Spotify – Speaker’s corner

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A smart speaker makes no sense.

  • Job postings indicate that Spotify is jumping into hardware and, while I think that a smart speaker makes no sense at all, there may be something in a device that makes dumb speakers work really well with Spotify.
  • Spotify is recruiting operations and project managers for hardware in a move that indicates that it intends to move into production with a hardware product that, I assume, is deeply integrated with its music service.
  • Everyone is going to assume that Spotify is going to launch a smart speaker to compete with HomePod, but I think that this makes no sense at all.
  • There are two reason for this.
    • First, Digital assistant. Spotify has no digital assistant in any form.
    • This means that it will need to use one of the others from which Alexa, Google Assistant, SoundHound and Cortana are all viable choices.
    • This may be where SoundHound makes more sense as it has a passable digital assistant (called Hound) as well as a music recognition service like Shazam.
    • Although a music recognition service does not make a lot of sense in this setting, there is a strong and well developed music related AI domain in SoundHound that may compliment Spotify’s existing music AI nicely.
    • Furthermore, SoundHound and Cortana are the only two that do not have a competing music subscription business.
    • The fact that all smart speakers except the HomePod, allow Spotify to be set as the default music service pretty much obviates the point in making a smart speaker in my opinion.
    • Second, audio: While Spotify knows a lot about categorising and understanding music tastes, its know very little about the increasing complexities of making high quality speakers with intricate microphone arrays.
    • This means that any speaker that it makes is unlikely to be better than something from one of the established players like Sonos or Harman Kardon.
    • These speakers all have the ability to set Spotify as the default music service and so I fail to see what benefit there is for Spotify in creating a competing product.
  • However, there are already millions of Bluetooth enabled speakers present in the market today that are very dumb with no intelligence embedded.
  • Millions of Spotify users play music through these speakers on a daily basis and so there could be a benefit to be had from a device that makes these speakers smarter.
  • This could take the form of a plug-in module or Bluetooth streaming device that includes microphones and is integrated with one of the mainstream digital assistants that has been optimised to make the Spotify music experience better.
  • The Spotify user experience through both Amazon Alexa and Google Assistant is basic at best and so something that has been optimised to allow better voice control of the Spotify music service could improve user loyalty and stickiness.
  • This is the kind of product I expect Spotify to create as it makes far more sense a business perspective.
  • The streaming music market remains dominated the two major players and while Apple has gained some momentum recently, it does not appear to have made a meaningful dent in Spotify.
  • I expect music streaming to remain the only engine of growth in the music industry going forward.

Music Streaming – Wrong villain.

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The music labels strike back.

  • It looks to me like intense lobbying by the music labels has resulted in the Copyright Royalty Board unfairly penalising the music streaming services when all along it is the labels that are mostly responsible for the “poverty” of the artists.
  • The Copyright Royalty Board of the U.S. Library of Congress has issued a written decision that will require the streaming services to increase their pay-out to artists to 15.1% from the current 10.5%.
  • On the surface, this ruling makes very little sense as, all of the streaming services already pay away far more than 50% of their revenues to the rights holders.
  • Furthermore, almost all of them are unprofitable as they either lack the scale to gain operating leverage or they have a free pricing tier supported by advertising.
  • If this decision is applied directly to the streaming companies, then I would expect to see a decline of 4.6% points on their gross margins and a deepening of their losses.
  • If the artists are not making good money from the streaming of their content and the streaming services are not hugely profitable then the only other place to point the finger at is the labels themselves.
  • Consequently, I have long believed that it is the labels that are making the most money from music streaming and it is they that are mostly responsible for the poor pay-out to artists from music streaming.
  • Interestingly, the announcement of this ruling was made by the National Music Publishers Association (NMPA) which may have had a hand in influencing the decision by the Copyright Royalty Board.
  • In its own words the “NMPA promotes, protects and advances the interests of music publishers and songwriters in matters relating to domestic and global protection of copyrights”.
  • To me this means that when some of its members are grumbling about not making enough money, it will seek restitution from outside of its ranks.
  • I have long believed that the music labels are at severe risk of becoming obsolete in the long-term.
  • This is because as more and more music goes digital, it is possible to recreate the historical function of the music labels (promoting and distrusting music to fans) can be more easily and effectively done with algorithms.
  • Consequently, in the long run I see artists going directly to Spotify and Apple Music and getting far more lucrative deals than they have today as the music labels will no longer taking a big share of the pie.
  • I think that the music labels are well aware of this threat and are doing everything that they can to prevent this scenario from playing out.
  • Lobbying the Copyright Royalty Board to worsen the economics for the streaming companies will help clip streaming’s wings and keep the labels in business for longer.
  • If this ruling goes into force, it is clearly bad news in the short-term for the streaming companies but the balance of power s rapidly shifting in their direction.
  • There are already signs of this as the deals that Spotify has most recently signed with the labels have shown an improvement in the economics in Spotify’s favour.
  • Hence, I still think that the long-term picture is still rosy for music streaming and that the labels will eventually be removed from the sale and distribution of music, but the economics will worsen in the short-term as the labels fight back.
  • This may put a small dent in Spotify’s IPO plans but its long -term path to a profitable, music-label free future remains intact.

