Samsung Bixby– Lightweight

Reply to this post

 

 

 

 

 

Bixby is hopelessly outclassed.

  • Bixby voice only shines in the areas where Samsung has given it special access to hardware that competitors do not have.
  • Outside of this area, Bixby is a third-rate experience that is unlikely to generate much traction especially as the vastly superior Google Assistant is just a button press away.
  • The voice piece of the Bixby digital assistant has finally launched but despite months of feverish activity in trying to teach Bixby to speak English, it is still not very good at it.
  • Bixby has been granted exclusive hardware access such that it can work when the screen is off or the device is locked.
  • This is something that Google Assistant cannot do but it also comes with the reality that Bixby is always listening.
  • I think that this will make some users very uncomfortable as a microphone in one’s pocket is far more intrusive than a microphone listening in the kitchen.
  • Voice recognition works best when there is an element of training involved as users often say things in very different ways.
  • Unfortunately, it appears that for some users, Bixby is unable to recognise the training sentences implying that this part of the system still needs work.
  • In effect Samsung has programmed Bixby with a series of standard functions that can be used to operate the smartphone as well as basic functions in the apps.
  • Outside of that area, the user is pretty much out of luck.
  • Unfortunately, these only really work for Samsung apps which outside of the messaging app for SMS, I think no one really uses.
  • Furthermore, for navigation and search, Bixby uses Google but without some of the bells and whistles that make Google so good.
  • For these functions, it makes no sense to use Bixby when one can go straight to Google.
  • Bixby does support third party apps through the “Bixby Labs” program but unfortunately it doesn’t seem to work properly.
  • Bixby can open things like Google Maps, YouTube and so on but does not seem to be able to get past the main screen of those apps.
  • The problem with Bixby is simply that its creator, Samsung, has no artificial intelligence expertise to speak of and digital assistants are only about AI.
  • Google Assistant is the best not because Google knows how to make an assistant but because the AI that runs it is the best in the world.
  • This contrast is so stark, that Samsung has had to resort to hobbling Google Assistant in certain areas (hot word) just to give Bixby a chance.
  • I think that this will encourage users to try Bixby once or twice but when they realise how poor it is, they will go back to Google Assistant.
  • Google will not be losing any sleep over Bixby even though it could end up on a very high percentage of Google ecosystem devices.
  • Samsung is now the No. 1 semiconductor manufacturer in the world, but I still rank it almost dead last when it comes to AI.
  • I think its investments in this space would be better accruing to shareholders in the form of higher profits rather than being invested in functions that are likely to damage Samsung’s reputation rather than improve it.
  • Samsung’s recent rally has removed the valuation argument for Samsung which leaves me preferring Tencent, Baidu and Microsoft.

Apple FQ3 17A – No pause here.

Reply to this post

 

 

 

 

 

Solid base for new product launches.

  • Apple reported good results and guided strongly for the coming quarter stoking speculation with regards to the possible strength of the coming upgrade cycle with the new iPhones expected to be launched next month.
  • FQ3 17A revenues / adj-EPS were $45.4bn / $1.67 slightly ahead of consensus of $45.0bn / $1.57.
  • While iPhone held steady it was Services that really underpinned the results with YoY growth of 22% to $7.3bn.
    • iPhone shipments were 41m which included a 3.3m inventory reduction ahead of the new launches.
    • iPad shipments were 11.4m up 15% YoY driven mostly by the product refresh that saw a new iPad and the smaller version of the iPad Pro launch in March 2017.
    • Mac shipments were 4.3m units driven mostly by the new MacBook Pro.
  • Services was the star of the show where the Apple App Store is the main driver generating almost double the revenue of its nearest rival Google Play.
  • This was despite the fact that Android devices appear to have closed some of the monetisation gap on iPhone especially at the high end (see here).
  • Guidance was surprisingly strong with revenues / EBIT expected at $49bn – $52bn ($50.5bn) / $11.7bn – $13.0bn ($12.4bn) broadly in line with consensus at $50.4bn / $12.4bn.
  • The result was a relief rally as fears of a pause in performance ahead of the new product launches now looks unlikely to occur.
  • Consequently, all eyes are now on product launches where a major product refresh is hoped to trigger another replacement cycle.
  • Bezel-less devices are now all the rage and if Apple can replace fingerprint ID with an excellent facial recognition system, the iPhone 8 could end up triggering a good cycle of upgrades.
  • Samsung has a wealth of biometric ID systems but none of them work particularly well as the fingerprint sensor is on the back of the device and the facial recognition is not nearly as reliable as it should be.
  • I don’t think that Apple will see a cycle as strong as the iPhone 6 but there is potential for the iPhone 8 to meaningfully outperform the 6s and the 7.
  • That being said, I continue to think that much of this good news is already in the stock and the valuation argument for long term investors has long since evaporated.
  • I remain pretty indifferent to the shares.

