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December 16th 2016: Radio Free Mobile updates its flagship research product with the publication of: Mobile Ecosystems – Artificial Intelligence – Men and boys.
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The difference between men and boys will be the brains of their toys. Artificial Intelligence promises to substantially improve the Digital Life services offered by the ecosystems which has underpinned a period of feverish investment. Despite this activity, developments are at a very early stage with none of the big challenges of AI being close to being solved. It is the search engines that are ahead in AI followed by Apple, Microsoft and Amazon. AI remains the Achilles heel of Facebook.
- Artificial Intelligence appears at last to be coming of age. The prospect of making real returns on investment has driven all of the ecosystems to invest heavily.
- Three goals for AI. AI is still in its infancy with three big issues to be solved. These are: 1) the ability to train AIs using much less data than today, 2) the creation of an AI that can take what it has learned from one task and apply it to another and 3) the creation of AI that can build its own models rather than relying on humans to do it. Performance in solving these three problems is likely to separate the men from the boys in the long-term.
- Early days. RFM finds that most claims to AI are simply advanced statistics and that true AI is at a very early stage. Even the best have made little headway with the three goals of AI.
- Law of Robotics. There is no doubt that good quality AI has the potential to significantly improve the quality of Digital Life services offered by the different ecosystems. Consequently, RFM sees AI being a major differentiator and now includes an assessment of AI as Law of Robotics No. 8: An ecosystem must have good artificial intelligence.
- Digital Assistants are the first real deployment of AI in ecosystems and are being offered free in order to generate the data that is needed to continually make them better. Consequently, digital assistants are a good first yardstick of each ecosystem’s competence in AI.
- Search engines. AI still requires vast amounts of human labour, great skill and copious data to develop which hands a substantial advantage to those that have been doing it the longest. Understanding data has been the livelihood of the search engines for many years. This is the main reason why it is Google, Baidu and Yandex that are the global leaders in AI and all of them are aggressively investing to maintain their advantage.
- Fast followers are made up by Microsoft, Apple and Amazon. Both Microsoft and Amazon have scope to earn a return on AI in their businesses that are not part of the ecosystem. Apple appears to have voluntarily hobbled its AI development with differential privacy.
- Facebook is the laggard with one of the weakest positions in AI globally. RFM research indicates that Facebook has real problems with automation. These have to be fixed otherwise providing customised services to 1.8bn users manually will be cripplingly expensive
June 13th 2016: Radio Free Mobile widens its coverage of global ecosystems with the publication of China Ecosystems – BATmen.
RFM research subscribers will receive their copy directly by email.
Baidu, Alibaba and Tencent (BATmen) dominate the scene in China. Almost every smartphone is user in China has an active relationship with all three of these companies. This means that none of them have yet developed fully-fledged ecosystems but remain focused on one or two services only. This is where the big battle will be fought and while Tencent has best armoury, Baidu demonstrates the best understanding of how to use it.
- China has grown up as a mobile first market. In many ways it is more advanced than its counterparts in the West and the usual rules do not apply. Internet control has meant that China is a huge market offering Chinese services for Chinese users almost exclusively by Chinese companies.
- Services are highly developed but the ecosystem is not. Between them the BATmen dominate the Digital Life pie but unlike Google and Apple, none of them outright control the Digital Lives of Chinese users.
- Ecosystem. Consequently, all of the BATmen need to expand beyond their areas of strength. This will lead them to start competing fiercely with each other as long term growth depends on them developing a thriving ecosystem where users spend almost all their time with one player rather than bits and pieces with all three.
- Baidu is the smallest of the BATmen but RFM thinks it has the most potential to surprise. It is not a leader in Digital Life but critically it demonstrates understanding of exactly what it needs to do to evolve into a thriving ecosystem. Even with serious shortcomings in corporate governance, the ADR is very attractive.
- Alibaba is the weakest of all the BATmen when it comes to the ecosystem. It is an e-commerce powerhouse but beyond that its understanding of the ecosystem appears limited. There is no sign of this changing which, combined with poor corporate governance and an expensive ADR, leads to potential downside.
