Microsoft, Huawei & ZTE – Hardware heaven?

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3 big leaps but with potentially with fatal flaws?

  • Microsoft, Huawei and ZTE have both expanded their hardware ambitions but I question whether enough attention to details has been paid to really make these products really successful.

Microsoft Surface Book 2

  • Microsoft has launched a worthy successor to the Surface Book, substantially upping both the power and the size of the device.
  • Two versions are now available: a 13.5” device and a 15” device and on both, the hinge has been meaningfully reinforced to ensure that the screen does not wobble during typing.
  • Microsoft has included the latest Intel processors as well as graphics from Nvidia to ensure that the performance of these devices is top notch.
  • Both screens detach from the keyboard to become a tablet but it is here where my concerns lie.
  • The single biggest fault of the original Surface Book is the fact that when the screen is detached, the keyboard stops working.
  • In my opinion this removes the best use case for a tablet PC which is to turn it into a portable desktop experience. (see here).
  • This provides both a more productive and a much healthier computing experience.
  • One can attach a separate Bluetooth keyboard to the product, but when the user has already paid up for a great keyboard, this seems to be a slap in the face.
  • It is not clear if this functionality has been enabled on the Surface Book 2 but I think it will make the difference between the perfect product and one that continues to follow the obsolete laptop dogma (see here).

ZTE Axon M

  • After being very rapidly commoditised in audio, ZTE is having another go at differentiation with the launch of a dual screen device not very unlike the YotaPhone.
  • The main difference is that ZTE is using two full colour smartphone displays compared to the YotaPhone whose secondary display uses e-ink for an always on display that consumes no power.
  • The aim here is to provide the screen of a tablet in a form factor that can fit in one’s pocket rather than a back-up for when battery is running low.
  • Google Apps can recognise when the second screen is active and run in tablet mode across the two devices but how this works for other apps is unclear.
  • Furthermore, the screen bezels mean that there is a big black line in the middle of the larger display which will be very distracting.
  • I am a big believer in larger screens on pocket sized devices, but until a single screen can unfold or unroll into a large rigid display that is as good as a tablet, this segment is likely to struggle.
  • This has been tried several times in the past and every time the hardware and software compromises being made to get two screens onto a single device have fatally hurt its appeal.
  • I don’t see how the Axon M will be any different and consequently remain cautious on its outlook.

Huawei Mate 10 / 10 Pro.

  • Huawei launched its 2017 flagship products with both devices sporting edge to edge displays pioneered by Samsung and copied by everyone else.
  • The main difference other than slightly different proportions between the devices, is that the Mate 10 is LCD while the 10 Pro uses OLED.
  • However, the main differentiator that Huawei is going for this year is AI where both devices use the Kirin 970 chip, developed in house at HiSilicon which have an onboard neural processing unit (NPU).
  • The idea is that using AI, Huawei claims to be able to prevent the inevitable performance degradation that occurs on all smartphones after months of usage.
  • This aims to compete with Apple’s Bionic A11 chip that also has an NPU but I don’t think NPUs are particularly difficult to produce.
  • AIs work best on processes that are massively parallel which is why GPUs are so good at running AI.
  • This not very difficult to achieve anymore.
  • What is far more difficult, is the creation of the AIs themselves to improve the user experience and here I think Huawei is badly lacking.
  • Huawei has no real AI expertise to speak of and on its own devices it will be competing against the global leader, Google.
  • Consequently, while Huawei may be able to win some short-term differentiation by providing an optimal place to run AIs, this will swiftly be copied leaving Huawei still struggling for differentiation.
  • To really make it, Huawei has to differentiate through the AIs itself and produce algorithms that provide rich and intuitive enhancements to services running on its phones.

OnePlus – Learning curve

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OnePlus’ slip serves as a warning.

