Intel and PCs – Soggy in the middle

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A new PC cycle depends on marketing.

  • Intel warned on Q1 revenues as the corporate refresh cycle has come to a more abrupt end than expected.
  • This combined with a poor macro outlook for Europe caused Intel to warn that revenues would be about $900m lower than expected.
  • Q1 15E revenues will now be $12.5bn-$13.1bn ($12.8bn) compared to previous guidance of $13.2bn-$14.2 ($13.7bn) which represents a miss of 6.5%.
  • 2014A PC shipments stabilised as the end of Windows XP support by Microsoft forced many corporations to upgrade their PCs.
  • This offset the ongoing weakness in the consumer PC market.
  • This was expected to filter down into small and mid-size corporations but this has not happened.
  • Adding in the extra weakness triggered by instability in the Eurozone caused a meaningfully weaker revenue picture to emerge.
  • The server business continued to be strong but with corporates falling off, it was unable offset the long-term trend of consumers moving to smartphones and tablets.
  • It is clear that users who only use a PC for content consumption are better served by using a smartphone or a tablet.
  • RFM research indicates that a large proportion of content consumers have already deserted the PC but there are still enough of them still leaving the platform to keep PC numbers heading slightly south.
  • Many commentators will see this news as another nail in the coffin of the PC but I don’t believe that this is the case.
  • Content consumers no longer have a reason to own a PC but content creators and companies need the extra power and input systems that the platform offers and I don’t see this going away.
  • Furthermore, RFM estimates that content creators and corporations make up more than 75% of all PC users.
  • Consequently, once the content consumers have all left the platform, the market should grow slowly, albeit from a lower level.
  • Finally, I think that when Intel, Microsoft and the PC makers finally realise that the laptop is an obsolete form factor and start properly pushing the tablet PC as a laptop replacement, then a product cycle will kick in.
  • The tablet form factor offers far better flexibility, functionality and ergonomics to the user than the laptop and with the specification of the Surface Pro 3, it can be a true portable desktop (see here).
  • If these companies get behind a marketing message that educates the users with regard to what is really on offer, then I can see laptop form factor being replaced with the tablet.
  • This would be enough to drive the PC market back to growth and underpin a big rally in all the PC names including Intel and Microsoft.
  • However, this requires dusty old marketing departments to ditch the sales tactics they have been using for 30 years and embrace a new paradigm.
  • Of this there is no sign and until there is, profit warnings and slip ups of this nature are likely to re-occur.
  • Weakness in Microsoft represents an opportunity to pick-up exposure to the larger ecosystem theme.

Tablets – The long goodnight

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The latest releases from Apple are unlikely to reignite growth.

  • The tablet market has been the fastest market to go from birth to rapid growth to commoditisation to maturity.
  • After a few short years of stunning growth, this segment already looks very mature with just 4% growth expected this year after 44% in 2013A.
  • I think that there are three main reasons for this:
    • First. It is the smartphone that is the driver of the digital ecosystem not the tablet. I have long held the view that a tablet enriches Digital Life and skews user behaviour more towards media consumption and gaming but it is not the defining device. Therefore the tablet is a nice accessory to have but it is not a must have. Users would rather have a smartphone.
    • Second: A lot of users who only consume content (browse, email, watch and listen) have purchased a tablet instead of a laptop. For these users this device makes much more sense and this shift has been a trend over the last few years. I see this trend coming to an end and consequently the demand for tablets has slowed.
    • Third: The creation by Samsung of a segment of the market with very large screens has eroded the bottom end of the tablet market.
  • The net result is that the market is likely to stagnate from here on and Apple’s refresh of the iPad on Thursday is very unlikely to change that outlook.
  • Furthermore, I suspect that Apple will not refresh the iPad Mini as the iPhone 6+ could really cannibalise demand for this product.
  • I expect that the new iPad Air to be lighter, thinner, with longer battery life and a faster processor but that’s about it.
  • The iPhone 6 is a big deal for Apple as it addresses what has long been a major gripe with earlier devices. Hence I can see strong replacement demand and switching from large screen Android products.
  • The new iPad Air is likely to be simply a slightly better version and consequently unlikely to trigger meaningful replacements or ecosystem switching.
  • Hence, I am looking for the next two quarters to be almost entirely driven by the iPhone 6 where Apple looks extremely well placed.
  • Although the longer term margin issues persist at Apple, the short term is looking healthy and I am happy to be in this one until at least the end of January.


