more than Waymo, but GM Cruise drove all of its miles in downtown San Francisco which it argues is the most difficult environment within which to operate an autonomous vehicle.
    • I would argue that it is certainly the most complex but also the slowest, giving the computer much more thinking time than it has on suburban street or a highway.
    • Either way, this is an impressive performance and for the first time, there is a credible challenge to Waymo’s dominance.
    • No. 3 Nissan which is the other dark horse in this race with 5007 miles driven and 24 disengagements (209 miles per disengagement).
    • Last place Mercedes which saw a meaningful deterioration in its performance during 2017.
    • In 2017 Mercedes had nearly 1 disengagement for every mile driven compared to 2 per mile in 2016.
    • It is possible that Mercedes decided to test in more challenging conditions in 2017 which caused the deterioration but regardless, it is the laggard in the race for an autonomous car driving solution.
  • Those that drove the most miles (Waymo and GM Cruise) still had the best performance, again underlining that the key to artificial intelligence (the heart of all autonomous driving systems) remains the amount data collected (see here).
  • Uber and Tesla have no data for 2017 as they did not test in California but given the distractions that Uber has suffered in 2017 combined with the ongoing trade secrets trial against Waymo, is likely to have meant that it has not improved much on its dreadful performance in 2016 (see here).
  • I am certain that Waymo is the best because it began working on autonomous driving in 2009 (far earlier than anyone else) and in the last 2 years has also driven substantially more miles than anyone else.
  • I continue to believe that there is not much point in rushing to get an autonomous driving solution to market as I still do not expect the market to be ready for autonomous vehicles much before 2028 (see here)
  • Consequently, those rushing to market may find that they have a solution but no deployments.
  • This could easily result in a number of viable solutions being available once the market is ready, making sitting on the sidelines for now a wise choice.
  • I suspect that this is why Google and Waymo are currently pushing to do a number of large long-term deals for technology as their lead over the rest of the market has already passed its peak.

Corporate governance – Caveat emptor.

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HKSE sells out investors.

  • In a bid not to repeat the ignominious loss of the Alibaba IPO to NYSE, the Hong Kong Stock Exchange is downgrading its listing rules that will allow public companies to ride roughshod over the interests of their shareholders.
  • I think that it is no co-incidence that Xiaomi is considering a large IPO where the founders wish to maintain control of the company and which HKSE is desperate to win.
  • For the last 31 years, HKSE has had an exemplary record when it comes to corporate governance with very strict rules around share classes and disclosures.
  • This is one reason why Tencent, which has its main listing there, is rated by RFM as having the best corporate governance compared peers such Google, Facebook, Alibaba, Baidu GoPro, Fitbit and so on.
  • This is the main reason why both Baidu and Alibaba chose to list on NYSE rather than HKSE.
  • NYSE allows companies to sell shares to investors that do not give them a fair say in how their company is run.
  • This most often manifests itself as multiple classes of shares where one class has many more votes than another.
  • This allows founders to control the company despite having sold far more than 50% of the economic interest.
  • This practice is common in small start-ups where speed and the ability to quickly pivot a strategy can be critical, but I have long believed it has no place in large public companies in which any one can invest.
  • I find that these distributions are more often than not detrimental for shareholder value.
  • This is because founders have emotional attachments to their companies meaning that their judgement over long-term strategy is often not objective.
  • GoPro is the most recent example.
  • On top of this, a super voting distribution allows a founder to spend other people’s money with no checks or balances.
  • For example, a founder who owns 5% of the economic interest but 55% of the vote will only incur 5% of the losses that result from his bad decisions.
  • Minority shareholders, who have no say in decision making, bear 95%.
  • I have long believed that this imbalance amounts to bad corporate governance and unfair treatment of minority investors.
  • The HKSE proposes the following changes:
    • First: Companies can now go public with different share classes as long as the voting ratio is no greater than 10 to 1.
    • Second: Sunset clauses must be used to convert super voting classes to ordinary should the founder sell down his shares or die.
    • Third: This only applies to companies that fit the HKSE’s definition as being part of the new economy.
  • I view this as a huge backward step in corporate governance as the HKSE is demonstrating that it cares more about its business as an exchange as opposed to the fair treatment of shareholders.
  • I also consider this to be unfair treatment of old economy companies as the listing rules should be the same for all companies of comparative size and maturity.
  • Furthermore, it will embolden companies to further downgrade their corporate governance as HKSE is sending a message that bad behaviour will be tolerated.
  • Sadly, other exchanges that have missed out some of the new economy IPO bonanza are also considering similar changes to their rules.
  • The one piece of good news is that participation in these companies is entirely voluntary so investors that don’t like these types of share structures do not have to participate.
  • Beneficiaries of pension funds do not have a direct say in how their money is invested but one would hope that the managers of their funds will take poor governance in some of their investments into account.
  • When I look at a company, I take this into account by applying up to a 30% discount to the fair value of the shares depending on the degree to which smaller shareholders are being disadvantaged.
  • Companies like Google, Facebook and Baidu get the full 30% discount.
  • If the company is still attractive after that discount (as is the case with Baidu), then I am happy to own it knowing that I am being properly compensated for being unfairly treated.
  • I fear that I will be using this valuation adjustment more and more as HKSE’s fall from grace could trigger a race to the bottom among the exchanges all desperate to land the hottest technology IPOs.
  • Caveat emptor.

