MWC Day 1 – The time machine

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The taxonomy of MWC is changing

  • Nokia has through nostalgia has created some excitement in the mobile phone industry but elsewhere the signs of maturity are everywhere.
  • The notable fall out coming from Microsoft, Blackberry, Huawei amoung others who have substantially reduced the sizes of their stands has been replaced with:
    • First: Automakers who outside of BMW still seem to be a little unsure of what they are doing at this show.
    • They have realised that mobile holds the key to preventing them from becoming Android handsets on wheels but are very uncertain how they intend to address this problem.
    • I think that Tesla has a very good idea of what it is doing in this space and consequently does not feel that it needs to be here.
    • Second: An endless list of handset brands who are all selling almost exactly the same device where the proposition is very unclear.
    • Two exceptions are Wiko and LeEco who are at least trying to offer points of differentiation on the device even if they are having a very hard time doing so.
    • Condor from Algeria and Accent from Morocco are doing stock Android but are attempting to achieve some differentiation by focusing on their respective regions.
  • Furthermore, the app industry, largely present in Hall 8,8.1 and the hallways, has moved into a new phase of development.
  • Gone are the heady days of 2015 when it was all a out adding users at any cost.
  • Now the focus is clearly on engagement, analytics and monetization.
  • Developed markets are pretty much saturated from a user perspective meaning that how to delight those users and making sure that they stay engaged is of paramount importance.
  • Consequently, the suit count in Hall 8.1 has gone up substantially as has the size of the average stand.
  • This implies that many of the smaller, ineffective players have been weeded out leaving the bigger players who have much larger marketing budgets.
  • Consequently MWC has revealed an industry that looks very mature (just like it did in 2005) but this time I can’t see anything on the horizon to upset the status quo.
  • I continue to prefer the ecosystems over the handset and PC makers in general as they, at least, have a way to differentiate

MWC Day 0 – Prominent feature.

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A feature phone steals the show.

Huawei – Rear view mirror.

  • Huawei launched its latest flagship the P10 and P10 plus but did not seem to be very excited about its products in a press conference that felt like it was simply going through the motions.
  • This was exemplified by the fact that Huawei had Pantone on stage talking for 15 minutes about two of the multiple colour variants in which the P10 is being launched.
  • Elsewhere, Huawei made incremental improvements to the camera and photography experience as well as marginal tweaks to the user experience.
  • At its heart, just like every other Android phones in developed markets, the P10 is a Google device and where Huawei is able to drive further usage, it will be Google that really benefits.
  • This is because, Huawei’s products remain largely undifferentiated to the user meaning that Huawei cannot charge a premium.
  • Huawei has made good progress with its brand this year rising to No. 72 (Interbrand) but even Samsung at No. 7 only really makes money from its volume, not premium prices.
  • Consequently, Huawei must find something with which to excite users otherwise it will continue to grind out 2-4% operating margins in the best instance.
  • Huawei has made good share gains but barely enough to be seen only as a dot in Samsung’s review mirror.

Nokia – No downside to old glory.

  • Nokia relaunched itself into the handset market with a throwback to its old glory days but the key ingredient, profit, looks unlikely to make a reappearance.
  • Global HMD, a company backed by Foxconn, launched three Android devices and new version of the classic 3310.
  • The 3310 has three features of note:
    • First: the battery lasts a month
    • Second: it has the Snake game
    • Third: it has the old Nokia ringtone.
  • Beyond that it is a design classic and while not sexy, it is likely to appeal in Africa and India where nearly 100m feature phones still sell each quarter.
  • Global HMD also launched the Nokia 3,5 and 7, which are three unremarkable Android devices that are really going to struggle to compete against the Chinese brands.
  • The real clue to the situation at Nokia and HMD Global is in the prices being charged for these new devices.
  • The 3310 is starting at $51 which in Nokia’s heyday would have been priced at almost half that and Nokia still would have made great margins on it.
  • The Android devices are priced at $150, $200 and $315 which in my opinion do not stack up that well against what the Chinese are offering.
  • This is clearly because Nokia no longer has the power of 40% global market share or its brand.
  • Consequently, if it wants to make headway in Android, it will have to do something interesting with the devices or cut its prices.
  • Good news for Nokia (the company) is that its exposure to this is simply the brand licence fee that it receives upon which gross margins will be almost 100%.
  • Consequently, there is no downside for Nokia if this does not work out as planned.