  • BBK Electronics is fortunate that OnePlus is one of its marginal brands as a gaffe of this size at Oppo or Vivo could have done real damage.
  • OnePlus is a subsidiary of Oppo which in turn is owned by BBK Electronics (like Vivo) and has its own favour of Android (GMS compliant) called OxygenOS.
  • Unfortunately, OnePlus decided to include code in OxygenOS that captured and uploaded: IMEI, serial number, MAC addresses, IMSI and WiFi network data in addition to which apps were being opened and what the user was doing in those apps.
  • This data was being uploaded and analysed by OnePlus without either the knowledge or consent of its users.
  • OnePlus claims that the data was only being used to improve the user experience but that has not earned the company a free pass.
  • However, once the company had been rumbled it was reasonably quick to react explaining how users can turn off usage data collection but for the other data it stopped short of saying that it would cease collecting it.
  • I suspect the real problem here lies in the cultural difference between China and developed markets.
  • RFM research (see here) has concluded that in China, privacy is much less of an issue where almost all services collect and use data without the user’s permission.
  • Critically, the users do not seem to mind.
  • However, in developed markets, a flagrant disregard for the users’ privacy can sink a product or service.
  • I suspect that the code used in China was simply translated into English and launched into developed markets without a second thought.
  • This is not the first time that this has happened nor, I suspect, will it be the last as smaller Chinese brands try and leave the home market.
  • Fortunately, it appears that this lapse has not also occurred at Oppo which ships a third of its volume overseas (10m units Q2 17) which would be at risk of losing a substantial part of its business as a result.
  • OnePlus is too small for anyone to really notice or care but it serves as a warning to other companies.
  • Being aware of the differences between China and the rest of the world may make the difference between success and failure.

Samsung Q3 17 – Spring clean.

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Now is the best time to clean house.

  • Samsung’s chip business has driven yet another mighty set of results making it the perfect time to deal with all of governance issues that continue to plague the company.
  • Q3 17 revenues and EBIT are expected to be KRW62.0tn / KRW14.5tn slightly ahead of estimates at KRW61.8tn / KRW13.4tn.
  • While these results are not very far ahead of expectations, Samsung has generated 2.8x more EBIT than Intel is expected to have generated in the same period.
  • This will put Samsung’s chip business comfortably in the global No. 1 slot where it looks it is going to stay for some time.
  • Handsets have also had a good quarter driven by its well-received flagship products but the real star of the show remains semiconductors.
  • Typically, an environment of limited supply and strong demand is ruined by over enthusiastic capacity additions but I see the semiconductor industry being a little bit more cautious these days.
  • I think this is due to the prohibitive cost of building a cutting edge fab and the fact that worries regarding Moore’s Law grinding to halt are now firmly on the investment horizon.
  • The big question mark remains China which has said that it wants to create its own semiconductor industry (not including Taiwan) and aggressive roll-outs there could cause yet another demand / supply imbalance.
  • Either way this will take some time meaning that Samsung’s chip business is likely to continue generating vast profits for at least 12-24 months.
  • Against this backdrop, the outlook for the shares remains pretty steady which makes it the perfect time to deal with the corporate governance issues that have been plaguing the company.
  • This appears to have begun in earnest with the resignation of co-Vice Chairman Oh-hyun Kwon who has also been serving as CEO.
  • With Jay Y Lee also likely to out of the picture for a few years, the way is open for new blood to take the helm of Samsung and clean-up these long-standing issues.
  • This is becoming increasingly important as the long-term discount in Samsung’s valuation has evaporated over the last 18 months.
  • This means that the murky way that the company is owned, controlled and managed needs to be changed into something much more transparent.
  • Failure to do this effectively is likely to result in a big correction in the valuation as soon as the current business momentum hits a bump in the road.
  • I am hopeful that today’s resignation is just the first step in this direction and that much more is to follow in the next 12 months.
  • While the company is firing on all cylinders, tolerance to the skeletons as they leave the closet will be at its highest.
  • Samsung’s timing looks to be excellent.

 

 

Apple – Expectations gap.

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iPhone X unlikely to produce the needed super cycle.

