SoundCloud – Clouds of red

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Management does not have the luxury of choice.

  • Poor monetisation strategy and a lack of fiscal discipline is likely to ensure that SoundCloud ends up being forcibly acquired by one of its rivals when it finally runs out of money.
  • From looking at the contenders, I think Google Music looks like the best fit.
  • Despite raising $70m in debt in March 2017, the company is in dire financial straits and it was forced to close offices and lay off 40% of its workforce last week saving an estimated €16.7m.
  • Given that the company lost around €50m in 2016, this looks set to only prolong the stay of execution until sometime in Q4 2017.
  • The company has said that it wants to take back control of its destiny (from its venture investors presumably) but with no money coming in and great difficulty in raising more, management does not have the luxury of choice.
  • The big question is the user base.
  • SoundCloud last updated this figure 3 years ago when it said that it had 175m MaU but there is concern that the success of Spotify’s free tier and YouTube have taken a big bite out that number.
  • This will have a material impact on any potential acquisition later in the year, but for the moment the main concern remains cash flow or the lack thereof.
  • I see two problems:
    • First: monetisation. Assuming that SoundCloud still has 175m users, it is currently generating $0.02 per user per month in revenues.
    • This compares very poorly to Spotify which I estimate generates $2.54 per user per month despite the majority of its users being on its free tier.
    • The fact that Spotify is 127x better at monetising its users than SoundCloud is, more than accounts for differences in catalogue and user base and shines the light squarely on SoundCloud’s lack of execution.
    • Anecdotally, as a regular SoundCloud listener on its free tier, I have never heard or seen a single advertisement, further reinforcing my opinion on execution.
    • Second: fiscal discipline: SoundCloud has had nice offices in Berlin and elsewhere, has offered free catered lunches twice a week and gifted new employees MacBooks and headphones as well as other freebies.
    • What is more, I think management has had its head in the sand with regard to the financial car crash that has brought it to its current predicament which potentially could have been avoided if it had been faced head-on.
    • The net result of the sudden layoffs is that morale has come crashing down and I understand that the people that SoundCloud badly needs to keep if it is to fix its monetisation problem, are now looking to leave.
  • The biggest problem I see is that the financial problems will absorb much of management’s time in trying to raise more money, meaning that the real problems of the business go unaddressed.
  • Consequently, I think the company will run out of money in Q4 17, as predicted, and be forcibly acquired for just enough to pay down the debt ($70m) leaving the assets unencumbered.
  • Of all the potential suitors, I think Google makes the most sense.
  • This is because SoundCloud is most like YouTube as a repository of user generated content and in that regard, Google will probably be most able to monetise what SoundCloud cannot.
  • I can see it being slotted into the YouTube infrastructure and being rebranded YouTube Audio or something similar.
  • The future is very bleak for SoundCloud but I think that management has only itself to blame for spending too much time feathering its nest and not enough time on grinding out hard cold cash.

 

Snap – Valuation snaps pt. II.

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Twitter remains by far the better choice

