Qualcomm & Microsoft – Dream with caveats.

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Some space left for this proposition

  • Windows on ARM is back for another crack at the PC market and while I can see a place for it, it is unlikely to cause Intel too much grief.
  • Microsoft and Qualcomm have launched a series of laptops that are running Windows 10 on Qualcomm’s SnapDragon 835 chipset.
  • In addition to offering better battery life, the presence of the chipset enables the always-on functionality and connectivity that users are used to with smartphones and tablets.
  • If that were all that there was to this story, then I would be pretty sure that Qualcomm would quickly take over the PC market but, as always, the devil is in the details.
    • First: Software compatibility: Many of the devices will ship with Windows 10S (for which they are best suited) but will be upgradeable to the full version of Windows 10.
    • Microsoft has compiled Windows 10, Edge and shell to run natively on ARM and had also recompiled a series of DLLs (dynamic link libraries) to ensure that the major desktop applications run properly.
    • For everything else, Microsoft has created an emulator (generally a big drain on performance) that will allow other third-party apps to run with some exceptions.
    • These are: 64bit apps won’t work yet, kernel mode drivers are not supported which means that most antivirus and games that use DRM or anti-cheat software wont work properly.
    • This means that buyers of these devices will not be able to be 100% certain that everything they might want to run will work.
    • I see this as a big sticking point, as failure to perform as expected will infuriate users and create a lot of bad press around these products.
    • This is the same concern that I had around the launch of Windows 10S which I continue to think makes some sense in the classroom but nowhere else (see here).
    • Second: performance. These devices need to perform as well as Intel devices in their pricing tier otherwise buyers are likely to be put off.
    • Given that Intel has much higher gross margins than Qualcomm in silicon, this might be achievable, but it will also depend on the quality of the implementation by the PC makers themselves.
    • Third, market dynamics: The PC market has changed dramatically over the last few years as casual users have deserted the platform.
    • This is because, these users predominantly used a PC for browsing, email and media consumption and smartphones and tablets offer a more convenient and better way to conduct these activities.
    • Consequently, these users have ditched the PCs that they owned and replaced them with smartphones and tablets instead.
    • It is this that I have long believed has been mostly responsible for the softness that has been observed in the PC market over the last 5 years.
    • This trend also means that the users that are left are much more focused on the functions that PCs do really well like content creation and high-end gaming.
    • For these users, performance is critical, and I suspect that Windows 10 on ARM will not be powerful enough for them.
  • This leaves Windows 10 on ARM somewhat in limbo but for students, schools and very price sensitive users, this may represent a good option.
  • Hence, if Intel is going to feel any heat from this, it is going to be at the very low end of the market which is not where it makes most of its money.
  • The amount of traction that these devices get depends mostly on their price and the quality of the implementation by the PC makers but I think that it is pretty clear that the performance driven end of the PC market is almost certain to remain Intel’s

Razer phone– In character.

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For hardcore fans only.

  • Razer has stuck to what it knows in its in launching first smartphone, but its focus on gamers means that the device looks very dated against competition in its price tier (Galaxy s8, Mate 10 Pro, iPhone 8 etc).
  • The Razer phone sports a very average looking screen with large top and bottom bezels but these make sense in the gaming context.
  • The most annoying thing about playing games on smartphones that are all screen, is that there is nowhere to rest one’s thumbs.
  • The large bezels also provide the real estate to include high specification speakers and Razer is also pushing audio as a differentiator for this product.
  • Razer has provided for this at the expense of aesthetics but combined with a 120hx refresh rate on the display and a snapdragon 835 and a whopping 8GB of RAM, I think it is safe to say that this will provide arguably the best overall gaming experience.
  • True to its roots it also allows gamers to tweak the performance of the device to optimise battery life against performance with the Razer app that comes preinstalled.
  • The Razer phone is effectively a tweaked Nextbit Robin which was the lead product of the small phone maker that Razer acquired in January.
  • This makes sense as it would have been almost impossible to come up with a new design from scratch in such a short time period.
  • Unfortunately, in order to benefit from the 120hz refresh rate, games companies need to include support for it in their apps meaning that the majority of Android games will not be able to make use of this key feature.
  • However, it has announced partnerships with Tencent, Square Enix, Namco and several others meaning that some high-end games will be able to work optimally with the device.
  • Razer has a similar problem to the one that caused Microsoft no end of grief which is that the average consumer will not understand its product and will only see an old looking device at a high price.
  • Consequently, I think that this is an enthusiast device that will only be purchased by users that are already very familiar with Razer and most likely own its products.
  • That being said, I have estimated that the software that it offers on its PCs has between 5m and 10m active users (see here), which probably makes up a big part of its core fan base.
  • If 5-10% of these users buy the device, then this would represent shipments of 500,000 or revenues of around $280m (at my estimated wholesale price).
  • This would help support Razer’s lofty valuation of around 10x sales at IPO, but margins are likely to be very low, leaving me unchanged in my opinion that there will be a better time to consider this one.