  • Expectations for the iPhone X are at fever pitch and I think that a super cycle is now required to prevent a sell-off in the shares.
  • iPhone X is the first substantial revision to the design of the iPhone since the launch of the iPhone 6 and in many ways the circumstances are very similar.
  • In 2014, the biggest complaint with regard to the iPhone was the size of the screen which was considered to be tiny compared to devices being produced by Samsung and the other Android handset makers.
  • When Apple fixed this shortcoming with the iPhone 6/6+, there was a lot of pent up demand as users who could only have a large screen with Android were able to have the best of both worlds.
  • This demand led to shipments growing (calendar quarters): Q4 14 46%YoY, Q1 15 40% YoY, Q2 15 35% YoY, Q3 15 22% YoY and Q4 15 0% YoY.
  • This was followed by shipments declines in Q1-Q3 16 as the pent-up demand was exhausted and replacement rates normalised.
  • I do not think that the iPhone X will stimulate a big enough uptick in replacement rates to meet the expectation that Apple will ship more than 255m+ units in its next fiscal year.
  • This is due to:
    • First, Utility: While the new screen is nice to look at and enables a big screen on a smaller device, it does not offer an increase in utility over the iPhone 7 similar to that of the iPhone 6 compared to the iPhone 5.
    • Consequently, I think it will not create the same degree of desirability and therefore not trigger a similar degree of early replacements compared to the iPhone 6/6+ .
    • Second, Price: The device is meaningfully more expensive starting at $999 which may put some buyers off.
    • Third, Law of large numbers. The bigger Apple becomes, the more difficult it is to post the kind of growth that the valuation of the shares now demands.
  • I think that the iPhone X will stimulate a replacement cycle but one that is smaller in magnitude compared to the iPhone 6.
  • With my optimistic hat on, I can just about get comfortable with the following unit shipment growth (calendar quarters): Q4 17 15% YoY, Q1 18 8% YoY, Q2 18 22% YoY, Q3 18 10% YoY.
  • This gives me 245m units shipped during the next fiscal year which is below current expectations.
  • The net result is that I think expectations for fiscal 2018 need to come back somewhat which is likely to trigger a sell -off in the shares bringing the valuation down somewhat.
  • Hence, I think that the time is right to take some money of the table and put it somewhere else.
  • Tencent, Baidu and Microsoft have less immediate downside in my opinion.

Microsoft – Blue Squares of Death.

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Google is the big winner from Windows Phone’s demise.

  • Microsoft has admitted that Windows 10 on mobile is no longer a focus finally putting to bed any hope (however tiny) that Android handset makers had to escape from Google’s clutches.
  • Their only hope now is that the EU forces Google to make its app store (Google Play) available without having to also install the rest of Google’s ecosystem and set it by default.
  • Microsoft has already wound down the activities that it acquired from Nokia which, combined with barely a mention at developer events like BUILD, has made this fact obvious to everyone but this is the first time that Microsoft has openly admitted this fact.
  • There will continue to be fixes and security patches for a while but no more than that.
  • Microsoft has blamed the lack of availability of apps and services from third parties as the main reason for the platform’s failure, but I have long believed that there was more to it than that.
  • The issue with developers is simply that they won’t develop for a platform with very few users as there is no way to make money.
  • Without third party apps and services, it is difficult to get users to adopt a new platform resulting in a typical chicken and egg problem.
  • Consequently, to kick start a platform, the platform owner needs to prime the pump in order to generate interest that will quickly feed off of itself.
  • Microsoft has tried very hard to incentivise app developers by paying them money and even writing the apps for them but this was not enough.
  • I have long believed (see here) that to succeed Microsoft needed to encourage both developers and users and it was in the encouraging of users where Microsoft really failed.
  • I have long referred to this as the Blue Squares of Death problem.
  • iOS has always been able to sell itself and Android was also a simple sell as it looked just like iOS except that it was cheaper.
  • By contrast, Windows Phone was very different and as a result, Microsoft needed to explain to users why it was great and how they could live their digital lives with Microsoft.
  • Furthermore, devices in the stores needed to be populated with data such that users would be able to clearly see how the Microsoft ecosystem would make their digital lives easy and fun.
  • Without this data, the demonstration devices were simply screens with blue squares on them preventing anyone not in the know to understand the proposition.
  • This needed to be done in conjunction with the efforts to get developers on board in order to give the ecosystem a fighting chance.
  • Microsoft’s mobile ecosystem has always scored reasonably well against the 8 Laws of Robotics and users who did use it generally reported a positive experience.
  • Hence, I believe that it was the failure to educate the users that was the primary reason for the ecosystem’s failure.
  • Marketing has never been Microsoft’s strong point and as a result it simply told users that the ecosystem existed and never explained to them why they should buy it.
  • The net result was that the ecosystem never got enough momentum in order to keep the developers interested resulting in the long decline that we have witnessed.
  • The real loser here is not Microsoft, which is going from strength to strength in the enterprise, but the Android handset makers.
  • If Windows had become a thriving alternative to Android and iOS then they would have had far more leverage over Google which could have resulted in much better economic terms as well as greater freedom.
  • Unfortunately, with its failure, they are completely stuck giving Google a free reign to continue draining the Android industry of its profits.
  • The one exception is Samsung whose profitability I have long believed comes from its huge volume advantage rather than any differentiation it is able to create on Android smartphones.
  • Despite Microsoft’s failure in mobile, its strategy in the enterprise is going from strength to strength leaving me still comfortable with owning the shares.

