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.

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.

 

Android – Further deterioration.

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Apple is 577x better at software upgrades.

  • Both Android 8.0 Oreo and iOS11 have been available for a few weeks and has highlighted, once again, how bad the situation in Android.
  • I continue to believe this has a fundamental impact on the Android user experience, loyalty and monetisation.
  • Data from android.developer.com shows that Android Oreo is present on 0.2% of Google Android devices while iOS11 is present on 38.5% of all iOS devices.
  • Android Oreo has been available for 44 days (August 21st 2017) while iOS has been available for just one third of that time (15 days, September 19th 2017).
  • This means that the iOS user base is, on average, being upgraded 577x more quickly than Google’s user base of Android devices.
  • To compound the problem, it looks as if the rate at which the user base is transitioning to newer versions of Android is slowing down.
  • 12 months ago, Android 7.0 Nougat had 0.1% share of the user base and currently it has just 17.8%.
  • At this rate it will take 5 years and 7 months for Oreo to completely penetrate Google’s own Android user base.
  • This is substantially worse than the 4 years that I have observed in previous years.
  • This means that when Google makes an innovation in functionality that requires a modification to be made to the underlying Android OS, it will take the best part of 6 years for this innovation to make it into the hands of all of its Android users.
  • By contrast this process is essentially complete on iOS devices within about 3 months.
  • Effectively Google is spending money on R&D that stands to benefit its competitors more than it benefits itself.
  • If Apple takes a fancy to something launched at Google i/o, it can include the innovation in its latest version and have it deployed to essentially all of its users long before Google Android makes double figures.
  • This combined with the endemic fragmentation, substantially hampers the user experience on Android making it inferior to iOS.
  • I think there is substantial financial upside for Google if it can fix this problem which is why I continue to believe that Google Android will eventually become fully proprietary.
  • This is the only way by which Google can fix these problems and it comes as no surprise that both Android Auto and Android Wear are fully proprietary.
  • While the status quo persists, Apple profitability on iPhone is unlikely to be challenged although I am much more cautious around revenue growth.
  • I continue to be indifferent to both Apple and Alphabet, preferring instead, Tencent, Baidu and Microsoft.

 

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.

Google – Yellow brick road pt. II.

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Another step to fully proprietary Android.

  • Android Auto and Wear are fully proprietary and I continue to see incremental moves by Google that lead inexorably towards fully proprietary Android on smartphones.
  • Following on from Project Treble (see here), Google is now starting to clamp down on kernel usage by Android smartphone makers.
  • The kernel is the small but critical software program in any computing system that has complete control over everything that forms part of that system.
  • It is the first piece of software that is loaded after the device is booted and the Android OS runs on top of it.
  • Because it has access to everything, the kernel is critical for security which is the reason that Google is has given for this action but it also has the convenient side effect of moving Google closer to a fully proprietary system.
  • To date, handset makers have been free to choose any Linux kernel they please (there are many) which has been a source of poor security and inconsistent performance of the same software on different systems.
  • However, from Android Oreo forward Google has mandated that the minimum kernel version on new devices must be 3.18 (to be revised upwards with time) or newer and must enable Project Treble.
  • These criteria are checked at the point of certification and again when the device software is upgraded over the air (OTA).
  • This will certainly make an improvement to the very poor security that plagues Android but it should also improve the endemic fragmentation which continues to hamper the Android user experience keeping it behind iOS.
  • I have long believed that fragmentation combined with the inability to update the vast majority of its devices (see here) are the biggest factors behind the inferior user experience on Android which in turn has led to lower usage, terrible security and low loyalty.
  • The effect of this can also be seen in Google’s financials where RFM calculates that, on average, Google still earns double the revenue from an iOS device running its services than from one of its own Google Ecosystem devices.
  • Consequently, there is substantial financial upside to improving the user experience on Android which I continue to believe will only be properly achieved by taking Android fully proprietary.
  • This remains a slow process but increasing control over the kernel is yet another step along the yellow brick road to Oz.
  • I continue to struggle with the valuation of Alphabet and hence still prefer Tencent, Baidu and Microsoft.