Apple – Battle for the smart home pt. VI

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HomePod delays have cost it dearly.

  • The HomePod has only one advantage in a market that is rapidly becoming all about the algorithms with hardware being left to those that really know audio.
  • The much awaited HomePod is now available for pre-order and will start shipping on February 9th
  • At $399, it is going up against some of the very best that the audio industry has to offer.
  • In 2017 the best digital assistants were only available in their own in-house hardware but this is changing rapidly as there is a plethora of third party products coming to market.
  • Furthermore, Amazon Alexa, Baidu DuerOS and Google Assistant all have substantial advantages over Siri, which in my opinion, make them much better smart assistants to have in one’s house.
  • Hence, I see the HomePod competing on two fronts and on the most important front, I see it being hopelessly outclassed.
  • These are:
    • Audio: There is no doubt that Apple can make excellent quality audio products.
    • However, in this category, it is not alone.
    • While I think it can comfortably hold its own in the mid to high end of the speaker market, I have doubts whether it can do so at 40% gross margins.
    • This is because competing solely on audio quality, there will be just as good audio products available at lower prices.
    • Digital Assistant. It is here that I think that Siri is hopelessly outclassed.
    • My tests have consistently shown that both Google Assistant and Duer OS are much better products in their relevant markets. (Baidu DuerOS does not yet exist in English).
    • Furthermore, when it comes to the smart home, Apple is hopelessly outclassed when it is compared to both Amazon Alexa and now, Google Home.
    • The star of CES was Google Assistant and not just because Google bought almost every piece of advertising space that there was available.
    • This was followed through on the show floor with almost every smart device manufacturer either already supporting Google Assistant or having it on the immediate roadmap.
    • Just like 2017, Apple HomeKit was a no show and I saw just one product (a smart ceiling fan) that had support for Apple’s smart home offering.
  • Consequently, I think that Siri is way behind in the smart home leaving Apple competing pretty much on audio quality alone.
  • The real competitors for HomePod are the likes of Sonos, Sony, Harman Kardon and so on, all of whom are likely to make their product available with either (or both) Google Assistant or Amazon Alexa.
  • This is why I see competition in this space moving away from audio quality and rapidly becoming all about the algorithms.
  • This combined with Google closing the gap in the smart home, is what has lead me to reverse my position and to expect that it will be Google that ends up triumphant in this space (see here).
  • Hence, from Apple perspective it appears that there will be equivalent sounding products with much better brains on the market at lower prices.
  • I think only a small sliver the hardcore Apple fanbase is going to buy this product which is not enough to make it a real success in my opinion.

Snapchat – Content blues

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Escaping content is a sign of real problems.