Samsung – Comes in the box.

  • Samsung launched a series of devices that I think need to have the accessories included in the box to drive user interest high enough to make a purchase.
  • Following a pitch on the needs of 5G and the launch of some infrastructure, came 2 tablets of which innovation around the new S Pen was the most interesting.
    • First: the Samsung Galaxy Tab S3 which was an unremarkable Android Tablet other than it has four speakers and that the S Pen comes in the box.
    • Second: the Galaxy Book which is a Windows 10 Pro tablet that is very thin but in my opinion is far from cutting edge.
    • At the cutting edge, I find the Eve V which is 7th generation i7 and is remarkable in that the device is fan-less.
    • The Eve V is a little thicker at 8.9mm but it delivers a more powerful processor, double the RAM, double the storage, more USB ports and a kickstand.
    • To jazz the Galaxy Book up Samsung is including both the S Pen and the type cover in the box with the device.
  • The S Pen stole the show in my opinion as it works with both Android and Windows Tablets, is integrated with Photoshop and Staedtler is doing a version of the S Pen that looks just like its classic yellow and black pencil.
  • Finally, a new version of the Gear VR was launched in conjunction with a hand controller that, of course, also comes in the box.
  • Of software, services, artificial intelligence and ecosystem there was no real mention other than a nod to Samsung’s cross device strategy powered by Samsung Flow.
  • The net result is that with the launch of the Galaxy s8 now on March 29th, these launches are unlikely to have any real financial impact this year even with the accessories already in the box.

Take Home Message

  • The launch of the new Nokia 3310 was the highlight of my day which is an indicator of how difficult it has become to innovate in smartphones.
  • Industry profits are gobbled up by Apple, Google, Baidu, Tencent and Alibaba leaving those without an ecosystem struggling for relevance.
  • Add this to a market that is unlikely to grow much in unit terms and may decline in monetary terms leads to a pretty grim outlook all round.
  • This is why I continue to prefer the ecosystems of whom Tencent, Baidu and Microsoft are my top choices.

Samsung – Residual fall-out.

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It is still the long-term damage that I fear. 

  • While Samsung appears to have contained the disaster that was the Note 7, I remain concerned that the reputational damage could have an impact in market share in developed markets and especially at the high-end.
  • Samsung has taken a massive $5.4bn hit to profits, apologized profusely for the recall and admitted shortcomings in its quality and assurance process but I don’t think that the full effects of this issue have fully hit home.
  • This is because there is also the potential for market share and pricing pressure to materialise from the weakening of its brand and its reputation as a vendor of high quality consumer electronics.
  • The first sign of this is in with a survey from Harris Poll which shows that Samsung reputation has fallen from No 7 in USA to No. 42, just one position above the US Postal Service.
  • Apple and Google have remained pretty steady at no. 5 and 8 respectively but Samsung is now thought to be less reputable than Hewlett-Packard, GE and Sony, which are competitors that do date, Samsung has had no trouble in defeating.
  • What concerns me is that when the Galaxy s8 and s8 edge are available, users in developed markets are likely to think a little bit harder before purchasing and may go so far as to consider something from LG, Google, Sony or Huawei.
  • Hence, I think that Samsung will have to price the Galaxy s8 and s8 edge quite carefully as well as go on a major charm offensive to calm user fears that these products will suddenly burst into flames.
  • I am certain that these products will be the safest that Samsung has ever made but that is not how the mindset of the average smartphone buyer operates.
  • Both of these charm offensives will cost money in terms of pricing and marketing spend.
  • The high-end devices that Samsung makes generate the majority of its handset profits and I am somewhat concerned that profits could suffer as the aftershocks of this disaster make themselves felt.
  • This is why I have been cautious on Samsung since the problem with the Note 7 surfaced, and why I would be thinking of taking some profits following the recent excellent performance in the share price.