WWDC 2017 – Catch-up gems.

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Mostly catch up but studded with a few gems.

  • While Apple spent most its time catching up with innovations made by other ecosystems, there were a few areas where its announcements put it ahead of the pack.
  • Machine Learning
    • Apple is weaving machine learning into all of its services.
    • This combined with increasing integration of Apple’s own apps and services promises to enhance the user experience.
    • This includes new predictive faces (like Google Now) on the Apple Watch and photo recognition and organisation and smart responses predicted from the user’s history in other apps.
    • The demos were slick and effective but how well this will work in the field and with a user that does not use all of Apple’s Digital Life services remains to be seen.
    • Apple is working hard on AI but I think it still remains way behind Google, Baidu, Yandex and even Microsoft.
  • iOS 11
    • For the iPhone, iOS11 is an incremental update but one that focuses most attention on iMessage and the App Store.
    • Apple, is following Tencent in allowing users to do more and more with iMessage including the enablement of peer to peer payments using Apple Pay.
    • iMessage and Photos are the only two services that really got some attention this year leading me to think that these are the two areas where Apple is really trying to create stickiness.
    • This is particularly relevant as I observed yesterday (see here) that leaving iOS for Android was particularly easy as I don’t use iMessage.
    • The network effect can be particularly strong leading me to think that iMessage is now one of the most important services that Apple has.
    • I think that it is much more important than photos as Google Photos is just as good and makes it easy to move photos off iOS.
    • The App Store update aims to address the problem created by its own success which is that discovery of new apps and services is now pretty difficult.
    • New tabs aimed that highlight the new and cool stuff as well as give tips on existing apps is curated through the user’s history and aims to drive more purchases.
    • The aim is clearly to further distance itself from the humdrum experience of Google Play.
    • App Store is an area where Apple is extending its lead.
  • iOS 11 for iPad
    • However, it was for the iPad that the new iOS software really shines.
    • In conjunction with a solid update to the line, iOS 11 enables new functionality that takes the iPad even closer to the laptop.
    • The iPad now has a file system which combined with enhancements to multitasking and window management take its usefulness to a new level.
    • This includes the ability to drag and drop links, pictures and files from one place to another and to share them in multiple ways more easily.
    • This takes the iPad (particularly the pro) closer to a laptop in terms of functionality but it does still fall short.
    • Without support for a mouse and full fat office, the iPad cannot replace a laptop for most content creators although it is getting closer all the time.
  • Hardware
    • In addition to the iPad Pro, the iMac and MacBook Pro all received incremental updates that keeps them in line with the high end of the PC market.
    • Apple also launched a super high end iMac Pro all in one aimed at the professional who needs to spend more than $5000 on a computer.
  • HomePod
    • Apple also gave a sneak peak of a home speaker that aims to replace expensive WiFi Speakers but also has the functionality of Amazon Echo and Google Home.
    • This is a high-end speaker that sports features that are designed to produce excellent sound quality and functionality potentially rendering Sonos obsolete.
    • At the same time the HomePod has Siri embedded meaning that it can answer questions and control the smart home through HomeKit.
    • Apple has positioned this as something that the user buys for a high-quality audio experience with Siri coming as an added bonus.
    • This is a smart move because Siri is not that bright and is easily out performed by Google Assistant while being on a par with Amazon’s Alexa.
    • HomePod shows no sign of being open to developers other than through HomeKit and I was disappointed that Spotify and other music services have not been enabled on the device.
    • Hence, this a device for the Apple Music subscribers of which there are now 27m and not really for anyone else.
  • The net result is that while I think there are some very interesting moves being made around the productivity elements on the iPad, Apple is mostly keeping step with the competition.
  • The good news is that its edge as the best distributor of apps and services of third partied has yet to be matched by Google, giving it time to re-invent its hardware differentiation.
  • The valuation case in Apple is not nearly as strong as it was 6 months ago leaving me still preferring Microsoft, Baidu and Tencent.

Samsung Bixby – Failure to launch

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Bixby is not fit for purpose.