Razer – The public game.

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Its too early for Razer to go public.

  • Razer wants to become the ecosystem for gamers but its progress in this area is at such an early stage that I think it has no business being a public company.
  • This is because when a company is in transition, things rarely go to plan meaning that deviations from forecasts on results day are likely to be large resulting in wild swings in the share price.
  • Furthermore, the fact that Razer is listing at $4.5bn, which is more than 10x the revenue that the company is likely to report for 2017, means that any slips or misses will be severely punished.
  • Razer is a PC Gaming hardware company that prides itself on providing PCs and peripherals that cater to exactly what gamers want.
  • On the back of this PC enthusiast niche, it recorded sales in 2016 of $392m upon which it made a reasonable gross margin of 28%.
  • However, just $0.095m (0.2% of turnover) was from software and services which grew to $0.11m (0.6% of turnover) in H1 2017.
  • This tells me that first and foremost, Razer is a hardware company whose best shot at monetising its ecosystem will be through premium device pricing.
  • Apple is the gold standard of hardware monetisation where its gross margins on the iPhone are comfortably over 40%.
  • This means that Razer needs to use software and services to create a user experience that can only be had on Razer products driving increases in prices for Razer products over and above competition.
  • This will be very difficult as:
    • First: virtually all of its products only run software and content created by third parties that is available elsewhere.
    • Second: its ecosystem is almost non-existent today.
    • At the heart of its fledgling ecosystem a is a software platform that launches, aggregates and compares prices of games as well as software that enables LED colour patterns.
    • This software has 35m registered users but the fact that there are only 7.8m likes on Facebook, 2.9m Twitter followers, 1.8m Instagram followers and 1.2m followers on YouTube leads me to think that the active users are somewhere between 5 and 10m.
  • RFM research (see here) has found that in order to hit critical mass, an ecosystem needs to have 100m+ users indicating that Razer has a very long way to go.
  • However, given that gaming is a specific niche within the consumer electronics industry, critical mass for Razer could be substantially lower.
  • Twitch now has well over 100m active users and so if Razer was to achieve somewhere in the realm of 50m, that could be enough to begin ecosystem monetisation in earnest.
  • Razer is also planning to launch a gaming-optimised smartphone which does make some sense as gamers who play games on PCs do also play games (albeit different games) on smartphones and tablets.
  • This has been tried multiple times in the past with no success but gaming does remain the one segment of the Digital Life pie where there is no dominant player in developed markets.
  • As a result, if Razer can create a vibrant and engaged community of gamers on its mobile devices then it could begin to generate device preference which in turn will lead to increases in gross margin.
  • Unfortunately, at a valuation of $4.5bn (around 10x revenues) a lot of this success (which is far from guaranteed) is already being priced into the shares.
  • As a result, any slip (which is quite likely given the transition) is likely to be severely punished by the market meaning that there will probably be a much better time to consider being involved.

Microsoft, Huawei & ZTE – Hardware heaven?

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3 big leaps but with potentially with fatal flaws?

  • Microsoft, Huawei and ZTE have both expanded their hardware ambitions but I question whether enough attention to details has been paid to really make these products really successful.

Microsoft Surface Book 2

  • Microsoft has launched a worthy successor to the Surface Book, substantially upping both the power and the size of the device.
  • Two versions are now available: a 13.5” device and a 15” device and on both, the hinge has been meaningfully reinforced to ensure that the screen does not wobble during typing.
  • Microsoft has included the latest Intel processors as well as graphics from Nvidia to ensure that the performance of these devices is top notch.
  • Both screens detach from the keyboard to become a tablet but it is here where my concerns lie.
  • The single biggest fault of the original Surface Book is the fact that when the screen is detached, the keyboard stops working.
  • In my opinion this removes the best use case for a tablet PC which is to turn it into a portable desktop experience. (see here).
  • This provides both a more productive and a much healthier computing experience.
  • One can attach a separate Bluetooth keyboard to the product, but when the user has already paid up for a great keyboard, this seems to be a slap in the face.
  • It is not clear if this functionality has been enabled on the Surface Book 2 but I think it will make the difference between the perfect product and one that continues to follow the obsolete laptop dogma (see here).

