Tencent – Digital circumnavigation.

Reply to this post

 

 

 

 

 

Tencent begins to build on Supercell.

  • Following the most difficult set of results after its IPO, Snap has conveniently announced that Tencent has taken a 12% stake in the company.
  • This has awoken take-over speculation that I thought would not really emerge before the shares dropped below $10 and should provide a badly needed boost to sentiment.
  • In its 10Q Snap stated that it had been notified by Tencent that it has purchased 145.8m shares representing a holding of 12% in Snap Inc.
  • If this had been purchased purely through the exchange it would have consumed 25% of the free float which I think would have been noticed triggering a rally and speculation.
  • Consequently, I suspect that the majority of this stake was accumulated by approaching existing holders directly whom I suspect were only too happy to sell.
  • I do not think that this transaction has anything to do with Tencent’s China business but instead is more about Tencent looking at ways of spreading its wings overseas.
  • RFM research (see here) has concluded that Digital Life services in developed markets do not work well in China (mostly because they are blocked) while Chinese Digital Life services do not work well in developed markets as they do not fit culturally and also are predominantly in Chinese.
  • Consequently, the BATmen have had to seek other ways to develop overseas other than just spreading their Chinese services into developed markets.
  • Alibaba is approaching this using the Trojan horse of Alipay (see here), while Tencent is showing signs of assembling a range of assets that would give it good coverage of Digital Life in developed markets (see here).
  • This process began with the acquisition of Supercell in June 2016 (see here), continued with an attempt on Spotify that failed (see here) and now it seems to be latching onto Snapchat.
  • Tencent is the global market leader when it comes to Digital Life coverage with 77% of the Chinese pie covered and 30% of the developed market pie covered with its position in Supercell.
  • Adding Snapchat would take this coverage to 44% ahead of both Google and Apple (who have 40% each).
  • However, it is one thing to have good Digital Life coverage and quite another to create a vibrant ecosystem that one can effectively monetise.
  • The Digital Life measure is only a measure of opportunity which is why RFM uses its 8 Laws of Robotics to assess the quality of the proposition being made to users.
  • Against these tests both inside China and overseas, Tencent does not score well (see here) which explains why the vast majority of its revenue comes from selling content and games rather than from monetising its community.
  • It increasingly looks as if Tencent is embarking on a circumnavigation of the Digital Life pie in order to build an ecosystem to challenge the established Google, Apple, Amazon, Facebook dominance of consumer digital services.
  • Consequently, I expect Tencent to actively seek investments or acquisitions in Media Consumption, Search, Social Networking and so on in order to build its coverage.
  • This is likely to prove to be expensive and in my opinion the real challenge for Tencent lies ahead.
  • This will be to assemble and integrate these assets into a vibrant and consistent community which is something is has yet to do with the majority of its assets in China.
  • It is at this time that its score against RFM’s 8 Laws of Robotics will begin to improve but so far there is not that much sign of it.
  • I continue to like Tencent as it is the strongest of all the Chinese ecosystems and the share price still does not reflect all of the potential upside.
  • Hence, there is still not much very downside in Tencent if it fails to integrate its assets and improve its score on the 8 Laws.
  • However, should it do so, there is plenty of further upside from here.
  • Tencent, along with Baidu and Microsoft remain my top picks.

 

Razer phone– In character.

Reply to this post

 

 

 

 

 

For hardcore fans only.