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.

Qualcomm FQ3 17 – Strong stomach

Reply to this post

 

 

 

 

 

Qualcomm has the stomach for a fight.

  • Despite the seemingly challenging situation the company is currently experiencing, I think the company has a better chance of beating Apple than it did of beating Nokia back in 2006.
  • FQ3 17A revenues / Adj-EPS were $5.3bn / $0.83 compared to consensus at $5.3bn / $0.85.
  • This was in line with consensus which has now been adjusted to account for the fact that royalties from the iPhone are no longer forthcoming.
  • Technology licencing revenues (QTL) fell by 42% YoY and 48% QoQ while QTL EBIT fell by 51% YoY and 56% QoQ highlighting just how significant the revenue generated by the iOS ecosystem is to Qualcomm.
  • Guidance for fiscal FQ4 2017 will be similarly impacted with revenues / Adj-EPS of $5.4bn – $6.2bn / $0.75 – $0.85 compared to consensus $5.6bn / $0.95.
  • While, Qualcomm has been transparent for many years about how QTL generates a disproportionately high share of profits, the market appears to have got its spreadsheets in a muddle and misread the impact of the lower revenues on QTL EBT margins.
  • These are expected to be around 66% which is the main reason why the EPS guidance is below consensus.
  • Included in this are the legal expenses that are being incurred to defend its business model, which I think in the long-run will be money well spent.
  • Most of the arguments that Apple is making to explain why it has an issue with Qualcomm’s business model have been made off and on for the last 15 years so the case it is bringing is nothing new.
  • These arguments were made most vocally by Nokia in 2006 and while the companies did come an eventual settlement, this time around the situation is quite different.
  • I think that these differences strengthen Qualcomm’s hand as:
    • First Contract validity: The dispute that arose between Nokia and Qualcomm in 2006 occurred because Nokia’s contract had come to an end and the companies were unable to reach agreement on terms for the renewal.
    • Nokia stopped paying Qualcomm as it had no idea how much to pay and instead accrued an estimate of the cost in its balance sheet.
    • The contracts upon which Apple has ceased payment have not expired and I can’t see any contractual grounds upon which to cease making payments.
    • As a result, I do not think that it will not be difficult to show to a court that Apple is acting in bad faith and to win an enforcement order.
    • Second: Third party suppliers. Apple does not pay Qualcomm directly as the payment is made by its manufacturing partners who make its products.
    • This means that Apple is getting involved in contracts that are in place between entities that have nothing to do with Apple other than it being the end buyer.
    • I do not think it will be difficult to argue that Apple has no real grounds to be involved in these contracts and is acting in bad faith.
    • Third: Non-standard essential patents. As Apple is no longer paying Qualcomm for its IP, it is not unreasonable for Qualcomm to sue Apple and its contract manufacturers for patent infringement.
    • Standard Essential Patents (SEPs) are those patents that have to be used to get a standard (like LTE) to work properly. One cannot design around them.
    • It is easy to prove infringement of a SEP (assuming that its valid) but patent holders are not allowed to be nasty when it comes to licensing terms.
    • When one contributes standard essential IPR, one agrees to license the technology to anyone who wants it.
    • This has to be done at a fair price and one agrees not to seek injunctions.
    • Historically, Qualcomm has tended to assert SEPs but this time it is asserting implementation patents against Apple and its manufacturers.
    • Implementation IPR is another kettle of fish entirely.
    • It is much more difficult to prove infringement as this IPR can be designed around, but when infringement is proved, the holder can pretty much do what it likes.
    • There is no limit to the royalties that can be charged, injunctions can be sought and the holder can force the infringer to redesign his product to get around the innovation.
    • If there is one thing that Qualcomm knows it is patents and I am certain that it has asserted implementation IPR that Apple is most likely to have infringed as well as patents that are fiendishly difficult to design around.
    • However, I am pretty sure that the engineers at Apple are now beavering away to work out how to do just that.
  • The net result is that I think of all the battles that Qualcomm has fought in the past (and there have been many), it has the best chance of winning this one.
  • However, to slug it out is going to take a long time it could easily be 2020 before this issue is fully resolved.
  • I think that this creates an excellent long-term investment opportunity in the stock but timing of entry is difficult to gauge and it is going to be a bumpy ride.