- Tencent is in pole position with a dominant position in Digital Life and the greatest resources to invest. Unfortunately, Tencent does not demonstrate deep understanding of the ecosystem and RFM fears that much of its potential may go unrealised. There is a lot of upside should things change, but of this there is no sign.
- Xiaomi and China Mobile are the also rans as Xiaomi’s ecosystem has not seen real development for 18 months while China Mobile appears to be more interested in providing capacity. The BATmen are fortunate, as China Mobile is a heavy weight that could cause them real problems if it decided to get serious on the ecosystem.
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January 6th 2016: Radio Free Mobile updates its flagship research product with the publication of: Mobile Ecosystems – Money Talks.
RFM research subscribers will receive their copy directly by email.
Low to zero device growth means that revenue is becoming increasingly critical to the ecosystem. RFM’s new monetisation model benchmarks ecosystems that monetise via advertising and allows assessment of those that monetise through hardware. Although Google has benefitted from iOS’s recent strength, there are real cracks appearing in its ecosystem which need to be urgently addressed. Elsewhere, Twitter remains gridlocked while Yahoo fails to execute. Facebook is the one with the most potential.
- Money Talks. Monetisation has to be the end game for every ecosystem as without it, there is very little point in getting out of bed. RFM has developed a simple monetisation model that assesses where ecosystems are on this journey, rates their performance and estimates their long-term revenue potential.
- The first cracks in Google’s armour are appearing. The combination of its increasing dependence on iOS, a weaker position in Digital Life, ongoing problems with software fragmentation / distribution and the growing risk of losing control of Android puts Google on the back foot. Long-term estimates for Android monetisation look to be at risk, raising the potential for a de-rating of the shares.
- Facebook continues to show all the signs of developing into an ecosystem, but it still has a lot of work to do. RFM’s monetisation model shows that there is still some space for revenue growth, but this is likely to run out before everything is in place for the next leg up. The resulting correction is likely to offer an opportunity to get in at a much lower valuation.
- Twitter has fully monetised the opportunity open to it and remains in the throes of strategic paralysis. The combination of a part time CEO and the continuing executive exodus makes it very difficult for a bold new strategy to see the light of day. Until this strategy emerges, growth will be very hard to come by.
- Yahoo. RFM estimates that Yahoo’s lack of execution is causing it to miss out on 93% of the mobile opportunity. Most worrying of all is that management appear satisfied with its performance in mobile implying that it has very little understanding of how the ecosystem can drive revenues.
- Apple and Microsoft serve as the do and do not of monetisation via hardware. Apple generates 5-10x the amount of “ecosystem revenue” via hardware than it could if it used advertising. By contrast Microsoft generates no “ecosystem revenue” raising questions about the viability of its consumer ecosystem.
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September 21st 2015: Radio Free Mobile updates its flagship research product with the publication of: Mobile Ecosystems – Gated communities
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The days of walled gardens have passed and users can now come and go as they please. This results in users being able to pick and choose the services they want from different ecosystems. RFM’s analysis clearly indicates the number of services that a user takes from any one ecosystem will have a non-linear impact on the amount of value that the ecosystem owner can extract in the long-term. The iPhone 6 has allowed the iOS ecosystem to extend its lead over principal competitors Google and Microsoft. Facebook and Xiaomi are the two emerging players that warrant close observation.
- Gated communities. The key for an ecosystem owner will be to ensure that users take as many of its own services as possible. This is because there is a non-linear relationship between the number of services used and the potential for monetisation of that user by any of the three established methods: hardware, advertising or subscription.
- Google’s recent moves do nothing to solve its biggest problems which remain software fragmentation and its inability to distribute updates to its users. This combined with Google Play losing ground to the Apple App. Store puts Google in greater danger of losing its grip on Android users in developed markets.
- Facebook is far from becoming an ecosystem in its own right but its path to this goal has become much clearer. Utilising gaming through IM, media consumption through the increasing use of video in its apps and its own personal assistant service (Facebook M), would take Facebook to 79% coverage of the Digital Life pie.
