Google Android – Useless genius

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Another great service that is effectively useless. 

  • Google has launched a new service that has the potential to deliver incredible value to Google but the limitations of Android render this stroke of genius effectively useless.
  • Google has updated its search app on Android such that it can now search for and categorise content and data within apps and services that it does not own.
  • This provides the user with a useful tool for searching his device and gives Google the ability to collect data from Digital Life services that it does not own.
  • This is a variant of Google’s Now on Tap service which allows context based search from anywhere on the device (see here).
  • I have long believed that this is a stroke of genius as Google currently only has 41% coverage of the Digital Life pie but this feature allows Google to collect data as if it owned 100%.
  • The net result will be greater understanding of its users and better targeting of its advertisements meaning higher prices, driving revenues and better margins.
  • Unfortunately, this service requires low level changes to be made in the Android Open Source Package (AOSP) meaning that the device has to have version 6.0 (Marshmallow)or later in order for this service to work.
  • The “in App” search also requires Marshmallow meaning that it will effectively be useless for several years to come.
  • This is because although there are 920m Google Android users, only a tiny fraction of them have a device that runs Marshmallow.
  • Furthermore, RFM research indicates that the vast majority of Android handsets cannot be upgraded to the next major release of Android meaning that to get Marshmallow the user needs to replace his device.
  • This gives competing ecosystems plenty of time to study the innovation, download the source code, improve it and get it to market years ahead of Google.
  • This is why I have long been of the opinion that Google is effectively doing competition on behalf of its competitors.
  • Furthermore, it means that it will be at least 2 years before any real benefits of this new feature make themselves felt on Alphabet’s bottom line.
  • By contrast, Apple is able to update over 90% of all its iOS devices within 3 months of a new version of the software becoming available.
  • This is how Apple was able to launch Apple Music to 400m users within 3 months with the touch of a button.
  • I have long believed that this situation, combined with the endemic fragmentation of Android is largely responsible for Google’s low Average Revenue Per User (ARPUs) on Android as well as the lower loyalty demonstrated by Android users.
  • I can see only one solution to this problem which is for Google to take complete control of the Android software effectively removing new versions of the code from open source.
  • This will allow Google to offer both a good user experience and also to ensure that improvements in its ecosystem are delivered to users in a timely manner.
  • This in turn should bolster revenues from Android but I think that the market is already discounting these revenues in the valuation of Alphabet’s shares.
  • This is why I remain cautious on the performance of Alphabet going forward and why I prefer Samsung, Microsoft, Baidu and even Apple from an investment standpoint.

Google & Android – Closed source pt. II

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Google is inching closer and closer to taking Android proprietary. 

  • It looks very much as if Google’s Nexus devices this year will show the first signs of a badly needed move to take Android from open source and make it proprietary like iOS and Windows.
  • Google typically updates its Nexus line of products in the autumn to coincide with the availability of the latest version of Android (N).
  • This has been done to demonstrate to handset makers what it thinks the ideal implementation of Google Android should look like.
  • To date, the Nexus project has produced pretty good devices but with tiny volumes that have been largely ignored by the handset industry.
  • Google has already said that it intends to become more opinionated about the design of phones which to me is the first step in accelerating a trend that is been ongoing for three years.
  • Google Mobile Services (GMS) is a proprietary piece of software that contains all of Google’s ecosystem and sits on top of the open source Android OS (AOSP).
  • For the last three years Google has been gradually migrating functionality from AOSP into GMS because Google can prevent fragmentation in GMS as well as distribute updates directly to users.
  • While, this has enabled some improvement in the Android user experience, the AOSP is more fragmented than ever, with most handsets never being updated resulting in a poorer user experience for users driving lower usage and loyalty.
  • It is of paramount importance that Google’s fixes these problems because if they continue, revenue generation from Android devices will continue to substantially undershoot its potential.
  • I have long been of the opinion that the only option for Google to fix this is to take the entirety of Android proprietary and thereby prevent fragmentation in future versions of its ecosystem devices as well as take full control of the updates.
  • The net result should be a user experience that is more likely to delight users that has the scope to be much more secure resulting in much needed higher usage and loyalty.
  • It looks very much as if the new Google devices that it will launch in the coming weeks will herald a real move in this direction, which I expect to continue with the launch of Android O at Google i/o in May 2017.
  • For the creators of Android forks such as Alibaba, Xiaomi, Tencent, Cyanogen and so on, this means that they will also be forced down the same road resulting in a series of proprietary operating systems all based on a common kernel.
  • For developers, this will make their lives generally easier as developing apps for Google Android devices will become much easier but more work will be required to also develop for others.
  • I continue to believe that this is the only way that Alphabet can reach the market’s expectations in terms of medium term revenue growth for its Google business.
  • This is why I see risk in Alphabet’s numbers because the path to making Android proprietary will be difficult as developers will need to be convinced that this for the best.
  • Furthermore, Alphabet will also still have to contend with the EU which is already concerned with what it considers to be Alphabet’s monopolistic practices in Android.
  • Hence I think that in the best instance, Alphabet’s share price is fair leading me to want to look elsewhere.
  • Samsung, Microsoft and Baidu are the places where I would be looking while I am waiting for the right time to look at Facebook.