ZTE Axon M

  • After being very rapidly commoditised in audio, ZTE is having another go at differentiation with the launch of a dual screen device not very unlike the YotaPhone.
  • The main difference is that ZTE is using two full colour smartphone displays compared to the YotaPhone whose secondary display uses e-ink for an always on display that consumes no power.
  • The aim here is to provide the screen of a tablet in a form factor that can fit in one’s pocket rather than a back-up for when battery is running low.
  • Google Apps can recognise when the second screen is active and run in tablet mode across the two devices but how this works for other apps is unclear.
  • Furthermore, the screen bezels mean that there is a big black line in the middle of the larger display which will be very distracting.
  • I am a big believer in larger screens on pocket sized devices, but until a single screen can unfold or unroll into a large rigid display that is as good as a tablet, this segment is likely to struggle.
  • This has been tried several times in the past and every time the hardware and software compromises being made to get two screens onto a single device have fatally hurt its appeal.
  • I don’t see how the Axon M will be any different and consequently remain cautious on its outlook.

Huawei Mate 10 / 10 Pro.

  • Huawei launched its 2017 flagship products with both devices sporting edge to edge displays pioneered by Samsung and copied by everyone else.
  • The main difference other than slightly different proportions between the devices, is that the Mate 10 is LCD while the 10 Pro uses OLED.
  • However, the main differentiator that Huawei is going for this year is AI where both devices use the Kirin 970 chip, developed in house at HiSilicon which have an onboard neural processing unit (NPU).
  • The idea is that using AI, Huawei claims to be able to prevent the inevitable performance degradation that occurs on all smartphones after months of usage.
  • This aims to compete with Apple’s Bionic A11 chip that also has an NPU but I don’t think NPUs are particularly difficult to produce.
  • AIs work best on processes that are massively parallel which is why GPUs are so good at running AI.
  • This not very difficult to achieve anymore.
  • What is far more difficult, is the creation of the AIs themselves to improve the user experience and here I think Huawei is badly lacking.
  • Huawei has no real AI expertise to speak of and on its own devices it will be competing against the global leader, Google.
  • Consequently, while Huawei may be able to win some short-term differentiation by providing an optimal place to run AIs, this will swiftly be copied leaving Huawei still struggling for differentiation.
  • To really make it, Huawei has to differentiate through the AIs itself and produce algorithms that provide rich and intuitive enhancements to services running on its phones.

E3 2017 – Glaring omission

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Very little interest in mobile gaming at E3.

  • E3 is the biggest trade show for the computer games industry but it still seems to be ignoring one of its most important segments: gaming on mobile devices.
  • Mobile gaming is radically different from gaming on PCs and consoles in three ways:
    • First: PC and console games are much more expensive and more complex.
    • Second: They require high-end PCs or dedicated hardware to run optimally compared to mobile games which run well on most smartphones.
    • Third: They are played for long periods of time whereas mobile games are played for a series of short periods.
  • This means that the software and hardware required to address this segment is completely different but that does not mean that there is no opportunity for the PC and console players in mobile.
  • This is because, I think that the hundreds of millions of users who play PC and console games also play games on their mobile phones.
  • These are different games, played in a different way with a different monetisation system but because the players are the same I see no reason why the big game communities should not be leveraged into mobile.
  • Sony, Microsoft and Valve have all spectacularly failed to leverage the multiplayer communities that they have on PCs and consoles onto mobile phones.
  • I believe that this is why the Digital Life segment of Gaming in mobile remains almost completely unoccupied.
  • This is very different to China where mobile gaming is dominated by Tencent with NetEase coming a distant second.
  • Hence, because Gaming is the single largest segment of Digital Life (30%), I think there is a big opportunity being left on the table.
  • This is the rationale for why I think Microsoft should be prepared to sell Xbox if the right offer comes along.
  • Someone with the ability to do with Xbox what Microsoft cannot should be willing to pay more for the asset than it is worth to Microsoft.
  • It is under these circumstances that I have advocated for its sale as it would generate more value for shareholders than remaining inside Microsoft (see here).
  • The same could be said for PlayStation but because it is such an important part of Sony, I seriously doubt that it would sell under any circumstances.
  • I can’t say the same for Microsoft which is continuing to do very well in dominating the Digital Work ecosystem but is letting its consumer ecosystem fade away.
  • Activision Blizzard looked to be making move on mobile gaming with its acquisition of King Digital but unfortunately, the mobile user numbers for King Digital have fallen by around 35% since the acquisition.
  • Hence, I think that this segment remains wide open creating a big opportunity for someone who has the skill and determination to do in mobile what Microsoft and Sony clearly do not.

