BlackBerry – Cold turkey

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BlackBerry finally breaks its addiction to hardware. 

  • BlackBerry reported poor Q2 17A results, but the decision to stop internal handset development buoyed sentiment allowing the shares to rise 5%.
  • Q2 17A revenues / adj-EPS were US$352m / US$0.00 compared to consensus at US$390m / LOSS US$0.05.
  • Within this, mobile device sales made up 30% of the total and with the close down of internal hardware design, I expect this number to quietly go to zero.
  • BlackBerry is not closing down hardware but is instead outsourcing everything to third parties.
  • This is relevant because BlackBerry will no longer have access to exclusive designs which is an admission that the era of having a physical keyboard on a device is well and truly over.
  • I have long believed that this has happened because users have become accustomed to typing on glass meaning that BlackBerry’s key differentiator became obsolete.
  • From here, there will be nothing to differentiate a BlackBerry from any other Android device meaning that margins will be 2-4% in the best instance.
  • This is not the kind of profitability that John Chen is used to and so I think he will be very happy to let hardware gently slip into oblivion.
  • Hence, the focus will shift to the software business which is going well revenue wise but needs attention when it comes to profitability.
  • At the moment it is the legacy SAF (Service Access Fees) business that is providing all of the profit with margins of 73.6% but revenues are declining fast with a 56% decline in the last 12 months.
  • This is because SAF has long been tied to hardware and represents revenues from the enterprise servers that support the devices and this looks to go the same way as hardware.
  • The Software and Services business is growing fast but is relatively unprofitable with EBIT margins of 18.6% and it is here where the real focus will be.
  • With two business looking set to decline to zero, the focus has to shift to the valuation of BlackBerry.
  • BlackBerry is currently a US$625m run-rate software business with an enterprise value of US$2.16bn (US$4.36bn market capitalisation and US$2.1bn in net cash).
  • That puts BlackBerry effectively on 3.6x EV/Sales with around 30% YoY revenue growth.
  • This is quite punchy when compared to IBM on 2016 EV/Sales of 2.0x but a bit cheaper than Citrix which is on around 4.3x 2016 EV/Sales.
  • Hence, I do not see much scope for BlackBerry to expand its revenue multiple from here.
  • The net result is that even with steady revenue growth and profit generation in the Software and Services business, a big rally is going to be pretty hard to come by even at these lowly levels.
  • Hence at around $8 per share, I think that BlackBerry has found a level where is should be stable.
  • Hence, I am pretty indifferent to the shares and would prefer Microsoft, Samsung, Baidu, Tencent or Apple.

Freedom 251 – Alarm bells.

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Someone is losing a lot of money on this device.

