Artificial Intelligence – Go-getter.

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A breakthrough that Facebook badly needs.

  • Google DeepMind has reported substantial progress on one of the big three challenges of AI which is exactly what Facebook desperately needs but is unlikely to achieve anytime soon.
  • DeepMind has been able to build a new Go (AlphaGo Zero) algorithm that relies solely on self-play to improve and within 36 hours was able to defeat AlphaGo Lee (the one that beat Lee Sedol) 100 games to 0.
  • RFM has identified three main challenges that need to be overcome for AI to really come of age (see here).
  • These problems are:
    • First: the ability to train AIs using much less data than today,
    • Second: the creation of an AI that can take what it has learned from one task and apply it to another and
    • Third: the creation of AI that can build its own models rather than relying on humans to do it.
  • In my opinion DeepMind’s achievement represents a huge step forward in addressing the first challenge as AlphaGo Zero used no data at all.
  • I do not think that this represents a step forward against the third challenge as the system of board assessment and move prediction (but not the experience) used in AlphaGo Lee was also built into AlphaGo Zero.
  • Hence, I do not think that this system was building its own models but was instead using a framework that had already been developed to play and applying reinforcement learning to improve.
  • What will really have the likes of Elon Musk quaking in their boots is the fact that AlphaGo Zero was able to obtain a level of expertise of Go that has never been achieved by a human mind (see here figure 3).
  • It is almost as if the use human data limited the potential of the machine’s ability to maximise its potential.
  • That being said, it is one thing to become superhuman at Go and quite another to enslave the human race and so I continue to think that dystopia will continue to be thwarted by Dr. Moore (see here).
  • There have been many other attempts to address the data quantity problem but this is the first one that I have seen that has shown real progress.
  • Many of the other digital ecosystems have been trying to use computer generated images to train image and video recognition algorithms but there has been no real success to date.
  • I suspect that taking what DeepMind has achieved and applying it to real world AI problems like image and video recognition will be very difficult.
  • This is because the Go problem is based on highly structured data in a clearly defined environment whereas images, video, text, speech and so on are completely unstructured.
  • Hence, we are not about to see a sudden improvement in Google’s ability to recognise and categorize images and video (which is already world-leading) but the seeds are clearly being sown that will keep Google a long way ahead of everyone else.
  • This exactly the kind of advance that Facebook really needs to make.
  • This is because I have long been of the opinion that while Facebook sits on a massive treasure trove of data, it has very little idea of what any of it is or what it means.
  • This makes it very hard to spot fake news or offensive content which has been the source of many of Facebook’s most recent problems.
  • It also makes it much more difficult to understand what its users do and do not like and therefore much more challenging to tailor its service accordingly.
  • Finally, it will also make it much more difficult for Facebook to keep up with competition in terms of deep and rich services meaning that its users may begin to spend time elsewhere.
  • This is a breakthrough that Facebook badly needs but unfortunately it is Google that owns the IP meaning that it will be Google services that improve.
  • I continue to think that Google comfortably leads the world in AI but recent stock performance and the resulting high valuation keeps me indifferent to the shares.

Broadcast TV – Sword of Damocles pt. III.

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OTA broadcast given a second chance.

  • While Netflix and Amazon continue to make inroads into the cable TV subscribing population, the old dinosaur of over-the-air (OTA) broadcast seems to be winning a second lease of life.
  • Over the last 4 years I have been very negative on the outlook for broadcast (OTA and cable) as I have viewed the convenience and lower cost of on-demand viewing as a much better proposition for users (see here and here).
  • However, while this prediction has been largely accurate, what I failed to take into account was the fact the OTA is free (ad supported) which I think is largely what lies behind its renaissance.
  • A standard Cable TV subscription in 2016 cost on average $103.10 per month (Leichtman research group) for which a large number of channels come as a prepaid package.
  • However, in reality, most users watch only a few of those channels meaning that it if they could subscribe to those channels individually, they would be in a position to save a lot of money.
  • This is now becoming a reality as some of the most prized content now belongs to the streaming companies as well as other content creators making their content available as a subscription through the Internet.
  • The most obvious response has been the well documented and accelerating cord cutting by US households unless the cable TV industry takes immediate and drastic action.
  • The other effect appears to have been a substantial recovery in the number of households making use of OTA rather than cable.
  • According to a Nielsen study commissioned by Ion Media, OTA only households has grown by 41% over the last five years to 15.8m households although this may have slowed significantly since 2015.
  • Furthermore, this is not limited to older generations as the median age of households using OTA and not cable is lower at 34.5 years than the total households using TV at 39.6 years.
  • Although the total number of households switching back to OTA-only may have slowed, there has been real growth in households that also have a fast broadband connection (nScreenMedia).
  • This leads me to believe that users (young and old) are increasingly switching off cable and replacing it with a combination of premium streaming services and OTA TV.
  • This allows the user to have access to a wide range of channels, almost all the content he was watching on cable at a much lower price.
  • Consequently, while commentators are cautious on the outlook for TV advertising revenues in 2018 and beyond, I think that they could easily witness a recovery having been stalled for some time.
  • While this gives OTA a reprieve, I still think it needs to act to prevent itself from becoming obsolete in the long-term.
  • The obvious move is to make the entire selection of channels available on a single, free, ad-supported streaming service.
  • That way the valuable spectrum can be re-farmed for a more economically productive use and OTA can ensure that it has a place in the future of the media industry.
  • If it is really sharp, OTA will also seek ways to make its offering available in emerging markets which are highly price sensitive and willing to consume advertising in lieu of paying a subscription.
  • I still think cable TV is going the way of the Dodo but OTA looks like it has been given some time to reinvent itself.