  • Snapchat’s move to allow content to be shared outside of its app is a sign that growth remains stagnant in the face of brutal pressure from Instagram and that it needs to expand its audience at any cost.
  • The personal stories will all remain in the app but Our Stories, Search Stories and Official Stories can now all be shared via a link that directs the recipient to a video player embedded in snapchat.com.
  • This is exactly the reverse of how video evolved on Facebook and I think it’s a worrying sign.
  • When Facebook started with video, users posted links to YouTube on their Facebook feeds but as it grew in popularity, users were able to cut out the middle-man and post directly on Facebook.
  • This is what allowed Facebook to become the video advertising powerhouse that it is today.
  • The reverse appears to be taking place at Snapchat and while the videos are still exclusive to Snapchat, this is a sign that things might change should the app continue to languish in terms of growth.
  • If Snapchat begins supporting videos that have been posted on other properties such as YouTube or Instagram, then its ability to monetise the Digital Lives of its users will take a hit.
  • The two most important measures of Snapchat’s ability to monetise its users are its Digital Life coverage and active users both of which remain stagnant.
  • Snap’s Digital Life coverage is 14% and without major traction in another area like Media Consumption or Gaming, it is unlikely to change for the foreseeable future.
  • If it begins allowing videos posted elsewhere to be seen and linked to on its system then its prospects for generating revenue from Media Consumption (10% of the Digital Life Pie) will be very seriously eroded.
  • I think that Snap’s active users are not growing because Instagram has successfully copied all of Snap’s user experience innovations and made them easier to access which this move could exacerbate.
  • Hence, I think that this further dents its prospects to increase its Digital Life coverage but it may just help its user growth but this will take a long time to materialise.
  • Putting this into the context of RFM’s monetisation analysis (see here), it means that once Snap Inc. has monetised its full potential, growth will grind to a halt as it has at Twitter.
  • Snap has a core user base and revenue opportunity which, in my opinion, still values the company at around $12.40 a share which is a good 14% below where the shares are today.
  • Despite fair value at $12.40, I still think that the stock needs to dip below $10 before I would consider looking at it as it is at this point that potential acquisition interest may materialise.

8K – Panel pains.

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Nightmare on pixel street.

