Virtual Reality – Endless funk

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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.

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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

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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.

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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

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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

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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.

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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.

LINE Q4 16 – Game off.

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Gaming could save LINE but the focus appears to be elsewhere. 

  • LINE reported a difficult set of results which laid bare how difficult it will be to return to growth without expanding either its coverage of Digital Life or its user base.
  • With the shares trading on 5.7x 2016A EV / Sales, I think that a return to rapid growth is required just for the shares to stand still.
  • Q4 16A revenues / EBIT were JPY37.5bn ($332m) / JPY1.6bn ($14m) substantially missing consensus estimates of JPY38.7bn / JPY5.3bn.
  • Even with a one-off charge against EBIT removed from the figures, LINE still missed consensus EBIT by 50%
  • The lower profitability was primarily caused by marketing expenses, general and admin expenses all of which grew substantially more than sales.
  • The main issue is that LINE is trying to change its business model from one based on stickers and games sold through its IM platform to one based on advertising.
  • This is because revenues from stickers and games is beginning to decline in the face of competing services (like Facebook Messenger and WhatsApp) which offer similar content for free.
  • Furthermore, RFM calculates that LINE’s current offering is not broad enough to return the company to real growth.
  • However, it should be able to replace existing revenues should they decline to zero.
  • When I look at LINE, I think it is capable of driving monetisation through the Digital Life services of Instant Messaging, Shopping and Telephony giving it total Digital Life coverage of 18%.
  • I do not think that its Smart Portal is mature enough to give it credit for Social Networking or any other Digital Life segment that it is trying to address.
  • Furthermore, its user base is pretty stagnant at 217m leading RFM to calculate that LINE could generate around $1.5bn in advertising revenues on an annual basis or $373m per quarter.
  • During Q4 16 LINE generated $139m in advertising with content generating $193m giving $332m in total.
  • This clearly shows that replacing content with advertising will only allow revenues to expand to $373m per quarter, some 12% above where the company is now.
  • To return to growth LINE will have to successfully expand its coverage of Digital Life or start growing its user base once again.
  • Growing the user base will be a major challenge as LINE has consolidated its focus onto the four countries of Japan, Thailand, Taiwan and Indonesia which considerably limits its scope.
  • Hence, I think it will have to improve its Digital Life coverage which will be difficult given that the other segments of Digital Life are pretty well covered already.
  • The one exception I see is Gaming and here there is an opportunity for LINE given its heritage in selling games through its platform.
  • This is a big segment and if LINE can generate a thriving multiplayer gaming community, then I can see its revenues expanding once again.
  • Unfortunately, of this there is no sign with much of the effort being places on other areas which to date have resulted in increased investments but no real revenues.
  • To justify its valuation, LINE must start to grow again as 5.7x EV / Sales is way to high for a company with low growth and heavy investments hitting profits.
  • I can see the valuation making a major adjustment downward from here.

Tencent Q3 16A – Work in progress.

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Still a lot of work needed to realise its full potential. 