Yandex – Homeless.

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Alice needs a hardware home.

  • Yandex has jumped on the digital assistant bandwagon but with its history, it should be able to produce by far the best product for the Russian speaking market.
  • However, it will be unable to serve the majority of use cases without hardware to carry it into the home or the vehicle.
  • Yandex is the pre-eminent internet company is Russia with 65% market share in search and just seen off a challenge from Uber (see here) to also become the dominant provider of ride hailing.
  • Most importantly of all, Yandex has been crunching data for over 20 years, which according to RFM research (see here), is a major contributor to its RFM rating as No. 3 in AI behind Google and Baidu.
  • Consequently, a digital assistant is an obvious product to launch and is one that has a much better chance of succeeding in Russia than any of the others even if they are taught to speak Russian.
  • The assistant is called Alice and is the result of putting together a series of AI projects that the company has been working on for some time.
  • These include voice search, weather, news, maps and so on.
  • Two of the key features include:
    • First, speech recognition. Yandex claims that the assistant demonstrates near-human levels of accuracy when it comes to understanding speech.
    • This is no great feat in English anymore but in Russian, this is likely to put Yandex meaningfully in front.
    • Second, context. Alice has some short-term memory in that it remembers what the previous question was and is able to answer a follow-on question in the context of the first.
    • This is quite a difficult AI problem to solve and the only other player that I have seen do a decent job of this is Hound from SoundHound.
    • I not seen this ability in Google Assistant, Amazon Echo, Microsoft Cortana or Apple Siri.
  • Alice is available in the Yandex Search app on iOS and Android as well as in beta on Windows PC but this is not where it is most needed.
  • Usage of voice assistants predominantly occurs when the user’s hands are occupied such as in the car or in the kitchen.
  • Consequently, to address this use case Alice needs to be resident in a home speaker of some description and, potentially, in a vehicle infotainment unit.
  • Yandex has stated that there will be further products forthcoming and I am pretty certain that a speaker (probably in conjunction with a known audio brand) will be shortly forthcoming.
  • Given Yandex’s heritage in AI and its dominance in search, it looks unlikely that Amazon or Google will be able put up much of a challenge leaving the Russian speaking markets open for Yandex.
  • It will have more difficulty if it wants to expand overseas but Russian is a big enough market for Yandex to fare pretty well just by staying at home.

Amazon & Microsoft – One-way street

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Amazon gets the best of it for now.