Apple & Amazon – Mixed bag.

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Plusses and minuses in both reports.

Apple FQ1 18 – relief rally

  • Apple reported good results where a 14.5% increase in iPhone ASPs allowed revenues to remain strong despite weakness in volume shipments.
  • FQ1 18 revenues / EPS were $88.3bn / $3.89 beating expectations of $87.6bn / $3.85.
  • The main driver was once again the iPhone which shipped 77.3m units missing expectations of 80.2m units by 4%.
  • This was more than made up by a 14.5% increase in ASPs to $796 which is what drove revenues to beat the bullish expectations set before weakness in iPhone X shipments become apparent.
  • This effect however will not carry through into FQ2 18 as Apple is forecasting revenues of $60bn-$62bn some 7% below expectations of $65.6bn.
  • Apple also said that in FQ2 18 that iPhone revenues would increase by at least 10% in an attempt to sooth fears with regards to iPhone X demand.
  • I think that this is a statement of the obvious as Apple has a 15% YoY increase in ASPs to play with meaning that shipments can still decline YoY in order to make this guidance.
  • iPhone X demand clearly been softer than expected mostly due to the very high price being demanded for the product and I think that this form factor will fare much better once Apple pushes it into its cheaper products and works out how to get rid of the notch.
  • With these results and the outlook for FY 2018, I think that Apple has done enough to qualm the fears of long-term holders but at the same time, I don’t see new money rushing into the company.
  • Hence, I think this one will perform broadly in line with the sector this year.

Amazon Q4 17

  • Amazon reported another mighty quarter and one in which it managed to make some money despite its very aggressive push into India.
  • Q4 17 revenues / adj-EPS were $60.5bn / $2.19 compared to consensus at $59.8bn / $1.83.
  • AWS was once again the powerhouse of profit generation with growth at 45% and margins holding steady at 26%.
  • It is worth noting that Microsoft is closing some of the gap on Amazon, as it managed to grow 98% YoY in the last 12 months albeit from a much lower base.
  • I suspect that it is this pressure that is preventing AWS from making the most of its scale and increasing its profitability as its revenues expand.
  • Most of AWS’ profits were consumed by the very aggressive market grab going on overseas and particularly in India.
  • Losses were approximately the same in Q4 17 at $919m (-5%) as they were in Q3 17 $936m (-7%) where I estimate that India is losing roughly $700m per quarter.
  • However, the domestic business generated $1.7bn in EBIT which allowed Amazon to report better than expected profits company wide.
  • Amazon is also clearly feeling the heat from Google which pulled out all the stops at CES and backed that up with a big jump in support from makers of smart home devices.
  • The result is that Amazon will be ramping up investments in the Alexa voice platform, but money alone will not buy the brain power needed to keep Google at bay.
  • I have recently reversed my position on the battle for the smart home (see here and here) with Google Assistant now looking like it will eventually win.
  • Pressure on AWS and Alexa is one thing, but the core business is going from strength to strength and there seems to be very little to challenge Amazon in e-commerce in developed markets.
  • That being said, I still struggle with the valuation of Amazon given its distain for making money and consequently it is still not a story I want to get involved in long-term.
  • If push came to shove, I would have Apple over Amazon.