Huawei & Baidu – Bodies and time.

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I think Huawei would be better off doing a deal with Baidu.  

  • It looks like Huawei has decided to build its own Chinese language digital assistant to cement its recent gains at home but no matter how many bodies it throws at this task, its lack of the core raw materials (data and history) is going to cause problems.
  • The digital assistant is the first real Digital Life service that is entirely dependent on artificial intelligence for its functionality which creates a huge challenge.
  • Furthermore, in order to evolve, all digital assistants need to generate usage data which can then be used to improve the algorithms that power the user experience.
  • Even the best assistants out there today are hugely limited in terms of what they can understand and what they can achieve.
  • For example, to accurately answer questions around exchange rates, the assistant has to be taught what these are, how they work and in what form the questions are likely to be asked.
  • For example, asking Amazon Alexa how many US Dollars there are to the GB Pound provides the correct answer but ask for UAE Dirhams to the Pound or Dollar and Alexa falls silent.
  • Only Google Assistant was able to provide the right answer due to the combination of the best search system and the best AI available.
  • In effect RFM research has found that Alexa, Cortana and Siri have been programmed with a fairly narrow set of capabilities and the AI and data set is simply not there to support the service when something unexpected is requested.
  • Fortunately for Huawei, Google is not present in China but at home it will be facing an opponent that is almost as good: Baidu.
  • Baidu dominates the search market in China and has been working on its AI algorithms for nearly 20 years.
  • Furthermore, Baidu has already launched its own digital assistant called Duer which I suspect will be significantly better than anything that Huawei is likely to produce in the medium term.
  • However in China, none of the ecosystems are preinstalled devices meaning that Baidu will be unable to install Duer on the device and set it as default.
  • RFM research (see here) has found that this could confer a substantial advantage to any ecosystem as strategy is virtually absent in the Chinese market outside of the app stores.
  • Huawei as a handset maker will have this advantage and so I can see a scenario where users try its digital assistant but unless it is superb they will quickly switch to Duer.
  • This is where I think Huawei will have difficulties as even though it has 100 engineers working on this product, it is starting from scratch and building decent AI takes years and requires vast quantities of data.
  • Hence, I think it unlikely that Huawei will ever come up with a product as good as Baidu’s.
  • This is where I think Huawei and Baidu could help each other as Baidu has the product and Huawei a mechanism for distributing it.
  • A deal where Huawei installs Duer at the factory and sets it by default in return for being paid TAC (traffic acquisition cost) makes more sense to me than paying 100 engineers to come up with an inferior product.
  • This will not help Huawei’s ambitions to develop an ecosystem and generate better profitability, but TAC revenue from Baidu would certainly help improve margins.
  • Given its recent market share gains at home, the time to negotiate this deal is now rather than when its own assistant has tried and failed.
  • Although Baidu looks like it may be backing out of its ecosystem, the short-term improvement in its financials that cost cuts could generate could give the shares a lift (see here).
  • This is why it is still on my preferred list along with Tencent and Microsoft.

Xiaomi & Huawei – Different strokes

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Xiaomi and Huawei go in different directions.

  • While commentators are absorbed with Apple’s (almost certainly temporary) No. 1 position in the smartphone market and Oppo’s ascendency in China, no-one seems to have noticed a good recovery at Huawei and that things are looking increasingly dicey at Xiaomi.
  • IDC has released its figures for the smartphone market in Q4 16 both globally and in China.
  • The market has shown some growth with 7% growth YoY globally and 9% YoY in China with the Chinese makers increasingly dominating the market both at home and overseas.
  • Apple has gained the No. 1 slot but is almost certain to lose this back to Samsung in Q1 17, due to the heavy seasonality of its handset business.
  • Both Oppo and Vivo make an entrance in the global top 5 with 7.3% and 5.8% share respectively, but I think that the real winner of the quarter was Huawei.
  • By the same token all does not appear to be well at Xiaomi which has fallen to No. 5 at home and is well out of the global top 5.
  • I have discussed these two in a bit more detail below.