  • Reality is beginning to set in for Snap Inc. but I think that the shares still have some distance to go before there is an opportunity to snap up a bargain.
  • A major downgrade by one of its underwriters taking the target price from $28 to just $16 caused the shares to dip to $15.44 which combined with the possibility that Snap Spectacles are not selling that well and savage competition does not bode well.
  • A very informal survey found that the target group (millennials) were not that interested in Snap Spectacles, have not seen them in public and do not know anyone else who is interested in the product.
  • However, there was some interest in Snap’s new functions such as Snap Maps and World Lenses but this is where the competition problem comes to the fore.
  • The minute Snap hits on an innovation that resonates with its user base, Facebook will copy it and offer it to its 1.2bn Messenger users or 600m Instagram users which, in my opinion, pretty much neuters the appeal of Snap.
  • This is because both of these companies are network based businesses where Facebook’s network is orders of magnitude larger and therefore offers its users exponentially more utility.
  • Consequently, I really struggle to see how Snap is going to increase its user base as its differentiation is flagging and the same services on Facebook are more useful.
  • It is on this basis that I value the company.
  • The peer group of Facebook, Twitter and LINE Corp is trading on a forward EV/Sales multiple of 6.6x for 2017E and 5.5x for 2018E.
  • Given, Snap Inc.’s current growth rate and its medium-term potential (see here), I think that the company could conceivably generate revenues of $800m in 2017E and $1.2bn in 2018E.
  • Being generous to Snap Inc. and because it is growing faster than the peer group I can give it a 200% premium to its peers giving an EV valuation of $10.5bn based on 2017E and $13.2bn based on 2018E.
  • The average of these two is $11.9bn with which I can be comfortable assuming flawless execution, continued rapid growth and a move into generating profits.
  • This translates into $12.40 per share which is still some 20% below where the share price is today despite recent falls.
  • Hence, I think that unless Snap Inc. can get its user base really growing again, it is going to have difficulty in justifying it’s still lofty valuation and I see further downside.
  • If Snap were to go below $10 per share ($9.6bn), there could be significant acquisition interest.
  • Until then, I would stay away.
  • Twitter (see here) remains in a much better position than Snap Inc. and if I was forced to choose between the two, I would have Twitter any day of the week.

China Internet – Home court advantage

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Regulatory enforcement makes life even harder for the foreigners. .

  • China appears to be on a path to plugging the leaks in the Golden Shield Project (aka The Great Firewall of China (GFW)) which is likely diminish to almost zero the small presence that Google, Facebook and so on have managed to establish to date.
  • Regulation in China can be a very grey area but when it comes to The Great Firewall of China, the government appears to be deadly serious about enforcing the rules it announced in January 2017.
  • In January the Ministry of Industry and Information Technology (MIIT) announced that all special cable and VPN services need to obtain government approval to operate.
  • This news past without too much fuss as many services such as ride hailing have continued to operate despite being technically illegal.
  • However, over the last few days the MIIT has clamped down further by adding another 84 categories of content to the blocked list as well as demanding that ISPs prevent users from using VPNs by February 2018.
  • I think that it is the demand that ISPs prevent users from using VPNs that has the scope to have the greatest impact.
  • There are two factors to consider:
    • First: there are many VPN providers that are capable of circumventing the GFW but do not have a physical presence in China.
    • Hence, they will be unaffected by the regulation or its enforcement by MIIT.
    • Second: It is much easier to block the vast majority of VPN traffic than most users think.
    • There are two main protocols in use: L2TP/IPsec and Open VPN.
    • Of the two, L2TP/IPsec is used far more because this protocol has been natively implemented into Windows 10, MacOS, iOS and Android which between them account for almost all internet traffic globally.
    • However, L2TP/IPsec has a problem which is that while the traffic is encrypted using IPsec, it is always transmitted on port 500 making it very easy to identify.
    • Open VPN is much more complicated to set up and use but it can be configured to run over almost any port, making it very difficult to detect.
  • Because most users are not technically literate, they tend to use L2TP/IPsec and any ISP determined to block this simply has to block all encrypted traffic on port 500 to shut it down completely.
  • This will leave Open VPN as the only viable option in China and because of the greater complexity in using it, only the very determined users will put the required effort in to get it working.
  • I think that this will further hamper the efforts of the foreign ecosystems to gain a foothold in the domestic Chinese market.
  • However, the flip side is that it will make the entrenched positions of Baidu, Alibaba and Tencent all the more secure as increasingly, they only have to worry about each other.
  • The net result is that my preference for Tencent increases as its position at home will become more secure even as the international market remains wide open for it to address.
  • This is why, it remains my favourite ecosystem from an investment perspective.

Mobike vs. Ofo – Blood soaked economics.

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Here comes another bloodbath.

