Google – Meaningless milestone

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Android’s success shows up Google’s deficiencies.

  • Android has surpassed Windows as the No.1 platform for accessing the Internet globally, highlighting just how bad Google is at monetising Android as it remains only a small percentage of total revenues.
  • I think that this could be a growth opportunity if Google can fix the many problems that exist within the system that it created and in many cases controls.
  • According to StatCounter, Android devices now make up 37.93% of all Internet access devices very slightly ahead of Microsoft Windows at 37.91% with iOS a distant third at around 13%.
  • Furthermore, with most users spending more time on smartphones and tablets than PCs, it is clear that the PC is rapidly becoming a device used in the enterprise and by content creators.
  • This is a major reason why RFM does not consider PC usage as a contributor to Digital Life when assessing the addressable market for a digital consumer ecosystem.
  • Consequently, it would be natural to assume that Android is a big part of Google’s revenues but in reality, it is not.
  • RFM estimates that in 2016 just 19% of advertising revenues came from Android devices compared to PCs and Macs which generated 60% of advertising revenues.
  • A further 19% of revenues came from iOS devices despite the fact that there are 2.9 Android devices for every 1 iOS device.
  • This tells me that the PC is a much better platform for advertising monetisation but it is also a clear indication that Google is doing something very wrong when it comes to making money from Android.
  • I have long argued that while demographics plays a role, the endemic fragmentation of Android and Google’s inability to update software on its own devices severely hinders the usage of and loyalty to, the Android platform (see here).
  • I believe that this is a major reason why an Android device generates less than half the revenues that an iOS device does which is also meaningfully less than a PC or Mac.
  • While this is a real black eye for Google, I also see it as an opportunity.
  • RFM estimates that in Q4 16A each iOS user delivered $3.37 in revenues for Google compared to $1.47 on Android.
  • If Google could fix the problems with Android, then I think that there could be meaningful upside to this number.
  • For example, if Google was able to increase monetisation of its own Android devices to $2.00 per user per month, this would increase revenues by $6.4bn on an annualised basis.
  • As smartphone user growth and usage both slows, Google will need to look for growth elsewhere and I see this as an obvious place to start.
  • I am hoping to see signs of this at Google i/o (in May) but in the preview of Android O (see here), I was disappointed.
  • Without these kinds of actions I think that Alphabet remains fully valued and would prefer the shares of Microsoft, Tencent and Baidu.

ARM vs. Intel – Silver bullet?

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Last time it was software. This time its emulators 