Microsoft & Facebook – 2 good runs.

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2 good runs could come to an end in 2018.

Microsoft FQ2 18.

  • Microsoft reported good FQ2 18 results, but the shares have been so strong recently that all the good news for the current year looks already priced into the shares.
  • FQ2 18 revenues / adj-EPS were $28.9bn / $0.96 nicely ahead of expectations at $28.4bn / $0.86.
  • Azure was once again the star of the show putting in 98% YoY growth with Office365 recording a very healthy 41% YoY.
  • This was supported by steady performance in its server infrastructure products which also saw double digit revenue performance.
  • This offset by Microsoft’s consumer facing businesses where gaming grew by 8% YoY and Surface hardware was flat.
  • This has been the tone for some time with enterprise going great guns and consumer underperforming the average.
  • The outlook for the rest of the year is more of same and consequently, Microsoft increased its revenue and profit forecasts for the full year.
  • However, the shares failed to react to the continuing good news giving me the distinct impression that its 15% rally in Q4 17 has already taken this into account.
  • Microsoft’s PER ratio is now above 25x, a level it has not seen since 2004, and well above its 10-year average.
  • I am comfortable that this is a different company and one deserving of a much better multiple than at the end of the Balmer era but expanding much beyond current levels looks challenging.
  • Consequently, I think that the multiple-expansion contribution to price performance is now in the rear-view mirror leading to a more pedestrian outlook from here.
  • Microsoft has been a favourite of mine since 2014 but it could be time to start thinking about taking some profits on what has been a fantastic run.

Facebook Q4 17.

  • Facebook reported good Q4 17 results as the planned changes have yet to meaningfully impact financial performance meaning that the outlook for 2018 is likely to be one of underperformance relative to its peers.
  • Q4 17A revenues / adj-EPS was $13.0bn / $2.21 comfortably ahead of expectations of $12.6bn / $1.95.
  • This was driven by continued growth of usage on mobile devices as the measures to increase the quality of engagement (see here) have not yet been in force for a full quarter.
  • This move to put its users ahead of its shareholder’s is not born from altruism, but instead reflects the need to maintain user loyalty as it transitions to becoming a fully-fledged ecosystem.
  • Consequently, I expect that Sheryl Sandberg’s cash register will be able to fully monetise this increased loyalty in due time, resulting in a pause rather than a curtailment of Facebook’s long-term prospects.
  • However, in the short-term the outlook remains difficult as Facebook is curtailing revenue growth while at the same time continuing to ramp up both OPEX and Capex.
  • Consequently, I think that in 2018 revenues could grow somewhere between 10% – 20% while OPEX has been guided to grow 45%-60%.
  • This is going to have a meaningful and deleterious impact on financial performance that I not convinced the market has fully digested with a PER 2018 ratio of 34x.
  • This is largely a result of Facebook’s weak position in AI.
  • I have long held the view that Facebook’s AI is not good enough to spot offensive content before it has been widely seen and as a result it is hiring 10,000 humans to do the machines’ job.
  • I also hold the view that humans are not fast enough to spot offensive content in time and as a result, I think that the improvement that Facebook is looking for will not be as good as expected.
  • The net result is likely to be continued problems with content on its service as well as a steep decline in profitability this year.
  • RFM research has shown that progress in AI is much slower than people in the field will have us believe and hence, I think it will be a long time before Facebook sees real improvements in AI impacting its bottom line.
  • This, combined with the fact that its ecosystem remains a work in progress, leads me to think that there is space for a lot of profit taking.
  • I would prefer Tencent or Baidu.