ARM vs. Intel – Pause for thought.

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Intel shoots at Asia rather than at home.

  • With another attempt to replace Intel chips in PCs on the cards, Intel has moved to protect its position with a not so subtle reminder that its instruction set is covered by a large number of patents.
  • The 40th anniversary of the x86 processor is approaching and to celebrate, Intel has published an editorial extolling the innovation that has made x86 by far the dominant processor in both PCs and servers.
  • The problem has always been that the x86 was never designed to run on battery powered devices meaning that it consumes meaningfully more power than its ARM equivalent.
  • Consequently, there has always been a desire to allow battery powered PCs (laptops) to use the ARM processor as this would, in theory, meaningfully extend their battery life.
  • The first attempt to do this was Windows RT which involved adapting the Windows software to run on the ARM instruction set which failed miserably.
  • The current effort involves an emulator which takes the ARM instruction set and translates it into x86 so that the regular Windows software and applications can run with no modification.
  • However, this proposition already has question marks around implementation and performance (see here) and now Intel is muddying the waters further with its patent pool.
  • Intel has filed around 1,600 patents (533 families) on its x86 instruction set of which around 1,000 (333 families) I estimate are still enforceable.
  • It seems pretty likely that an emulator that makes use of the x86 instruction set will infringe these patents and hence would need a licence from Intel to operate.
  • There are two reasons why I think this warning is not aimed Qualcomm and Microsoft but rather others who may be considering taking a similar route.
    • First: Qualcomm knows and understands more about IP licencing than almost anybody and consequently I think that it will have foreseen this issue.
    • Hence, I think that, together with Microsoft, it will have sorted these issues out with Intel before officially announce its progress down this route.
    • Second: in its 8th June comment, Intel states that “there have been reports that some companies may try to emulate Intel’s proprietary x86 ISA without Intel’s authorization”.
    • At the time of writing, the co-operation between Microsoft and Qualcomm to use an emulator to get Windows running on x86 was not a report, it was an announced fact.
  • This combined with my view that Qualcomm is likely to have sorted the IP issues out in advance, leads me to believe that this warning is targeted elsewhere.
  • Hence, I do not think that this will impact the effort by Qualcomm and Microsoft which, in my opinion, remains completely dependent on the implementation.
  • Emulators have a very bad track record in terms of consuming extra resources which to date, has rarely resulted in any real benefit accruing to the user.
  • I still think that to succeed, these devices must perform at least as well as an Intel powered device at the same price point and have better battery life.
  • I think that this is the minimum requirement as without this, there is no incentive for a user or an institution to purchase the device.
  • This is what I think Microsoft and Qualcomm will be most concenred about but for the other chipmakers in Asia Intel’s comments will have given them pause for thought.

ARM vs. Intel – Silver bullet pt. II

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Implementation and performance will be everything.