  • Qualcomm and Microsoft have announced that Windows is once again coming to the ARM processor but this time the approach is completely different to the disaster that was Windows RT.
  • In Windows RT, Microsoft modified Windows 8 such that it would work on an ARM processor and in the process killed flexibility and backwards compatibility to legacy software.
  • The result was a platform that was shunned by both developers and users, completely killing any hope that ARM would gain penetration in Intel’s home turf of PCs.
  • The fact that Intel has cut its lower end Atom line of products that aimed to compete with ARM in Android tablets has left space in the market for these products to grow into.
  • This time the approach is completely different as Qualcomm and Microsoft have produced an x86 emulator that fools the software into thinking that there is an x86 chip present.
  • The net result is that any Win32 and universal Windows app will run on the device with no modifications being required by the developer.
  • The net result is hoped to be cheaper, fan-less, always-on, mid to low end PCs that have longer battery life than their counterparts powered by Intel.
  • Qualcomm and Microsoft have also promised that Adobe Photoshop, Microsoft Office and Windows 10 games will all run on these products and it is here that I find the big caveat in this strategy.
  • This caveat is performance.
  • Intel processors may be power hogs but they offer blistering performance in real world devices as well as in benchmark tests.
  • ARM has been able to match some of the benchmarks but has never been able to come close to Intel in real devices.
  • This is why the mention of Photoshop, Office and games is so important as these three are well known to be very processor intensive.
  • Their requirements are so high that the software is written directly to the processor (written to the metal) to avoid any lags created by going to the processor via the operating system.
  • This is where the problem will occur as processor heavy apps will no longer be written directly to the metal but instead will be going through the emulator.
  • The emulator process is as follows:
    1. Translate requests from the x86 programs sitting on top of it into the RISC instruction set that ARM understands.
    2. Execute the request on the ARM processor.
    3. Translate the results back into the x86 instruction set so that the app can run.
  • Consequently, the emulator will incur additional processing overhead as well as consume power.
  • The big questions are how much will it consume and will it have an impact on the overall user experience?
  • For Intel, this is a critical question because if there is no impact it could see its market share in the mid-range PC market (most of the volume) come under serious threat.
  • In Q3 16A Intel reported non-GAAP gross margin of 64.8% compared to Qualcomm at 58.9% but if I remove the profits from licencing, I estimate that Qualcomm’s chip gross margin is around 40%.
  • Consequently, if Qualcomm’s Snapdragon chipset plus the emulator can match Intel’s performance, Intel will have to cut its prices to stay in contention.
  • This could see its gross margin come under sustained pressure as the first real challenge to its monopoly finally hits home.
  • History is on Intel’s side as emulators on battery powered devices have always impacted the user experience so much that the experience failed to win over users.
  • In order to put pressure on Intel, the Qualcomm powered Windows 10 devices will have offer the same level of functionality and performance, better battery life as well as a cheaper price.
  • These are my three criteria for Qualcomm to really challenge Intel and success will come down to the quality of the emulator that it has created.
  • Qualcomm will also need to work closely with the device makers as there are endless hardware configurations for Windows 10 PCs and clumsy integration could easily make a complete mess of the elegant product that Qualcomm and Microsoft have created.
  • The first devices will be available early 2017 (launch at CES 2017 looks likely) and it is by these that Intel’s outlook will be judged.
  • This is obviously negative for Intel but it is worth remembering that every attempt to dislodge Intel to date has been a miserable failure.

Microsoft – Wood for the trees.

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Microsoft is so focused on the future that it misses the opportunity in the present. 

  • Microsoft has moved even further away from the consumer with its Creators Update for Windows 10 and the launch of the Surface Studio complete with the Surface Dial accessory.
  • At the same time, Microsoft continues to ignore the huge opportunity presented to it by the obsolescence of the laptop form factor which I find strange as it claims to be all about creating new product categories.
  • Microsoft unveiled two new innovations as well as an incremental update to the Surface Book.
    • First: Windows 10 Creators update
    • In addition to a host of other incremental improvements, the Creators Update focuses on enabling 3D objects on the PC as well as in both AR (HoloLens) and VR, gaming and easier connections and sharing with close contacts.
    • None of this is desperately new except that the degree to which content now works across different devices is far superior to anything else that has been launched to date.
    • Microsoft hopes to include the mobile phone in this range of devices but how well it can do that on Android and iOS remains to be seen.
    • These platforms are now critical as Windows Phone is rapidly losing all of its remaining users.
    • Also key to this update is the focus on content creation as the upgrades in this update are aimed at improving functionality for those that draw, write, broadcast and so on rather than those that consume.
    • This is a tacit admission that the battle with iOS and Android for content consumers has long been lost.
    • However, it also shows Microsoft aggressively acting in both software and hardware to keep the content creator users and corporates on its platform.
    • Second: Surface Studio.
    • This is very high specification all-in-one PC with a 28” monitor that can transform to become a work surface exactly like the drafting table used by anyone that draws or designs for a living.
    • Surface Studio comes with the Surface Dial which is designed to go in the non-pen hand to alter characteristics such as ink colour, brush size, opacity and so on.
    • The Surface Dial works both on and off the screen and is backwards compatible with all Surface products.
    • This device is clearly aimed at professionals and it is priced accordingly at $2,999.
    • Third: Surface Book.
    • The top end i7 model has been upgraded to offer double the graphics capacity than its predecessor as well as 30% more battery life.
    • Microsoft now claims that the device can provide 16 hours of battery life.
    • However, the single biggest failing if this product has been carried through into the next version as the keyboard stops working as soon as the screen is detached.
  • The net result is an update to the Microsoft Windows proposition that is aimed at keeping content creators and corporates on its platform.
  • In that vein, this is a good update with nice looking and relevant products but I still think that Microsoft is missing the wood for the trees.
  • I have long argued that the laptop form factor is obsolete as having the keyboard, mouse and screen permanently locked together offers a substandard user experience that is both uncomfortable and unhealthy (see here).
  • This is why the Surface Pro line of products is a game changer as it enables a desktop like user experience to be enjoyed from anywhere.
  • This works by allowing the screen to be at the correct height and distance from the eyes with a wirelessly connected mouse and keyboard to be in the most comfortable and ergonomic position.
  • However, this does not work with the Surface Book as the minute the screen is detached from the keyboard, the keyboard ceases to function.
  • I think it would cost Microsoft less than $1 per unit to put this right and it would enable it to really push a whole new use case for content creators out of the office.
  • I have long believed that this could lead to a huge replacement cycle where ageing laptops are replaced with PCs in the tablet form factor which could even kick the PC market back to growth for a few years.
  • However, this failing indicates that Microsoft has still not realised the opportunity that lies before it.
  • Intel and the PC makers are equally guilty of this oversight but these companies have not taken it upon themselves to re-imagine computing.
  • I suspect that the main issue here is that these companies have been selling laptops for over 30 years and it is very difficult to break out of that mindset.
  • It would also require a big marketing campaign as laptop users are also so ingrained with this form factor that they have not realised that there is something much better on offer.
  • The net result of this event is a software and hardware update that goes a long way to keeping content creators faithful to Windows but continues to ignore the possibility to create a large replacement cycle in its core product.
  • Fortunately, Microsoft’s valuation does not demand this vision to come true in order to be attractive which is why I continue to like it alongside Tencent and Baidu.