  • With 4K panels now being in the mainstream, the technology discussion in the panel industry has now turned to 8K which on the surface looks like a technology with very little future.
  • Sony, Samsung and LG all demonstrated at CES 2018 new large panels (80”+ size) featuring 8K resolution.
  • 8K refers to a resolution of 7860 x 4320 at a 16:9 aspect ratio which is made up from 33.96m pixels.
  • This is 4x the current standard of 4K (3840 x 2160 at 16:9) which has a total of 8.29m pixels and already takes the user way beyond what one would consider a discernible difference in resolution.
  • There is only a certain amount of detail that the human eye can see which can be used to calculate the distance from the screen that user needs to be positioned to see the benefit of higher resolution videos (see here and here).
  • For instance, to see the difference between 1080p (regular HD) and 720p on a 50” screen, the user needs to sit no further than 9.8 feet (3.0m) from the screen and will see the full benefit of 1080p at 6.5 feet (2.0m).
  • With average screen size now closing in on 50” and a living room viewing distance of 8-9 feet, it is obvious why 1080p is now a complete necessity when it comes to selling TVs.
  • However, the same case cannot be made for 4K.
  • To see the difference between 4K and 1080p on a 50” TV the user needs to sit no less than 6.5 feet (2.0m) from the screen with the full effect being noticeable at 3.0 feet (0.9m).
  • I have long believed that anyone with a room large enough to accommodate a 50” panel is going sit much further than 6.5 feet from the screen rendering the improvement in resolution unnoticeable over 1080p.
  • However, 4K TVs have sold reasonably well and I think that this is because of the picture quality innovations other than resolution that have been offered on newer TVs.
  • These include high dynamic range, better contrast, faster refresh rate, improved colour gamut and so on.
  • These have allowed 4K panels to produce brighter, more vibrant images than 1080p panels which has greatly driven their appeal.
  • The problem for 8K is even more pronounced as the user needs to sit no further than 3.0 feet (0.9m) from a 50” panel with the full effects being noticeable at 2 feet (0.6m).
  • Unfortunately, all the picture quality tricks seem to have been used to sell 4K leaving 8K with very little with which to sell itself.
  • This is why Sony was touting its panel more on the basis of brightness rather than picture quality.
  • Furthermore, another big problem for 8K is content which has to light up 19.3x more pixels than 1080p at its native resolution.
  • This means that for a barely discernible difference in resolution, nearly 20x more transmission or streaming capacity will be needed to deliver the picture assuming no improvement in compression.
  • This is completely unfeasible as there is no way the user will pay 20x the price to stream or receive 8K compared to 1080p leaving 8K in a quandary.
  • There is only one use-case that I can think of which is to use the extra pixels to generate a 3D-without-glasses effect.
  • This is an idea that was first created by Phillips and it works by moving the focus point of pixels from a simple 2D plane into a 3D block.
  • This can then be used to create what is known as a light field which has been demonstrated to produce compelling 3D images without having to use glasses.
  • The higher resolution of the panel, the more pixels can be used to create this effect and the more pronounced it becomes.
  • Even a doubling of pixels to 16m (6K resolution) creates a huge improvement (over 4K) in both the image and the 3D effect and I suspect that this will only improve as the pixels available for the light field continues to increase.
  • This creates a use case for 8K as using pixels for 3D instead of resolution will mean much lower transmission or streaming requirements as well as create a discernible difference for the users.
  • Whether users will pay-up to have 3D on their TVs has yet to be proven, but this technique does solve almost all of the horrible limitations that hobbled 3D TV when it was first tried 5 years ago.
  • However, I do see a strong use case in digital signage as the 3D effect still works when users are moving and test panels have been shown to be far more effective at grabbing users’ attention.
  • As it stands today, there I see no other application that is likely to drive adoption of 8K which explains the steadily increasing level of interest that is being shown by the panel makers who badly need something new to keep prices high for the next panel generation.

 

Broadcast TV – Sword of Damocles pt. IV.

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Cable TV looks finished while OTA has another chance.

  • The nominations of the Golden Globes have revealed further gains for the OTT players over the traditional content creators also signalling the coming demise of cable TV.
  • The nominations for the 2018 Golden Globe awards have been published where the TV section makes interesting reading.
  • Out of a total 55 nominations, 15 (27%) went to TV shows that were exclusively owned and distributed by streaming services.
  • This is a big increase from last year where 10 (18%) out of 56 nominations went to shows owned by the streaming services.
  • However, 2017 has seen real differences emerge between the streaming players with Netflix pulling away from its competitors Amazon and Hulu.
  • In 2016 Netflix and Amazon were neck and neck on 5 nominations each but this year Netflix has gone up to 9 (behind HBO on 12) while Amazon has fallen to 3.
  • I suspect that this is a reflection of the big increases in content spending that Netflix has made which grew to $6bn in 2017 and $8bn in 2018.
  • However, while Netflix is gaining ground on the traditional content creators, its catalogue is really suffering as other content creators are increasingly pulling their content from its catalogue and going on their own.
  • The latest is Disney which aims to start its own streaming service in 2019.
  • Netflix started life as a distributor of DVDs and was early into streaming, but as it has rightly identified content as the future, it earned the ire of the rest of the entertainment industry.
  • The result could end up being a series of streaming services all with exclusive content from which consumers can pick and choose their subscriptions.
  • To me, this is the death rattle of the cable TV industry.
  • 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.
  • With the content creators all fragmenting into their own streaming services, this is exactly what seems to be happening and I suspect that the amount of money spent on premium TV in USA is going to fall meaningfully.
  • This is likely to be a death sentence for both the cable TV companies and the smaller channels that ride on the coat tails of the big channels.
  • This is because they are receiving income from the all in one subscription payment despite having very few viewers.
  • At the same time there appears to have been a substantial recovery in the number of households making use of OTA (over the air broadcast).
  • 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 representing 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.
  • I suspect that this is a temporary trend as the spectrum that OTA currently occupies could be re used for much more valuable services as there is no reason why OTA can not be streamed just like everything else.
  • The obvious move is to make the entire selection of channels available on a single, free, ad-supported streaming service.
  • 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.
  • Hence, I think that the era of one big subscription is coming to an end and consumers are likely to end up spending less money while still getting exactly the channels that they want without having to indirectly pay for any more.
  • I see cable cutting accelerating significantly in 2018 with real industry change coming in 2020 and beyond.