Microsoft – Glaring Obsolescence

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Microsoft is still missing the opportunity created by laptop obsolescence.

  • The Surface Pro 3 is far more than a laptop replacement but so far Microsoft has totally failed to market this device to its full potential (see here).
  • I am of the opinion that the laptop form factor is now obsolete as there is a far better alternative.
  • Having the keyboard physically separate from the screen enables a far better user experience in terms of use, comfort and flexibility.
  • The only reason to attach the keyboard to the screen has been to create enough space for the components and battery needed to enable a full power portable computing experience.
  • This also created a form factor that is easy to carry around but it offers a cramped, unpleasant and inferior computing experience.
  • This compromise is no longer required but the device makers and users are so entrenched in their thinking that they have yet to see what is before them.
  • Having the keyboard physically attached to the screen is no longer required and this opens the door to whole new use case which I call “Portable Desktop”.
  • However, the laptop has been universal standard for over 20 years meaning that a huge marketing effort is required to make users realise that the world has changed.
  • With a Surface Pro 3, the ingenious Arc Touch Mouse (see here) and superb Logitech Tablet Keyboard (see here), I effectively have a desktop computer that weighs the same as a laptop and is just as easy to carry around.
  • Not a single person to whom I have demonstrated the “Portable Desktop” has indicated that they would rather stick with the laptop form factor.
  • Microsoft’s R&D team is starting to realise the potential of this form factor as it has just launched a wireless keyboard that can handle everything including an Android phone or tablet, iPhone or iPad and Windows Phone to full Windows devices. (see here).
  • Critically, the stand can be separated from the keyboard which now gives Microsoft the potential to launch the two products together as an alternative to the pretty awful Type Cover.
  • In my travels, I use the type cover as a screen protector when it is in my bag and as a mouse mat when working on a glass surface.
  • However Microsoft’s marketing department seems to be completely oblivious to the potential for this product and in its 1 minute marketing video for the new keyboard it shows the stand separated from the keyboard for a total of 3 seconds.
  • Furthermore, all of the marketing materials for the Surface Pro 3 show the device being used with the Surface Type Cover most of the time.
  • Microsoft does not seem to have considered the potential that this device offers and until it puts its weight behind educating the users that something better is available, volumes are likely to remain low.
  • I think that the substantial usability improvement over the laptop is critical to convincing users that this is a form factor that is worth paying up for because it is not a cheap product.
  • This form factor offers so much more than a MacBook Air can ever do but Microsoft is continues to hide that fact from its users.
  • I am certain that Apple is far from ignorant of this issue.

Surface Pro 3 – Portable desktop.

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Not a laptop replacement but something much better.