Lenovo Q1 17A – Heavy weather.

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I see opportunity but not without risk. 

  • Lenovo is hanging on in the difficult markets that it serves, but I think there is an opportunity for it to be as creative in PCs as it has been in handsets.
  • Q1 17A revenues / EBIT were US$10.1bn / $245m nicely ahead of estimates of $10.0bn / $167m.
  • This was mostly driven by good profitability in PCs which chalked up 5.3% EBIT margins despite a 7% decline in revenues.
  • Handsets increased their losses compared to Q4 16A as sales and marketing expenses have been increased ahead of the new models from Motorola (Moto Z and Moto Mods).
  • Here, I am hopeful that these products will be reasonably successful as the Moto Z offers a lot of phone for a very reasonable price and Moto Mods is the most interesting iteration of modularity I have seen for a very long time.
  • Motorola has crammed an Android device into a very thin package leaving space for a series of backs that magnetically attach to the device offering a range of functions such as camera, projector and high quality speakers.
  • If these devices ship reasonably well, there should be a corresponding improvement in profitability that should be further augmented by steady cost reductions.
  • All of Lenovo’s end markets are having a difficult year but Lenovo is continuing to do a good job at making the best of them.
  • However, I think it could do more and I would like to see some of the creativity in Motorola spread to the other parts of Lenovo.
  • The softest target is PCs where Lenovo’s strategy is to differentiate by addressing certain segments where there is growth such as tablet PCs, Gaming PCs and Chromebooks.
  • Unfortunately, its tablet PCs are nothing more than laptops where the keyboard comes off and then instantly stops working.
  • What Lenovo needs to do is to go further than even Microsoft and Huawei have gone and make the most of the fact that the laptop form factor is now obsolete.
  • Having the keyboard and the screen physically separate allows for the vastly superior, much healthier desktop PC experience to follow the user out of the office.
  • I have long argued that this offers the potential to create a 3 to 4 year replacement cycle where laptops are replaced with something that is just as powerful but offers a vastly superior user experience.
  • The problem is that the PC industry has been selling laptops for 40 years and seems incapable of accepting the notion that there is now something much better on offer.
  • This is the opportunity for Lenovo but it is not without risk, nor will it come cheap as users are even more oblivious of how the tablet PC can improve their portable computing experience.
  • Consequently, I do not expect Lenovo to do down this road, but I believe that if it wants to see a return of growth and better than commodity margins, this is where it must go.
  • Of all the PC makers, I find Lenovo to be one of the best run and most pragmatic, even if it is a little unimaginative.
  • I would back it against almost any of the others.