  • Samsung has once again delayed the roll out of the voice component of its digital assistant Bixby further reinforcing my opinion that Samsung can really only compete in hardware.
  • This, combined with the poor performance already offered by Bixby services on the Galaxy s8, leaves me unsurprised that a method to rewire the Bixby hard key to Google Assistant has already been published.
  • Bixby was launched with much fanfare at the unveiling of the Galaxy s8 and promised the following:
    • First, completeness: This promises to give users complete control of enabled apps rather than the few tasks offered by other assistants.
    • Second contextual awareness: Samsung is promising that Bixby will be aware of the context within which it has been triggered, making it more relevant and useful.
    • Third natural language recognition: Bixby should be able to understand complex, multi-part questions as well as prompt the user to clarify the pieces that it does not understand.
  • I have been testing Bixby extensively and so far, the experience bears no resemblance whatsoever to these promises.
  • Instead Bixby offers a series of suggestions of videos to watch and articles to read that bear little relevance to any of my interests or my history.
  • The one thing that Bixby can get right is to highlight which apps I use most but the functionality of suggesting which app I am likely to want to use next based on the time of day or my circumstance is nowhere to be seen.
  • These features are very similar to those promised by Viv, the artificial intelligence company that Samsung purchased in October 2016 which is clearly the source of this product.
  • However, It appears that Bixby as it exists today has nothing to do with Viv which partly explains the poor functionality but also makes me wonder why Samsung acquired it in the first place.
  • This is a sure indicator of just how far behind Samsung is compared to everyone else when it comes to developing intelligent services.
  • RFM research (see here) has identified three stages of voice recognition of which the first and by far the most simple is the accurate conversion of voice to text.
  • Almost everyone, even Facebook, has pretty much cleared this hurdle but it appears that Bixby still has not.
  • Furthermore, Bixby vision is also way behind the curve as it is unable to properly identify objects.
  • Instead what it does is search Pinterest for other pictures with similar pixel patterns.
  • It does not identify objects nor offer any real functionality beyond finding similar pictures rendering it useless.
  • Even Facebook, which I have long identified as being behind in AI, is demonstrating reasonably good machine vision which leads me to put Samsung far behind even Facebook.
  • This leaves Samsung exactly where I left it as a manufacturer of excellent but commoditised hardware that outsells it nearest competitor by more than 2 to 1.
  • As long as it can maintain that edge, I have no fear for its handset margins but Huawei is trying very hard to close the gap.
  • Huawei’s disappointing handset performance in 2016 has led it to be more focused on profitability this year meaning that it will not be trying to turn the screws on Samsung with quite the same vigour.
  • Hence, I think that Samsung is set up to have a good 2017 but the rally in the share price has more than taken this into account.
  • Hence I continue to prefer Microsoft, Tencent and Baidu.

Google i/o 2017 – Brain game

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Superior brains being used to make its services the best.