Huawei

  • Huawei has had a torrid 2016 after spending big at Mobile World Congress and failing to make the market share gains that it badly needed to begin to fulfil its ambition to become the global No. 1.
  • I am pretty certain that the increase in spending in 2016 has pushed the handset business into loss making territory for the year.
  • Furthermore, I suspect that the business will be on a much tighter leash in 2017 which will mean that investments have to be very carefully targeted.
  • The good news is that it had a much better Q4 2016 gaining 1.8% points of global share to reach 10.6%, giving it a platform upon which to build in 2017.
  • I remain convinced that to really become No. 1, Huawei must become an adept of software and the user experience which is something with which it continues to struggle (see here).
  • I see 2017 as a year of focusing on profitability and steady gains rather than all-out assault upon the market.

Xiaomi

  • Everything seems to have gone wrong at Xiaomi during Q4 16 with a heavy market share loss and the departure of its international captain and tireless cheerleader, Hugo Barra.
  • Following its explosion into the market with a cool user experience and innovative sales channel in 2015, during Q4 16, Xiaomi fell to an ignominious No. 5 in the Chinese market with just 7.4% share down from the 15% it managed during 2015.
  • I suspect that overseas it has also struggled as RFM estimates that its global share has fallen to 3.1% down from 4.1% in Q3 16 and its peak of 5.1% in Q2 15.
  • The departure of Hugo Barra is a sign that all is not well with its international business where its Chinese ecosystem has no relevance leaving it stuck selling Google.
  • I think that this leaves Xiaomi struggling for relevance both at home at overseas, putting its ecosystem strategy at great risk.
  • Xiaomi has comfortably more than the 100m it needs for critical mass, but I am becoming increasing concerned that the engagement that it is able to generate is not nearly enough.
  • This is because on the Chinese Digital Life pie, not one of its services is the dominant offering in any segment, leaving it playing catch up with the much stronger and more aggressive BATmen. (see here).
  • I am sticking with my $5.0bn valuation for now but unless Xiaomi shows a new lease of life in 2017, this will be going south again.

Apple FQ1 16 – One way street.

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iPhone benefits where Google could not.

  • Apple released excellent results highlighting that contrary to my previous view, iOS has been the main beneficiary of Samsung’s recent woes.
  • FQ1 17A revenues / Adj-EPS were $78.4bn / $3.36 compared to consensus at $77.3bn / $3.22.
  • iPhone was the main driver of the upside with 78.3m units shipped at an ASP of $695 beating expectations of 76.3m units at an ASP of $688.
  • In addition to the share gain, prices went up as the larger screen version of the iPhone saw its biggest contribution to the mix ever.
  • I think that has been primarily driven by Apple taking a good share of users that purchased the Note 7 and were left high and dry by the recall.
  • Users appear to have taken this opportunity to move from Android to iOS, a move which I think is pretty much a one-way street.
  • I find this surprising as the iPhone 6 is now in its third generation meaning that a large screen iOS device has been an option for users for 2.5 years.
  • This means that most high-end Android users have already purchased a new Android device despite a large screen iOS option being available.
  • This is what led me to believe that iOS would not benefit from Samsung’s Note 7 disaster but this logic appears not have been correct.
  • Instead it appears that the negative stigma surrounding the recall has been enough to encourage users to switch away from Android despite the fact that many apps will need to be repurchased.
  • I have estimated that around 2.5m users (see here) were affected by this incident of which I think around 2m have bought an iOS device and 0.5m a Google Pixel device.
  • This explains the strong performance of iPhone, the better mix towards the larger screen device (Note 7 is a large screen) and the geographic performance of Apple during calendar Q4 16.
  • It also explains Apple’s slightly cautious guidance for the coming quarter as this gain is likely to have been a one-off benefit.
  • FQ2 17E revenues / gross margin are expected to be $51.5bn – $53.5bn / 38% – 39% compared to consensus at $53.8bn / 38.7%.
  • This is bad news for Samsung as the crowd that bought the Galaxy Note 7 appear to have switched to iOS from whence they are unlikely to return.
  • Ironically, although Google has failed to win those users over to Pixel, it will still benefit as RFM research indicates that iOS users generate far more advertising revenues for Google than Android users in the same demographic groups.
  • These were good results but they do not herald the return to growth that the shares badly need if they are to see any real upward momentum.
  • I still think that the shares represent great value for income based investors but those looking for capital growth will remain better off with Microsoft, Baidu and Tencent.