Microsoft FQ4 16A – Finnish with a flourish

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Good results restore optimism in strategy 

  • Microsoft reported good FQ4 16A results supported by signs of stabilisation in PCs and excellent performance in the cloud.
  • FQ4 16A revenues / adj-EPS were $22.6bn / $0.69 compared to consensus estimates of $22.1bn / $0.58 and RFM on $21.9bn / $0.59.
  • Microsoft’s strong results were driven by a very good performance by Azure which continued to grow by over 100% and some signs of stabilisation in the PC market.
  • This was slightly offset by gross margin pressure triggered by the increasing mix of revenues coming from cloud and Office 365.
  • This is completely normal as cloud revenues have lower gross margins than perpetual software sales but they are longer lasting meaning that they deliver more profit in the long term.
  • I would continue to expect to see gross margin decline steadily over the next year or two as this transition continues.
  • Stabilisation in PCs has been echoed by a number of other companies in the supply chain which have also seen some signs of stabilisation in the PC market this quarter.
  • I have long been believer that the PC is very far from dead but it is in fact suffering from a portion of its users continuing to defect to other platforms.
  • These users are the ones that I refer to as content consumers who have historically used a PC to do nothing more than browse the internet, email, shopping and so on.
  • These users have very little reason to own a PC as a smartphone or tablet running iOS or Android can do the job just as well and much more conveniently.
  • I think that other users such as content creators and companies will long have need of the PC and while I don’t think it is going to grow, I don’t see a precipitous decline either.
  • This is why I think that Microsoft’s legacy OS revenues are likely to stabilise as the OS tends to be sold as part of the PCs overall and therefore is likely flatten in line with the market.
  • The same cannot be said for Office but Microsoft is doing an excellent job at converting traditional Office sales into Office 365 subscriptions and there is every sign that this will continue.
  • Consequently, the outlook for the next fiscal year is good with steady revenue growth and tight control of the cost base.
  • However, the issue around the consumer assets remains unanswered.
  • Microsoft is increasingly becoming focused on prosumers and the enterprise and where assets like Bing, Xbox fit and Skype fit into that remains very unclear.
  • The good news is that Microsoft’s valuation does not demand any real action around integrating these assets to create a fully-fledged enterprise and consumer ecosystem.
  • Hence, I can still see these assets being sold off at some point which still gives me a valuation for the shares of around $62.
  • This is still nicely above current levels ($55) leading me to remain positive on the outlook.
  • I would also add Baidu and Samsung into this group of stocks to look at for the balance of 2016.

Microsoft – Close call

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Microsoft needs 200m corporate upgrades to make its 1bn target 

  • Microsoft is just over 1/3rd of the way to its goal of 1bn Windows 10 users 3 years after its launch, but with the end of the free upgrade looming, it is going to be tight.
  • Windows 10 was launched on July 29th 2015 and one year after launch there are 350m devices running Windows 10.
  • This is by far the best performance yet of any of Microsoft’s operating systems but it is also the first time that the upgrade has been both relatively painless and above all: free.
  • However, that free period is ending at the end of this month and consequently, I expect upgrades from Windows 8.1 and Windows 7 to grind to a halt.
  • In the last 12 months roughly 250m new PCs have shipped of which 225m will have had Windows 10 installed.
  • This means that around 125m existing users have upgraded their devices to Windows 10.
  • However this already includes 48m Xbox One consoles that were upgraded at the end of 2015 to run the Windows 10 core.
  • This means that 77m PCs have been upgraded to the new OS.
  • I suspect that almost everyone who has Windows 8.1 will have upgraded but for users still using the excellent Windows 7 there is very little incentive to pay up after the end of July.
  • Consequently, I think that from here almost all additions will come from new PCs being shipped.
  • If I assume that in the next 2 years 500m new PCs will ship of which 450m will be running Windows, this leaves Microsoft at a total of 800m Windows 10 devices in July 2018.
  • This is why I have long been of the opinion that Microsoft would extend the free upgrade period but that has been proved to be incorrect.
  • Consequently, Microsoft will have to see 200m existing corporate PCs upgraded to Windows 10 in order to make its 1bn target.
  • RFM estimates that there are around 1bn PCs that are currently being used in a corporate context, meaning that 20% of them need to be upgraded rather than replaced in the next 2 years.
  • Given that PCs these days last between 5 to 7 years, this is not a huge stretch.
  • Furthermore, as many large corporations have a subscription deal with Microsoft for their software, the upgrade is unlikely to involve further expense.
  • Hence, I think that Microsoft will make its target quite comfortably but I think that this has very little to do with the consumer and is all about professional use.
  • When it comes to Digital Work, Microsoft is doing very well but I have concerns with regards to the Digital Life assets such as Xbox, Bing and so on.
  • In the context of an increasingly enterprise focused company, the Digital Life assets look out of place and I can’t help thinking that they might be worth more to someone other than Microsoft.
  • The good news is that Microsoft’s valuation does not demand any traction from Digital Life as Digital Work is enough to see upside in the valuation.
  • Consequently, I still like Microsoft in addition to Samsung and Baidu.