  • Razer has stuck to what it knows in its in launching first smartphone, but its focus on gamers means that the device looks very dated against competition in its price tier (Galaxy s8, Mate 10 Pro, iPhone 8 etc).
  • The Razer phone sports a very average looking screen with large top and bottom bezels but these make sense in the gaming context.
  • The most annoying thing about playing games on smartphones that are all screen, is that there is nowhere to rest one’s thumbs.
  • The large bezels also provide the real estate to include high specification speakers and Razer is also pushing audio as a differentiator for this product.
  • Razer has provided for this at the expense of aesthetics but combined with a 120hx refresh rate on the display and a snapdragon 835 and a whopping 8GB of RAM, I think it is safe to say that this will provide arguably the best overall gaming experience.
  • True to its roots it also allows gamers to tweak the performance of the device to optimise battery life against performance with the Razer app that comes preinstalled.
  • The Razer phone is effectively a tweaked Nextbit Robin which was the lead product of the small phone maker that Razer acquired in January.
  • This makes sense as it would have been almost impossible to come up with a new design from scratch in such a short time period.
  • Unfortunately, in order to benefit from the 120hz refresh rate, games companies need to include support for it in their apps meaning that the majority of Android games will not be able to make use of this key feature.
  • However, it has announced partnerships with Tencent, Square Enix, Namco and several others meaning that some high-end games will be able to work optimally with the device.
  • Razer has a similar problem to the one that caused Microsoft no end of grief which is that the average consumer will not understand its product and will only see an old looking device at a high price.
  • Consequently, I think that this is an enthusiast device that will only be purchased by users that are already very familiar with Razer and most likely own its products.
  • That being said, I have estimated that the software that it offers on its PCs has between 5m and 10m active users (see here), which probably makes up a big part of its core fan base.
  • If 5-10% of these users buy the device, then this would represent shipments of 500,000 or revenues of around $280m (at my estimated wholesale price).
  • This would help support Razer’s lofty valuation of around 10x sales at IPO, but margins are likely to be very low, leaving me unchanged in my opinion that there will be a better time to consider this one.

Razer – The public game.

Reply to this post

 

 

 

 

 

Its too early for Razer to go public.

  • Razer wants to become the ecosystem for gamers but its progress in this area is at such an early stage that I think it has no business being a public company.
  • This is because when a company is in transition, things rarely go to plan meaning that deviations from forecasts on results day are likely to be large resulting in wild swings in the share price.
  • Furthermore, the fact that Razer is listing at $4.5bn, which is more than 10x the revenue that the company is likely to report for 2017, means that any slips or misses will be severely punished.
  • Razer is a PC Gaming hardware company that prides itself on providing PCs and peripherals that cater to exactly what gamers want.
  • On the back of this PC enthusiast niche, it recorded sales in 2016 of $392m upon which it made a reasonable gross margin of 28%.
  • However, just $0.095m (0.2% of turnover) was from software and services which grew to $0.11m (0.6% of turnover) in H1 2017.
  • This tells me that first and foremost, Razer is a hardware company whose best shot at monetising its ecosystem will be through premium device pricing.
  • Apple is the gold standard of hardware monetisation where its gross margins on the iPhone are comfortably over 40%.
  • This means that Razer needs to use software and services to create a user experience that can only be had on Razer products driving increases in prices for Razer products over and above competition.
  • This will be very difficult as:
    • First: virtually all of its products only run software and content created by third parties that is available elsewhere.
    • Second: its ecosystem is almost non-existent today.
    • At the heart of its fledgling ecosystem a is a software platform that launches, aggregates and compares prices of games as well as software that enables LED colour patterns.
    • This software has 35m registered users but the fact that there are only 7.8m likes on Facebook, 2.9m Twitter followers, 1.8m Instagram followers and 1.2m followers on YouTube leads me to think that the active users are somewhere between 5 and 10m.
  • RFM research (see here) has found that in order to hit critical mass, an ecosystem needs to have 100m+ users indicating that Razer has a very long way to go.
  • However, given that gaming is a specific niche within the consumer electronics industry, critical mass for Razer could be substantially lower.
  • Twitch now has well over 100m active users and so if Razer was to achieve somewhere in the realm of 50m, that could be enough to begin ecosystem monetisation in earnest.
  • Razer is also planning to launch a gaming-optimised smartphone which does make some sense as gamers who play games on PCs do also play games (albeit different games) on smartphones and tablets.
  • This has been tried multiple times in the past with no success but gaming does remain the one segment of the Digital Life pie where there is no dominant player in developed markets.
  • As a result, if Razer can create a vibrant and engaged community of gamers on its mobile devices then it could begin to generate device preference which in turn will lead to increases in gross margin.
  • Unfortunately, at a valuation of $4.5bn (around 10x revenues) a lot of this success (which is far from guaranteed) is already being priced into the shares.
  • As a result, any slip (which is quite likely given the transition) is likely to be severely punished by the market meaning that there will probably be a much better time to consider being involved.