Qualcomm – Tooth and nail.

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This time around, Qualcomm should fight.

  • I think Qualcomm will best serve its shareholders by fighting tooth and nail to halt the fall of royalty rates that has been going on for the last 9 years.
  • The fight between Apple and Qualcomm is a sure indicator that life in the smartphone market is getting tougher which came to light in Qualcomm’s latest earnings release.
  • FQ1 17A revenues / Adj-EPS were $6.0bn / $1.19 compared to consensus estimates of $6.11bn / $1.18.
  • Guidance was very slightly weak with FQ2 17E revenues / Adj-EPS of $5.5bn – $6.3bn / $1.15 – $1.25 compared to consensus of $5.9bn / $1.19.
  • Apple’s dispute with Qualcomm is nothing new and in fact from a brief examination of Apple’s complaint and Qualcomm’s response, it is clear that while times have changed, the arguments remain broadly the same.
  • Between 2006 and 2008, Qualcomm was embroiled in a bloody and bitter fight with Nokia which at the time was in the same position that Apple finds itself today.
  • At that time, Nokia made almost all of the mobile phone industry’s profits and so it was the largest payer of royalties to Qualcomm.
  • When its contract expired, it sought to lower the rate it was paying to Qualcomm and when negotiation did not work it resorted to the courts.
  • At the time, I believed that Qualcomm had the advantage and would eventually win but Qualcomm decided to settle with Nokia in 2008.
  • Although the real details were not disclosed, I calculated at the time that this resulted in a new royalty rate of around 2.3% down from the old rate of 4.1% (of the wholesale price of the device).
  • The problem with this is that everyone else was paying 4.1% and then went on to demand the same deal as Nokia.
  • More recently, Qualcomm has done a deal with China where the effective rate appears to be around 1% which could very well a further decline in the overall global royalty rate that Qualcomm receives for its IP.
  • This is the heart of the problem with patents as there is no real way to determine what should be paid to for them.
  • I have long believed that patents are worth either:
    • First: what an entity is prepared to pay for them or
    • Second: the present value of the cash flows that the patent generates.
  • This is why historical precedent is so important when it comes to patent licencing and here Qualcomm has a huge advantage.
  • Qualcomm has hundreds of agreements and more than 20 years of history as evidence that its agreements have not damaged the mobile industry, in fact quite the reverse.
  • The issue of course is that Apple simply wants a lower royalty rate and even the terms of the deal in China appear not to be low enough.
  • Qualcomm claims Apple has rejected terms that are consistent with the deal it did in China and upon which it has struck most of its Chinese licences.
  • The problem as I see it is that if Qualcomm gives Apple a discount then the rate paid by everyone will go down yet again and where it will end is impossible to tell.
  • By fighting against Apple, it has a chance to arrest the general fall of royalty rates across the industry and stabilise them at what I would estimate will end up at around 1%.
  • This is why Qualcomm must fight as I think that the future of its IP licensing business depends on it winning the second time around.
  • It will be painful and expensive but I can’t see how Qualcomm has much choice.

Essential Products Inc. – What’s essential?

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Something must-have has to come out of the bag at launch. 