Cyanogen – Call for vultures.

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Software asset worth buying from a dying Cyanogen. 

  • Although, Cyanogen appears to be on its last legs, I think that the software asset that it has developed remains the best alternative to Google Android that is available.
  • The latest twist in the sorry tale of Cyanogen is the claim that management miss-represented its user numbers to its investors when it raised $85m in March 2015.
  • At the time of the fund raising a number of 25m tracked users was used that went hand in hand with an estimate that there were around 50m active users of the software overall.
  • Cyanogen OS has some excellent privacy features that make it impossible to track a device should they be enabled which gave rise to the estimate of another 25m users that the company could not see.
  • Unfortunately, it appears that the current number of active users is closer to 2m rather than 25m with the commercial version (used by handset makers) registering around 4m (The Information).
  • I suspect that the accusation of miss-representation is without merit and that the reality is that through poor strategy and execution, the user number has fallen of a cliff in the last 12 months.
  • Cyanogen began life as the anti-Google Android offering but quickly changed direction when it realised that to get volume, it had to be compliant with Google’s standards.
  • This was when the code split into CyanogenMod (not compliant partly maintained by the community) and Cyanogen OS (compliant and managed by the company).
  • Cyanogen OS was given to handset makers to create devices and deals stuck with service providers such as Microsoft (Office 365) for a share of service revenues generated.
  • I have long believed that this business model was doomed to failure (see here) which combined with very poor execution led to no revenue generation and the need for yet another shift in strategy.
  • RFM research indicates that the current plan is to cease development of the OS entirely and instead concentrate on providing hardware makers with custom implementations of the Android code.
  • In effect, Cyanogen will become just another body shop with very little to distinguish it from the many competitors that already exist in both India and China.
  • Cyanogen’s list of departed clients is long and includes Oppo (currently 2 the Chinese market), Micromax and many others who have since returned to stock Android.
  • I think that these clients left Cyanogen not because of the product, but due to the way that they were managed by the company which is what I think prompted the precipitous decline in user numbers.
  • RFM research indicates that one of Cyanogen’s last clients, Wileyfox which is currently front and centre on Cyanogen’s website, is also moving back to standard Android.
  • This leaves Cyanogen with no way for its commercial product to make it to market ending any hope (forlorn in my opinion) that it would ever generate any revenues.
  • I do not think that Cyanogen’s last gasp strategy to become a body shop will work because it’s a commoditised business where there is brutal price competition.
  • This is a very disappointing outcome because I have long held the opinion that Cyanogen OS is an excellent implementation of Android.
  • Furthermore, in its recent iterations of the code it has enabled the kind of data sharing that I think is required for an ecosystem to take its functionality to the next level.
  • Consequently, Cyanogen OS is an excellent option for any ecosystem that needs to have control of its user experience, be able to evolve it, deploy its services and set them as default.
  • RFM research (see here) indicates that this is what the Chinese ecosystems need to do to evolve into full ecosystems with a complete set of Digital Life services.
  • Outside of Alibaba (with YunOS and Meizu) and Xiaomi, the other ecosystems are at a very early stage and I think that acquiring the Cyanogen OS would give them a rapid leg up in the race.
  • Furthermore, I think that any other player is that is thinking of trying to break free from Google in Android in emerging markets should also be interested in acquiring this asset.
  • The proceeds from the sale could give Cyanogen some more runway to get this new strategy off the ground even though I suspect that it will never take-off.
  • I see one of the BATmen as the most likely buyer.