  • Another battle is brewing over ride hailing but the fact that it is bicycles rather than cars will make no difference to the blood-letting that is likely ensue.
  • The big contenders in this space are both Chinese, headquartered in Beijing comprising of Mobike backed by Tencent and Sequioa and Ofo backed by Alibaba and Didi Kuadi.
  • This is coming to head now as Ofo has just raised a massive $700m following on from Mobike which raised an almost-as-massive $600m last month.
  • Both of these companies are going to use the money raised to expand overseas in what is likely to become a brutal battle to become the go to place to rent a bicycle.
  • Mobike and Ofo offer a docking station free rental service making it much more convenient for users as they can leave the bicycle wherever they choose.
  • Mobike is currently the leader with a presence in 100 Chinese cities, 100m registered users and up to 25m trips being taken on busy days.
  • Ofo has a presence in 150 cities with 6.5m bikes in the market but I think it is stretching itself much more thinly than Mobike.
  • This is because to get to same level of usage every Ofo bike would need to be rented nearly 4 times every day.
  • Furthermore, in Singapore, where both services are present, Ofo bikes are much harder to find compared to Mobike indicating a much thinner spread across more locations.
  • This is also because the Ofo app does not tell the user where its bicycles are to be found which is something that needs to be rapidly fixed if Ofo wants to have a chance of competing successfully.
  • Outside of the blood-soaked economics (see below) these schemes have two big problems.
    • First: theft and vandalism. Neither Ofo or Mobike have said how much their bicycles cost to make but it is clear that they are not nearly as robust or as thief-proof as the much more expensive but bomb proof bikes to be found in many Western cities.
    • This means that they are far more prone to vandalism and theft which Ofo has particularly suffered from to date with poor locks and no GPS tracking.
    • Second: capacity management. It is not uncommon for users to all want to go in the same direction at the same time.
    • This causes problems in ensuring that enough bicycles are available at the right place at the right time which becomes infinitely more complicated with no docking stations.
    • Furthermore, Mobike and Ofo bikes have been found in trees, blocking pedestrian paths and clogging up parks when the weather is nice.
    • While one can get away with this to some degree in China, municipalities in the West are unlikely to allow it to happen.
    • For example, Bluegogo (another Chinese bike sharing start-up) was forced to shut down operations in San Francisco for exactly this reason.
  • These are all problems that can be solved, but the biggest problem of all is likely to be how the economics of this business are likely to work.
  • Bicycle renting is a commodity business where the barriers to entry are simply how many bicycles one can buy and make available on the streets.
  • The net result is that now that both companies have a huge treasure trove of cash to invest, they are likely to go on a massive user recruitment drive.
  • This means free rides and discounts in order to encourage loyalty.
  • As long as one company is not more than twice the size of the other in any one location, then neither will make money resulting in substantial cash drains at both players.
  • I suspect that both companies are likely to target the same international cities (like Singapore) which will result in a bloody struggle until one gives up and leaves or is acquired by the other.
  • In the meantime, this is great for users who have access to plenty of cheap transport, but the minute there is only one dominant player left, prices are likely to rise.
  • It is not so great for investors who will be footing the bill for winning as much share as possible, but given that this battle is effectively Tencent vs. Alibaba, is not as if they can’t afford it.

Alibaba – Virgin home

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Another day, another home assistant.