Xiaomi – Back in black

Reply to this post

 

 

 

 

 

Xiaomi is back but ecosystem nowhere to be found.

  • A monster quarter has brought Xiaomi back into contention as a major player in the smartphone industry but this recovery needs to be more than just a product cycle for it to stay there.
  • In a letter to employees, CEO Lei Jun has announced that Xiaomi has shipped 23.16m smartphones in Q2, up 70% QoQ.
  • Most importantly, this represents a significant gain in market share from 3.6% in Q1 2017 to as much as 6% in Q2 2017.
  • This looks to have been achieved through a combination of factors:
    • First: new products. The new flagship Mi 6 launched at the beginning of the quarter which was well received and looks to have been the backbone of the recovery.
    • Second: retail channel. I have long been of the opinion that Xiaomi ground to halt because it had fully exhausted the capacity of selling devices over the internet.
    • In order to address a wider slice of the market, Xiaomi has invested heavily in retail with 123 MI stores opened across China and the first results from this push are now being seen in the numbers.
    • Third: India and overseas: Investments in India are beginning to pay off with the Redmi Note 4 becoming the biggest volume smartphone in Q2 17, elevating Xiaomi to No. 2 in India.
    • By far the largest part of Xiaomi’s overseas fan base is to be found in India and this should help the fan base to grow further.
    • However, India can be one of the most fickle markets as it is so price driven and as many Indian brands have found, success can be all too brief.
  • This quarter will mean that its revenue target of RMB100bn in 2017 should be reasonably easy to achieve but the company also set itself the target to ship 100m smartphones in 2018.
  • This is achievable as long as the company can hold onto the share that it has so suddenly won back.
  • For me, this is the big question as if most the volume is coming as a result of its nice new products or very generous pricing (India), then this is unlikely to be sustainable.
  • This will result in a few very strong quarters as its fan base upgrades and then a drift back to baseline.
  • I think Xiaomi has a chance to avoid this with its growth outside of China and its push into retail but it will cost it dearly in profitability.
  • This is because amongst all of this success there is no mention of its ecosystem anywhere.
  • This leads me to believe that Xiaomi is still selling its products pretty much on the basis of good quality hardware at very attractive prices.
  • Only by luring users in and having them identify with Xiaomi software and services can Xiaomi ever really hope to make than a commodity margin in smartphones.
  • Hence, I still think that Xiaomi, like all of its Android brethren (except Samsung) is making 2-4% EBIT margins in the best instance.
  • This means that even hanging onto this level of market share in the long term would see EBIT generation of around $1.5bn per year.
  • This is not nearly enough to justify anything like the $45bn at which it last raised money, but it is enough for Xiaomi to remain independent.
  • The risk of being acquired by Tencent or Alibaba will decrease, should this new level of market share prove to be sustainable.

Samsung Q2 17A – Just chipper.

Reply to this post

 

 

 

 

 

Samsung heading for No. 1.