Google – From Russia with Love pt. II

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Russian ruling could have global implications. 

  • Although the Russian complaint against Google is a sideshow compared to the EU, it could materially weaken Google’s global agreements that allow it to ensure its ecosystem is on almost all Android devices in developed markets.
  • The Russian regulator (FAS) has already fined Google $6.75m for requiring handset makers to install its services on their phones to be able to use its App Store: Google Play.
  • FAS also came down on Google for refusing to allow other third party services such as Yandex Search to be pre-installed.
  • However, Google appears to have already dropped this requirement and Yandex has seen a corresponding increase in search share in the Russian market.
  • The Google agreements that really matter are the MADA and the AFA.
    • Mobile Application Distribution Agreement (MADA).
    • This agreement requires anyone wanting to use Google Play to also include the key Google services such as search, mail and maps and to display them prominently in a folder on the home screen.
    • RFM research indicates that it also requires these services to be set as default on the device such that a request from an app to open a map always defaults to Google Maps.
    • This ensures that it is Google’s Digital Life services that are predominantly used and it is this bundling that both the FAS and the EU object to.
    • The Anti-Fragmentation Agreement (AFA).
    • This agreement is required for a handset maker to deploy Google Play and prevents the manufacturer from producing other devices that use non-Google versions of Android.
    • This prevents any handset maker from providing any alternative to Google on any Android device anywhere in the world.
    • I suspect that this has been a factor in Google’s ability to dominate the Indian market where it is now almost impossible to sell a device without Google Play on it.
    • Google has effectively seeded the Indian market with its services and the game may already be over for the home grown alternatives.
  • In addition to the fine, the FAS has also demanded that Google change these agreements with device makers.
  • Google has appealed this decision and a hearing is scheduled for August 16th.
  • While the MADA is signed on a device by device basis, the AFA is a global agreement and should the FAS force Google to relax the AFA, then it could have global implications.
  • This is because handset makers would then be free to user other versions of Android without Google services being installed potentially weakening Google’s grip on Android in markets outside of Russia.
  • Furthermore, the FAS’s decision will provide precedent which, in legal conflicts such as this, can be highly influential in determining the outcome.
  • I continue to be concerned that Google’s grip on its ecosystem on Android devices may be slipping bringing into question RFM’s medium term revenue forecasts.
  • Most of Alphabet’s revenue growth from here is being driven by advertising revenues derived from Android devices, raising the possibility that RFM’s numbers are too high.
  • Even assuming that nothing goes wrong, the shares of Alphabet look fairly valued at best, leading me to believe that there is better value to be had elsewhere.
  • Samsung, Microsoft and Baidu continue to be the places where I would be looking.

Android security – Swiss cheese pt. III

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Security is just another reason to close Android down. 