Apple vs. Spotify – Duck lines

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Two lines of ducks are forming.

  • With a new alliance between Spotify and Tencent and the acquisition of Shazam by Apple, the big players are getting their ducks in a row to dominate the global music industry.

Spotify and Tencent

  • Following on from Tencent’s failure to acquire the company (see here), a compromise has been reached where the two companies will acquire a cross holding in each other and “explore collaboration opportunities”.
  • To me this means two things:
    • First: Tencent will be able to integrate the Spotify service into the ecosystem experience that it assembles to enable it to address developed markets.
    • This could form part of an offering that also has a gaming offering using Supercell and an instant messaging offering using Snapchat.
    • Second: I expect that Tencent will get access to Spotify’s best in class music categorisation and recommendation system for use in making its Chinese service better.
    • For this I expect that Spotify will receive a revenue share from Tencent as I think it very unlikely that Spotify has any real chance of succeeding in China on its own.
    • This is because Tencent’s QQ music is already the leader with 41% share and because like everything else, China’s music market is predominantly about Chinese music for Chinese users.
    • The Chinese music market has been tiny historically, but this is beginning to change as the more affluent end of the market is beginning to pay for streaming services.
    • Consequently, the Chinese market is almost all digital with only a tiny physical presence.
    • It is this change that I think has interested Tencent in Spotify’s technology as technology is what I have long believed underpins Spotify’s superior performance relative to Apple Music enabling it to keep Apple at bay.
  • A close collaboration between Spotify and Tencent could mean a fully global offering with the exception of India which would probably require an acquisition to get a foothold.

Apple

  • At the same time, it seems likely that Apple has reached a deal to acquire Shazam, the music recognition company, for $400m.
  • This is well below the $1bn valuation at which Shazam raised money in 2015 but in 2015, there was a much greater supply of belief.
  • The issue that Shazam has had is that it has had great difficulty in making money as 2016 revenues appear to have been around $50m with the company hovering around break-even.
  • I suspect that the company has not grown nearly as quickly as it expected which has meant that profits expected by investors have not materialised making them willing to consider a lower offer.
  • From Apple’s perspective, I do not see this as an acquisition of a service but much more a technology.
  • Shazam has been analysing and recognising music for nearly 20 years and as a result is pretty good at characterising, recognising and understanding music.
  • This is one of the traits that makes Spotify’s service so good as it is able to take that and match it to users’ tastes.
  • Consequently, I see Apple taking Shazam’s technology and incorporating it into Apple Music in a bid to improve its service and compete more aggressively with Spotify.
  • I continue to believe that the best way for Apple to do that would be to introduce a free tier, but that is a whole other discussion (see here).
  • This is great news for SoundHound as the loss of independence of its major rival will make it far more appealing to anyone who competes with Apple at any level.

Take Home Message

  • Streaming has reversed a long decline in music industry revenues and consequently is widely considered likely to become the standard way to distribute music.
  • I still think that the market is big enough for two players to thrive and Apple and Spotify remain at the top and look unlikely to be seriously challenged.
  • Hence, these recent moves look to be aimed at cementing the position of the two leaders ensuring that streaming remains a duopoly outside of China and India.

Sonos – Sounds of sameness pt. III.

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Sonos is now just another speaker maker.