  • The second lap of trying to get Windows to work on ARM processors is in full swing but the key to success will be the performance of the devices.
  • At the Computex trade show in Taipei, ASUS, Lenovo and HP have all announced that they will be producing Windows 10 devices that are powered by Qualcomm’s Snapdragon 835.
  • This is the final piece of the puzzle to get devices into the hands of users after Qualcomm and Microsoft announced that they would be giving Windows on ARM another try (see here).
  • ASUS, Lenovo and HP will be using Qualcomm’s Snapdragon 835 to provide both the horsepower to run the device as well connectivity to ensure and always on experience.
  • With its first attempt, 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.
  • 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 Apps (UWP) will run on the device with no modifications being required by the developer.
  • I understand that UWP apps will run natively on the Snapdragon 835 but the emulator will be required for everything else.
  • This is where the success or failure of this venture will be determined.
  • The computing devices will lightweight, low cost with a long battery life making them ideal candidates to run Windows 10S (see here).
  • This device category is ideally suited for schools but for students who have their own devices, the appeal is less clear.
  • This is because the majority of the kind of apps that I think students will want on their PCs are not available as UWPs.
  • Students tend not to have a lot of spare cash and therefore will rely heavily on free software which if they are using Windows 10S needs to be on the store.
  • Taking the top free PC software as recommended by TechRadar, I found that 3 apps were available as UWPs compared to 10 that were not but of which, for 2 or 3 there was something similar.
  • Google Chrome, iTunes, Google Drive or any BitTorrent clients are available as UWPs, all which I suspect are pretty important for cash strapped students.
  • Therefore, the performance of the emulator will be critical as I think it will be heavily used in these devices.
  • On bench tests, the Snapdragon 835 is perfectly capable of running Windows 10, but there is a huge difference between performance in the lab and performance in the hands of real world consumer.
  • Furthermore, emulators always incur a performance overhead meaning that apps running via the emulator can never perform as well as those running natively.
  • The key questions are:
    • First: How well will Windows 10 be implemented on the ASUS, HP and Lenovo hardware to ensure the Snapdragon 835 can perform to the best of its ability.
    • Second: How much performance drag will the emulator incur?
  • The answers to these questions will only be apparent once the devices are available but I think it is quite easy to draw a line in the sand.
  • To succeed, I think these devices must perform at least as well as an Intel powered device at the same price point and have better battery life.
  • I think that this is the minimum requirement as without this, there is no incentive for a user or an institution to purchase the device.
  • I also think that always on connectivity is not a requirement for a Windows 10 device because all of the Digital Life activities that require this kind of connectivity have long since moved to smartphones.
  • Hence, I do not consider it to be a valid selling point of the devices.
  • The launch of these devices is obviously a negative for Intel but it is worth remembering that every attempt to dislodge Intel to date has been a miserable failure.

 

Microsoft – Breathing space

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Microsoft gives the PC makers room to breathe.

  • Microsoft updated its Surface Pro at an event in Shanghai but left plenty of space for its partners to innovate within the fledgling tablet-PC category.
  • Microsoft has followed Apple in dropping the version number from the name and the new product makes incremental improvements which include:
    • Battery: Microsoft claims that despite looking very similar, the new product has 50% more battery life than the Surface Pro 4, clocking in at 13.5 hours under optimal conditions.
    • This will be well received by road warriors who spend a lot of time in airports and coffee shops looking for power sockets.
    • Fan-less: The new Surface Pro is fan-less in the m3 and i5 versions which is a meaningful saving both in terms of power and noise.
    • Microsoft is very late to fan-less computing and I see it as behind the curve as there are other devices (see here) available that run the same processors but are fan-less across the whole range.
    • I am assuming that as the i7 version also runs Intel Iris Plus Graphics 640, more heat may be generated under heavy load than the i5, necessitating the presence of a physical fan.
    • Going fan-less is a good opportunity to reduce thickness and weight but again Microsoft does not appear to have taken this route as it is keeping the same chassis for all versions.
    • Instead it is leaving this to other companies like Samsung, Huawei, Eve Tech and HP which has clearly been doing some work on its form factors.
    • Hinge: A new hinge has been created to enable what Microsoft calls studio mode.
    • This is where the device is almost horizontal but is slanted at the same angle as the workspace of an architect or illustrator.
    • This is very similar to the use case provided by the popular but expensive all-in-one PC Microsoft launched last year called Surface Studio.
  • Outside of these upgrades, the new Surface Pro is an incremental upgrade which leaves plenty of room for others to address this space.
  • I don’t think that it has ever been Microsoft’s intention to take market share away from its partners but more to show them the way forward
  • Historically, PC makers have really been starved of form factor innovation, having outsourced almost all of its to the ODMs.
  • However, there are signs of this coming back.
  • A good example is HP which as seen huge improvements its form factors with the Envy line of laptops finally living up to its name.
  • Most PC makers now offer a Surface Pro-like product which if marketed properly, still has the potential to change the nature of PC market.
  • A tablet PC with a separate keyboard and mouse offers a more productive, healthier and more ergonomic computing experience which I still think renders the laptop form factor obsolete.
  • However, PC makers and the marketing departments of Intel and Microsoft have been selling laptops for 40 years which has become a very difficult habit to break (see here).
  • I still believe that this has the potential to kick the PC market back to growth as old laptops are quickly replaced, but given that this is just a product cycle, it would only last for a few years.
  • This rising tide would float all boats but I would prefer to be aboard either Microsoft or Lenovo for this ride.

Microsoft – S for school.

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Windows 10 S great for schools but not for the Surface Laptop.  