PC Industry – Twiddled thumbs.

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The PC industry continues to ignore the solution to its woes.

  • The Computex show passed virtually unnoticed last week as exhibitors on many stands spent a lot of time twiddling their thumbs.
  • Only stands which demonstrated virtual reality or were related to smartphones saw any real interest.
  • Most commentators have used this as another sign of an industry in the grip of terminal decline but I think a lot of this is self-inflicted.
  • I have long argued (in vain so far) that if the PC industry would address the 2 in 1 segment properly, it could trigger a product cycle that would kick the PC market back to growth at least for a few years.
  • This opportunity is rooted in my belief that the laptop form factor is obsolete and can be replaced with something that offers a more productive and ergonomic experience that is better for your health.
  • There is no longer any reason for the keyboard to be physically attached to the screen but the industry is so used to this form factor that seems incapable of moving on.
  • With the keyboard separate from the screen and a portable mouse, a tablet PC has the capability to become a portable desktop giving the user a desktop quality experience wherever he is.
  • The one caveat is when the user has no surface upon which to position the device and is forced to use it on his lap.
  • In this orientation, the tablet PC offers a poor experience but I believe that this use case is a minority of the time spent using a portable computer.
  • I think that the average computer buyer these days is a content creator as most of the email / web browsing crowd have long since migrated to smartphones and tablets.
  • This means that a keyboard, mouse and probably Office are important to that user which I think creates an opportunity for the PC industry to offer something better than a laptop.
  • A good example of how badly the PC industry misunderstands this issue is the specification of most laptops where the screen can be detached.
  • In almost every single product (Surface Book included) the keyboard stops working the minute the screen is detached.
  • This makes no sense whatsoever as it obviates the one use case (portable desktop) that the product really excels at.
  • This is a very simple and cheap problem to correct and the fact that no one has done it clearly points to how short-sighted the industry has become.
  • I think the biggest problem with this proposition is marketing.
  • Users have been using laptops for 40 years and they are so ingrained into their psyche that it is almost impossible for them to contemplate that there could be a better solution.
  • Consequently, users need to educated that there is something better on offer and how it would benefit them.
  • Unfortunately, I don’t think that much of the PC industry has realised that there is an opportunity and even Intel and Microsoft are struggling to send a clear message.
  • If they can get it right, then there is a big product cycle to be had as laptops are replaced with tablet PCs which would push the industry back to growth albeit for a few years only.
  • In the absence of this cycle, the PC market is likely to continue drifting downwards until all the content consumers have left the platform and at that point it should stabilise.
  • I don’t think that the PC is dead as iOS and Android are awful platforms for content creation, but the PC industry has to start moving with the times.
  • Microsoft, Samsung and Lenovo are the ones I would look at for an upswing in the PC segment although I suspect that a rising tide would lift all boats.