  • The latest sensation to hit the mobile device industry is the launch of the Freedom 251 smartphone that is retailing online for INR251 or ($3.70).
  • The device is “made” by an Indian handset maker called Ringing Bells which is part of the Make in India initiative launched by Prime Minister Modi in September 2014.
  • The Freedom 251 runs Android Lollipop and sports a 4inch 540×960 display, a MediaTek 1.3Ghz processor, 1GB RAM, 8GB of internal storage and a dual-SIM 3G baseband.
  • The problem with this device is that the economics make no sense.
  • The device is being sold at INR251 with no strings attached meaning that any entrepreneur could buy up as many of the devices as he can get his hands on, break them up and sell the components at a profit.
  • On my calculations this device is being sold at gross margins of at least minus 650% with $26 of losses with every device sold.
  • This is before expenses for sales and marketing and warranty costs.
  • I do not think that there have been any development costs because in reality this device appears to have been sourced from Indian electronics importer Adcom. (see here).
  • The closest matching product is the Adcom Ikon 4 which currently sells for INR3,599 ($53).
  • Adcom is not a manufacturer and therefore it is extremely likely that this device was actually manufactured in China.
  • The big question remains who is underwriting this product? There are a few possibilities.
    • First. The Indian government. Although the company strongly denies that this device is state subsidised, there are many ways that this could still happen.
    • For example, the government could be a shareholder of Ringing Bells and thereby contributing cash to support the company without officially subsidising it.
    • Second. The Chinese company that actually made the phone.
    • Chinese companies are very keen to break into the Indian market as their home market is brutally competitive and showing every sign of maturing.
    • Consequently, it may have been willing to virtually give the phone away in order to get a toehold in the Indian market.
    • Third. The Freedom 251 could be sourced from old inventory that has already been written down to a very low level or even zero.
    • This is possible as the device has not been certified as safe by the Bureau of Indian Standards (BIS).
    • Consequently if the device batch failed the BIS safety tests it would become unsellable in the Indian market providing the manufacturer with little choice other than to write it down.
    • This could have enabled Ringing Bells to buy the device for almost nothing and thereby not lose money in selling it at such a low price.
  • The company’s line is that by making the phone in India it can reduce costs by INR400 per device with scale providing another INR500 of savings.
  • The long term hope is that the company will obtain enough scale with its devices to be able to make money by selling services to millions of users in a similar manner to Cyanogen.
  • Unfortunately with the likelihood that the device was actually made in China and with only 30,000 devices sold before the website crashed, these aspirations look highly questionable.
  • This launch has generated a lot of waves and I suspect that either after the first batch has been sold, the price goes up to $53 per device or that the company quietly disappears.
  • There is no way that these economics add up in the long term meaning that the alarm bells must already be ringing at the company.
  • I doubt that other handset makers will lose much sleep over this device or its pricing as it is clearly unsustainable.
  • RFM would like to acknowledge Aamir Siddiqui from xdadevelopers which was the source for many of the facts in this post. (see here).

Nokia – Finnished with phones.

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Nokia is not about to start making phones again.

  • The wires are full of the notion that Nokia is again about to plunge headlong into the mobile phone business but I think that this is very unlikely.
  • What is far more likely is that Nokia licences out its brand name to a company that already makes mobile phones in order for it to win some volume in low end feature phones.
  • Microsoft’s right to use the Nokia brand on its feature phones expires in 2016 giving the opportunity to monetise the brand back to Nokia.
  • Although all of the attention is focused on smartphones, the feature phone market is still significant, shipping around 135m units per quarter.
  • Against this backdrop, devices using Nokia’s brand still have around 20% market share and good recognition with users in those price tiers.
  • Consequently, there is still value in the Nokia brand in the feature phone market, which I think Nokia is aiming monetise in 2016.
  • For an EMS vendor like Foxconn this represents an opportunity to move up the value chain and increase its wafer thin margins by becoming an OEM and direct to consumers.
  • Currently EMS vendors make their money by manufacturing phones on behalf of OEMs who then sell them onto to consumers.
  • Selling directly to consumers will allow the EMS vendor to keep more profit but it will have to manage sales and distribution itself.
  • The hope here is that by doing a deal with Nokia for its brand, sales and distribution will be much easier given the strength of the brand thereby making this strategy viable.
  • Nokia’s exposure to this is likely to be nothing more than a brand royalty that I think could net an extra $50-$100m in revenues per year.
  • This would be coming at almost 100% margins making it a no brainer from Nokia’s perspective.
  • Consequently, I do not see Nokia blowing the cobwebs out from the old closed operations and turning the lights back on.
  • This is simply zero risk monetisation of an asset that would otherwise go to waste.
  • Nokia has done a good job at maximising the value from its operations for shareholders which combined with a potential sale of HERE and the licencing if its brand, looks set to continue.
  • Consequently, I can still see upside in the Nokia share price but I remain nervous that this value will be consumed by the merger with Alcatel which is at risk of not living up to expectations.

 

 

 

Google – One Purpose

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Android One’s sole purpose is to push Google’s ecosystem into the lower tiers.