 

Google – Brain boxes

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Clever devices are useless without volume.

  • Behind the carefully orchestrated event was a series of strategies aimed at driving penetration of devices which to date have been very disappointing.
  • Google made up for slightly below par hardware by maximising its leadership in AI to provide best in class functionality as well as some unique features that no one else is likely to be able to copy for some considerable time.
  • However, the key to badly needed volumes will be execution as Google completely bungled the open goal left by Samsung after its Note 7 disaster.

Pixel 2 / 2 XL

  • Google has updated the Pixel phones and has moved to OLED displays.
  • In contrast to iPhone X, Google has opted to make use of the always on display feature that allows key information to be displayed when the screen is off with almost no impact on battery life.
  • Why Apple declined to make use of this excellent feature on the iPhone X is a complete mystery.
  • What really sets the Pixel 2 apart are the new features such as Google Lens which offers the best image recognition and the fact that Google uses AI to do with one camera while everyone else needs 2.
  • However, Google openly admitted that volumes of Pixel have been disappointing and its offer of a free Google Home Mini is clearly aimed at driving badly needed volumes of this device.
  • Pricing remains punchy at $649 for the Pixel and $849 for the XL making the comparison to better looking Samsung s8 and iPhone 8 inevitable.
  • I suspect price is going to be an issue for users considering this device.

Google Home.

  • Two new products were introduced:
    • First: Google Home Mini ($49) which takes direct aim at the best-selling Amazon device (Echo Dot) in another clear attempt to drive badly needed volume.
    • Second: Google Home Max ($399) which goes up against Sonos and Apple HomePod.
  • The broadening of the portfolio should help Google increase its penetration of the home but the smart home piece is still badly lacking.
  • Google claims that 1,000 devices from 100 manufacturers now work with Google Home but it failed to demonstrate any and instead concentrated on products from Nest.
  • Google also launched routines which is exactly the same as the Amazon Echo function of the same name and something that all smart home controllers need in my opinion.
  • The integration of Google Home with other Google devices and the functionality being added is far ahead of anything else available but the smart home bugbear continues to rankle.
  • This means that anyone serious about smart home is likely to choose Amazon simply because they know that anything made for the smart home will work while the same cannot be said for Google.
  • This needs to be fixed and will remain the reason for Google’s potential defeat at the hands of Amazon because elsewhere it is by far the best product available.

Google Accessories.