  • Amazon looks to be the main beneficiary of the co-operation between Amazon and Microsoft which will see Alexa offer access to Cortana and vice-a-versa.
  • Amazon and Microsoft are working on a co-operation where Windows 10 users will be able to get Cortana to open Alexa and perform its range of functions.
  • Users of Amazon Echo products will also be able to ask Alexa to open Cortana and ask it to perform its various actions.
  • The idea is that users get another easy conduit from which to access Alexa while Cortana is provided with a badly needed escape from the PC where it has been stuck since the collapse of Windows Phone.
  • Cortana was originally designed to operate on a mobile device and consequently was taught how to work in a range of domains that are used on mobile.
  • The problem is that most of these domains are irrelevant on a PC and as a result, Cortana is fairly useless where it is predominantly present today.
  • This is exacerbated by the fact that Cortana has not really been taught how to work with the Office applications making the user experience for its main use case on a PC pretty poor.
  • For example, asking Cortana to read my email results in a Bing search for “read my email” and it is quicker and easier to open documents in Office with a mouse than to ask Cortana to do it.
  • I think that Microsoft’s artificial intelligence is actually better than Amazon’s as a result of the data it has been crunching via Bing but very little of this has found its way into Cortana.
  • Consequently, Amazon has come up with a better product that is far more useful in the environment where it is present (speakers in kitchens and living rooms).
  • Hence, I don’t see much of a use case for Alexa users to begin asking Cortana to do things but having access to Alexa via a PC could prove to be quite useful.
  • This is particularly the case as Alexa is very good at shopping and controlling the smart home potentially making device control remotely from the office much easier.
  • As a result, I think that Amazon is the main beneficiary of this collaboration in the first instance.
  • However, if Microsoft’s AI continues to be better than Alexa’s then there is scope for a much deeper collaboration where Microsoft’s AI could be used to power some of Amazon’s services.
  • The only problem here is that this could result in cross over between Microsoft and Amazon Web Services who are fierce competitors in the cloud.
  • Hence, a deepening of this collaboration looks unlikely at the moment but may become a reality if Amazon’s AI continues to languish.
  • Although Amazon appears to have gotten the better of this deal, I still cannot stomach the valuation leaving me with a strong preference for Microsoft’s shares.

Google – Brain boxes

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Clever devices are useless without volume.

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

Pixel 2 / 2 XL

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

Google Home.

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

Google Accessories.

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

Take Home Message.

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

Ola vs. Uber – Turntable

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Ola has one chance to turn the tables on Uber.

  • Ola has secured $2bn in funding from Softbank and Tencent which it must immediately put to good work if it is to wrest the advantage from Uber in India.
  • I think that this is an excellent time for Ola to receive a large cash injection as it is almost neck and neck with Uber in India and has the advantage of focus while Uber fights endless fires elsewhere.
  • This advantage will not last for ever and if Ola can push its share back to 60% it will stand a chance of doing to Uber what Didi in China and Yandex in Russia have done before it.
  • Car hailing is one of the best examples of a networked economy and, just like classifieds, it is extremely difficult to make money until one of two criteria are met:
    • First: one must have at least 60% market share or
    • Second: one must have double the market share of the next largest player.
  • Data in terms of market share has been somewhat unreliable but it looks as if Ola has been able to cede only a small amount of market share in the last 12 months.
  • Research by KalaGato Pte shows that Ola’s share in July was around 44% with Uber on 50% with everyone else fighting for the scraps.
  • In October, Ola’s market share was around 50% (see here) and it looked to me like Ola would only survive with state intervention.
  • During March 2017 Ola’s rides per customer stood at 2.95 while Uber were 4.38 with 40.9% of Uber customers paying less than Rs100 per ride while only 31.4% of Ola’s customers paying less than Rs100.
  • While not definitive, this data indicates that Uber has been gaining share through aggressive pricing and the good user experience offered by the app.
  • However, I think that Uber’s troubles have had a massive ripple effect right the way through the organisation resulting in the eye coming off the ball.
  • It is this that has given Lyft a new lease of life in USA and now offers the same chance to Ola.
  • This turmoil has only intensified with Transport for London denying Uber a licence to operate necessitating even more diversion of attention away from India.
  • This $2bn investment and Uber’s focus elsewhere gives Ola a chance to halt its recent losses and turn them around.
  • What it has to do appears to be quite clear:
    • First: cut prices and
    • Second: improve the usability of its app and service.
  • If Ola can get back to 60% share then it will have reached the hallowed status at which it will be able to generate cash and Uber will not.
  • It is at that point it will be in a position (as long as it holds onto 60%+) to eject Uber from India (probably through acquisition) but not before.
  • Now it all comes down to Ola management’s ability to execute and upon this, everything depends.

iPhone X – One trick pony

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Face ID will make or break this device.