  • Google has announced a new reference design for low cost Android called Android One at an event in India.
  • The launch of this design goes hand in hand with availability of three devices from Micromax, Spice and Karbonn which will sell for around $105.
  • MediaTek is also a central piece of this initiative as the initial designs are all based on the MT6582 which is a big factor in the reasonable specifications being able to hit the $105 price point.
  • This reference design specifies stock Android meaning that it will come with the full suite of Google services as well as Google Play.
  • There is no scope for OEM or operator customisation but Google has allowed their apps to be installed alongside its own.
  • I can be certain that these devices are first and foremost Google devices and its own services will be front and centre.
  • Importantly, it is Google that will control the updating of these devices meaning that Google will have almost total control of these devices.
  • Google is the biggest ecosystem but it really only has a strong presence in developed markets and on higher prices devices.
  • In emerging markets it is a fragmented free for all where the vast majority of devices are forked versions of Android where Google is not present.
  • About these users Google learns virtually nothing and therefore its ability to earn revenues from advertising is non-existent.
  • These users will be of much lower interest to advertisers and the marketing spend per device is going to be just a fraction of what it is in developed markets.
  • However, these markets are so big in terms of the number of users that the revenue opportunity is very substantial even at a tiny spend per device.
  • Furthermore, this is where most of the growth will come from in smartphones making this space a must from Google’s perspective.
  • For example there are 30% more people in India alone than there are activated Android devices in the world today.
  • In order for Google to monetise this opportunity it must push its services into the lower tiers which to date has been dominated by others.
  • This is because it is much cheaper and easier to make a non-Google compliant device and the maker can do whatever it likes in terms of software and services.
  • The main issue as I see it is that in the history of the handset industry, reference designs have never been successful.
  • The logic for using them is undeniable as it makes it much easier and cheaper to make a smartphone but in practice no one has been able to stick to the design.
  • This has had the effect of substantially increasing the cost of the devices making them uncompetitive and undesirable to users.
  • This case may be different as these manufacturers will have all agreed not to deviate from the platform for these devices putting the onus for success on their appeal to users.
  • If these devices prove popular, I can see Google meaningfully expanding its reach into emerging markets (with the exception of China that has its own plans).
  • History is not on its side, but the right elements are in place for it to be different this time around.

Firefox India – Double edged sword.

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Unconformity to the design ensures losses.

  • Mozilla has announced that Intex, the Indian handset maker, has launched a Firefox powered device called Cloud FX Phone that will go on sale for $33.
  • Later this week, a second device manufactured by Spice Mobility will be launched for the price of $38.
  • Both of these devices look like they are based on the $25 smartphone reference design that was launched at MWC this year.
  • My view on this platform remains unchanged (see here) in that I believe that the project needs to ship 10m units of the design with no modifications in order to break even.
  • Unfortunately, I see evidence that the same problem that killed the “3G for all” program in 2007 occurring yet again.
  • In 2007 the winner of that contract (LGE) needed to accumulate more than 6m of orders of its reference SKU in order to ship enough units to break even.
  • Unfortunately, every customer wanted something different meaning that LG would end up spending a fortune customising all the variants and consequently lose money on the overall project.
  • Consequently the project was quietly put to sleep.
  • The same thing appears to be happening again as the Cloud FX phone and the Spice Mobility devices look like they are only loosely based on the standard $25 reference design.
  • The specification of the Cloud FX Phone and its price indicate that Intex has tinkered with the specification to make its own version of the device.
  • While this is not an issue per se, it means that Intex will have incurred further costs to make its desired variations.
  • This is clear in that the device has a 2MP camera while the reference design uses 0.3MP and it has 128MB of RAM while the reference has 1GB of embedded DRAM.
  • The fact that the Spice Mobility device will sell for $38 implies that, it too, has made modifications to the standard design.
  • The beauty of the reference design is that someone else has done the integration and testing already meaning that all the vendor has to do is put it together.
  • This ensures a meaningfully lower development cost and greater economies of scale if parts can all be sourced together.
  • This is critical to enabling a handset maker to be able to break-even at a very low price.
  • In this instance the reference design is controlled by Spreadtrum who was also tasked with buying all the parts in bulk so that everyone could benefit from lower prices.
  • However, it looks like each manufacturer is going it alone which essentially ensures that the $25 price will be missed and everyone will lose money even at the higher price points.
  • Furthermore, The Firefox ecosystem is very short on third party apps.
  • So much so that WhatsApp connectivity has to be provided by a third party app. on these devices.
  • Consequently, these manufacturers are not going to benefit from the scale effect that is so desperately needed to make this project fly.
  • I will be surprised if these two devices ship 1m each leaving the project short of 8m devices in the best instance even if everyone was sticking to the script.
  • Consequently, I see no way for this project to make money and continue to remain extremely cautious concerning the outlook for the Firefox ecosystem.