  • Two companion products were launched which deepen the cross-device functionality as well as highlight Google’s core AI strengths.
    • First: Pixel Buds ($159). These take aim at Apple’s popular AirPods (also $159) and while the design looks inferior, the functionality is excellent.
    • This includes an exciting implementation of Google Translate that works with the Pixel phone to enable usable voice translation in 40 languages.
    • It also allows easy access to the best in class Google Assistant in a similar way to AirPods.
    • The difference here being that Google Assistant is a substantially better service than Siri.
    • Second: Google Clips ($249). This looks like a regular GoPro or Yi camera but the differentiator lies in its functionality.
    • The idea with clips is to position the device during an event or gathering and leave it to gather the best photos and video clips.
    • Again, this is Google using its leadership in AI to differentiate and if this feature works well, I suspect that it will be a very good reason for users to buy this product.
    • The number one use case for GoPro and Yi cameras is family despite their sporting image and it is this use case that Google is taking aim at.
    • If it works well and gains traction, this spells more trouble for GoPro which has struggled with software and ecosystem from Day 1.

Take Home Message.

  • Google has substantially deepened its cross-device capability with the new launches as these devices should all work extremely well together.
  • I think that Google comfortably leads the industry in this capacity.
  • Furthermore, much of the functionality that Google has demonstrated should make its way onto the Android devices from other manufacturers driving which should really help penetration.
  • How well they work on the hardware of others is a concern as manufacturers tinker with Android that always seems to result in inconsistent and subpar performance of apps and services.
  • Consequently, in terms of driving deeper and richer services for its ecosystem users, this was a successful event but the real question remains what volumes will Google’s own hardware achieve?
  • These services will obviously work better on Google controlled hardware where the endemic fragmentation and lack of software updates are not an issue.
  • Execution and marketing are the two things I am looking for from Google as to date, these have been woefully lacking.

Google – Thrice bitten, never shy.

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Fourth time unlikely to be the charm.

  • Google has announced a partnership with HTC that sees some key engineering talent join Google but it remains a complete mystery to me as to what Google is paying money for.
  • This will represent the fourth major hardware related transaction that started with Motorola Mobility and continued with Nest and Dropcam.
  • These deals all had two things in common.
    • First: All of the acquired companies have felt great discomfort being owned by a company that does not really understand hardware.
    • The result was infighting and a failure to use Google’s strengths to increase market share of the products in question.
    • Second: In each case the real beneficiaries of the transactions were the owners of the assets being sold, leaving Google shareholders considerably worse off.
  • Even with highly hardware-experienced management, these assets have struggled to perform, leaving me with the impression that just being inside Google is enough to put good hardware people off their game.
  • I think that the case with HTC will be a little different as Google is not buying the whole company but instead is paying for some IP and taking on some engineering talent.
  • This is where I am left scratching my head as on my numbers, HTC’s smartphone assets currently have negative value.
  • One possibility is that Google is simply pre-paying in order to guarantee capacity and resources such that the previous ramp-up problems that occurred with Pixel do not happen again.
  • This will also provide the infrastructure and distribution to produce Pixel smartphones in high volumes, something with which last year’s product really struggled.
  • I do not think this deal is about promoting pure Android as Andy Rubin’s Essential Inc. is already pushing this button with great energy.
  • Hence, I think that this is about bringing smartphone production and distribution to scale and if Google is prepared to be as aggressive on price as Xiaomi, it might just get somewhere.
  • I think that the real risk to this transaction is once again Google’s culture which has made the other hardware acquisitions feel like unwanted orphans that have no business being part of Google.
  • Google has yet to show any sign that it has learned from the mistakes but better late than never.
  • I continue to be pretty ambivalent to Alphabet whose valuation has kept in step with the improvement of its revenues generated by mobile devices.
  • Tencent, Baidu and Microsoft look more interesting to me.

Apple – Worst kept secrets.

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Face ID was the star of a show where everything had been leaked.

  • Apple launched its next series of products that brings its hardware into line with the best of Android but it is in the software where the differentiation will continue to be found.

iPhone X.