  • Google held the first day of its annual developer conference and in its keynote, it highlighted the features and improvements that it is making to its ecosystem to keep users engaged while gathering and categorising as much data as it can.
  • Artificial Intelligence headlined the event with Google’s leading expertise now being implemented in everything that it does.
  • These included:
    • First, Google Lens. This is machine vision similar to what many others have also announced but in Google’s case I suspect it will work properly.
    • This can be used to identify items which combined with search to bring up relevant information about it.
    • This stretches from the history and background of a place to the ratings users have given to restaurants and shops.
    • Others fall short in the ability to identify items as well as in the digging up of relevant information about the item.
    • This is because the AI they are using to power the service is not nearly as advanced as Google’s.
    • This functionality is being rolled across all of Google’s properties to enhance everything Google does such as the Photos app, Maps, Daydream and so on.
    • Second, AutoML. This is a research project within the Google.ai initiative.
    • It is neural network that is capable selecting the best from a large group neural networks that are all being trained for a specific task
    • While few details were disclosed, Google said that the results achieved to date were encouraging.
    • This is a hugely important development as it marks a step forward in the quest to enable the machines to build their own AI models.
    • Building models today is still a massively time and processor intensive task which is mostly done manually and is very expensive.
    • If machines can build and train their own models, a whole new range of possibilities is opened-up in terms of speed of development as well as the scope tasks that AI can be asked to perform.
    • RFM has highlighted automated model building as one of the major challenges (see here) of AI and if Google is starting to make progress here, it represents a further distancing of Google from its competitors when it comes to AI.
  • Google also gave updates on all the current products and services including the next version of Android: Android O.
  • Most relevant updates included:
    • First, Android. There are now over 2bn active Android devices in the market but I suspect that there is meaningful multiple device ownership.
    • For example in Brazil there are more mobile phone connections than there are people, highlighting that multiple devices are owned by a large number of people.
    • This is a trend that is mirrored in many other emerging markets.
    • Every Google Android device has a Google sign-in and for the other Google services, the figures are closer to 1bn which also includes those that have iOS devices.
    • Hence, in terms of real unique users rather than devices, I think the numbers are much lower.
    • This is important because it is unique users that generate the revenue for Google and hence they are a better measure of the real penetration of Android across the globe.
    • Second, Android Go. This is the relaunch of the failed Android One project which aimed to put smartphones in the hands of more users which obviously, requires much lower cost.
    • Android Go is like a mini-mode of Android O which runs in an optimised way on devices with memory down to 512MB of RAM.
    • Google’s apps have also been optimised to run in this highly constrained environment.
    • Importantly, functionality has been added that focuses on saving data usage as well as offering complete control of data usage from the device.
    • For the lower income users, data has become almost like a currency and this gives them much better control of their “spending”.
    • This looks like a much better proposition than Android One which was highly restrictive to the handset makers.
    • However if they start tinkering with Android Go (as they always do), there is a good chance that all of these good improvement will vanish into thin air.
  • While this is not the most exciting i/o event in terms of new announcements, it is what is going on with AI that has the most implications for Google’s outlook.
  • AI is now embedded in everything and because Google is clearly the global leader it has the scope to make its services richer and more intuitive than anyone else’s.
  • This is critical because this is how Google will win over more users to its services, generate more traffic and therefore more revenue.
  • However, I think that much of this is already embedded in the share price and I continue to prefer Baidu, Tencent and Microsoft.

 

Android Project Treble – Yellow brick road

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Yellow brick road that leads to a fully proprietary Android OS.

  • The launch of Project Treble sees Google finally moving to address the Android updating problem but it also quietly paves the way for Google to take full control of the Android software.
  • It could also cost the handset makers more of the precious little differentiation they have left.
  • I have long believed that the inability to update Android OS is one of the biggest problems that Google faces with its ecosystem on Android (see here).
  • This has meant that whenever Google makes an innovation that requires any changes to be made to the OS, it takes around 4 years to arrive on the majority of Google ecosystem Android devices.
  • In contrast iOS takes a matter of weeks to update almost everybody.
  • For example, as of today, despite being available for over 6 months, less than 7% of all Google ecosystem Android devices are running the latest version (7.0 Nougat).
  • This is because Google has no control over the updating process for all of its devices (except Pixel and Nexis) and must rely on handset makers and operators to do it.
  • The problem here is that handset makers have little incentive to make their devices updatable and most of the time are quite content just to sell a new handset instead.
  • Project Treble aims to fix this by abstracting the hardware vendor’s modifications from the underlying OS such that the OS can be updated independently.
  • The way it works today is that Google passes the code to semiconductor companies who modify the code to ensure it works with their chips and release it to the handset makers in the form of a board support package (BSP).
  • The handset makers take the BSP and then modify it to meet their own requirements such as functionality or new hardware.
  • It is at this point that their modifications must pass the compatibility test suite (CTS) in order to able to deploy Google’s App store: Google Play.
  • Problems begin when Google updates Android OS as the manufacturer has to ensure that all of the modifications it has made will work before distributing the new Android code to its devices in the hands of users.
  • This process can be so arduous that many handset makers simply do not have the resources or the incentive to redo their modifications meaning that the update stays on the shelf.
  • Project Treble aims to fix this by adding in an abstraction layer between the Android OS and the vendor modifications such that the underlying Android OS can be updated without the manufacturer losing compatibility.
  • This is being referred to at the Vendor Test Suite (VTS) and while it looks like a great idea, it will have a number of problems.
    • First, differentiation: Most Android handset makers differentiate themselves through hardware innovation.
    • For example, Samsung’s iris scanner and HTC’s edge sensors on the U11.
    • This sort of differentiation may require the handset maker to put changes into the Android OS that go beyond the VTS interface that Google has defined.
    • Modifications beyond the interface obviate the whole point of the VTS and so Google updates would be back to square 1.
    • Second, control: The VTS will be like the computability test suite (CTS) which is a series of tests that the software must pass in order to ensure that apps from Google Play will run properly.
    • Modifications made beyond the interface are likely to result in a failure to pass the VTS test.
    • Hence, in effect, the VTS is another level of control as I suspect that handset makers that don’t pass the VTS will not be able to use Google Play or Google services.
  • Hence, the VTS could further limit the small amount of differentiation that the handset makers have left, further increasing their commoditisation.
  • However, for Google its all good as handset makers will no longer have any excuse not to update the Android OS, thereby ensuring that Google’s innovations in the OS come to market much more quickly.
  • However, this does nothing to address the fact that a large number of handsets are not updateable which has been discussed here.
  • This also paves the way for Google to:
    • First: take control of updating the Android OS separately from any modifications that the handset makers have made.
    • Second: move the remaining parts of Android OS out of open source and into Google Mobile Services (GMS).
  • It has long been my opinion (see here) that this is what Google must do to fix the inherent problems of fragmentation and software updating that continue to plague the platform to this day.
  • An easier to use and more consistent platform would most likely increase traffic generation and therefore Google’s revenues which on Android remain half of that generated on iOS.
  • I continue to think that Alphabet remains fair value and I would continue to steer clear of the handset makers whose differentiation looks like it may take yet another hit.