 

 

FireFox OS –A $25 dream

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$25 dollar smartphone is likely to remain slideware

  • Mozilla is moving to fulfil the promise of an ultra-cheap smartphone but the outcome of this initiative is out of its hands.
  • In February 2014, Mozilla together with Spreadtrum launched a smartphone reference design that promised to put a Firefox OS smartphone in the hands of a user for an unsubsidised price of $25.
  • This device is now expected to launch in Indonesia and India towards the end of this year and should the devices make it to market, they should attract reasonable demand.
  • There will be a problem with the device not being Android as this is what a lot of emerging market customer’s demand, but the price is so attractive it should help users overcome this preference.
  • However, the biggest problem with this device is that I can’t see any manufacturers being willing to make it.
  • At the heart of this design is the SC6821 from Spreadtrum which offers Cortex A5 @ 1Ghz, 1GB embedded DRAM and 2GB of external NAND flash.
  • The reference design includes a 3.5inch HVGA screen, 0.3MP camera, 2G EDGE, WiFi, Bluetooth and FM radio.
  • This is not exactly exciting in the smartphone world but at $25, this measures up impressively against budget feature phones in this price tier.
  • However, the bean counters at the handset makers being offered this design will be wondering how they will be able to make any money at all out of it.
  • With this specification RFM calculates that any manufacturer making the device will have to sell 10m in order to break-even.
  • This means every handset maker that takes on the design will be looking for total commitments of at least 10m units before going into production.
  • This kind of commitment is almost unheard of in the mobile phone industry and I suspect that even getting commitments of 1m will be almost impossible.
  • This is exactly what killed the GSMA’s “3G for all” program in 2007 where LG could not secure commitments from operators for the KU250 to be able to make a decent return on the device.
  • It seems that history will once again repeat itself and unless operators can be made to really step up, this device will not make it off slideware.
  • Hence, while this is a great idea, it is totally impractical and I cannot see this project putting any extra pressure on Android or any of the other smartphone platforms.
  • Consequently, Firefox OS is likely to remain a smartphone platform that aims to offer superior performance than a similar priced Android device.
  • Since its launch in 2013, it has failed to fulfil that promise and as a result shipments and uptake of the OS have been very disappointing.
  • Something fundamental needs to change in order for FireFox OS to become anything more than a footnote in smartphone history.

 

 

IFA 2013 – A big event once again

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IFA owes its new found importance to its timing.   

  • The IFA trade show kicks off tomorrow in Berlin and its timing right before Apple’s event on September 10th has made it the place to launch new products.
  • Consequently, Samsung is holding another unboxed event where it is widely expected that the company will launch a smart watch and the Galaxy Note III.
  • This event is being held at 1pm ET on Thursday September 5th.
  • LG has already launched a new tablet and Amazon if refining its Kindle line up.
  • Sony is also holding an event tomorrow where a new smartphone, several cameras and some new Viao laptops are expected.
  • I am also expecting HTC and Lenovo to announce products at this trade show.
  • All of these announcements are aimed at stealing Apple’s thunder for when it holds its event next week on September 10th.
  • Whether or not they succeed depends very much on what Apple has decided to launch.
  • A big hardware upgrade with a much larger screen and biometric sensors could re-light the fire underneath Apple but I fear that the iPhone 5S will be simply a minor update with the device looking pretty much the same as the old one.
  • The other big question is the iPhone 5C.
  • Expectations are that this device will be a lower end device priced at $300-$400 aimed at increasing Apple’s addressable market.
  • This is the device announcement that eclipses all others.
  • If this device is launched as expected and it proves to be a hit with consumers, it will change the dynamics of the smartphone market.
  • In that instance, it will be damaging for Android, Windows Phone and BlackBerry and it will push them further down into the cheaper tiers of the market.
  • This will mean lower prices and margins for these players.
  • However, Apple has never really done cheap very well and I see the possibility that consumers shun the device not wanting to be seen as not rich enough to afford an real iPhone.
  • This strategy also comes with the very real risk of cannibalisation (as with iPad Mini), which could end in overall lower revenues for Apple despite an increase in smartphone market share.
  • Apple may also launch a smart watch and Apple TV next week but frankly these are less likely and minor issues when compared to the potential impact of the iPhone 5C.
  • Its going to be a busy week for device announcements but it’s the events on September the 10th that will decide how share prices move.