  • iPhone X brings Apple into line with Samsung in terms of screen design and quality (OLED) but I suspect it is in Face ID where the real leap in innovation lies.
  • Face ID uses a 3D depth sensor and infrared camera to map the user’s face and then compare that against a previously captured map.
  • Face ID promises to be fast and not fooled by photographs or even 3D models of the user’s face.
  • It will also continue to recognise the user when wearing a hat or glasses or should the user grow a beard.
  • This should be a big improvement on Samsung’s facial recognition which is slow and unreliable to the point where it is often easier and quicker to put in the PIN number.
  • Apple has also redesigned the home button press and multitasking commands into swipes that should be reasonably easy to adjust to.
  • Beyond that there are incremental advances in the camera and image processing but at the end of the day, this device is all about the new screen.
  • Apple has brought itself into line with the high-end of Android in terms of hardware specification meaning that the price premium will be all about the iOS ecosystem.
  • Pricing is in line with expectations at $999 for the 64GB version and I estimate $100 more for the 256GB version.
  • With Android struggling with endemic fragmentation and Samsung remaining very poor at software Apple remains at the head of the pack.

iPhone 8/8+.

  • Many of the improvements present in the iPhone X are also present in the iPhone 8 with the exception of the screen and FaceID.
  • It continues to use fingerprint recognition on the home button and has a slightly improved screen although it is in the old configuration and is not OLED.
  • It has the same photographic enhancements as the iPhone X and represents a steady upgrade to the iPhone 7 with pricing staying the same.

Apple Watch Series 3

  • Apple has recognised that almost all the usage this product is for fitness and is doubling down on this use case in the new version.
  • New functions have been added that improve the performance of the device for certain activities as well as adding some new less common activities.
  • The heart rate monitor has been improved to offer continual heart rate monitoring as well as resting and recovery heart rates thereby deepening its appeal to fitness.
  • At the same time, Apple is taking tentative steps into medical with the launch of a study that looks at alerting users to abnormal heart patterns that can lead to strokes.
  • This is a work in progress but Apple clearly intends to move deeper into this area as it is working closely with the FDA on this study.
  • Apple has also added a modem to one variant of the Apple Watch which I continue to believe is completely pointless (see here).
  • Apple has done enough to keep this category going but the real use case that will make everyone rush out and buy one remains glaringly absent.

Wireless Charging

  • Apple’s new iPhones have glass backs which enable wireless charging for the first time.
  • Apple has backed the Qi standard which is also used by Samsung which I suspect will now ensure that Qi becomes the single global standard.
  • Apple also discussed a proprietary product that enables multiple devices to charge on a single mat but as this is not in the standard it will only work with Apple products.
  • Apple is moving into line with everyone else on wireless charging as even the multiple devices on one mat is not a new idea.

Take Home Message

  • The endless leaks and speculation meant that Apple was not able to spring a single surprise on the audience this year.
  • That being said, I think it has done just enough to keep itself at the top of the industry for another year.
  • This is more about the Android camp struggling with software fragmentation and low profitability than Apple raising the bar for the gold standard in smartphones.
  • The one area where it has raised the bar is FaceID but this feature needs to tested in the wild to see just how good it really is.
  • Apple’s share has enjoyed a great rally this year meaning that the valuation argument for owning the stock long-term has evaporated.
  • With no real surprises coming this year there is a case to be made for taking some profits and looking elsewhere.
  • Tencent, Baidu and Microsoft spring to mind.

Huawei – The AI of others

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Huawei needs its own algorithms to succeed in AI.