Lenovo Q4 15A – Weather-beaten

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Lenovo should be able to weather a stormy 2016

  • Lenovo reported a difficult quarter as weakness in the PC market and market share losses in mobile took a heavy toll on financial performance.
  • Q4 15A revenues / net income were $9.1bn / $180m compared to consensus at $10.6bn / $204m but it was cash flow that hurt the most with a $700m outflow from operations.
  • Lenovo has remained the market leader in PCs and did very well to keep margins broadly stable at 5.0% despite the declines in revenues suffered.
  • Mobile was more problematic with both the Lenovo and Motorola brands losing out with combined share falling to 3.3% in calendar Q1 16A compared to 5.1% in Q4 15A.
  • The home market of China was also a major problem as market share there is now just 1.5% compared to 2.7% in calendar Q4 15A and 7.4% in Q1 15A.
  • Lenovo has suffered at the hands of both Huawei and Oppo, both of whom have made strong share gains in the home market in the last 12 months.
  • As a result of the decline in smartphone share, losses widened to 6.1% of sales in Q4 15A compared to 0.9% in Q3 15A.
  • This combined with increases in working capital is what led to the $700m cash outflow.
  • While Lenovo has done an exceptional job in PCs, the focus needs now to turn to smartphones where it must find a way to differentiate its products.
  • The Motorola brand is no longer enough and I think that Lenovo either needs to work on a compelling cross device strategy, develop its own software or look at an alliance with one of the big Chinese ecosystems.
  • All of the big three are very strong in their respective segments and I think that the next stage of their evolution will be to try and entice users to spend more time with their services rather than those of the competition.
  • I think that this could lead to a greater requirement to be vertical and while all of them except Baidu have their own Android software, no one is yet making the phones.
  • An alliance here could help Lenovo as it may be able to negotiate a traffic acquisition fee with the big ecosystems that give it a boost to its profitability.
  • I also think that Lenovo needs to take a step forward in its PC business and follow the trend that Microsoft has started with the Surface Pro.
  • Huawei has already followed in this vein, but if the market leader was to do so, I think that there would be a better chance of users sitting up and taking notice.
  • All of these things will take time to come through and consequently, I see a tough year ahead for Lenovo.
  • The one comfort is that I think that the management is fairly accustomed to difficult times and so should be able to weather the storm.

Yahoo and Intel Q1 16A – Falls at the first.

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Results season off to a tough start

Intel Q1 16A

  • Intel reported a difficult set of results and cut 10% of its workforce as the server business can no longer compensate for the damage being done by the weakness in PCs.
  • Q1 16A revenues / EPS were $13.7bn / $0.42 broadly in line with forecasts of $13.8bn / $0.37 but the outlook was weak.
  • Q2 16E revenues are expected to be around $13.5bn with gross margins around 61% which compared unfavourably with consensus at $14.2bn / 62%.
  • The problem remains the PC market which fell nearly 10% in Q1 16A as content consumers continue to desert the platform.
  • I still think that the PC market will stabilise once all these users have left, but it is taking longer than I originally anticipated.
  • With the data centre business beginning to slow down, Intel has to look elsewhere to make up the difference.
  • Here, it will be mobile, Internet of Things, Wearables, automotive and so on where Intel will be looking but this is easier said than done.
  • Intel has been struggling in mobile for 15 years despite vast investments and the ARM processor remains a much better proposition for many of the segments that Intel is hoping to address.
  • The job reductions are clearly aimed at realigning Intel to the new reality it faces as well as preserving its superb profitability until the other business lines can be brought up to speed.
  • With Intel’s history outside of its core markets, this will be a big ask and with ARM finally having a credible go at the server market, the immediate term outlook remains very difficult.

Yahoo! Q1 16A

  • Yahoo reported results that just beat the very low expectations set by management but underneath the veneer, I see declining engagement in mobile.
  • Q1 16A revenues-ex TAC / Adj-EPS were $859m / $0.08 compared to forecasts of $847m / $0.08 but guidance for Q2 16E missed again.
  • Q2 16E revenues are expected to be $810m-$850m ($830m midpoint) compared to consensus at $860m.
  • Yahoo is now struggling with video advertising which is one area where all of its peers are seeing strong growth highlighting again how bad the execution has become at Yahoo.
  • Furthermore, I see weakness in mobile.
  • Yahoo generated $250m in revenues from mobile devices but benchmarked (see here) on its already dismal performance in mobile in Q4 15A, I was expecting $270m in Q1 16A.
  • In Q4 15A, RFM calculated that Yahoo managed to monetise 12% of the opportunity that it has in mobile which fell to 11% in Q1 16A.
  • Yahoo refused to be drawn on any aspect of the sale process which I think is likely to end with Yahoo selling its core assets at a very low price.
  • This is likely to be positive for the share price as the core value of Alibaba and Yahoo Japan should be unlocked when the assets are separated.
  • However, given the increasing problems that Yahoo has in both mobile and video, I see risks to FY 16E guidance of $3.4bn-$3.6bn which will be high in the minds of all potential acquirers of the core business.
  • There is huge value in Yahoo shares but it still looks like a value trap as these results indicate that things are getting worse not better.