  • A truly mighty performance from Samsung puts it well on track to promoted to being the largest semiconductor company in the world by revenues this year.
  • Samsung has reported preliminary results for Q2 17 with revenues / EBIT expected at KRW 60tn / KRW 14tn nicely ahead of consensus of KRW 58.4tn / KRW 13.0tn respectively.
  • As always with Samsung, the market has already taken into account the discrepancy between published expectations and the real figures, resulting in no meaning movement in the shares after the announcement.
  • Despite the recovery of the handset business following the Note 7 disaster, these results are primarily driven by semiconductors where Samsung is extending its dominance while its competitors flounder.
  • The difficulties that Toshiba is going through and the uncertainty surrounding the future of its flash memory business has certainly done Samsung no harm so far this year.
  • This combined with a rapid move away from magnetic hard drives to solid state storage has meant that demand has been so strong that both volumes are growing very quickly and price declines have slowed.
  • I suspect that around 50% (if not more) of EBIT has been derived from the semiconductor business while the handset business has remained solid but much more pedestrian.
  • The outlook remains very strong as the smartphone market is seeing a temporary blip in growth while the trend towards solid state storage looks set to continue for some time to come.
  • Consequently, it looks pretty certain that the next two quarters are likely to see Samsung post two more record levels of profit and cash generation.
  • However, this has been widely flagged already and with the shares at KRW2.4m, the valuation argument for holding a big position it not nearly as great as it was.
  • Consequently, I remain pretty ambivalent to Samsung, preferring Tencent, Baidu and Microsoft.

 

Smartphone hardware – Sticky fingers.

Reply to this post

 

 

 

 

 

Fingerprint sensors define the market this year.

  • The problem with covering the whole of the front of a smartphone with glass is that it creates a problem for fingerprint ID on the home button.
  • Samsung got around this by inconveniently locating fingerprint ID on the back of the device ensuring that it gets used much less than it otherwise would.
  • Another option is to put the fingerprint ID sensor on the power button which can be used to turn the screen on.
  • I think that this is currently the lead contender for the iPhone 8 as I have seen no indication that Apple has cracked the problem of putting the sensor under thick protective glass and still have it working reliably.
  • Qualcomm has just announced a solution that uses ultrasound that is capable of reading a fingerprint beneath an OLED display with a thickness up to 1.2mm as well as up to 0.8mm of glass.
  • Assuming the sensor is reliable, this specification should be more than enough to offer fingerprint recognition on any smartphone regardless of whether it uses the Snapdragon chipset.
  • Qualcomm is demonstrating the technology on a retrofitted Vivo smartphone and I suspect that Vivo will be the first to deploy it in a commercial device.
  • Apple and Samsung are working on their own solutions but I do not believe that they have solved the problems created by placing the sensor under the glass.
  • Fingerprint sensors have become part of everyday life on smartphones and with Samsung, Xiaomi and Essential Products setting the standard when it comes to screens, Apple has little choice but to follow.
  • Hence, with the upper and lower bezels of the device being no longer available, by far the best solution remains to place it under the screen on the virtual home button.
  • I think that anything else, including the power button, diminishes its usability and therefor its overall appeal.
  • Fortunately for Apple, the draw of its ecosystem is still very strong meaning that even if the sensor is on the power button or even the back, it is unlikely to meaningfully impact demand for the device.
  • This is because despite improvements, the user experience on Android remains meaningfully adrift of that on iOS which is so far keeping users very loyal to iOS.
  • Hence, I don’t see Apple rolling out this technology until it is rock solid in terms of reliability.
  • I think that the availability of under screen fingerprint sensors will have a significant impact on the handset market in Q4 17 as they enable an optimal user experience.
  • Anyone who can bring this to market by Q4 17 is likely to enjoy a temporary gain in market share, most likely over Samsung, but even the Qualcomm solution will not really be available until next year.
  • Consequently, I see Q4 17 continuing to be dominated by Samsung and Apple once again.
  • Samsung’s shares continue to be very strong, but I think that the valuation opportunity has now passed.
  • Consequently, I still prefer Tencent, Baidu and Microsoft.

Alphabet vs. EU – Timeslip

Reply to this post

 

 

 

 

 

Google has time on its side in Android.