Mozilla – The promise

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Mozilla must live up to its promise to survive in mobile.  

  • Not content with just smartphones, it looks as if Mozilla is also moving into the cut throat tablet market.
  • June 3rd is the date for a joint press event between Mozilla and Foxconn where a new device seems certain to be announced.
  • The two companies are expected to formally announce a partnership and to jointly launch a tablet.
  • In all likelihood it will be in the 7inch category and will run the Firefox OS.
  • At this point it is unclear whether this product will be a reference product or whether Foxconn is about to launch a brand of its own and compete with its customers.
  • I suspect that the offering from Foxconn will be very like the Firefox OS phones currently made by Geeksphone.
  • It was these products that were shown at Mobile World Congress in February when the platform was launched.
  • These products are not intended for sale to consumers but for developers to aid them when they are building apps for the platform.
  • I suspect that the tablet will be similar in its intent and that Foxconn is not about to launch its own brand. Not yet anyway.
  • Whether Mozilla produces a tablet or a phone is irrelevant.
  •  All that matters is that the products live up to the promise that was made when the platform launched. (see here)
  • This promise is to deliver mid-high to high smartphone performance at a mid to high feature phone price.
  • In tablet terms this would be something like Galaxy-tab performance at an Amazon Kindle price point.
  • In the devices and demonstrations that I have seen to date, Mozilla is very far from delivering on this promise and I suspect that the tablet will fare little better.
  • Without an ecosystem of any meaningful size, Mozilla has to be better than Android and Windows Phone otherwise no one is going to notice.
  • It does not matter how many operators support the platform because if the users don’t want the devices, then they will simply gather dust on the shelves.
  • You can lead a horse to water but you can’t make it drink.
  • This is why Mozilla must deliver on the promise or else be relegated to the ranks of the also ran.

 

Nokia – Brutal for a bit

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Nokia’s new platform does everything right except address the horrors of low end Android.

  • Nokia has launched a big update to the Asha platform and the release of a new handset the Asha 501.
  • The new platform runs on software proprietary to Nokia and uses Java for applications development.
  • To date, Java has been awful in mobile phones but the Asha platform optimises Java to run more efficiently and Nokia has extended functionality to make the applications more appealing.
  • At the same time Nokia has made its Software Development Kit (SDK) and web tools available for designing and coding applications to run on these devices.
  • Also included in the package will be an in-App payment system to make it easy for developers to earn a return on their investment.
  • Developer support for the new Asha platform looks pretty encouraging ensuring that most of the core functions of digital life will be available to users.
  • The Asha 501 was also launched which sports a 3” screen, 3.2MP camera, WiFi but no 3G, full touch and a range of bright colours.
  • The device will sell for $99 and will ship in June.
  • I am a huge fan of Asha as I believe that it delivers fantastic functionality and quality for the price asked.
  • It also capitalises on Nokia’s core strengths of scale, logistics and platform.
  • Unfortunately smartphone buyers at the moment don’t seem care.
  • All they seem to care about at the moment is the largest screen for the lowest possible price.
  • Consequently the endless medley of Chinese and Indian smartphone makers are churning out devices to meet that demand.
  • A typical device will have almost all of the BOM invested in the display with a little left over to invest in the MediaTek baseband and applications processor.
  • During Q1 these devices did Nokia’s Asha series considerable damage in the $35-$100 price range and I can only hope that the Asha 501 and its successors can reverse the trend.
  • Nokia has invested in functionality but the majority of the demand in that segment at the moment is hardware only.
  • These users are often first time smartphone users and I suspect that as they become more sophisticated they will start to realise the drawbacks of a device where all the investment has gone into the display.
  • Until then, life is going to remain tough as Nokia is selling a proposition that the market may not be ready for.
  • In the longer term, Nokia has the right characteristics to be a dominant low end handset supplier and as long as it can hang on through the tough times, life should be much sweeter on the other side.
  • Asha is right answer for Nokia to address low-end Android, but the users need to realise the realities of the proposition first.