  • Huawei abandoned its habit of launching a new phone at IFA 2017 and instead focused on a new chipset called the Kirin 970 that promises all usual the bells and whistles as well as artificial intelligence.
  • Huawei made some bold claims regarding its hardware performance as well as power efficiency thanks to its 10nm geometry but I get the impression that it intends to drive differentiation through its embedded neural processing unit (NPU).
  • This is a part of the chipset that has been specifically designed to run AI algorithms more quickly and more efficiently than running them on the CPU or in the cloud.
  • The result should be faster processing of AI tasks resulting in better services that drain the battery less.
  • This is all well and good but what really matters is what users of Huawei devices will notice, to whom they will attribute the value created and for what they will pay.
  • The Kirin 970 NPU supports Huawei’s own APIs as well as Google’s TensorFlow and Facebook’s Caffe 2 meaning that AI created by these two ecosystems will also run optimally on the NPU.
  • The idea is that the algorithms are created in the cloud, downloaded to the device where they run locally improving both speed as well as privacy as the data will not leave the device.
  • I have long believed that this type of AI will be limited to functions where the algorithms are very well established.
  • In the early days this is likely to be image processing such as facial recognition or computer vision.
  • This is where I think Huawei will begin to struggle as I believe that it has very little AI of its own meaning that the Kirin 970 will spend almost all of its time processing the AI of others.
  • The AI of others will be running on the devices of all of Huawei’s competitors meaning that Huawei will be competing purely in hardware performance.
  • When other chipmakers come to market with their own NPUs, it will then be a straight fight based on hardware performance.
  • When it comes to AI, users are going to place value of the depth, richness and intuitiveness of the services themselves meaning that to improve its differentiation, this is where Huawei needs to compete.
  • Of this there is no sign meaning that while the Kirin 970 may help Huawei increase market share, it will do nothing to enable it to increase the prices of its phones.
  • The net result is that until Huawei can outsell Samsung by a factor of 2 to 1 in terms of volume, it will really struggle to increase its margins beyond the 2-4% that everyone else (except Samsung) is stuck with.
  • Google is the only company that really makes money from Android but I continue to be cautious as its valuation is already pretty full.
  • Tencent, Baidu and Microsoft remain my top choices.

 

Xiaomi and Google – Race to the bottom.

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Android One will only ever benefit Google. 

  • Xiaomi and Google are resurrecting the Android One program but given what Xiaomi has launched, the original aim of Android One has clearly been completely abandoned.
  • The idea behind Android One was to provide a reference implementation of Android optimised for Google’s services that would be used by multiple manufacturers.
  • With multiple manufacturers on board and joint sourcing of components, the cost to make these devices would have been substantially reduced.
  • This is how Google capable devices could have been economically put in the hands of users at much lower prices which in turn would drive usage for Google, highlighting the whole point of the exercise.
  • However, handset makers need differentiation and so they all wanted to tweak the specification meaning that development costs would rise and that any volume discounts on components would be lost.
  • The results were devices that were no cheaper to produce than anything else rendering the program useless.
  • Xiaomi has resurrected the Android One brand but is completely ignoring the point of the program with the launch of the Xiaomi Mi A1: a dual 12mp camera with 5.5” 1080p screen selling for an incredibly reasonable INR14,999 or US$234.
  • The device abandons the MIUI user experience and ecosystem being pushed in China and goes soup to nuts Google.
  • This is almost as much a Google device as the Pixel is.
  • This is where the Xiaomi’s strategy comes unstuck as I have ong believed that the Android One program benefits Google and no one else.
  • While the Mi A1 is a nice-looking device, it is still competing on the basis of hardware only meaning that all Xiaomi is doing is further accelerating the race to the bottom.
  • Xiaomi’s strategy has been to sell hardware at cost and then generate profit through its ecosystem of software, services and connected devices.
  • By going fully Google, this strategy goes completely out of the window as Xiaomi has no way to make money from its ecosystem.
  • Consequently, unless it can outsell its closest rival by more than 2 to 1 (this would require beating Samsung) all it can really hope for is commodity margins at best.
  • This might help Xiaomi to grow market share and revenue in India but I think that it will do nothing for its profitability.
  • Xiaomi has staged a good volume comeback in 2017 but it is very far from a position where it can make good profits or offer a return to the long-suffering investors who put money in at $45bn.
  • I continue to believe that the only winner in Android (outside of Qualcomm, MediaTek and ARM) is Google but I think that this benefit remains fully priced into the shares and prefer to look elsewhere.