Virtual Reality – Endless funk

Reply to this post

 

 

 

 

 

Even Oculus doesn’t believe the hype.

  • Oculus has sent the surest signal yet that all is not well with virtual reality (VR) in a move that can only be interpreted as an admission that VR is far from being able to live up to the expectations that have been set for it.
  • Oculus has updated its policy for its app store that allows a user who is dissatisfied with something that he has purchased in the store to get a no questions asked refund.
  • This applies to both Oculus Rift and Gear VR content subject to the following:
    • First: The user can not have spent more than 2 hours using the content (30 mins Gear VR).
    • Second: The application for refund must be made within 14 days (2 days Gear VR).
    • Third: The refund does not cover movies or content that is bought as part of a bundle although the whole bundle appears to be covered.
  • This generous policy is an indication that the experience offered by VR is far from satisfactory which is hurting both hardware shipments and software revenues.
  • Hence, in order to keep interest in the platform and prevent disgruntled users from chucking the device in drawer, it has to offer a sale or return policy that is almost unheard of in software.
  • It is clear to me that the problems that have plagued VR since its inception are still far from being solved.
  • These are:
    • Price: Many of the devices cost several hundreds of dollars and also require a PC to run, further increasing the cost.
    • Sony is the one exception which is why I am pretty sure that it is currently the runaway leader albeit in a very small market.
    • Clunky: VR and AR units are still large, clunky and uncomfortable to wear.
    • In many cases they also make the user feel foolish when wearing one.
    • Comfort and security: VR cuts the user off from almost all sensory inputs from his immediate environment severely limiting the situations in which the user would feel comfortable using one.
    • Many units also cause feelings of nausea due to an imperfect replication of the real world compared to what the brain is expecting.
    • Cable: Many units require an HDMI cable which prevents the user from moving and also increases the risk of a fall should the user trip over the cable.
    • Content: Both games and content remain in short supply and of poor quality necessitating the Oculus shift in policy.
  • The net result is that VR is clearly still far from ready prime time and there remains a lot of work to do before volumes will really take off.
  • I do not see this happening in 2017 meaning that the outlook for next year remains pretty grim.
  • This is why I see the likes of Facebook and Apple pivoting their consumer offerings towards viewing and interacting with a virtual world through the camera of a smartphone rather than with a head unit.
  • Augmented Reality has more problems than VR but the case for it in the enterprise remains strong.
  • This is because there are immediate productivity benefits to be had from deploying a unit to parts of the work force and critically, in the enterprise one can get away with a poor user experience.
  • This is because users are paid to have the experience meaning that they are willing to endure the shortcomings listed above.
  • The net result is that I think VR will continue to disappoint with all the action in the short-term remaining squarely in AR.

Tencent – Tale of two pies.

Reply to this post

 

 

 

 

 

Tencent dominates but still has much more to do. 