  • The Surface Pro 3 has significant issues but it is the first product capable of changing the higher-end mobile computing landscape.
  • (It is important to note that I am specifically excluding the tablet market as tablets are focused on content consumption which is now a very different market).
  • Both Microsoft’s and the reviewers’ fixation on the laptop is the wrong way to view the Surface Pro 3 which offers so much more.
  • I believe that the real value in this form factor is its ability to provide the user with such flexibility that it becomes a no brainer to ditch the laptop.
  • A generation of mobile computer users are fixated on the laptop form factor which offers a horrible, uncomfortable and un-ergonomic computing experience.
  • Until recently, technology limitations have meant that the keyboard had to be attached to the screen which is what led to the laptop form factor in the first place.
  • However, now a computer with the power of desktop can now be crammed into a tablet weighing 800g.
  • I have been using the Surface Pro 3 i5 / 8GB / 256GB for two months and am now comfortably over the initial euphoria stage.
  • This device has issues.
  1. It is a little bit heavy for extended one-handed use.
  2. The WiFi and Bluetooth performance are far from ideal.
  3. Battery life in real usage is 6 hours in the best instance.
  4. It requires restarting far more often than my Windows 7 desktop.
  5. It is expensive. My device costs $1,299.
  • Against this, the 12” screen, pen based input and powerful innards give the user 3 further use cases that a laptop cannot.
  1. The use of a Bluetooth keyboard and mouse allow the device to be used just like a desktop almost anywhere. This offers far better usability with much greater comfort for extended use, much easier interaction with the device and far superior ergonomics.
  2. The pen allows the device to be used as both a notebook for taking handwritten notes as well as annotating and marking-up documents created by others.
  3. Held in both hands, the device can be comfortably used for reading for watching video.
  • The use of the attachable keyboard cover can re-create the laptop form factor when there is no table upon which to rest the device but it does not do a very good job of it.
  • I believe that this is a minor issue as the vast majority of laptop use is not done on the lap of the user but on a table.
  • Here the greater versatility of the Surface Pro 3 leaves a laptop in the dust.
  • The user can easily purchase an excellent bluetooth keyboard, tablet stand and the superb Arc Touch Mouse Surface Edition for less than the optional Surface Pro type cover. 
  • When I pick up the Surface Pro 3 my first action is almost always to remove the cover and to use it one of the three configurations above.
  • The problem is that users are so fixated on mobile computing being based on a laptop form factor, that they have completely missed the other options that this form factor offers.
  • I am hoping that the lumbering marketing machines of Microsoft, Intel and the OEMs will finally realise where the real value in this form factor lies, and will stop trying to replicate the laptop.
  • Instead they should educating users that this form factor offers a far superior, more comfortable and healthier computing experience when not at one’s desk.
  • Once this is achieved, this form factor could easily trigger a strong replacement cycle where laptops are replaced with devices of this form factor.
  • Price is going to be an issue but I think that the usability improvement that is offered will go a long way towards enticing users to pay-up.
  • I would also not be surprised to see a future generation of the MacBook Air incorporate touch and a form factor with a separate keyboard and mouse that all click together for easy transport.
  • Intel and Microsoft are the obvious winners from this but if Apple is sharp there is an opportunity for it to upgrade its entire MacBook population with new high margin devices.
  • Apple also has the opportunity to meaningfully gain share if it can use its expertise in form factor innovation and design to produce cool looking devices that are even better at meeting these use cases.

Amazon – Prime target

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Amazon needs to restructure Amazon Prime.