  • Alibaba is moving to launch a home speaker, much like Amazon Echo, that should direct users to its e-commerce services but I suspect that if it teams up with Baidu, it will launch a better product
  • The obvious intention is to make it even easier for users to shop on Alibaba’s sites but given the differences between China and developed markets, I am not convinced that this is necessary.
  • Alibaba’s users are already making over 80% of their purchases on mobile devices which is much higher than Amazon or other e-commerce platforms in developed markets.
  • The reason for this is that China is a mobile first market (see here) because in China, the mobile internet works much better than fixed.
  • In developed markets, the opposite is true which has meant that shopping via a PC or Mac still represents the majority of transactions.
  • Hence, if one can easily order products using voice commands with Amazon Echo, it represents an easier experience than using a PC and a web browser.
  • However, apps on smartphones are so optimised for the task for which they have been designed that it may not end up being much easier to use a speaker from Alibaba than the mobile phone.
  • This will especially be the case if the assistant that Alibaba puts into the speaker is not that smart.
  • RFM research (see here) has not highlighted Alibaba as being a leader in AI meaning that the intelligence of its speaker is likely to be second or even third rate.
  • Hence, if the shopping experience is not much enhanced by having a speaker, it will need to be very good at other functions in order to be appealing.
  • Typically, these have included the ability to play music, answer general inquiries and control smart devices around the home.
  • Offering a decent user experience in these areas is a much more general AI problem and one with which I think Baidu is far more advanced.
  • Hence, I think that if Alibaba comes to some arrangement with Baidu to use its personal assistant Duer for part of the functionality, it will end up with a much better user experience.
  • The good news is that China is almost virgin territory when it comes to this space as I do not believe that either Baidu or JD.com have had any real market impact with their products.
  • Furthermore, the failure of Amazon in China and the blocking of Google services has meant that foreign competition is almost non-existent.
  • This means that even if Alibaba’s speaker is sub-par due to the basic level of AI that Alibaba has to put into its offering, it may still sell reasonably well with the right marketing push behind it.
  • I think that Alibaba is also still well behind when it comes to the smart home and so it would make sense to emulate Amazon’s extremely developer friendly attitude.
  • Xiaomi has also built up a reasonable ecosystem of smart home devices In China that use its API, and so including this at the factory would also seem to be a good idea.
  • I have been quite encouraged by Alibaba’s emerging understanding of the importance of data and how it can benefit by integrating it all together and making as much use of it as possible.
  • This move with a home speaker would represent a further expansion of that understanding.
  • I still struggle with the valuation of Alibaba as there is a lot built into its share price, but fundamentally it is doing all the right things to be one of the big ecosystems at home.

LeEco – Bleeding out

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LeEco could be acquired by one of the BATmen.

  • Despite closing the vast majority of its US operations, LeEco’s troubles are far from over as its cash problems have intensified which I think could lead to its eventual acquisition.
  • Leishi Internet Information & Technology (listed parent of LeEco) held its AGM last week and admitted that the cash crunch that first appeared towards the end of 2016, is now far worse than expected.
  • LeEco raised $2.2bn in January from Sunac (see here) but instead of using the money to fix its financial problems and invest in its fledgling businesses, Leishi used it to pay down debt.
  • Some of the debt was in the founder’s (Yueting Jia) name which may explain why debt was paid down rather than being used to keep its subsidiaries going.
  • The result was that all of the operations (especially USA and Faraday Future (see here)) appear to have received no cash injections at all, leaving them in dire straits.
  • This is why the company has had to exit its acquisition of Vizio, sell the land in Silicon Valley it bought from Yahoo, close most of the US business and the founder has also been forced to sell his stake in electric car company Lucid Motors.
  • Yueting Jia also admitted at the AGM what I have long suspected which is that the real problems have been caused by LeEco’s automotive ambitions, Faraday Future (see here).
  • The company is now seeking funding for this venture but given that many participants in the automotive industry and the state of Nevada (where the factory is being built) have grave doubts with regard to its viability, raising money will be extremely difficult.
  • Consequently, I see two outcomes for LeEco.
    • First: It sells or closes all of its automotive operations and pours everything into its core business as a provider of Chinese media over the Internet.
    • This would mean a return to its more humble origins and not something that I think its founder has seriously considered.
    • Second: It continues trying to create an ecosystem around televisions, mobile phones and cars for which it is very unlikely to see any success.
    • I do not think that Leishi has the capital, management depth or credibility to bring this ambition to fruition meaning that I see an intensification of the cash crunch if this option is chosen.
  • Given management’s commentary at its AGM, I suspect that it is going to go for option 2 which I believe will end in failure.
  • This is likely to cause the real value of the shares (currently suspended since April 2017) to continue their free fall.
  • This would make the Internet media asset a good tuck in acquisition for Baidu, Alibaba or Tencent (BATmen) all of whom are aggressively vying to become the leader in the Digital Life segment of Media Consumption in China.
  • In the absence of real fiscal discipline, I fear that this will be the ignominious fate of a once great ambition.