  • Tencent already dominates Digital Life in China and now it is increasingly turning its attention to the opportunity overseas.
  • This makes sense as China is starting to show signs of maturity meaning that the recent breakneck pace of growth will inevitably slow down forcing the BATmen to look overseas for more growth.
  • RFM has long identified that ecosystems and smartphone usage in China and developed markets are very different (see here).
  • This means that Chinese Digital Life services are not really relevant in developed markets and visa versa.
  • This means that overseas expansion for the BATmen has to be much more than just attempting to offer their Chinese services overseas.
  • While Alibaba is looking to grow overseas using AliPay (see here), Tencent is focused on adding relevant developed market assets to improve its coverage of Digital Life in developed markets.
  • This strategy has begun with the purchase of Supercell giving Tencent coverage of Gaming but it looks as if Tencent is keen on acquiring other segments of the Digital Life Pie also.
  • Most recently, Tencent appears to have made a move on Spotify that would have given Tencent a very strong position in Media Consumption.
  • Combined with Gaming, this would have given Tencent 40% coverage of the Digital Life pie in developed markets along with the 77% that it already has at home.
  • Spotify appears to have spurned Tencent’s advances, but I suspect that Tencent will continue to look for key strategic assets to improve its position in Digital Life in overseas markets.
  • Currently, Tencent has 30% coverage with Supercell but there is far more to creating a vibrant ecosystem than just gathering assets which provide coverage of Digital Life.
  • The trials and tribulations of Yahoo are all the evidence that one needs to conclude that one cannot succeed by coverage alone.
  • In 2014, Yahoo had 73% (more than anyone else at the time) of Digital Life covered but failed to create any meaningful traction on mobile devices.
  • This is because it was unable to take what were essentially fixed services and successfully leverage them into mobile.
  • Tencent does not have this problem as its traction in mobile is already strong but what it is missing is an understanding of the importance of integration.
  • I have long believed that to be really successful, the different services across Digital Life need to be integrated such that usage can be understood as a profile rather than a series of discrete and independent services.
  • This is one of the key ingredients of Google’s success and is something that Baidu and, increasingly Alibaba, are beginning to get to grips with.
  • Tencent on the hand, appears to be quite far behind in terms of grasping the importance of integration as I still see no signs of this happening.
  • In the short-term this is not a big problem but as Tencent’s valuation continues to rise, it will become an increasingly necessary for Tencent to bring its assets together in a cohesive way to justify its share price.
  • This is how Tencent can really begin to monetise its ecosystem beyond the sale of content and games and become a place where users spend their Digital Lives.
  • In China, some of this is coming through the rapid expansion of WeChat from a place to exchange messages to a place where all sorts of transactions can be executed.
  • However, in the long-term Tencent needs to have all of its services integrated and in that regard, there is quite some way to go.
  • I continue to like Tencent as it is the strongest of all the Chinese ecosystems and the share price still does not reflect all of the potential upside.
  • Hence, there is still not much very downside in Tencent if it fails to integrate its assets.
  • At the same time there is the promise of further improvement in the long-term if it begins to develop its ecosystem beyond a series of very successful but discrete services.
  • Tencent, along with Baidu and Microsoft remain my top picks.

iOS vs. Android – Catch-up

Reply to this post

 

 

 

 

 

Android is snapping at Apple’s heels.