  • For the education of children, Windows 10 S makes perfect sense but for college and everything else, I can’t see why anyone would want it.
  • Microsoft held an education event this week where it launched a new version of Windows 10 called Windows 10 S and a stunningly beautiful laptop called Surface Laptop.

Windows 10 S

  • The main feature of Windows 10 S is that it is locked to running apps that are available in the Windows store.
  • This allows a greater degree of security as each app will have been checked by Microsoft but also will run in its own container.
  • This has the effect of not bogging down the operating system as often happens as devices age and ensures that performance will always be crisp and quick.
  • This is ideal for the classroom where all devices should offer exactly the same performance and teachers can’t waste time waiting for the older laptops to boot or load.
  • Windows 10 S also allows the school to take complete control of the device just as enterprises do with the laptops within their organisations.
  • I see this as highly appealing to schools whose aim is educate the students rather than to offer them a good and fun user experience on the device of their choice.
  • Microsoft has also added a handy feature enabling the creation of a USB drive that can install all of the required apps, settings and permissions on a Windows 10 S device in one go.
  • This makes the set up and management of devices within a school much easier and faster.
  • The app limitations mean that Windows 10 S can run effectively on devices that compete with Chromebooks which is clearly what Microsoft is intending with this version of Windows.
  • However, outside the controlled environment of a school, I can’t see anyone willingly running this version of Windows.
  • This is because what is available in the Windows Store is a sad reflection of the wealth of software that is available for the PC.
  • If take the example of a student at university then this reality is put into sharp focus.
  • Students tend not to have a lot of spare cash and therefore will rely heavily on free software which is they are using Windows 10 S needs to be on the store.
  • Taking the top free PC software as recommended by TechRadar, I found that 3 apps were available compared to 10 that were not but of which, 2 or 3 had something similar in the store.
  • The Windows Store does not offer Google Chrome, iTunes, Google Drive or any BitTorrent clients, all which I suspect are pretty important for cash strapped students.
  • Microsoft refers to its refusal to install the software that the user wants as a “friendly popup” that directs you to something similar in the store but I suspect that almost all users who have paid for their own devices will find this utterly infuriating.
  • Hence, I think that to make Windows 10 S gain any traction outside of schools, Microsoft needs to dramatically improve the Windows Store.
  • This will take some time and hence I see virtually no traction for Windows 10 S outside of the controlled education environment for which it has mainly been designed.
  • The good news is that users can unlock the device by upgrading to Windows 10 Pro for $49.99 (free for students) but how well Windows 10 Pro will run on a $170 PC remains to be seen.

Surface Laptop

  • Microsoft also launched a beautifully designed laptop that has looks and power but with the price tag to match starting at $999.
  • Every detail has been attended and it is refreshing to see a device maker show such care and passion for a product that it has created.
  • For high end users, who are not fans of the tablet form factor, this is a great option but in that regard, it has no business whatsoever being launched with Windows 10 S.
  • This product has clearly been designed to appeal to users and hence I suspect that almost every device will be shipped to users who have paid for it themselves.
  • Furthermore, the vast majority of schools, will not be buying this product for their students but rather something much cheaper.
  • Hence, I think that to create the best possible demand for this product Microsoft should offer the option for the device to ship with a regular version of Windows at no extra charge.
  • This is because I suspect that almost everyone who buys this service will not want to be bound by the limitations of Windows 10 S.
  • I think that after paying up to $2,200 for this device being forced to pay another $50 just to run the apps that the user wants will really stick in the craw.
  • Microsoft have launched the Surface Laptop as a hero device to encourage the adoption of Windows 10 S on much cheaper devices but it makes absolutely no sense for the device itself to run this version.

Take Home Message.

  • The end result is that I like Windows 10 S for school as it will take the fight to Chromebooks which dominate the education landscape in the US.
  • This is especially the case because Office is a far better option for content creation than Google Docs but where Google has an edge is in text books.
  • Google has spent a lot of time building up a huge library of e-text books for schools and this is something that Microsoft will have to quickly replicate in the store if it wants schools to switch.
  • Furthermore, if Microsoft can win students over to Office when they are young it sets Microsoft up nicely to continue its dominance with Office as these students enter the workforce.
  • Microsoft looks better positioned in education with this release which to me looks like a very long term, but worthy investment.
  • I continue to like Microsoft which is doing very well in the enterprise and fortunately the valuation does not demand excellence in consumer, where I continue to see indecision and slow decline.

 

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.