  • Essential Products Inc. is the latest in a long line of protagonists which is aiming to have a crack at the high end of the handset market and while it knows where it should compete, I am not convinced that it will be able to.
  • Essential is a start-up led by Andy Rubin who was the founder of the company that Google very successfully turned into Android.
  • Essential aims to compete in high-end consumer electronics by offering differentiation if the following areas:
    • First: Hardware. In any ecosystem strategy today, the most important device is the smartphone as this is where users spend almost all of their time.
    • Essential aims to compete here by offering a device which has a screen with no or almost no bezel.
    • Xiaomi has already done this quite effectively with the Mi Mix but this currently only available in China.
    • This is also the strategy, that I think Apple might use in the iPhone 8 but Essential should be able to launch well ahead of this.
    • Second: Artificial Intelligence. RFM research has recently identified AI as the 8th Law of Robotics concluding that AI is likely to have meaningful impact on the quality, and hence appeal, of Digital Life services in the medium term.
    • However, RFM research has also concluded that good AI requires a huge amount of time and a vast trove of user data in order to develop.
    • I seriously doubt whether Essential has either of these characteristics and while it may try to develop intelligent services, I suspect that it will struggle.
    • This is especially the case as its services are likely to end up competing with Google’s own which Essential will be obliged to implement on its smartphone and to set as default.
    • Third: Mods. Essential’s patent filings include a design for a proprietary magnetic charging port that can also be used as an expansion slot to add hardware functionality to devices.
    • In this day and age, unless you are Apple, proprietary charging ports are a big no-no and may be an indicator of the inexperience that Essential has in making smartphones.
    • Furthermore, the best mod on the market is currently made by Motorola which already has some volume and a reasonable range of third party brands making devices to connect to it.
    • All other modularity plays have either already failed or are struggling for relevance.
    • I struggle to see how Essential is much different.
    • Fourth: Cross device: Essential intends to produce a series of devices that will work together to deliver its proposition to users in all aspects of their Digital Lives.
    • This is also a vision pursued by Samsung, Xiaomi, Apple, Microsoft among others, and it does make some sense.
    • This is because if devices from one manufacturer all work together seamlessly, it provides a reason for users to buy all of their other devices from the same manufacturer.
    • This is one way of generating device preference without having an ecosystem and hence of earning better than commodity returns.
    • The problem is that getting all of these devices to work seamless together is fiendishly difficult and even the mighty Apple has not really got it right.
    • Microsoft does a reasonable job but there are still glaring holes in the experience that it offers.
    • Combined with this difficulty, will come the capital intensity of having to design a series of device types all at the same time which could easily be beyond the financial resources of Essential Products Inc.
  • With the segment that Essential chosen to compete in, there is very little scope to compete in the ecosystem as it will invariably have to support Google.
  • This is because its target users whether they are on iOS or Android will already have a meaningful part of their Digital Lives invested in Google are unlikely to want to switch.
  • Consequently, I remain uncertain as to what is special or different with regards to Essential Products Inc.
  • I am hoping to be well informed when it launches its proposition at some point during H1 2017.

Xiaomi – State of the nation

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Valuation lifted to $5bn but still 89% below last raise. 