  • Another vulnerability has emerged that exposes over 900m Android devices to the possibility of granting root access to hackers potentially making the device part of an illicit botnet as well as the theft of all data on the device.
  • Checkpoint has released details of four vulnerabilities (Quadrooter) that affect Android devices powered by Qualcomm chipsets but the good news is that there is no evidence to date that the exploits have been used in the wild.
  • Checkpoint provided Qualcomm with the details of these vulnerabilities 90 days ago which in turn released patches for its vulnerable drivers but it is there where the orderly process stops.
  • Qualcomm has made the patches available to any customer using its chipset, but whether the end devices themselves have been patched is a matter of great doubt.
  • In the normal scheme of things, a vulnerability is found, communicated to system owners who then create a patch and make it widely available.
  • In iOS and Windows, these updates are rapidly distributed to all users who then update their systems and within a few weeks the issue has been put to bed.
  • However, with Android this is not the case as there are two issues that prevent devices from being updated.
    • First: Most Android devices are not updatable.
    • Android is a commoditised, brutally competitive market meaning that in the mid-range every cent of cost matters.
    • Making a device updateable means that extra resources have to be added to the device which are never reflected in the price.
    • Consequently, the vast majority of Android devices are not updateable to later versions of Android as there is no incentive for the device maker to add this capability.
    • Second: Google has no control over the update process for any of the devices that run its services.
    • It can update Google Mobile Services (GMS) from Google Play but lower level system updates (Android) are controlled by either the maker of the device or the mobile operator.
    • The two exceptions are Xiaomi and Cyanogen both of whom have retained the ability to update devices running their software.
    • This is provided that the devices themselves are updateable as per the first issue above.
  • These issues are so acute that even Google, will not have fixed all four of the vulnerabilities in its devices until the September update is distributed and installed.
  • I suspect that for many handset and tablet makers, this vulnerability will continue to exist for a long period of time.
  • While the Quadrooter has not caused any damage per se, this issue clearly demonstrates that, should a major hack occur, it will take the Android community many months to fix it, if it fixes it at all.
  • This issue combined with the endemic fragmentation of Android is a major reason why I think Android devices generate much less traffic than iOS devices and why Android users demonstrate much lower loyalty.
  • One only has to look at the defection of users from Android to iOS when the iPhone 6 was launched for evidence of how vulnerable Android is to market share loss.
  • This is bad news for Alphabet as RFM research finds that its long-term growth is dependent on traffic generated by Android devices meaning that these issues are hampering its growth potential.
  • I continue to believe that Alphabet will solve this problem by taking Android completely proprietary, effectively removing it from open source (see here).
  • This will solve all of these problems in one go but comes with the problem of convincing the community that going proprietary is in everyone’s best interest.
  • Here, Google will have the advantage of being able to point the finger at Oracle (see here) as the architect of the problems that have forced it to close Android down which I think will make things much easier for Alphabet.
  • I think that this will begin in earnest in 2017 probably at its developer conference (i/o) in May.
  • I continue to prefer Baidu, Microsoft and Samsung over Alphabet for the immediate term with Tencent and Facebook on my watch list for the right signals to enter.

Cyanogen – Share of zero

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The best option is to sell itself to China. 

  • There are further signs that Cyanogen is in trouble as it is laying off staff and may be about to go through yet another change in strategy.
  • This is a far cry from 12 months ago when it had $80m in the bank and was planning on reaching at least 200 people by the end of 2016.
  • Unfortunately, its business model of revenue sharing with Digital Life service providers enabled through its software, has never made any sense and now I see Cyanogen is adjusting to that reality.
  • The example of Microsoft serves as an excellent example of how this strategy was never going to work.
  • Cyanogen announced with great fanfare in April 2016 that it would be integrating Microsoft Office and other services into Cyanogen upon which it would presumably collect a revenue share.
  • Unfortunately, all of Cyanogen’s devices have screens of less than 10” and on these devices, Office is free.
  • Consequently, while a partnership with Microsoft is great for the headlines, it never really had any chance of generating any revenues for Cyanogen.
  • The other problem is that since Cyanogen caved in and became compliant to Google’s standards, it gave up its key selling point and hence, its appeal as an alternative to Google went to almost zero.
  • This combined, with suboptimal handling of the few handset makers that it already had on board meant that the outlook for Cyanogen making any revenues in the foreseeable future collapsed.
  • It appears that the workforce is being reduced by about 30% and the company is rethinking its strategy but I can see only one realistic option for this company (Recode).
  • There are two factors that make China a good fit for Cyanogen.
    • First: Cyanogen has a good implementation of Android and has a pretty good team of software engineers that understand some of the finer nuances of digital ecosystems.
    • Second: RFM research indicates that the next stage for competition in China is likely to involve much greater vertical integration for the likes of Baidu, Alibaba and Tencent.
  • Taken together it is not difficult to see how Cyanogen would be an excellent fit for ecosystems in China that need a platform.
  • Both Alibaba and Xiaomi and reasonably well advanced in creating their own platforms but both Baidu and Tencent look to be very far behind in this race with the China Mobile doing virtually nothing.
  • I think that buying Cyanogen and using it as their own proprietary fork of Android would provide a big step forward for these companies and could put them ahead of Alibaba which is currently leading this trend.
  • I think that this would be a better outcome for Cyanogen’s workforce and its investors as the current trajectory has it on the road to running out of money and closing down.
  • I think that this would be a real waste as Cyanogen has a good software asset and its development direction indicates a good understanding of the 7 Laws of Robotics which I think is essential for the success of any digital ecosystem.
  • Of all the companies in China, RFM research shows that only Baidu demonstrates a real understanding if these laws.
  • Unfortunately, I suspect that selling out to the Chinese would be seen as a big failure and I can see resistance to this option both inside Cyanogen and in its investor base.