  • I have long believed that this year’s iPhone offerings will not trigger a super cycle of replacement but with a lukewarm reception for the iPhone 8 is likely to mean that it is up to the iPhone X to drive Apple’s bottom line beyond expectations.
  • When I look at the iPhone X and compare it to the Galaxy s8 / s8+ or the Note 8, it is frankly, unremarkable.
  • Furthermore, I suspect that on a side by side test, the Galaxy s8 screen may well come out on top.
  • However, the Galaxy s8/s8+ and Note 8 all fall over where every Android phone always falls over which is: software.
  • All the apps are there but they never seem to work quite as well as they do on iOS leaving the whole experience feeling disjointed despite best in class hardware.
  • In my opinion the weakest feature of this year’s Samsung line-up is the facial recognition which is very slow and unreliable on the best of days.
  • Almost anything other than a perfect situation causes it to fail and sunglasses, hats and even lollipops are a no go.
  • The end result is a trip back in time to when Nokia ruled the smartphone market where I end up using a PIN to unlock the device 90% of the time.
  • This is where the iPhone X can leave Samsung in the dust as I suspect that almost everywhere else (except perhaps the processor) it is likely to be somewhat behind.
  • However, in order to do this Face ID on the iPhone X has to be flawless which is a tall order especially as it failed to recognise one of Apple’s best-known executives first time.
  • In Apple’s defence there may have been some mitigating circumstances that caused it to fail in that instance that have nothing to do with how the technology will work day to day.
  • However, if Face ID proves to be anything less than Apple has billed, I think it will materially hurt the appeal of the device as the method of unlocking and authenticating on the iPhone 8 will instantly become far superior to the flagship.
  • This has the prospect to slow down replacement by iOS users which will materially impact Apple’s results going into fiscal Q1 (Q4 17) and Q2 (Q1 18).
  • The net result would most likely to be an unwinding of Apple’s PER multiple which has expanded nicely this year on hopes of another iPhone 6-like super cycle.
  • I think that even if Face ID works as well as hoped, I doubt it will trigger another cycle of that magnitude, especially given that the device starts at $999.
  • Consequently, I am increasingly nervous with regard to Apple’s share price as I can see only downward drivers.
  • My indifference is moving more towards the negative end as there is more value to be had elsewhere.
  • Tencent, Baidu and Microsoft leap to mind.

India e-commerce – Second front.

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Amazon goes for the jugular.

  • Amazon is not content just to let its rivals gift it the Indian market through their own bad decisions but is going for the jugular by opening up a second front in bricks and mortar retail.
  • Amazon is buying a 5% stake in Shoppers Stop for $28m which will enable Shoppers Stop to increase the number of stores it has by 25% thereby expanding its reach into smaller towns.
  • Currently only 5% of retail sales are made online in China meaning that for at least some time to come it will be an advantage to have an offline presence.
  • This is exactly the strategy that Alibaba is pursuing in China and is looking to improve the poor offline experience by adding in technology and know-how garnered through its growth online.
  • All of Shopper Stop’s stores will play host to Amazon experience centres in order to educate and inform users with regard to the benefit of e-commerce.
  • Shoppers Stop’s will also have an exclusive flagship store on Amazon’s Indian website which will help Amazon deepen its offering to Indian consumers.
  • This is yet another blow to the local players Flipkart and Snapdeal whose inability to merge looks likely to hand the Indian market to Amazon.
  • Flipkart, Snapdeal and Amazon are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
  • 20 months ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
  • Together, Flipkart and Snapdeal would have just about hit this threshold and with flawless execution might just been able to see off the threat from Amazon (see here).
  • However, Snapdeal recently ended merger discussions with Flipkart in a move that I think hands could easily hand victory to Amazon.
  • Furthermore, having been soundly beaten in China by Alibaba, Amazon is absolutely determined to win the Indian market and I estimate that it is currently burning at least $400m per quarter to make that happen.
  • In my opinion, the move by Snapdeal demonstrates a fundamental misunderstanding of how Amazon works and what it is likely to do to win the Indian market.
  • Most companies have a strategy that involves trade-offs such as offering high quality or low prices.
  • This is the route that Snapdeal is taking by deciding to streamline and focus on giving sellers the best experience in India.
  • This is not how Amazon functions as there is no either / or in its vocabulary.
  • Instead Amazon goes for dominance and offers high quality and low prices or in this case the best experience for both sellers and buyers.
  • Even with extra backing from Softbank, I do not think that Flipkart has the depth of management or the financial resources to withstand this ruthless onslaught and I think that it is unlikely to ever make a good return for its shareholders.
  • The outlook for Snapdeal is even worse as it is much smaller with far less to invest.
  • I think Amazon will now be able to grind its two main rivals down to the point at which they either exit the market or agree to be acquired.
  • Both of these scenarios are likely to result in much lower valuations than were being discussed as part of the merger.
  • Hence, I think that Amazon is the only real winner from the strategic choices being made by Flipkart and Snapdeal.
  • However, in the short-term $400m cash burn per quarter is unlikely to help Amazon’s fundamentals much and so I remain unenthused with an investment in its shares.
  • I continue to prefer Tencent, Baidu and Microsoft.

Facebook – The selfish giant

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No love for minority investors.