  • Tencent reported another excellent set of results but the fact that expectations are already so high meant that the numnbers felt more like a damp squib.
  • Q3 16A revenues / EPS were RMB40.4bn / RMB 1.12 compared to consensus at RMB39.0bn / RMB 1.17 and RFM at RMB35.3bn / RMB 1.15.
  • The combination of greater investments being made in sales and marketing and a higher tax rate was responsible for the lower profitability that the company experienced.
  • When one looks at gaming, the importance of the transition that Tencent is going through becomes apparent.
  • Although Tencent did manage to grow revenues from PC gaming, the daily active user count was down by 9% YoY and the number of concurrently active users for casual PC-based games was down 18% YoY.
  • This is an indication that usage is shifting to mobile and that PC users are spending more time playing each other rather than on their own against the AI.
  • Tencent has responded to this by offering more game related activities such as tournaments, video streams of popular gamers and so on.
  • This shift is also nudging Tencent closer and closer to becoming a fully-fledged ecosystem but in that regard, there is still a lot of work to do.
  • Its biggest assets here are Weixin / WeChat, its social network Qzone and its mobile gaming offering.
  • All together Tencent has 77% coverage of the Chinese Digital Life pie but its assets remain quite disparate and fragmented and it is this that needs to change.
  • Tencent needs to become the place where Chinese users go to spend 77% of their digital lives perhaps with the occasional outing to Alibaba to shop and Baidu to search.
  • To achieve this, Tencent needs to fully integrate its offering and make it as consistent, easy to use and as fun as possible.
  • Tencent shows little sign of doing this on the surface but the investments that it is making in data centres and in sales and marketing are some indication of what is taking place behind closed doors.
  • This is encouraging because on its current trajectory, Tencent is heading for a big slowdown in 2017 and beyond as the Chinese market matures.
  • However, RFM calculates that Tencent is very far away from fully monetising the ecosystem that it is creating, meaning that there is an opportunity for another leg of growth in the medium-term.
  • To achieve this, Tencent needs to really integrate all of its assets into a single experience for users rather than a series of different services.
  • It is at this point that further growth is possible both in terms of profits and the share price.
  • However, I don’t see Tencent being ready to grab this opportunity in 2017, and so in the short-term a slowdown looks inevitable.
  • The good news is that even without the ecosystem there is still some headroom in Tencent’s valuation.
  • Hence, I am happy to keep it on my list alongside Microsoft and Baidu.

Facebook – Gamification.

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Facebook does not intend to play second fiddle to Tencent for long. 

  • Facebook is increasing its position in gaming aiming to come at this critical Digital Life service from all angles to ensure that it ends up dominating the segment in developed markets.
  • Facebook has launched a new app for the desktop called Gameroom which is a client, much like Steam, which allows games that are developed in Unity to be easily published and accessed via Facebook’s platform.
  • Steam is a PC gaming platform that serves as a distribution channel for digital games, supports multiplayer and has a thriving community of PC gamers.
  • Gameroom aims to be very similar with the added kicker that it will provide game developers with much easier access to its 1.6bn users which is an asset not to be sniffed at.
  • Facebook’s aim is to help developers sell more of their games to users and to encourage users to play games on its platform rather than elsewhere.
  • Steam gamers are mostly hard core players but it does also distribute casual games and I think that it is this segment that Facebook is going after at this stage.
  • This makes complete sense because when it comes to the ecosystem, it is the smartphone and the tablet that really matter as the vast majority of games played on these devices are casual games.
  • Hence, when Facebook is trying to entice users to spend more time within its properties, it will be on these devices where it will need to generate the most traction.
  • This is because it is based on the experience on these devices that the user’s ecosystem decision is taken.
  • Hence, I do not see Gameroom as a real challenge to Steam but instead a play to fully colonise the Gaming segment of the Digital Life pie which in developed markets remains largely unoccupied.
  • Facebook is coming at gaming from all angles from VR and Occulus at the high-end to experimenting with gaming within its chat app Messenger.
  • Gameroom adds another string to Facebook’s bow when it comes to conquering gaming and of all of the major ecosystems, it is probably in the best position for gaming (except Tencent in China).
  • Microsoft and Sony also have thriving gaming communities but have completely failed to convince any of these players to play casual games within their systems on mobile.
  • This has left the largest (30%) segment in Digital Life wide open which is why I think Activision bought King Digital (see here).
  • I also believe that this is why Tencent purchased Supercell (see here) but the consortium structure that it is building around this acquisition makes me think twice.
  • This launch further reinforces my belief that Facebook is working at becoming the largest ecosystem of them all with over 2bn users and 80% Digital Life coverage.
  • This would put Facebook in undisputed leadership with Tencent in second place with 77% coverage and over 1bn users.
  • This is how Facebook goes from being a US$20bn revenue company to US$50bn, a large slice of which is likely to come out of Google.
  • However, in the meantime, Facebook has a lot of work to do as its current Digital Life coverage is just 36% and it remains really just a collection of apps rather than an ecosystem in its own right.
  • This is why I am nervous on the short-term outlook for Facebook as market estimates are assuming that revenues materialise from the new ecosystem services long before I see them as being mature enough to generate revenue.
  • I think the slip comes pretty soon, which is why I remain short-term cautious on Facebook despite the fact that it has a lot of long term potential.
  • There will be a better time to get in.