Digital sensors – Eyes and ears.

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Sensors are the eyes and ears of AI.

  • Data is the raw material of artificial intelligence (see here) meaning that will be increasingly critical that the sensors that collect that data are reliable and accurate.
  • Nowhere is this more true than in eHealth where inaccurate data is useless at best and deadly at worst.
  • This is why there is still a big market for extremely expensive medical monitoring equipment but I see signs everywhere that this is starting to come to an end.
  • This also explains the problems that the likes of Fitbit, Apple, Xiaomi, Garmin and others are having as the data they generate is such low quality that it can really only be used for recreational fitness.
  • I see two ways in which the data that these sensors generate can be improved.
    • First: Improve the quality of the sensors themselves.
    • If an optical heart rate sensor can gather data as reliably and as accurately as an ECG, then this would have substantial ramifications for cardiac medicine.
    • Not only could the equipment costs be slashed, but high-risk patients could be continuously and un-invasively monitored allowing many cardiac events to be predicted and stopped before they occur.
    • The sensor industry is feverishly working on this with the latest launches promising more and more accuracy and detail.
    • Despite this, I have yet to meet a cardiac sensor company that is claiming that it can hit the kind of quality that would allow it to be certified with the FDA.
    • The same is not true in blood pressure where small start-up Leman Micro Devices is making some bold claims.
    • It has come up with a tiny blood pressure sensor that can fit onto a smartphone which it thinks is very close to being good enough to measure blood pressure at a medical grade with FDA approval.
    • Second: create intelligent software that improves the quality of the data.
    • There are many examples of algorithms being used to meaningful conclusions from low quality data both in and out of the medical field.
    • In automotive, retro-fitted vibrations sensors are being used to track the condition of tyres, wheels, shock absorbers, brakes and the steering wheel (see here and here).
    • This is not because a great sensor has been invented, but because these companies have worked out to interpret the data that most people consider to be random noise.
    • Phillips is also quite good at this which is why its health watch is recognised to be generating good quality data even if it does struggle in other areas.
  • Hence, I see the road to accurate data being made by eroding the problem from both ends combining both better hardware sensors and much better software to interpret the signals.
  • I think that this is crucial as sensors are the eyes and ears of the machines upon which the world increasingly depends.
  • Consequently, I think that sensors will remain an area of intense investment and an area where I would want to be invested.
  • The issue of course is to separate the solutions that have real prospects from those that are merely riding the wave of hype and easy investment.

 

Alphabet vs. EU – Timeslip

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Google has time on its side in Android.

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

Google vs. Amazon – Battle of the Home pt II.

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Alexa still ahead despite very poor performance.