I continue to think that having to close its doors, making it a distressed seller, is a much worse outcome for all concerned.

Alphabet – Competition conundrum

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Google’s growth depends on how well it defends itself to the EU. 

  • Google has a very serious problem with the EU as the remedy that it is likely to impose, should it decide that Google has abused its dominant position, could end Google’s control of Android.
  • The long running EU complaint against Google is beginning to come to a head as Google now has until September 7th to respond to the statement of objections that the EU has put forward regarding its conduct on Android mobile devices.
  • There are currently two complaints active against Google.
  • One of these is to do with its dominant position in search where most of its revenues come from PCs and the other to do with whether Google has unfairly used its position in Android to stifle the services of its competitors.
  • I have long been of the opinion that the Android case has the most scope to damage Google’s outlook as RFM research indicates that without revenue growth coming from Android devices, Google’s growth will be very pedestrian indeed.
  • This has substantial implications for Google’s valuation as I think that the shares are already pricing in a continuation of its dominance of all Android devices outside of China.
  • The problem for Google is not the fine, which is likely to be around three month’s cash flow, but the remedy.
  • Here, I suspect the EU could force Google to stop requiring handset makers, who wish to use the Google Play app store, to put its core services front and centre on their.
  • These requirements are laid out in the Mobile Application Distribution Agreement (MADA) that each handset maker has to sign in order to get access to Google Play.
  • 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.
  • 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 material numbers of devices in developed markets.
  • This is why I believe that 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.
  • The 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.
  • Hence, I do not see an immediate collapse in Google’s revenues from Android should it lose to the EU but I would become much more concerned with its long term outlook.
  • I see this as all downside as I think that Google’s valuation is already discounting indefinite dominance of Android which is something that is increasingly looking to be under threat.
  • This is just another reason to reduce a position in Google.
  • I would look to Baidu, Microsoft, Samsung for the immediate term and Apple, Facebook and Tencent for the long term.

Android – Swiss cheese Pt II.

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More malware further underpins a proprietary future. 