  • Xiaomi has supplied some details of its performance for 2016 but reading between the lines implies that it is pinning all of its hopes for 2017 on its ecosystem devices outside of phones.
  • There is no doubt that things were tough in 2016 as Counterpoint Research and RFM estimate that Xiaomi handset shipments fell by 16% to 60.8m units globally.
  • If I assume an ASP of around $175, this gives handset revenues of $10.6bn.
  • Xiaomi has also said that its network of ecosystem partners produced (other ecosystem products) revenues (TVs, smart routers, wearables, smart home) for Xiaomi of RMB15bn or $2.2bn.
  • If I assume Internet service revenues (3rd business line) of $100m, this gives a 2016 grand total of $12.9bn or RMB89bn.
  • This is down some 2% from what I think it earned in revenues in 2015 with other ecosystem products revenue largely offsetting the fall in handset sales.
  • This makes the revenue goal of RMB100bn ($14.4bn) look achievable as Xiaomi is calling for 10% growth.
  • I suspect that none of this is going to come from mobile phones as in the tightening environment, I think Xiaomi will hold share and revenues flat in the best instance.
  • Consequently, I think that Xiaomi is looking for revenues from its other ecosystem products to grow by around 64% and Internet service revenues to treble to $300m.
  • Given that the other ecosystem products segment more than trebled its revenues in 2016, this is not too much of a stretch to reach.
  • Therefore, I am comfortable with the revenue target.
  • However, despite whatever Xiaomi says, a viable business needs to make money and it is here where the problems remain.
  • I think that Xiaomi will make EBIT margins of 2-4% on its RMB 100bn of revenues in the best instance in 2017 giving EBIT of US$434m or RMB3bn.
  • I see no reason to change my valuation methodology (see here) and I continue to use Apple as a comparison.
  • I still believe that using the EV/Sales multiple is fundamentally flawed and so I continue to use EV/EBIT.
  • Apple’s forward EV/EBIT is now around 7.7x but because Xiaomi has a good chance of growth in 2017 whereas Apple may not, I will give Xiaomi a 50% premium to Apple.
  • I cannot give Xiaomi a higher premium simply because it is not going to grow fast enough.
  • Applying this premium gives a fair enterprise value for Xiaomi of $5bn, 40% better than the last time I valued the company, but still 89% below its last raise.
  • I think that Xiaomi can survive without raising more money but its ability to really invest and compete against the BATmen in China will be very limited putting it on the backfoot.
  • This valuation is unlikely to change until Xiaomi gets serious about making money for its investors rather than growing its user base.
  • I still see Xiaomi as an acquisition target where it would fit well into Baidu or Tencent.

Alphabet – Great thrall of India

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Africa warning as India falls into Google’s thrall. 

  • Google is moving consolidate its growing grip on the Indian market and unless rivals act quickly, there will soon be nothing left.
  • Furthermore, Google’s tactics in India is a sign of what it is to come in Africa providing a warning for those intending to address that market.
  • Google’s coverage of Indian railway stations with free WiFi has past 100 stations up from 52 at the end of Q3 16 and is well on its way to 400.
  • Just a few years ago, India was a reasonably open market but the failure of the local players to act (see here) allowed Google to grab the market and I see it being just one step away from its goal.
  • Several years ago, buyers of smartphones in the Indian market would ask for Android such that it was difficult to sell a device without a picture of the green robot on it.
  • Now, users have moved one step on and are demanding devices with Google Play just like users in developed markets.
  • This puts the handset makers on the backfoot as while it is easy to make an Android device, to get Google Play, one has to jump through all of Google’s hoops.
  • This means that in addition to Google Play, one has to install Google’s major services, put them front and centre on the device and set them by default.
  • Having apps and services pre-installed on the device and set by default has long been known to be a big driver of usage.
  • This is even the case even if the service is inferior as is the case with Apple Maps.
  • Consequently, once Indian users move from demanding Google Play to using, enjoying and demanding Google Services then there will be very little that any competitor can do.
  • I see India being close to this tipping point now.
  • I think that the EU will force Google to unbundle Google Play from the rest of its services (see here) (as it did with Microsoft) which could cause Google problems in distributing its services to users. .
  • However, if Google can migrate users from demanding Google Play to demanding Google Services then this remedy will effectively have been neutered as Google will no longer have to enforce the bundling of its services with Google Play in order to generate usage.
  • This is why I think Google is rolling out free Internet in India as fast as it can and why it was keen to stop Facebook from getting a grip on the Indian market (see here).
  • I think that this should also serve as a warning shot to anyone who is intending to develop an ecosystem in Africa.
  • Africa remains one of the last reasonably untapped market where users are largely ignorant of any Digital Life services.
  • I suspect Google intends to repeat its Indian strategy in Africa giving any domestic player a relatively short window in which to act.
  • I continue to prefer Microsoft, Tencent and Baidu over Alphabet and Alibaba.