  • Amazon has announced that its sales of Kindle products this year were the best ever but given last year’s shipments, that is not saying very much.
  • Amazon’s latest move to drive adoption of the Amazon Kindle Fire series is to allow payment by instalments.
  • Users pay 25% up front and the rest over a 90 day period interest free.
  • If users don’t pay, Amazon can semi-brick the tablet and render it almost useless as far as Amazon services are concerned.
  • I would assume that there is nothing to stop the device being re-flashed with standard Android but that would remove all of the functionality that makes the tablet interesting.
  • Amazon is clearly hoping that this will drive adoption but I think that Amazon is attacking the wrong problem.
  • Shipments of tablets are stronger than ever and Amazon is already at the cheap end of the spectrum. Price is not the problem.
  • The real problem as I see it is the way that Amazon Prime is structured.
  • The Amazon Prime service includes free shipping on all your shopping as well as access to a wide range of music, movies and TV shows via streaming.
  • This service costs $79 a year which for many users is quite a hefty price tag.
  • The only thing that sets the Amazon Kindle Fire series apart from the competition is the Amazon Prime services.
  • Hence, an Amazon Kindle Fire is really only a must have for an Amazon Prime customer.
  • I think that this is incredibly limiting as Amazon Prime only makes sense to the Amazon hard-core shoppers thanks to the free shipping that’s included in the package.
  • My latest estimate is that Amazon has around 17m Prime subscribers which is up about 70% YoY.
  • This is good growth, but in the ecosystem scheme of thing it is nothing.
  • Google is closing on 400m, Apple on 300m and even Microsoft is somewhere around 60m.
  • If Amazon wants to become a proper ecosystem, it needs to have a minimum of 100m subscribers and at this rate it will never get there before the race is done.
  • The problem as I see it is the tying together of free shipping and video streaming.
  • The free shipping forces Amazon to charge a high price and this is what keeps the user number low.
  • If it were to split the services into two separate packs (with maybe a small discount if one takes both), then the service that makes the Kindle Fire worth having could become much cheaper.
  • This I believe would be a much bigger driver for adoption than an instalment plan of payments.
  • Shipment volumes from the other players have shown that price is not the problem.
  • If Amazon were to offer a cheap media streaming service (without the free shipping) then I suspect that the shipments of the device would be much greater.
  • Until this happens, Amazon Kindle Fire is likely to continue disappointing, leaving the architects of Amazon’s strategy scratching their heads.
  • I like Amazon as an up comer in the ecosystem space but its valuation is already asking for way too much in terms of profitability that seems never to materialise.
  • I prefer Yahoo! or Microsoft.


Windows RT – The last shoe

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The last shoe has dropped on Windows RT. Only Microsoft is left.

  • Samsung, Lenovo, Asustek, Acer and now finally Dell have all discontinued their Windows RT devices.
  • As of today the Dell XPS10 is no longer listed on its website and the company carefully steers visitors towards the Latitude 10 which runs full Windows 8 and Intel.
  • A fan will say that it has been withdrawn ahead of Dell’s event in New York next week but I am almost certain that a Windows RT product will not be launched to replace the XPS10.
  • The writing is on the wall. Windows RT is a total failure, is costing fortune even by Microsoft’s standards and should be stopped now.
  • The sales of Windows RT have been almost non existent and it is clear that the consumer has no interest in the platform.
  • This is because it is neither fish nor fowl. It is an expensive, heavy tablet that lacks the apps of the other platforms and the locked desktop means that it cannot function as a laptop.
  • Only full Windows 8 has the potential to be the dream hybrid product.
  • The problems with Windows RT are fourfold:
    • It looks like Windows 8 but the user can’t install anything on the desktop creating confusion and mistrust.
    • Many of the classic applications expected on a tablet are missing.
    • The devices are underpowered creating a poor user experience.
    • The devices are too expensive compared to the iPad and other tablets even after the recent round of reductions.
  • For these reasons users have shunned Windows RT and I cannot see any future for the platform.
  • Microsoft would be best served by focusing its energies and cash pile on getting full Windows 8 to run on ARM.
  • Then users can choose a Windows 8 device that they know will have full functionality.
  • The choice should be made on the basis of price, performance and battery life alone.
  • If this can be achieved (I am not optimistic) then ARM has a chance to grab some share in the PC market.
  • If things stay the way they are (and I can see no change before mid-2014) then ARM has no chance and estimates need to be cut.
  • The recent update to Surface RT does nothing to solve these problems and Microsoft looks to be throwing good money after bad.


Samsung – Slippery Mud.

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The Galaxy Gear is unlikely to stick.   