- iOS has distanced itself further from its peers. Share of high-end users has grown and developers appear to be more focused on the App. Store than ever. This gives it more time to execute its long term strategy and in the short-term there is no immediate threat to its margins.
- Xiaomi had a fantastic 2014 but has completely run out of momentum as there are limits to the volumes that can be achieved via internet distribution. This means traditional methods need to be explored resulting in higher costs and even lower margins. Xiaomi cannot allow non-Xiaomi devices to run its ecosystem if it ever wants to make a decent profit
- Microsoft’s strategy for consumer is increasingly unclear. The rationalisation of its mobile business means that its consumer ecosystem will decline. Other options to address consumer via Xbox or cross device will be harder to execute and only the Digital Work ecosystem is likely to excel on the platforms of others.
June 15th 2015: Radio Free Mobile updates its in depth research of Android with the publication of: Android – Bits and bytes – An in depth analysis of the ecosystems based on Android.
Android – Bits and bytes – (Click here for details and purchase options). RFM corporate subscribers will receive their copy directly by email.
One has to be good at bits or bytes to succeed in Android. Those with an ecosystem (bytes) desired by users, an edge in hardware (bits), technology or huge scale can make a decent living but everyone else is fighting for the scraps. Of these Google and Xiaomi have the best outlook for succeeding in the ecosystem while Samsung is now being driven by its component supply businesses. Of the public companies, Google remains the most attractive but RFM thinks that the downside risk in Samsung has now passed.
- Android. The best of the growth is over in devices but the total number of Android users should grow nicely in the medium term. This is good for the ecosystems but will leave hardware makers fighting tooth and nail for share and margin. .
- Google’s growth is primarily driven by mobile advertising on Android devices. RFM thinks that this provides the motivation for almost everything it does. Google remains vulnerable to market share loss which is why is must take complete control of the Android user experience and of software distribution. It cannot challenge iOS or effectively fend off competitors until it does. Fortunately the valuation of its shares do not demand this in the short-term. .
- Samsung. The outlook for Samsung has improved. It has managed to stabilise handset margins around the levels (10-12%) that RFM thinks is sustainable even without an ecosystem. Strength in semiconductors now makes Device Solutions the engine of growth at Samsung which is what RFM thinks will underpin the share price around current levels.
- Xiaomi makes very little money but critically it really understands the ecosystem and has a substantial first mover advantage in China. Its current momentum is enough to win 214m ecosystem users by 2018E which RFM thinks provides enough scale to lift EBIT margins to 8-9% up from 2-4% where RFM thinks they are today. This outlook is uncertain as Xiaomi has 4 very large competitors all pursuing the Chinese ecosystem. These companies can invest much more for much longer than Xiaomi can.
- Cyanogen has the market’s attention but its future is far from certain. Cyanogen offers software and tools to build an ecosystem on Android without being reliant on Google. The chopping and changing in company strategy leads RFM to think that Cyanogen is finding life much more difficult than it had initially anticipated.
May 11th 2015: Radio Free Mobile deepens its flagship research product with the publication of: Microsoft – Mission Impossible – An in depth analysis of the Microsoft ecosystem
Microsoft – Mission Impossible – (Click here for details and purchase options). RFM corporate subscribers will receive their copy directly by email.
Microsoft’s position is difficult but not impossible. Nadella’s mission, which he has decided to accept, is three fold. 1) Control legacy, 2) Bring the ecosystem to life and 3) Merge Digital Work and Digital Life. Microsoft must reverse its share declines in mobile, make its ecosystems delightful and fix its marketing in order to succeed. Fortunately, the shares of Microsoft are attractive even it blows Missions 2 and 3.
- Opening act: Nadella has already achieved what many thought was impossible in flipping the culture of Microsoft on its head. From boardroom to water cooler, the company is aligned in realising that things have to be very different going forward.