 

Microsoft Build – Bots and bobs.

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Steady evolution but existing issues still need fixing. 

  • Microsoft launched a series of evolutionary upgrades to Windows 10 and the devices that run it, at its /build// developer conference in San Francisco.
  • This is the key conference that gives visibility on where Microsoft intends to take its ecosystem over the next few years.
  • While there were some interesting developments, some of the short comings of the existing ecosystem were not addressed.
  • The top spots were:
  • Conversations as a platform.
    • This is all about instilling a much greater level of intelligence into every device that user has including iOS and Android.
    • The initial focus is around intelligent bots that can allow companies offering goods and services to interact with their customers much more easily.
    • The fact that bots are very early stage is highlighted by Microsoft’s Tay AI chat bot on Twitter that this week became a racist, sexist bigot as it was not smart enough to realise that this was inappropriate.
    • The failure of this experiment is why things are starting off from a very simple premise.
    • Microsoft has launched a framework for creating simple bots (.bot) that can take orders and recognise a degree of natural language and escalate to a human when it gets stuck.
  • Cortana
    • As part of this initiative Cortana is becoming much more deeply integrated into Windows 10 and developers can also integrate its intelligence into the apps that they build.
    • This will work on Android right away but typically it will not work for iOS just yet, although Microsoft promised that it is coming.
    • These are all the right places to take Cortana, but I still think that its fundamental intelligence needs a lot of work as it still significantly underperforms Google Now when tested.
    • This is evident in the fact that usage of Cortana remains very low.
    • There are 270m installations of Windows 10, each of which is Cortana enabled, not to mention Cortana’s presence on non-Windows devices.
    • However, it is only answering 1m questions per day meaning that only 0.37% of users use it daily.
    • In the best case scenario this translates into 11% of users using it once per month but I suspect that in reality this is more like 3-5%.
    • To get this number up, Cortana must become much smarter although the deeper integration launched here will help.
  • Windows 10 Anniversary update.
    • The uptake of Windows 10 is coming along very nicely with 270m devices using the code with an encouraging trajectory of take up.
    • Against this backdrop, Microsoft will enhance certain aspects of the experience to make it more intuitive and easy to use:
      • First. The Windows Hello authentication used for logon will now be available to be embedded into apps and websites visited with the edge browser.
      • Second. The use case for Ink will be enhanced such that the pen can be used to make smart annotations in multiple programs.
      • The aim here is to encourage the 72% of users who still use pen and paper to switch some of that usage to digital.
      • Third. Xbox One games will run on all Windows 10 devices and the device can now be used as a development environment to make development more straight forward.
      • Fourth. Visual Studio will be usable to develop apps for all platform including Android and iOS.
      • This went hand in hand with improving on the code converters making porting across these platforms more straight forward.
  • Cross device.
    • The story of services and functionality working across all platforms was hammered home at every opportunity.
    • This includes not just the whole range of Windows 10 devices, but also iOS and Android devices as well.
    • The demonstrations of services jumping from one device to another and one platform to another were seamless and convincing.
    • This reinforces my view that when it comes to cross device and platform, Microsoft has developed an edge over its competitors that needs to be aggressively marketed to users.
  • While these updates represent a solid evolution of the offering, there was no real mention of addressing some of the real problems that the Windows ecosystem is still grappling with.
  • This includes the problem that all of the data that Microsoft collects from its different services is not pooled together to provide a better and more enhanced experience for the user.
  • Furthermore, integration between the different services also remains very weak and it remains to be seen how well these new updates address these problems.
  • The net result is a good development path for the ecosystem, but the existing problems have to be fixed before the user experience will really shine and appeal to users.
  • Microsoft is still quite attractive even it completely messes up its ecosystem strategy, making it a very low risk investment with plenty of upside, should it get it right.