  • Android is showing signs of catching up with iOS in terms of user spending at the high-end, but further down the pricing tiers and in mobile advertising, I think that iOS remains miles ahead.
  • A recent study of the habits of 1.4m USA based users during the month of June 2017 was carried out by DeltaDNA, an analytics firm.
  • The study only measured gaming but this is already well known to be by far the biggest revenue generator from any Digital Life segment.
  • Almost all games these days are free to play and have in-app purchases for monetisation.
  • It is these that the survey measured and I have expressed these as ARPU $ / month.
    • Samsung Galaxy s8 / s8+: $6.30 / $16.20
    • Google Pixel / XL: $6.30 / $9.60
    • iPhone 7 / 7+: $8.40 / $10.80
    • Other US Android devices: $6.00
  • From this I conclude:
    • First: Screen size and quality is a big determinate in game monetisation.
    • The Samsung Galaxy s8+ which has by far the best screen (and the best audio in my opinion) available on the market today, is clearly making a difference to game play with the observed results.
    • Second: On normal screens, iPhone is still comfortably ahead of both the s8 and the Pixel but the gap is closing.
    • Third: Both the s8 and the Pixel are not meaningfully better than other Android devices implying the that user experience on the s8+ and Pixel XL has nothing to do with their better monetisation.
  • Although these models are clearly closing the gap on the iPhone, when it comes to total revenue generated there still remains a vast chasm in terms of total revenues generated.
  • In Q1 17A, Apple generated $7.04bn in revenues from services while Google other revenues were $3.10bn ($3.09bn in Q2 17A).
  • These figures are not direct comparisons as there are other businesses also included in these figures, but I think it is pretty safe to say that Apple App Store is easily generating double the revenue of Google Play.
  • A large part of this will be because in the high-end segment Apple has much higher share but also because Apple does still clearly offer a higher quality apps and services experience as the data for the regular sized phones indicates.
  • Furthermore, I have not seen a shift in the mobile advertising metrics and so I still believe that an iOS device generates double the advertising revenues of an Android device.
  • This data should send a warning shot across Apple’s bows as the better Android devices are certainly snapping at its heels.
  • Should they finally catch up, Apple may find it starts to feel the dreaded pricing pressure that will hurt profitability.
  • This is why I continue to believe that Apple needs to make its ecosystem sticky in areas other than its App Store which is what I think its strategy around HomeKit, HealthKit and Apple Pay are centred around.
  • However, to date, not a huge amount of sustainable traction has been generated by any of these services and so Apple has to radically improve them or think of something else.
  • This is one reason why the iPhone 8 is so important as once again it has slipped too far behind the hardware curve and needs to catch up.
  • With the rally that we have seen in 2017, the valuation argument for holding Apple has long since evaporated which is why I would prefer to hold Tencent, Baidu or Microsoft for this year.

Microsoft FQ4 17 – Head in the clouds.

Reply to this post

 

 

 

 

 

Not a cloud in the sky.

  • A strong finish to the fiscal year cements Microsoft’s positions as the main alternative to Amazon Web Services and as the preeminent provider of a Digital Work ecosystem.
  • FQ4 17 revenues / Adj-EPS were $24.7bn / $0.75 nicely ahead of consensus at $24.3bn / $0.71.
  • Outperformance was primarily driven by Azure which grew by 97% YoY and Office 365 which showed continued to show healthy progress in both the enterprise and with prosumers.
  • Gross margins improved slightly as favourable product mix was able to offset the impact of the increasing share of revenues coming from the cloud which has much lower gross margin than licence sales.
  • This is entirely normal and RFM research has shown that in Microsoft’s case in the long-run, it is better to have recurring revenues at lower gross margins than one off sales at much higher levels.
  • This is because the one-off sales do not occur frequently enough to generate more profit than subscription revenues at much lower margins.
  • Consequently, gross margins are going to remain under pressure in future albeit at a lower rate as cloud gross margins are rapidly expanding as the businesses continue to scale.
  • Guidance for FQ1 18E was a little light with revenues / EBIT of $24.0bn / $7.1bn forecast compared to consensus at $24.2bn / $7.4bn.
  • Guidance for FY18E remains unchanged with the priorities being placed upon increasing cloud gross margins and cautious growth in OPEX.
  • While the Digital Work ecosystem is going from strength to strength, the consumer ecosystem continues to wither away.
  • The one exception is gaming where the Xbox live community is still growing nicely and Microsoft remains the only real challenger to Sony in console gaming.
  • Despite this, I still think that Xbox Live is a massively under-utilised asset is it has completely failed to get any real traction in mobile gaming.
  • This is why I still think that there may be a party out there that is willing to pay more for Xbox than it is worth to Microsoft.
  • In that instance, Microsoft should sell Xbox in the best interest of its shareholders.
  • Microsoft is not the most exciting company in my universe but it has been one of the steadiest over the last 2 years and there is every sign that this will continue into FQY 18E.
  • Microsoft remains along with Baidu and Tencent, my two top picks.

Tencent – Feathering the nest

Reply to this post

 

 

 

 

 

Rovio could help Tencent spread its wings.