 

Google – From Russia with love pt. III

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Google escapes to fight another day.

  • Google has settled its dispute with the Russian regulator but I suspect that Google has managed to avoid having to give away its crown jewel: Google Play.
  • According to the FAS Russia (see here), Google has agreed to:
    • First: Google will no longer prevent the pre-installation of competing search engines or apps on Russian GMS-compliant Android devices or their presence on the home screen.
    • There is no mention of which services will be set as default when the user turns on the phone for the first time.
    • Second: Google will no longer enforce the parts of the previously signed agreements that contradict the terms of the settlement.
    • As the terms of the settlement have not been made public, it is not clear exactly what this entails but I suspect that it refers primarily to point 1 above.
    • Third: Google will ensure that users of Android devices already present in the market will be given the option to change their default search provider via a software update and pop up.
    • Fourth: Google will pay a fine of $7.8m which I calculate is equivalent to around 100 minutes of Alphabet’s cash flow and consequently, is completely irrelevant.
  • This settlement ensures that competing apps can be on the home screen but it appears to do nothing about the requirement to bundle the Google Apps with Google Play nor the fact that they are set by default, albeit, now changeable.
  • The settlement was proposed by Google and accepted by the FAS which admitted that it was under some pressure to have this two-year dispute resolved.
  • This is why I believe that this crucial element was left out if the agreement as I think that it is the unbundling of Google Play from Google’s Digital Life services that could do the real damage.
  • This is because it is widely accepted that in most markets outside of China, it is almost impossible to sell an Android Device that does not have Google Play installed because this is what users demand.
  • This gives Google the power to force handset makers and operators to install the services from which it makes almost all of its Android mobile revenues front and centre on the device and to set them as default.
  • Research has shown many times that installation at the factory and being set as default are big drivers of usage, even if the service in question is considered to be inferior (Apple Maps).
  • This is why I have long believed that Google Play is so important to Google’s Android revenues and that unbundling Google Play could be highly detrimental to its long-term outlook.
  • The good news for Google is that it has now set a precedent with which it may be able to more easily settle its outstanding dispute with the EU.
  • The net result is that I think that while Google has given up a little ground, the fortress of Google Play remains intact and with it its ability to continue dominating the Android landscape.
  • However, this dominance is not enough to make me think that the shares are attractive and I continue to prefer the shares of Baidu, Tencent and Microsoft.