  • Facebook has withdrawn plans to issue a new distribution of shares that would have further worsened its corporate governance in a move that I think was purely motivated by self interest
  • Facebook was planning a new distribution of shares that would have allowed the voting rights of Facebook to be almost entirely stripped away from the economic interest.
  • Voting shares were planned to be split into three of which two would have had no votes and one with.
  • This would have allowed Mark Zuckerberg to sell up to 66% of his stake in Facebook without affecting his voting interest.
  • Super voting distributions of shares are common in technology companies across the world and while I believe that this is fine for small private companies, it has no place in large public companies in which anyone can invest.
  • The main reason for super voting distributions is to allow founders to raise capital but still maintain control.
  • In small companies just getting started, this can be critical as it allows the company to be extremely flexible meaning that it can quickly adjust to changes and adversities that can be crucial for the company’s success or survival.
  • However, in a large company like Facebook there is no need for any kind of sudden pivot for the company to survive and consequently there is no reason whatsoever to have super voting distributions.
  • Furthermore, I find that these distributions are more often than not detrimental for shareholder value.
  • This is because founders have emotional attachments to their companies meaning that their judgement over long-term strategy is often not objective.
  • On top of this, a super voting distribution allows a founder to spend other people’s money with no checks or balances.
  • For example, a founder who owns 5% of the economic interest but 55% of the vote will only incur 5% of the losses that result from his bad decisions.
  • Minority shareholders, who have no say in decision making, bear 95%.
  • I have long believed that this imbalance gives rise to bad corporate governance and unfair treatment of minority investors.
  • Unfortunately, Facebook has not cancelled this distribution because it cares about fair treatment for investors.
  • Instead it has cancelled the transaction as:
    • First: The share price has risen enough such that Zuckerberg can finance his short-term philanthropy by selling fewer voting shares and thereby still maintain control.
    • Second: Facebook is facing an embarrassing shareholder lawsuit where Zuckerberg was due to be cross examined by the plaintiff’s lawyer where difficult questions about motivations for maintaining control were certain to be asked.
  • Consequently, I still think that Facebook views minority shareholders as an inconvenience and ranks them below the officers of the company and as well its employees and customers.
  • Unfortunately, there are many companies who take this attitude and in order to compensate for this I add a 30% discount to the valuation of the shares in order to compensate minority shareholders for the added risk of having no say in the running of the company.
  • In the long-term there is still some upside in Facebook including this discount but in the short-term I see a correction following the slowdown in revenue growth that I am expecting in H2 2017.
  • Consequently, I would be looking to take some profits now and then get back in after the slow-down related correction.
  • I still prefer Tencent, Baidu and Microsoft in the immediate term.

 

Snap Inc. – Troublesome hardware.

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Another plan that failed.

  • With the reorganisation of its hardware division, Snap Inc. is admitting that it made a wrong turn with its spectacles which despite being cool, no one bought.
  • Steve Horowitz will now become president of technology and report to the chief strategy officer rather than the CEO in what can only be a significant demotion.
  • A large part of the marketing effort has also been terminated with the COO of hardware, Mark Randall presiding over the vestigial remains.
  • Despite being viewed as pretty much the coolest wearable device available, Snap Spectacles only managed to rack up around $5m in revenues during Q2 17.
  • This clearly indicates that hardware was running at a substantial loss and with no turnaround in sight inevitably resulted in the cuts we have just witnessed.
  • All references to becoming a camera company have now been quietly deleted leaving the company at a dead end when it comes to hardware.
  • As Google and Facebook are finding, doing hardware when one is a software company is much more difficult than it sounds and I would not be surprised to see Snap quietly drop this idea completely.
  • This leaves Snap with little differentiation over Facebook which remains its biggest problem.
  • Instagram has a habit of copying all of Snap’s best innovations and pushing them out to its much larger user base pretty quickly.
  • This makes it extremely hard for Snap to compete as apps that offer communication are all about the network of users.
  • Metcalf’s Law of Networking states that the utility or value of a network increases by the square of the number of devices attached to it.
  • This would imply that Instagram should be at least 16x more valuable than Snap meaning that at Snap’s valuation, Instagram makes up more than half of the valuation of Facebook.
  • Instagram is an important part of Facebook but I don’t think it is contributing more than 50% of Facebook’s value.
  • Hence, I would be inclined to believe that Snap remains meaningfully over-valued.
  • I think that fair value for Snap remains around $12.40 per share which is still 10% below where the shares are today.
  • I still think that negative sentiment could push the shares closer to $10 at which point acquirors could start to take interest.
  • Until then I still see no reason to get involved and would strongly prefer Twitter to Snap Inc. (see here)