  • I think that it is the remedies that the EU imposes that have the potential to do the real damage as long as they are quickly put in place.
  • I view the fine as almost an irrelevance.
  • Alphabet has been handed a $2.7bn fine by the EU as punishment for what the EU considers to be anti-competitive practices in using search results to promote its own shopping services over those of competitors.
  • This fine amounts to just 23 days of net cash flow from operations for Alphabet, causing only a small ripple in what is otherwise a powerhouse of cash generation.
  • Google has 90 days to change its algorithm to bring search results into line with what the EU considers to be fair or suffer a further fine equivalent to 5% of daily global revenues ($14m) for every day that the algorithm continues to breach the EU ruling.
  • Google clearly intends to appeal the ruling but I am doubtful whether it has a realistic chance of changing the outcome.
  • This is but one of three current complaints being made against Google with the Android and AdSense complaints yet to be addressed.
  • Of the other two, I think that the Android complaint has the scope to do the most damage.
  • Again, this is not because of a fine that could be even bigger than this one, but because of the possibility that the EU forces Google to unbundle Google Play from the rest of its Digital Life services.
  • This “bundling” is laid out in the Mobile Application Distribution Agreement (MADA) that each handset maker has to sign in order to get access to Google Play.
  • This agreement requires handset makers to install certain Google services on the device at the factory, set them as the default service as well as to put a search bar on the home screen.
  • It is well known that it is almost impossible to sell an Android device in developed markets that does not have Google Play on it meaning that every Android device in developed markets is effectively a Google ecosystem device.
  • Google’s position is that it is “entirely voluntary” for handset makers to sign the MADA which I believe is a very misleading statement.
  • This is because if handset makers do not sign the MADA, they are unlikely to be able to sell their devices in good volumes in developed markets.
  • This is why I believe that while the MADA is entirely voluntary technically, it is effectively mandatory because there will be no meaningful handset sales without it.
  • I don’t think for one moment that the EU will be fooled by the “entirely voluntary” defence which is why Google needs to come up with a far more robust defence for its conduct in Android.
  • If Google was forced to unbundle Google Play from its other Digital Life services, handset makers and operators would be free to set whatever they like by default potentially triggering a decline in the usage of Google’s services.
  • However, one thing that Google has in its favour is time, as these proceedings can take years to be resolved.
  • The longer it takes, the more time that Google will have to become entrenched with users before it is forced to unbundle Google Play from its other services.
  • By that time, if Android users are already hooked on Google’s services, the need to have the MADA will be diminished as users will simply download the services to which they have become accustomed from the app store.
  • Hence, the longer the process takes, the less teeth the remedy will have.
  • The caveat to this is the power of default and the example set by Apple Maps and Internet Explorer.
  • Apple Maps is an inferior service compared to both Google Maps and HERE but it has managed to gain traction in iOS by being set as default with no option for the user to change it.
  • Internet Explorer’s market share has been gradually eroded over a period of many years since Microsoft was forced to unbundle it from Windows.
  • Consequently, I think that there is still a possibility that Google loses its entrenched position with users if the EU forces it to relax the MADA requirement, but it could take a long time.
  • Alphabet’s share price has barely reacted to this news and at $955, I still find it to be unattractive preferring instead, Tencent, Microsoft and Baidu.

Essential Products – Domestic bliss.

Reply to this post

 

 

 

 

 