- Mission 1: Control legacy. RFM calculates that Microsoft has snuffed out the PC revenue time bomb by moving to business subscriptions. There is a long pay-back period but there will be more profit generated in the long run. RFM thinks that Microsoft has succeeded in this mission, moving the focus onto Missions 2 and 3.
- Mission 2: Ecosystem. Microsoft’s position in Digital Work is very strong and it has a good portfolio of Digital Life services. However, the services need to be properly integrated in order to offer the seamlessness user experience that will win the hearts and minds of users. Microsoft must also reverse its market share losses in mobile as this is having a seriously negative impact upon its credibility in mobile. Progress so far in fiscal 2015E has been disappointing.
- Mission 3: Digital Life and Work. Merging Digital Life and Digital Work seamlessly in a way that is both easy and fun to use is something that only Microsoft has a real hope of achieving. This will create differentiation allowing the company to monetise and improve profit growth. To succeed here requires Mission 2 to work, service integration at least as good as Google’s, and a turnaround in marketing.
- Marketing. RFM thinks that Microsoft’s marketing is not nearly as effective as it should be. In the ecosystem, Microsoft is the challenger and hence it must explain to users why they should live their Digital Lives and Work with Microsoft. Simply telling users that it exists may have worked 20 years ago. It no longer does today.
- Safe to live in hope. The good news is that Microsoft’s valuation is undemanding even if it fails to execute on Missions 2 and 3. RFM has used a combination of comparative valuation and DCF to arrive at a valuation of $61.0 per share. This makes Microsoft is attractive just on the basis of the success Mission 1 where it is already showing excellent progress.
February 24th 2015: Radio Free Mobile updates its flagship research product with the publication of: Mobile Ecosystems – Devil in the details
Mobile Ecosystems – Devil in the details – (Click here for details and purchase options). RFM corporate subscribers will receive their copy directly by email.
Ecosystems are becoming more sophisticated as users do more and with their devices. Consequently, how one ecosystem differs from another is becoming less obvious. RFM has introduced 4 new Laws of Robotics to better evaluate the different players. iOS continues to gain in strength while Google is still struggling with software problems. The lead challengers are Microsoft, Xiaomi and Yahoo! all of whom have a lot to do.
- Maturing market. Users are becoming more sophisticated in terms of what they demand from their Digital Lives. Ecosystem providers are beginning to cotton onto this and differentiation between different players is becoming more difficult.
- Devil in the details. To take this increasing sophistication into account, Radio Free Mobile has expanded the criteria by which the quality of an ecosystem is judged from 3 to 7. This is to take into account the increasing sophistication of ecosystems as well as to be able to more accurately reflect their strengths and weaknesses.
- Four new laws. Law 4: App equivalency. How well the app. store of an ecosystem compares to Apple. Law 5: Data sharing. How well the user experience is enriched through apps and services sharing data. Law 6. User data integration. How well an ecosystem understands its users. Law 7. Software consistency. How consistent is the software used across the devices upon which the ecosystem is present.
- iOS. RFM’s research indicates that Apple has decided not to compete on Digital Life services but instead to differentiate through exclusive functionality based around HomeKit, HealthKit and Apple Pay. The superb reception of the iPhone 6 has given Apple more time to get this strategy up and running before commoditisation starts to bite.
- Google has the largest ecosystem but the user experience remains hobbled. The quality of the user experience and Google’s inability to get its software into the market in a timely fashion, continue to be serious hindrances to user loyalty and Google’s ability to monetise Android. RFM expects Google to aggressively exert its control over the Android software in the short to medium term.
- Microsoft still has a massive hill to climb. Its ecosystem is gradually getting better but it continues hide its light under a bushel. Its marketing remains very weak and users still have no idea why they should consider Microsoft’s ecosystem. As a result, Microsoft actually lost market share during 2014A.
- Others Xiaomi and Yahoo! head an ever growing list of challengers.
