Enterprise AI – IBM and Salesforce

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Microsoft to Facebook could be what IBM is to Salesforce.

  • Salesforce and IBM have announced a wide ranging partnership which will combine their two AI offerings but they will continue to sell the combined offering under two brands.
  • At the same time IBM has announced that it will move its CRM business to Salesforce, depriving Microsoft of a landmark customer.
  • IBM and Salesforce also stated that they already have about 5,000 clients common but virtually no overlap which means to me that the cross-selling opportunity is actually not that large.
  • Hence, I think that the main reason for the combination is that today AI requires both a lot of time and a lot of data and it is here where IBM and Salesforce can help each other out.
  • IBM’s Watson has been around for many years which makes it one of the most experienced.
  • Salesforce is a relative new comer to AI but I think that it is generating far more data than IBM is.
  • Consequently, it is not hard to see how using Watson’s brains and Einstein’s data could result in more effective AIs being trained in a much shorter period of time.
  • Compared to consumer, enterprise AI is much trickier as each corporation wants different things from AI and the data sets are quite specific to each company.
  • Hence, I can see more general algorithms being trained by the supplier which are then customised with the requirements and specific data set of specific customer companies.
  • The net result is that I can see a lot of sense in this tie up as both companies will be able to do what they are currently doing better without treading on each other’s two.
  • In the same vein, there may be some sense in Microsoft doing a similar deal with Facebook in consumer.
  • Facebook is sitting on the second largest data pool in the world but has no idea what do to with it while Microsoft has some history in AI, but its waning consumer ecosystem means that its data volumes in this area leave a lot to be desired.
  • Furthermore, Facebook and Microsoft do not really compete against each other anymore and are already co-operating on building an undersea cable (see here).
  • Consequently, a co-operation on AI could have significant benefits to both companies and would go quite some way to fixing the serious problem that Facebook has with AI (see here).
  • I continue to prefer Microsoft, Baidu and Tencent over Facebook.

Smart Home – Back to front.

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Apple is losing badly despite offering the best user experience.

  • Apple has redesigned its HomeKit website (see here) in order to generate interest around its smart home offering but despite having the best experience, it remains a very distant third in developed markets.
  • HomeKit enables smart home devices to be controlled with Siri as well as the Apple’s own Home app that appeared with iOS10.
  • I think that Apple has three main problems with its offering for smart home:
    • First: Hardware. device makers need to install a piece of Apple hardware to enable them to work with HomeKit.
    • This adds a level of complexity and cost for device makers who in many instances are small companies with only a few employees and very limited resources.
    • Consequently, most have ignored HomeKit completely and simply written their own app for iOS devices that talks to the device directly over WiFi or Bluetooth.
    • Second: Data. Just like Digital Life services, HomeKit brings together multiple devices and enables them to work together.
    • The device makers get access to the data that their devices generate, but it is only Apple that gets to see the whole picture.
    • RFM research has found on multiple occasions that understanding the bigger picture is far more useful and offers a much greater monetisation opportunity than looking at data sets individually.
    • I think that this is why device makers who understand this concept generally decline to make their devices work with HomeKit or HealthKit.
    • Third: Device. Apple has no device within which Siri can reside within the home.
    • Usage of both Alexa and Google Home show that over 60% of all usage is generated when the user’s hands are busy with another task.
    • This makes the use case of Siri on a device that needs to be removed from the pocket not as easy or as intuitive as Alexa or Google Home.
    • Furthermore, both Alexa and Google Home can hear the user from a distance which also improves the use case within the home.
    • Hence I think it quite likely that Apple will launch a home speaker device of its own or enable third parties to embed Siri in their products.
  • The irony of the current situation is that Apple has by far the best smart home user experience.
  • This is because Apple has understood the importance of integrating these devices together into single commands and use cases like going to bed, leaving the house or arriving home.
  • This makes it easy to turn off all the lights, lock up, turn down the heating and so on with a single button press which is something that neither of the other two have come close to offering.
  • Furthermore, I suspect that HomeKit will end up being far more secure than the other two but at this point in time, no one seems to care.
  • Amazon has both first mover advantage and has done the best job of showing developers love and support.
  • The net result is that there now over 10,000 skills available for Alexa which continues to grow rapidly despite the awful user experience offered by most of these skills.
  • Consequently, I still think that this is Google’s race to lose as its product is by far the best, and its decimation by Amazon at CES seems to have shocked it into getting its developer activities up to scratch.
  • Of the three, I would continue to prefer Apple but overall I still like Baidu, Microsoft and Tencent.