  • More Android based malware has come to light where 10m infected devices could be generating fraudulent revenues of $3.6m per year.
  • This brings the Android security problem into sharp focus once again further underpinning my long held opinion that the chaos that is Android is likely to become a series of tightly controlled proprietary systems.
  • This latest malware is known as HummingBad and installs itself as a rootkit and then downloads many fraudulent apps which are then used to generate advertising revenue.
  • All versions of Android are susceptible to this malware and there are an estimated 188,000 devices in North America implying that it is not just the unofficial versions of Android that are susceptible.
  • This sort of occurrence is not abnormal but typically what happens is a rapid response from the platform owner and the issue is resolved within a week or two.
  • Unfortunately, any security problem that requires a major update to the Android Open Source Package (AOSP) is virtually unfixable meaning that the issue will persist indefinitely.
  • There are two issues that cause this problem.
    • First: Most Android devices are not updatable.
    • Android is a commoditised, brutally competitive market meaning that in the mid-range every cent of cost matters.
    • Making a device updateable means that extra resources have to be added to the device which are never reflected in the price.
    • Consequently, the vast majority of Android devices are not updateable to later versions of Android as there is no incentive for the device maker to add this capability.
    • Second: Google has no control over the update process for any of the devices that run its services.
    • It can update Google Mobile Services (GMS) from Google Play but lower level system updates (Android) are controlled by either the maker of the device or the mobile operator.
    • The two exceptions are Xiaomi and Cyanogen both of whom have retained the ability to update devices running their software.
    • This is provided that the devices themselves are updateable as per the first issue above.
  • This is just another reason why usage of Android devices is likely to continue trailing that of iOS and why these devices are likely to yield a much lower return for the ecosystems that run upon them.
  • For example RFM estimates that Google can earn $31.6 per user per year from an iOS device whereas its own Android devices can only generate $14.0 per user per year on average.
  • Part of this is due to the differences in demographics between the two ecosystems but I am certain that most of it is due to the fact that Android devices are more difficult to use, less secure and as a result, generate much less traffic.
  • I think that this lower usage also drives lower loyalty meaning that Android users are willing to try something else.
  • Fortunately for Android, there is nothing else at the moment but that does not mean that this will be the case forever.
  • This is why I see Google, Alibaba, Tencent, Xiaomi, Cyanogen and others all taking their versions of Android fully proprietary as then they will be able to control fragmentation, update the devices when needed as well as fix security flaws.
  • I think that this will begin in earnest in 2017 with Google leading the way as Oracle has given it the perfect excuse to do so (see here).
  • Failure to fix this problem is likely to hurt Android revenues in the long term leading to Google’s shares looking even more overvalued.
  • I continue to prefer Baidu, Microsoft and Samsung to Google in the immediate term.

Amazon – Proper practitioner? pt II.

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An experiment that might finally work. 

  • Following Amazon’s painfully expensive experiment in distributing its ecosystem with a mobile device of its own, it has sensibly decided stick to services with an innovative approach to device subsidisation.
  • Amazon is offering its Prime subscribers a very good deal to get their hands on a brand new Moto G4 or the much cheaper BLU R1 HD.
  • The Moto G4 will retail at $199.99 and the BLU R1 HD at $99.99 but if Prime subscribers elect to have advertising pushed to their lock screens, the price falls to $125 and $50 respectively.
  • This is an innovative approach and one that has already proven to be successful in emerging markets.
  • Advertising pushed to the lock-screen is considered by marketers to be extremely effective as it is the first thing that the user sees more than 100 times per day.
  • Consequently, they are prepared to pay a surprisingly high price for this piece of real estate meaning that the subsidy is likely to be comfortably paid for over the expected life of the phone.
  • Amazon is also using this opportunity to install its ecosystem onto the device, although in this regard it will be playing second fiddle to Google.
  • These devices are Google Mobile Services (GMS) compliant meaning that Google Play and Google’s other mobile services will be installed on the device and they will be set as default.
  • I think that this is why Amazon is pushing this deal to its Prime subscribers.
  • These users will have an awareness of and incentive to use Amazon’s services as they will have already paid for some of the content that is being offered through these apps.
  • Furthermore, as Prime subscribers they will also be heavy users of the shopping service which should work extremely well as it will have been installed and optimised at the factory.
  • Amazon’s media consumption services and its shopping services are on the device but the Amazon App Store and the Silk browser appear to be missing.
  • This comes as no surprise as Silk competes with Chrome and the Amazon App Store is the runaway leader in the race to challenge the dominance of Google Play in developed markets.
  • This is the problem of trying to compete on the platform owned by a competitor but this looks a lot better than losing more than $1bn on a device that no one buys.
  • I have long been of the opinion that the end result of Amazon’s foray into software platforms would be it launching its ecosystem upon the hardware of others.
  • This makes sense because Amazon’s model in hardware has been to sell the device at cost to make money on the content and services that it sells on top.
  • Consequently, making its own devices has never made any real sense other than to ensure that its services were making it into the hands of users.
  • By targeting its existing user base, it is ensuring that its services will be used on mobile which could serve as a beachhead from which to expand its reach to non-Prime users.
  • Amazon’s strategic direction as it relates to the ecosystem is improving.
  • This move in conjunction with the decision to create an ecosystem-only tariff (see here) on Amazon Prime demonstrates that Amazon is finally getting to grips with digital services outside of e-commerce and cloud.
  • Amazon still has a very long way to go as its understanding of the detailed elements of the ecosystem still appears to be rudimentary but this is yet another sign of progress.
  • Unfortunately I still really struggle with seeing any value for investors in Amazon’s shares (see here) as at the end of the day the story in Amazon is about making money from its retail e-commerce operations.
  • Consequently I continue to prefer Samsung, Baidu and Microsoft for the short term and Facebook, Apple and potentially Tencent for the long term.