  • Samsung is looking for other avenues of growth and in that vein I suspect that the Galaxy Gear is merely an experiment.
  • Samsung launched three products at its event at the IFA trade show: Galaxy Gear smart watch, Galaxy Tab 10.1 2014 and the Galaxy Note 3.
  • The Galaxy Tab 10.1 and Galaxy Note 3 are both solid updates to the predecessors and I expect that they will continue to fare well.
  • The Galaxy Tab 10.1 features a “super clear” LCD with a 2560 x 1600 display, 2.3Ghz processor and Android 4.3.
  • The Galaxy Note 3 increases the screen size to 5.7 inches with full HD at 1920 x 1080, a larger battery as well as a large redesign around the S-Pen and its functionality.
  • Both of these devices feature ergonomic improvements by which the back of the device is made of faux leather (including stitching) making it easier to hold but losing the premium metal feel.
  • The real interest surrounded Samsung’s first foray into the world of wearables with the launch of the Galaxy Gear.
  • This is an ugly and chunky Android device with a 800Mhz processor that I think almost everyone outside of the uber-geeks will be ashamed to wear.
  • It has a 320 x 320 AMOLED display and is launching with 70 applications that are focused around activity and fitness.
  • The Galaxy Gear appears to be running a customised version of Android to which, I suspect, Google has no access.
  • This is a sign of things to come and over the next 5 years, I think that Samsung will increasingly look to edge Google out of its products leaving the eco-system opportunity available for Samsung rather than Google (see here).
  • The Gear’s shortcomings reveal that this is just an experiment.
  • Samsung is throwing mud at the wall to see what sticks.
  • Because the Galaxy Gear ignores many of the critical requirements for a watch (fashion and brand), I think that very few people will buy it.
  • Furthermore, it is not much more than a remote control for one’s smartphone and that instance it does not offer users a reason to get excited.
  • I am curious to see if Apple can do any better when it comes to coming up with a must-have use for one of these devices.
  • As it stands today, this is a segment in its infancy and what is out there at the moment just does not cut it.
  • I need to see a unique use case and a strong element of desirability in a device such as this to compete in the timepiece industry which is driven by brand and fashion.
  • I would not abandon a Casio to wear one of these let alone a Panerai or a Rolex.


LG – Glutton for punishment

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LG’s new tablet is likely to be a license to lose money.

  • It appears that one disaster and the travails of almost all of its peers is not enough to dissuade LG from launching another tablet.
  • The forthcoming G-Tab with an 8.3” screen, a 1920×1200 display and a Qualcomm Snapdragon 800 chipset is expected to be launched at the IFA 2013 trade show in Berlin between September 6th and 11th.
  • LG is expecting to sell 100,000 units a month or 0.3m units per quarter but whether it will make any money at those volumes is highly questionable.
  • To be frank I am not sure why LG should even expect to ship that many tablets as I can’t see anything that sets it apart from the competition.
  • The tablet market has become very concentrated with Apple and Samsung at the top with 50.4% between them and the cheap and cheerful white label tablets at the bottom 33.3%.
  • That leaves 16.3% or 7.3m tablets for everybody else.
  • LG has neither the brand power of Samsung, the money of Microsoft nor the PC volumes of Asustek, Acer and Lenovo to help push this device and consequently it looks doomed to failure.
  • This essentially means that LG’s margins are likely to be negatively impacted by this device.
  • This is something that LGE can ill-afford as its Android devices are un-differentiated and have nothing that makes them stand out from the competition.
  • Hence, volumes will be dictated by price meaning that margins will remain wafer thin at best.
  • Adding yet another loss-making device on top is something that the company can ill-afford.
  • I remain negative on the outlook for LG.


Acer – Point of capitulation?

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Capitulation often marks the bottom of the market.