  • Sonos has finally enabled Alexa voice control and Spotify support in its speaker systems thereby ensuring that it will now be competing purely on the quality of its hardware.
  • The Sonos One is Sonos’ first voice-activated speaker which has received rave reviews for its sound quality, but very little else.
  • This is because this device uses Amazon’s Alexa to control its functions and is adding support for streaming services like Spotify and Tidal with increasing regularity.
  • While this is exactly what is required to sell speakers in this day and age, it is confirmation to me that Sonos has completely lost its mojo.
  • Sonos was very early into digital music streaming around the house and developed a suite of software that made multiroom music possible.
  • While this was a novelty, Sonos achieved differentiation and was able to charge a premium price for its high-quality audio products with this functionality.
  • Unfortunately, Sonos has squandered the lead that it had and instead of using its lead to maintain its differentiation, it focused on trying to lock users into its products.
  • It tried to do this by only allowing users to access popular services such as Spotify, Amazon and so on via its own app.
  • The idea was to create a compelling user experience such that users would choose a Sonos even if something of equivalent quality was available at the same price point.
  • Unfortunately, this is where it has all come unstuck as Sonos’ ecosystem delivers a frustrating, buggy and substandard user experience that I think users would not use if they had a choice.
  • By enabling both Spotify Connect and Amazon Echo, Sonos has removed the requirement for users to use its software which I think is a sign that it is giving up on trying to create user preference around an ecosystem.
  • Because Amazon Echo and Spotify Connect are keen to work with any speaker on the market, Sonos’ differentiation now becomes: audio quality and design.
  • Multiroom functionality is now table stakes in the home speaker game.
  • Hence, I see Sonos’ only chance is to either
    • First: invest in cool new hardware features and stay ahead of its competition to maintain its price premium or
    • Second: to go for volume and gain scale advantages by significantly outselling its rivals.
  • Both of these will be extremely difficult to achieve as much bigger and stronger rivals are all investing in producing great audio quality in a small package and the market is rapidly fragmenting given the low barriers to entry.
  • Given Sonos’ current position, I think that both of these options would have required a bold strategic move from Sonos that would probably have had the most chance of success if it had appointed an outsider as CEO rather than its COO.
  • Hence, I think Sonos now has nothing to differentiate it from Apple HomePod, Google Home Max and so on meaning that its only weapon will become price.
  • I think that this is big problem because its larger and more powerful rivals are more than capable of subsidising these products in order to push their ecosystems deeper into the home.
  • The net result of this is likely to be a weakening of Sonos’ financial position to the point where one of the larger players is able to buy it at a discounted valuation.
  • I see Samsung, Apple, Sony, Tencent and Amazon as potential acquirers.

Google vs. Facebook – AI dividend.

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Google’s AI already paying dividends

  • Both Google and Facebook have a fake news problem but Google’s leadership in AI means that it is likely to have a better solution and will not have to materially impact the financial performance of the company to fix it.
  • Over the last 2 years, Google, Facebook, Twitter and so on have become far more important when it comes to delivering current events to users.
  • This is particularly relevant when certain events occur that result in regular citizens present at these events uploading videos and commentary long before the more established media outlets can arrive on the scene.
  • As a result, important information often appears on Google, Facebook and Twitter first, meaning that the accuracy and veracity of this information is of paramount importance.
  • Unfortunately, during these sorts of events, there is often a scarcity of information available making it the easiest time to successfully propagate fake news.
  • This is the problem with which both Facebook and Google are wrestling, but from looking at how both are dealing with it I think there is a huge gap between these two players.
    • Facebook: To combat this problem, Facebook has announced that the total number of employees working on safety and security will be doubled from 10,000 to 20,000.
    • Given that the total number of employees at the end of June 2017 was 20,658, this implies that 50% – 60% of all Facebook employees will be working in non-revenue producing positions.
    • This will mean that costs will meaningfully outstrip revenues leading to a “significant” decline in profitability.
    • These humans are being shipped in to deal with the problem because Facebook’s AI is not even close to being good enough to deal with it
    • Furthermore, I think that this is a problem that humans cannot really solve given the velocity that is required.
    • Google: to be fair to Facebook, Google’s data tends to be somewhat more structured than Facebook’s making it easier to analyse but this does not come close to explaining the difference in AI ability.
    • Although Google remains reluctant to discuss the methods it is using to combat this problem, this is something that it has been dealing with for many years and there has been no sudden increase in current for forecasted headcount.
    • There has also been no sudden decline in gross margins (current or forecasted) which would indicate that Google had taken on contractors to help fix the problem.
    • While Google does use fact checking services to ascertain the veracity of some of the content that appears in its searches, I think that almost all of its efforts are going into closing the loopholes in its algorithms that allow fake news to surface.
    • This is why there is no financial impact on Google from this problem compared to Facebook.
  • Furthermore, I think that using humans to combat fake news will end in failure.
  • This is because it takes the human system around 2-3 days to reliably label an article or item as fake by which time is has trended and already been seen by millions of users.
  • Consequently, I do not think that having tens of thousands of humans scouring Facebook for fake news will actually solve the problem.
  • Hence, I think that this will result in $1bn+ of shareholders money being wasted in every year that humans are being used.
  • This highlights the gravity of the AI problem that Facebook is trying to deal with and think it is one that Google is much closer to solving.
  • Hence, I see Google being able to far more effectively manage this problem and at a fraction of the cost.
  • From a shareholder value perspective, perhaps it is time to consider switching from Facebook to Google.