Home is where the heart is

  • While I am not a fan of Essential Products’ phone (see here), I think that the strategy around the smart home is bang on I think it has created the right product.
  • I don’t like the phone simply because it does not do anything particularly special in a brutal commodity market and given the company’s overall strategy, I see no real need why it can’t make use of the phones of others.
  • However, the Home product is something else, and although it may not succeed, I think that it has a good chance.
  • This is because, I think Home has been designed to explicitly address the two biggest problems with home automation that exist today.
  • These are:
    • Firstly, voice control: RFM research (see here) has found that voice communication with machines is very far from being good enough to work effectively without a screen for output.
    • The issue is that even the best machines are not yet intelligent enough to provide a useful experience using voice only and often have to fall back to a screen.
    • In Google Assistant’s and Alexa’s case this means using the screen of the phone which is not an optimal experience especially as most voice usage is when the hands are busy doing something else.
    • Essential Home has already taken this into consideration and the small device has an attractive looking screen on the top.
    • This looks much better than hideous Amazon Show which seems to have been designed to be a jack of all trades.
    • I think that Essential has hit the nail on the head and its product should optimally fix the single biggest current problem with human machine voice interaction.
    • Second, fragmentation: Despite Amazon Alexa being able to talk to almost everything, the experience remains horribly fragmented.
    • The real use case for the smart home is where all elements of the home are aware of each other and can be controlled together.
    • For example, the use should be able to say “I am going to bed” resulting in the doors locking, blinds drawn, heating turned down and so on.
    • Instead each separate device has to be manually operated and adjusted.
    • The experience on Alexa is so bad that it is quicker and more convenient to make these adjustments by hand.
    • Apple HomeKit also addresses this problem effectively but I see little traction among the smaller, more innovative smart home device creators.
    • Furthermore by being limited to Apple products only, 85%+ of the market is not being addressed.
    • This is the problem that Essential has recognised and is trying to address this by making its Home APIs and Ambient OS as open as possible.
  • I like the potential of this product as it is both differentiated from its competition and has been designed to explicitly solve the biggest problems with home automation.
  • There has been no word as to what assistant will be resident in the device, but if Essential is smart, it will ensure that the user can use any assistant he chooses.
  • The problem is going to be getting the device into the hands of users in volume.
  • This will be critical because volume deployments will be needed to get developers to make their products work on Ambient OS.
  • This is the old chicken and egg problem which is very difficult to crack but once it is solved creates real momentum for a platform.
  • This is the problem that Amazon cracked earlier this year and now every developer of any smart product will make it work with Alexa.
  • This will be the key to getting the Home product to succeed but it is going to be an uphill battle even for a start-up as well financed as Essential Products Inc.

Amazon – A song of ice and fire.

Reply to this post

 

 

 

 

 

Project ice has nothing to do with phones.

  • After racking up nearly $1bn in losses from its last foray into handsets, one would think that Amazon would have had enough but it appears that it is at it again but for a totally different reason: India.
  • Project ice appears to be the development of another Android device but this time at the other end of the price spectrum.
  • One of the devices in the pipeline features a 5” to 5.5” screen with 2GB RAM, 16GB of storage, Snapdragon 435 and a cracking price to match at around $93.
  • The device is fully Google compliant with its ecosystem installed and set by default but I am pretty sure that at least Amazon’s core e-commerce apps will also be installed.
  • Amazon’s last set of results (see here) showed a big dent in profitability in its overseas operations that I think can be largely put down to its determination not to lose India as it lost China.
  • Alibaba wiped the floor with Amazon (and Walmart) in China and with developed markets maturing, Amazon’s long-term growth is at least partially dependent on history not repeating itself in India.
  • In the Indian market, Amazon is the underdog with around 23% market share compared to Flipkart on 35% and Snapdeal on 15%.
  • However, it is by far the best financed and if it comes to last-man-standing battle, it is likely to win.
  • However, Softbank, the backer of Flipkart is keen for it to merge with Snapdeal which if perfectly executed, would give the combined entity 50% share (see here).
  • According to RFM’s rule that to become the go to place to transact, a marketplace must have at least 60% market share or be at least double the size of its nearest rival (see here).
  • The combination could be enough to see off Amazon but never to back down from a fight, Amazon has a trick up its sleeve.
  • I have long believed that the internet in India has very little to do with fixed (like developed markets) and everything to do with mobile (like China).
  • Consequently, the ice device portfolio could serve as a way to encourage users to do their online shopping with Amazon rather than Flipkart & co.
  • Google has no e-commerce offering to speak of and so Amazon can produce Google ecosystem devices (which Indian users demand) and at the same time install its shopping apps, optimise them and set them by default.
  • Studies have shown time and again that having apps preinstalled leads to them working better and being used more, even if they are not as good as other apps that need to be downloaded (e.g. Apple Maps).
  • Hence, I can see Amazon selling ice devices at 0% gross margins in order to win over more affluent Indian users to its shopping proposition at the expense of Flipkart & co.
  • This is exactly the strategy that it uses with Fire tablets and Kindle with the money being made on the content sold over the device.
  • This example looks no different except that the strategy here is to gain share in e-commerce before Flipkart can reach an unassailable position through consolidation.
  • This is why Flipkart has to act promptly to consolidate Snapdeal as the longer it delays, the more share Amazon is likely to gain and the harder it will be to become twice Amazon’s size.
  • Amazon’s strategy to control the primary device, from which Indians will do their online shopping, only increases the urgency for it to act and act fast.
  • Winter is coming.