  • Acer has reported another set of rotten results and at the same time seems to be throwing in the towel on Windows 8.
  • Acer looks to be prioritising products using Chrome and Android which it expects to grow 30% to become 10-12% of revenues in 2014.
  • Acer along with HPQ and Dell are the underdogs in the PC market lacking the R&D capability to deliver innovative hardware form factors to take advantage of the touch capability of Windows 8.
  • This is what I believe has led Acer to look to Android and Chrome to bail it out of its current predicament.
  • The market for tablets is still growing very quickly with Q2 showing 80% YoY growth to 45m units.
  • However, the QoQ story is more sanguine with -4.3% QoQ growth in Q1 13 and -8.4% QoQ growth in Q 13.
  • This is a sign that the PC market may be about to bottom (see below).
  • This market can be carved into three pieces: iPad, Samsung and the cheap and cheerful segment.
  • Of Android tablets Samsung commands 26.5% share with other players (cheap and cheerful white label) taking 49%.
  • Acer managed to win just 4.5% of the market in Q2 13.
  • The message in Android is very clear: branded tablet buyers buy Samsung and everyone else buys the cheapest tablet they can find.
  • This leaves Acer with the prospect of competing against the white box tablet makers which history has shown is a license to lose money.
  • Hence I think that Acer has come much too late to this market and as such Android and Chrome devices are not going to pull it out of its current nosedive.
  • The interesting point to note that when the laggards in a market throw in the towel, it often marks the bottom.
  • Slowing iPad and Samsung tablet growth over the last 2 quarters is pointing to the beginnings of saturation in the top half of the market.
  • This leads me to believe that most casual PC users (who can just as easily use a tablet) have now given up their computers.
  • This has been a major factor in the weakness of the PC market and I am hopeful that this transition is reaching an end.
  • This would mark the bottom of the PC market’s recent decline.
  • Both Microsoft and Asustek have suffered badly at the hands of the PC market and its stabilisation could cause a spike in sentiment.
  • Acer, HPQ and Dell look set to continue suffering but I am looking at Microsoft and Asustek as a way to play the stabilisation story.

Windows RT – White Elephant

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Windows RT has no future. If only Microsoft could see that.

  • The latest round of disclosures reveal what a disaster Windows RT is adding further weight to the notion that it should be killed off.
  • In its end of year filing, Microsoft disclosed that it has sold just $853m of its Surface line of tablets. (page 28 10K)
  • This number appears to include both the Windows RT version and the Windows Pro version.
  • This suggests that Microsoft has sold a total of slightly more than 1m units of both devices combined.
  • In reducing its existing Surface RT inventory by $150 per unit, Microsoft managed to wipe out more value ($900m) than both product lines managed to generate in revenues in a whole year.
  • To add salt to the wound, Asustek has joined Samsung in halting development of Windows RT devices.
  • I suspect that these two are not alone and that it will be Microsoft alone that carries this white elephant into 2014.
  • The problems with Windows RT are fourfold:
    • It looks like Windows 8 but the user can’t install anything on the desktop creating confusion and mistrust.
    • Many of the classic applications expected on a tablet are missing.
    • The devices are underpowered creating a poor user experience.
    • The devices are too expensive compared to the iPad and other tablets even after the recent round of reductions.
  • This combined with poor coverage when it comes to applications that users expect to be on tablets means that RT has no future.
  • What Microsoft needs to do is to make full Windows 8 run on ARM.
  • Then users can choose a Windows 8 device that they know will have full functionality.
  • The choice should be made on the basis of price, performance and battery life alone.
  • If this can be achieved (I am not optimistic) then ARM has a chance to grab some share in the PC market.
  • If things stay the way they are (and I can see no change before mid-2014) then ARM has no chance and estimates need to be cut.
  • Windows RT has been a very expensive experiment but it is time for Microsoft to cut its losses before they become crippling.
  • This is great news for Intel as its chips are closing in on ARM and its Windows 8 tablets are the only ones to buy (and the only ones the OEMs are making).
  • I like Microsoft as it is cheap, has great assets and has recently said exactly what I want to hear in its recent strategy announcement.
  • However, its unwillingness to admit its blunders and long legacy of poor management fill me with doubt as to whether this miracle can be pulled off.
  • I prefer Nokia.