Tencent Q3 17 – Time purchase

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Mighty core business buys time.

  • Tencent reported strong results driven mostly by its content offerings which gives the company time to work out how to fully monetise the vast the community it has created.
  • Q3 17 revenues / net income RMB65.2bn ($9.8bn) / RMB18.0bn ($2.7bn) nicely ahead of estimates of RMB61.0bn / RMB15.8bn.
  • Tencent called out smartphone games (especially Honour of Kings) and its online video platform (which it now believes has overtaken Alibaba and Baidu to become China’s No. 1 place for video streaming) as top performers during the quarter.
  • Most revenue streams grew between 45% and 50% YoY but it was the contribution from other businesses such as first-time monetisation of WeChat Pay and cloud services that really drove the numbers above expectations.
  • Overall, these revenues grew by 143% to RMB12.0bn which pushed the corporate average revenue growth rate to a 7 year high of 61% YoY.
  • While the core businesses continue to defy the slowdown I have been expecting, the laggard in the company remains the monetisation of the ecosystem that it has created.
  • This is what Baidu and Google are really good at and what Alibaba has been showing increasing signs of getting to grips with.
  • The vast majority of Tencent’s revenues come from selling content like games, in app purchases or streaming subscriptions making it more like Netflix and Amazon rather than Google or Facebook.
  • Tencent has created a community of 980m users at least half of whom regularly interact with Tencent in multiple Digital Life segments.
  • This creates a substantial revenue opportunity for Tencent but one I think that it has struggled to really get to grips with.
  • Online advertising is still just 18% of revenues which I calculate is between one third to one half of what it should be for an ecosystem with 980m active users.
  • It is here that I still see the real upside for Tencent as it has done little in the last 15 months to address this opportunity.
  • To be fair to the company, management time has been very successfully invested in growing the existing businesses but the time will come when it will need to monetise this opportunity to keep growth going.
  • Here, I think that Tencent has a lot of work to do as its score on RFM’s 8 Laws of Robotics is pretty low, particularly against Laws 5 and 6 which focus on the integration of services and user data.
  • To monetise the ecosystem effectively, I think a good score against these measures is required and Tencent has so far shown little sign of grasping the importance of integration.
  • However, while the core business continues to defy expectations, this is not a problem from a share price perspective and buys management time to get to grips with integrating its assets into a single place where users can live their Digital Lives.
  • This is how I can continue to like Tencent as an investment despite its apparent slowness to move onto the next stage of its development.
  • While the core business continues to deliver, the valuation remains underpinned with the potential further upside coming from monetisation of the ecosystem.
  • This is why Tencent remains my preferred pick globally.