  • Rovio is almost certainly past its prime but it has an asset that could be capitalised on should the right buyer come along.
  • Tencent is not showing any real signs of being the right buyer at the moment but its ownership of Supercell makes Rovio a good strategic fit.
  • Rovio is the creator of the well-known Angry Birds franchise where its revenue from games has been revitalised by the recent good performance of the Angry Birds movie.
  • 2016 revenue / EBIT was Euro190m / Euro17.1m with a bump in games, thanks to the movie, bringing the company back into profit.
  • The revenues from the movie will be recognised over the 2017 and 2018 financial years.
  • Tencent has had some success in taking Western games and leveraging them into China as League of Legends has become a major hit in China through Tencent’s patronage.
  • I have been fairly disappointed with Tencent’s acquisition of Supercell so far as while it is now able to leverage Supercell’s hugely popular games into China, I think the real opportunity lies outside.
  • The Chinese market is starting to slow meaning that the BATmen will need to look elsewhere long-term for sources of growth.
  • Of all of the BATmen, Tencent has the greatest opportunity as the Digital Life segment in China within which it is the strongest remains unoccupied in developed markets.
  • This is kargely because the big multiplayer gaming communities Xbox Live, PlayStation Network, Valve (see here) have all failed to leverage their communities from PCs and consoles into mobile.
  • Activision Blizzard, which I think purchased King Digital exactly for this purpose, is also not doing a great job of it as active users of King mobile assets have gone into freefall.
  • This leaves the way open for Tencent to begin to build its assault on developed markets starting with the all-important segment of Gaming which it dominates at home.
  • However, it has not shown much intent to make the most of this opportunity instead concentrating on leveraging overseas games into its home market.
  • In Supercell it considers itself to be a financial investor which is why it seems to have been left pretty much to its own devices.
  • Rovio would be a good fit for Tencent alongside Supercell but I still think that the real opportunity lies in using these assets to grow its presence overseas.
  • Tencent has by far the strongest ecosystem in China with 77% coverage of the Chinese Digital Life pie which is why I think there is so much upside.
  • It makes almost all of its money from selling media and games with only a small proportion coming from monetisation of the ecosystem it has created.
  • If it was to effectively monetise its ecosystem at home and aggressively push into developed markets, it could become one of the biggest digital ecosystems globally.
  • However, there is still a long way to go in recognising this opportunity and it needs to structure its assets appropriately to take advantage of that.
  • Consequently, I don’t see Tencent seeing the benefit of this for some time to come but the good news is that there is still enough growth left at home to sustain the valuation for a while.
  • Tencent, alongside Baidu and Microsoft are my favourite ecosystems at the moment.

E3 2017 – Glaring omission

Reply to this post

 

 

 

 

 

Very little interest in mobile gaming at E3.

  • E3 is the biggest trade show for the computer games industry but it still seems to be ignoring one of its most important segments: gaming on mobile devices.
  • Mobile gaming is radically different from gaming on PCs and consoles in three ways:
    • First: PC and console games are much more expensive and more complex.
    • Second: They require high-end PCs or dedicated hardware to run optimally compared to mobile games which run well on most smartphones.
    • Third: They are played for long periods of time whereas mobile games are played for a series of short periods.
  • This means that the software and hardware required to address this segment is completely different but that does not mean that there is no opportunity for the PC and console players in mobile.
  • This is because, I think that the hundreds of millions of users who play PC and console games also play games on their mobile phones.
  • These are different games, played in a different way with a different monetisation system but because the players are the same I see no reason why the big game communities should not be leveraged into mobile.
  • Sony, Microsoft and Valve have all spectacularly failed to leverage the multiplayer communities that they have on PCs and consoles onto mobile phones.
  • I believe that this is why the Digital Life segment of Gaming in mobile remains almost completely unoccupied.
  • This is very different to China where mobile gaming is dominated by Tencent with NetEase coming a distant second.
  • Hence, because Gaming is the single largest segment of Digital Life (30%), I think there is a big opportunity being left on the table.
  • This is the rationale for why I think Microsoft should be prepared to sell Xbox if the right offer comes along.
  • Someone with the ability to do with Xbox what Microsoft cannot should be willing to pay more for the asset than it is worth to Microsoft.
  • It is under these circumstances that I have advocated for its sale as it would generate more value for shareholders than remaining inside Microsoft (see here).
  • The same could be said for PlayStation but because it is such an important part of Sony, I seriously doubt that it would sell under any circumstances.
  • I can’t say the same for Microsoft which is continuing to do very well in dominating the Digital Work ecosystem but is letting its consumer ecosystem fade away.
  • Activision Blizzard looked to be making move on mobile gaming with its acquisition of King Digital but unfortunately, the mobile user numbers for King Digital have fallen by around 35% since the acquisition.
  • Hence, I think that this segment remains wide open creating a big opportunity for someone who has the skill and determination to do in mobile what Microsoft and Sony clearly do not.