Apple – Fluff ‘n’ stuff.

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Fluffy sentiment has nothing to do with the company.

  • The weakness in Apple’s share price and the souring of sentiment around Apple has nothing to do with Apple and everything to do with the bulls getting overexcited about the so-called super cycle that was supposed to be driven by the iPhone X.
  • I have long been of the opinion that while the iPhone X is a good product, its price and the fact that it is not revolutionary would prevent it from driving a super cycle like the iPhone 6 in 2014 (see here and here).
  • This reality is now beginning to dawn on the market resulting in estimate cuts from the most bullish and some softness in the share price of the company.
  • Based on analysis I conducted in December, I concluded the following:
    • First: uptake of the new generation of iPhone has been slower than last year and there has been no sign of the much hoped for super cycle.
    • I think this was mainly driven by the very high price of the most desirable product which lead to many users waiting until the full screen penetrates to the lower priced segments.
    • Second: the higher price of the iPhone X has offset the some of the impact on Apple’s revenues of a slower uptake compared to the iPhone 7, but it has not been enough to allow the company to soundly beat market expectations.
  • Unfortunately, Apple bulls had assumed that volumes would not be impacted by the higher price of the product, leading to record revenues and earnings.
  • I have always thought that this as very unrealistic and it is this resetting of expectations that has been responsible for the recent weakness in shares and the souring of sentiment.
  • This has absolutely nothing to do with Apple itself and I am expecting a reasonably upbeat set of results when it reports FY Q1 18 earning on Thursday February 1st.
  • That being said, the long-term valuation case for Apple relative to its faster growing peer group is now much more difficult to make.
  • Consequently, I am less interested in the shares as a long-term holding and would prefer to look at Tencent as the most powerful ecosystem of them all or Baidu as the cheapest AI investment available.

 

Apple – Battle for the smart home pt. VI

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HomePod delays have cost it dearly.

  • The HomePod has only one advantage in a market that is rapidly becoming all about the algorithms with hardware being left to those that really know audio.
  • The much awaited HomePod is now available for pre-order and will start shipping on February 9th
  • At $399, it is going up against some of the very best that the audio industry has to offer.
  • In 2017 the best digital assistants were only available in their own in-house hardware but this is changing rapidly as there is a plethora of third party products coming to market.
  • Furthermore, Amazon Alexa, Baidu DuerOS and Google Assistant all have substantial advantages over Siri, which in my opinion, make them much better smart assistants to have in one’s house.
  • Hence, I see the HomePod competing on two fronts and on the most important front, I see it being hopelessly outclassed.
  • These are:
    • Audio: There is no doubt that Apple can make excellent quality audio products.
    • However, in this category, it is not alone.
    • While I think it can comfortably hold its own in the mid to high end of the speaker market, I have doubts whether it can do so at 40% gross margins.
    • This is because competing solely on audio quality, there will be just as good audio products available at lower prices.
    • Digital Assistant. It is here that I think that Siri is hopelessly outclassed.
    • My tests have consistently shown that both Google Assistant and Duer OS are much better products in their relevant markets. (Baidu DuerOS does not yet exist in English).
    • Furthermore, when it comes to the smart home, Apple is hopelessly outclassed when it is compared to both Amazon Alexa and now, Google Home.
    • The star of CES was Google Assistant and not just because Google bought almost every piece of advertising space that there was available.
    • This was followed through on the show floor with almost every smart device manufacturer either already supporting Google Assistant or having it on the immediate roadmap.
    • Just like 2017, Apple HomeKit was a no show and I saw just one product (a smart ceiling fan) that had support for Apple’s smart home offering.
  • Consequently, I think that Siri is way behind in the smart home leaving Apple competing pretty much on audio quality alone.
  • The real competitors for HomePod are the likes of Sonos, Sony, Harman Kardon and so on, all of whom are likely to make their product available with either (or both) Google Assistant or Amazon Alexa.
  • This is why I see competition in this space moving away from audio quality and rapidly becoming all about the algorithms.
  • This combined with Google closing the gap in the smart home, is what has lead me to reverse my position and to expect that it will be Google that ends up triumphant in this space (see here).
  • Hence, from Apple perspective it appears that there will be equivalent sounding products with much better brains on the market at lower prices.
  • I think only a small sliver the hardcore Apple fanbase is going to buy this product which is not enough to make it a real success in my opinion.