Huawei – Rivers of blood. Pt II.

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Huawei’s software has a better chance in China.  

  • Huawei is making the right initial moves in order to maximise its chances of becoming No. 1 in smartphones but I suspect its software has better chance at home rather than overseas.
  • Huawei has stated that intends to become No. 1 in smartphones and to achieve this lofty goal, it appears to be developing both software and services.
  • This is exactly what Huawei needs to do in order to minimise its margin damage in the coming war with Samsung (see here), but its users will have to be prepared to pay something for its software for the strategy to work.
  • I see three areas of development:
    • First: user experience.
    • Huawei’s efforts are being led a new hire (Apple, 10 year veteran) and the aim is to lift the user experience on Huawei phones above other Android makers and thereby achieve differentiation.
    • The user experience in developed markets is already reasonably well defined but RFM research finds that in China, almost everyone struggles as 90% of users have low quality stock Android.
    • Only Xiaomi, has developed a unique user experience but unfortunately, this has done nothing to help its poor profitability.
    • Hence, I think that Huawei will have to do something very special to achieve a price premium for its products which is unlikely to last long as cool ideas will quickly be copied.
    • Second: proprietary operating system
    • I think that Huawei is also building a complete alternative to Android where it would have full control of both hardware and software.
    • This would give it the freedom to fully optimise the software to run with its silicon (HiSilicon) as well as to develop its own suite of services without having to put Google as default.
    • The problem is that outside of China and Africa, the Google ecosystem dominates Android to the point where it is almost impossible to sell an Android device without Google Play on it.
    • Google uses this demand for Google Play to require that handset makers put its services front and centre on their devices as well as precluding them from making devices based on other versions of Android.
    • Hence, while this status quo exists, the Huawei version of Android is very unlikely to see the light of day outside of China.
    • However, it is China where I see the greatest potential, as RFM research (see here) finds that all of the Chinese ecosystems except Xiaomi are struggling with a second rate user experience.
    • Third: services.
    • This is the Holy Grail because if Huawei can develop a suite of Digital Life services that millions of users love, it will be able to charge a significant premium for its devices.
    • Unfortunately, this is by far the most difficult to do as one has to both build great services and then convince the users to use them.
    • Furthermore, in both China and overseas there are bigger and stronger companies that are already dominating in the services space.
  • I find it encouraging that Huawei has understood and committed to differentiating is software as this represents its best chance of fulfilling its strategy without a substantial bloodletting for all Android handset makers.
  • I think that China represents Huawei’s best chance as it is in China where the most improvement in the user experience is needed and the this is Huawei’s home market.
  • I also see the possibility of a tie up with Baidu, Tencent or even China Mobile as possibilities as these companies have very nascent, if any, verticalisation strategies for their services.
  • Samsung’s best defence here is to get as close as it can to Google and ensure that it is Samsung devices that run the Google ecosystem to its best advantage.
  • In China Samsung has already been reduced to a low share and does not stand a realistic chance of a comeback.
  • I think that Samsung still has the upper hand as it has much better profitability than Huawei in handsets, much greater volume and an in house supply of cutting edge components to rely on.
  • Hence, I continue to prefer Samsung, Baidu and Microsoft over Google, Alibaba, Twitter and Amazon in the short term.
  • In the long term Facebook, Tencent and Apple look very interesting but they still have some real hurdles to overcome.