Microsoft – Empty harbour.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

I think the video game streaming ship has sailed.  

  • Microsoft is showing no signs of giving up on gaming but it will have to do something really special with Mixer if it wants to make any dent at all in Twitch.
  • Microsoft has renamed the video streaming service that it acquired in 2016, Mixer, and relaunched it with a host of new features in order to compete with Twitch.
  • Twitch is the gorilla in the video game streaming business that Amazon acquired in 2014 for around $1bn (see here).
  • At the time of acquisition Twitch had 55m users but the engagement that it generated was quite staggering with 7m logging in every day with an average watch time of 2 hours.
  • In the last 2 and a half years these numbers have continued to grow with now than more than 100m MaUs of which around 10m login every day.
  • Even more surprising is that engagement has further increased with nearly half of all its users spending 20 hours per week using the service.
  • When compared to the other players (YouTube Gaming, Mixer and Hitbox), I think that Twitch is more than 10x the size of its nearest rival.
  • Twitch is a network based business where sellers (game streamers) and buyers (viewers) are put together with Twitch sharing the revenue with its content creators.
  • Twitch is the standout go to place for streaming video games and given its size advantage, I think there is almost nothing that Microsoft or anyone else can do about it.
  • Mixer is launching with some pretty cool new interactive features that takes sharing videos to a new level, but I am far from convinced that it can ever gain the critical mass needed to put even a ding in Twitch.
  • For example, in April 2016 Mixer had just 100,000 users and even its big launch event today has only around 600 users watching it.
  • Furthermore, if every Xbox Live user was to start using Mixer, it would still be less than half the size of Twitch.
  • This issue is exacerbated by the fact that Mixer is not available on PlayStation which is a much bigger community than Xbox.
  • Consequently, I think that Mixer will end up as a niche offering that has a very small, but loyal following.
  • Whether that is enough to cover the cost of the service remains to be seen.
  • Microsoft recently made a robust defence of its presence in gaming at its financial analyst briefing at the BUILD conference (see here) with which I do not necessarily disagree.
  • However, both Microsoft and Sony have made a horrible mess of trying to leverage their gaming communities into mobile and I do not buy the argument that these communities are not applicable on mobile.
  • These users almost all have smartphones upon which they will play games albeit different from those that they play on consoles and PCs.
  • Twitch is big but there are billions of users playing games on mobile devices and gaming is by far the biggest revenue generating segment for developers.
  • This is why I think that if these communities were properly leveraged into the mobile, they would be orders of magnitude more valuable than they are today.
  • Furthermore, in developed markets, this space is vacant with the only really big player (Tencent) being only present in China.
  • This is why I think that someone with the ability to do with Xbox what Microsoft cannot would be willing to pay more for the asset than it is worth to Microsoft.
  • It is under these circumstances that I have advocated for its sale as it would generate more value for shareholders than remaining inside Microsoft.
  • As it stands today, I think Xbox can generate some value for Microsoft but far more for someone else.