India e-commerce – Last man standing

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Flipkart looks close to keeping Amazon out.

  • Jasper Infotech which owns online marketplace Snapdeal has reported dreadful revenue performance that almost certainly materially worsened in the last 9 months.
  • This has rendered Snapdeal to an irrelevance leaving Flipkart as the only company with a chance of keeping Amazon out of its home market.
  • For the year ending March 2017 revenues where INR 904 crore (US$142m) down 38% YoY which predates the ending of the merger talks with Flipkart (see here).
  • It was Snapdeal that ended merger discussions with Flipkart in a decision that is showing every sign of having triggered its complete collapse.
  • I suspect that Snapdeal walked away as it did not like the valuation that Flipkart had offered, but given that its revenues were falling precipitously despite the market growing rapidly, I think that it could be argued that Flipkart was being generous at any price.
  • Instead, Snapdeal walked away and decided to focus on becoming a niche player triggering the resignation of one of its earliest investors.
  • The result has almost certainly been an acceleration of its decline and I would not be surprised to see its revenues for the year to March 2018 fall by another 50% or so.
  • This would take its market share to less than 2% down from 25% in 2015 meaning that it is now an irrelevance in the battle for the e-commerce market in India.
  • However, the good news for India is that much of this share appears to have gone to Flipkart rather than Amazon as its shareholders are now claiming that it has reached 70% of the e-commerce market in India.
  • This is crucial because this would take Flipkart comfortably over the critical level that it needs to keep Amazon at bay.
  • Flipkart, Snapdeal and Amazon are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
  • 2 years ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rival to begin really making profit (see here).
  • If Flipkart’s estimates are correct, then its 48% growth in GMV has put it in a position to be able to survive Amazon’s predations without being crushed.
  • However, Amazon disputes Flipkart’s numbers and is stating that its net revenue grew by over 80%.
  • However, I think that it is share of GMV is that really matters.
  • This is because when one becomes the go to place to transact (>60% share), competitive pressure eases and monetisation and cash flow becomes much easier.
  • Third party (Kantar IMRB) research disputes Naspers’ claim putting Flipkart’s share of GMV at 58% with Amazon on 42% which makes some sense given that it is now a two-horse race.
  • This also explains the need for the $2bn cash injection that Softbank made into Flipkart as well as Amazon’s increasing losses in India during Q3 2017 (see here).
  • With these figures, both will still be haemorrhaging money in their fight for supremacy in the Indian market.
  • Despite its’ smaller overall size, Flipkart is nearing the magic 60% and as long it can keep its momentum going it has a good chance making it to the point where it can keep Amazon at bay without consuming vast amounts of cash.
  • I have previously held the view that Softbank was unwise to invest more money in Flipkart as I thought that the collapse of the merger would hand the initiative to Amazon.
  • That appears not to have been the case and exemplary execution from Flipkart has enabled to it gobble up almost all the volume that Snapdeal relinquished.
  • Should this continue, placing Flipkart in safe territory, then this will have proven to be an excellent investment from Softbank and a great victory for David over Goliath.
  • I would hesitate to count Amazon out just yet as it is absolutely determined to spend whatever it takes to win India following its ignominious defeat in China but the momentum is clearly with the home player at the moment.