  • New data suggests that Google Assistant is even more superior to Amazon Alexa than RFM’s tests have suggested, but still Google remains at risk of suffering a Betamax-like defeat (see here).
  • The digital agency, 360i has written a piece of proprietary software aimed at scientifically testing how good digital assistants are at answering queries (see here).
  • This software asks 3,000 questions and then assesses the answers given.
  • It is here that I suspect some human intervention is needed as both Google Assistant and Amazon Alexa often give answers that I think software will have difficulty in assessing.
  • This is why I suspect the results are being considered as very preliminary and that some human parsing of the answers is needed.
  • While, there is no hard data available yet, 360i has said that the initial indication is that for any question, Google is six times more likely to come up with the right answer compared to Amazon Alexa.
  • This contrast is so stark, that I suspect that Google will still beat Alexa hands down once the real data has been scrutinised and published.
  • This reflects RFM’s own much less scientific tests where every person asked to live with Amazon and Google side by side for four days expressed a strong preference for Google Assistant.
  • The one exception was a small child who was much more interested in endlessly turning the lights on and off rather than improving his general knowledge.
  • It is here that we find Google Home’s great failing as Google Home does not support the smart light system tested, as it is only available with Amazon Alexa.
  • This problem is reflected right the way through the entire smart home ecosystem where every smart device one can think of works with Amazon Alexa but only a small proportion work with Google Assistant.
  • Amazon has been extremely welcoming to third party developers giving a lot of support as well as meaningful discounts for running their services on AWS.
  • The same cannot be said of Google as almost every developer I have spoken to has not been complimentary when describing the experience of trying to develop for Google Home.
  • I find this to be a big surprise because Google’s Android developer program has been huge and thriving for years.
  • This is why Google suffered such a resounding defeat at CES in January where Amazon Echo was everywhere and Google Home was barely seen or talked about.
  • Google’s strategy to fix this issue is to focus developers on the assistant rather than the device.
  • This has two advantages:
    • First It ensures that any device with Google Assistant in it can control any product written to the one API.
    • Second and most importantly, developing for the Google Assistant is part of the highly successful Android developer program rather than the poor effort made by Google’s hardware division to date.
  • I still think that smart home is Google’s to lose but Amazon Alexa is still orders of magnitude greater when it comes to the number of home devices in the hands of users.
  • The home speaker is a much more convenient device with which to control the home as there is no requirement to remove the device from a pocket or unlock it.
  • Furthermore, I don’t think that users have yet really understood that the functionality on the phone is exactly the same as it is on the home speaker or anything else meaning that Amazon still has the volume advantage in the mind of the developer.
  • I still think that Google has the advantage as it has by far the better product but developers start really making their products work with the assistant soon, then the game will quickly be lost.
  • Google’s outlook for 2017 remains pretty good but the shares still look fairly priced leaving me preferring Microsoft, Tencent and Baidu.

Microsoft & Facebook – BFF

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I see Microsoft and Facebook creeping quietly together. 

  • I continue to think that Facebook and Microsoft make very good partners and I see them doing more and more together over the long-term.
  • In addition to building an undersea cable together (see here), Facebook and Microsoft have a long history of collaboration and when I look at their assets and the directions they are taking, it continues to be an excellent fit.
  • The latest place where they have appeared together is Section F which is a huge start-up campus in Paris with space for 1,000 start-ups.
  • Both companies are involved with Microsoft lending support to build is AI program and Facebook also being a major launch partner.
  • Facebook and Microsoft have often worked well together in the past and I can see this collaboration deepening going forward.
  • This is because Microsoft and Facebook are now going in very different directions meaning that there is almost nowhere where they directly compete with one another.
  • Facebook has the intention to become by far the biggest consumer ecosystem of them all while Microsoft appears to be edging away from the consumer and is increasingly dominating the enterprise.
  • If I look at their respective Digital Life pies there is also a good fit as Facebook is very strong in Social Networking and Instant Messaging while Microsoft has good assets in Gaming, Search and Browsing.
  • Consequently, I think that should Microsoft decide to bite the bullet on consumer, Facebook would represent a natural place for many of those assets to find a home.
  • While Microsoft is not the best in AI, it is far better than Facebook, and sharing that expertise would move Facebook meaningfully forward.
  • This could also benefit Microsoft as it really is only able to generate data using Bing but if it had access to some of the data being generated by Facebook, this could help it to both improve the diversity of algorithms it creates as well as the speed of development.
  • Even in Gaming where Facebook is already present with Oculus, the fit as good and it has already been announced that the VR headset will be able to be powered by the Xbox.
  • I don’t think that Facebook and Microsoft will merge but there are many areas in which collaboration is mutually beneficial and there is a remote possibility that Facebook will buy some of Microsoft’s consumer assets.
  • In the short-term I prefer Microsoft as its increasing strength in enterprise still gives plenty of support to its current valuation.
  • However, over the long term, I suspect that Facebook’s growth into new Digital Life segments will provide greater upside potential once it has overcome the short-term slowdown in growth (see here).