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Radio Free Mobile updates its flagship mobile ecosystems research product with the publication of:
Mobile Ecosystems – Command and Control. (Click here for details and purchase options)
Ecosystem importance continues to rise. Handsets and tablets are commoditising fast and only those that have an ecosystem or can supply value-added-technology have a chance at sustainable profitability. RFM sees good user growth for the next few years but already the ecosystem players are moving to cement control of their ecosystems. The end result is likely to be a series of proprietary ecosystems meaning greater fragmentation to cope with for both application developers and technology suppliers.
- Handset hell. Google has now taken complete control of its ecosystem leaving all of the Android makers with no way to differentiate other than hardware. This will ensure that better and better specifications are made available at lower and lower prices. The only beneficiary from this is Google and RFM continues to see a huge transfer of value from the handset makers to Google over the next 4 years.
- Ecosystem heaven. The other major ecosystem players either make their own handsets (Apple and Microsoft) or else implement their ecosystems on top of open source Android. Growth will be steady and returns will be earned by monetising traffic (Google and Yahoo!), charging users for software (Microsoft) or through premium device pricing (Apple).
- Command and control. Most of the major ecosystems are now tightly controlled and the chaos that reigns in Android is a major drawback for all the ecosystem players that base their offerings on it. RFM sees all of these players, and Google in particular, moving to gain more control over all aspects of their ecosystems. This is likely to result in Android becoming a series of proprietary ecosystems based on an open source Android kernel. This has significant implications for both application developers and component suppliers.
- iOS. Apple already has complete control of iOS but is very weak when it comes to Digital Life services. RFM sees Apple moving to define the future of Digital Life rather than trying to compete in an already crowded field.
- Microsoft is changing. The new broom is showing all the signs of turning Microsoft into an ecosystem company. This is good news for the long term outlook but there are still huge hurdles to overcome.
- Others. Sony and Yahoo! are ahead of the rest of the pack but still have a lot to do before they will begin to earn a return on the investments made to date.
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Radio Free Mobile publishes its second piece on mobile ecosystems with the publication of:
Mobile Software – iRobot. (Click here for details and purchase options)
It is time to look for the second derivative. Smartphones have been the belle of the ball so far but the place to now look is the ecosystem. This is because ecosystem users are likely to continue growing long after revenue growth in the smartphone market has fallen to zero. Here RFM would look to Yahoo!, Baidu, Google and Microsoft and forget about trying to eke out a painful commodity existence in Android.
- Low puff. The smartphone market is running out of growth and this year prices could easily fall hard, resulting low or no revenue growth. Commoditisation is everywhere and where 6 months ago Samsung and Apple were sitting pretty, even they now are feeling the pinch. This investment theme is out of breath.
- High puff. On the other hand the ecosystems appear to have lots of growth left in them. There are currently around 1.5bn mobile ecosystem users globally which RFM expects to more than double by 2017E to 3.5bn. Any business model that has exposure to user numbers rather than smartphone shipments has a much stronger basis for growing revenues over the next few years.
- Myth. Most commentators think that the ecosystem war is over with iOS having 30% of the users and Android 70%. While this is an accurate split of operating systems it bears no resemblance to reality when considering the ecosystems. The main reason for this is that Android is not an ecosystem. It is an operating system upon which a number of ecosystems are based.
- Reality. There are three big ecosystems with more than 300m subs. (iOS, Google and China), Two medium sized ecosystems with more than 100m subscribers (Yahoo! and Samsung) and a number of small ones all trying to become viable. 100m+ subs are needed to be viable and 300m to make a proper return.
- Investment positioning. First and foremost Radio Free Mobile is looking for companies with exposure to the size of the ecosystem rather than device shipments. In that regard Yahoo!, Baidu and Google immediately move to the top of the list. Facebook and Twitter are also candidates but they are both seeing slowing growth in their user counts. Microsoft is also a contender but this piece is so small inside the company that it is more a play on a recovery in PCs than it is an ecosystem investment. Apple is likely to be hobbled by falling hardware margins and has significant problems when it comes to delivering an ecosystem of its own. Commodity Android should be avoided at all costs.
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