Firefox OS – The Vital Promise

 

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The success of Firefox hinges on a single promise.

  • Lots of attendees and lots of partners were present for the launch of Mozilla’s Firefox OS that has been squarely aimed at emerging markets.
  • The new OS is written entirely in HTML-5, which adds a number of features that gives the system apart from its competitors.
    • Firstly, the software and hardware (by Qualcomm) have been thoroughly optimised to work together which dispels the old problem of web apps running slowly and consuming vast resources.
    • Secondly, with the whole device running in HTML-5, the apps can either run in the browser or stand-alone on the device. This allows application to be “temporarily installed” and then discarded after a single use.
    • This will resonate with those have loads of apps on their devices that gobble resources, need to be constantly updated but have hardly been used.  
    • Typical example would be a new game that promises to be great but ends up being poor. Typically this would sit on the device, gobbling resources but never touched again.
    • Firefox OS can download the apps into the browser, run them with the same performance as HTML-5 is native to these devices and then get rid of them when finished.
    • Thirdly, It going to be cheap.
    • Mozilla promises mid-high Smartphone performance at mid to high feature phone prices.
    • I think this means prices around the $80-$130 mark with one of the operator partners putting his peg in at $100.
    • To me, this is what will make FireFox OS work. If this promise is really delivered on, then there is a proposition that is worthy of hundreds of millions of users.
    • If not, then it will just be used by operators as a stick with which to try and beat Apple and Android into submission before failing and being dropped by the wayside.
    • Fourthly, it is not a new community. There are lots of developers out there already writing for HTML-5 meaning that developer traction and apps is unlikely to be a major problem.
  • However, the problems are legion:
    • It is open source code with 50% of the code being contributed by volunteers.
    • What is more Mozilla’s philosophy is for total openness with no one having overall control
    • Its very nice but this is a recipe for total anarchy especially in a world that is so driven by hardware.
    • Android is already chaotic enough and is incredibly vulnerable because of it. This could be far worse meaning that the users can never really get on top of the proposition.
    • Security is going to be a nightmare. Loads of app stores and developers delivering code directly to users basically means that there will be virtually no control preventing malicious code from getting past hapless users.
    • There may be some way of controlling this by running apps in the browser, but this not going to solve the problem entirely.
    • Mozilla and its partners have chosen the most brutally competitive and toughest part of the market to address.
    • This is why it must deliver on its promise or no one will ever notice.
  • The bottom line is that Mozilla has an interesting proposition but I think, like Jolla, it has missed an opportunity.
  • Android looks very vulnerable and there I see no reason why users in developed markets might not be tempted by something different when they come to change their phones.
  • This is a more benign market even though it is mature and I think that Mozilla and Jolla are ruled themselves out from a much easier win.
  • This is great for Nokia and Microsoft, as they have been pretty much left to their own devices in terms of sticking the knife into Android in developed markets.
  • Success is going to depend on the performance promise and on its partners making data available to users at much more reasonable prices.
  • I need to see 100m+ active subscribers to see FireFox OS as viable, 300m+ to call it a real success.