Digital assistants – Man and dog

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Late-comers have very little chance

  • The latest craze to hit the mobile industry is digital assistants where every man and his dog is now building one to try and drive engagement through the ecosystem.
  • LINE is the latest entrant with its offering called Clova but just like everyone else, LINE is going to find that digital assistants are fiendishly difficult because they require top notch artificial intelligence to power them.
  • To make life even more difficult, digital assistants suffer from a chicken and egg problem (see here) where they need usage to improve because its with usage data that they can improve.
  • The problem is that no one will use them if they are not already very good meaning they will be unable to gather the data they need to get to level of quality where users will engage with them.
  • LINE is an instant messaging company that has done an excellent job of monetising messaging through the sale of stickers and games but needs to find other avenues to keep its growth growing.
  • The problem is that when I look at LINE, I see no AI competence to speak nor do I see any history of it working on AI.
  • The search engines are the leaders in AI, but they are not the leaders because they are the cleverest.
  • They are the leaders because they have doing it the longest.
  • This is why RFM thinks that Google Assistant and Baidu Duer are miles ahead of everything else that is being offered including Alexa, Siri and Cortana.
  • Now that Google Assistant is being rolled out onto every Android phone that has Marshmallow, Nougat and above, I think many of the others have very little chance at all.
  • Siri will continue to live on iOS devices but the real battle will be between Google and Amazon for the home speaker.
  • Here Google has a vastly superior product but Alexa is much better at controlling the smart home, albeit with an awful user experience.
  • This is because Amazon has done a great job at getting smart home developers on board whereas Google has been very late in even making the API available.
  • RFM estimates that Amazon has around 8m Alexa enabled devices in the hands of users whereas Google has just over 0.5m.
  • Consequently, Google is at risk of losing (see here) to Amazon but I think the shock of seeing itself wiped out at CES has shaken it from its stupor.
  • Consequently, I think that LINE, Huawei, Samsung Viv, JD.com Ding Dong, SK Tel Ding Dong, Sony and so on have very little chance and would be best served by doing a deal with one of strong ones rather than wasting shareholder’s money.

MWC Day 2/3 – Show barometer.

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What’s hot and what’s not at MWC.

VR / AR

  • Along with the number of drones, the number of VR units on the stands has fallen substantially compared to last year.
  • I think that this is because last year, VR was a novelty that everyone wanted to try but interest has now waned as very little has changed in 12 months.
  • VR has hugely disappointed in terms of user adoption and there is very little that is new and exciting is being offered on the stands.
  • I think that this is symptomatic of the limitations that plague VR (see here) and until these limitations are properly addressed, VR will continue to disappoint.
  • AR has exactly the same problems with the exception that it has plenty of applications in the enterprise where the content, comfort and price limitations are less important.
  • Consequently, those AR companies that are focused on productivity applications are likely to fare better in the short term.
  • I would steer clear of any investment dependent on VR for now, and HTC in particular.

Jolla – Last man standing

  • Jolla has shown remarkable resilience to the difficult conditions that have caused its competitors to fall by the wayside.
  • I think Sailfish is now the only really viable alternative to Android.
  • Furthermore, the market environment has become far more favourable with both Russia and China far less willing to allow US controlled software into their networks than they were 3 or 4 years ago.
  • Russia has certified Sailfish as an approved OS for state owned enterprises which Jolla is now actively trying to leverage into China.
  • There, it has announced the creation of the Sailfish China Consortium which aims to take the core Sailfish OS, and adapt it for Chinese enterprises that wish to have software over which they have full control.
  • The consortium has three Chinese entities that have expressed an interest in joining.
  • It has also got some interest from Latin America but it is still quite early days.
  • This creates credibility for Jolla and raises the potential for Jolla to get some revenues in the door in order to keep the ship afloat.
  • It is still early days but the dark days of 2016, when the ship looked like it was holed below the waterline look to be behind it.

Artificial Intelligence

  • Artificial Intelligence has made a big appearance at the show this year but still most companies demonstrating it do not seem to have absorbed what AI really is.
  • There are many robots from Asia that are billed as AI but can only respond to a series of pre-programmed responses.
  • In a similar vein, many companies are touting their service or app as being driven by AI but when one looks under the hood one finds little more than advanced statistics.
  • AI is currently the realm of the big companies who can afford the very high salaries that AI engineers can now demand and have the balance sheet to continue investing for a long period of time.
  • The exception is tiny start-ups that have come out of universities but already these companies are very hot property.
  • I have no doubt that AI will be a major differentiator and driver of the digital mobile ecosystem over the next 10 years, but developing AI is still an incredibly difficult, time consuming and expensive task.
  • In AI, I continue to look for those that are developing:
    • Firstly: the ability to train AIs using much less data than today,
    • Secondly: the creation of an AI that can take what it has learned from one task and apply it to another and
    • Thirdly: the creation of AI that can build its own models rather than relying on humans to do it.
  • I consider fixing these problems as essential to fulfilling the dreams that so many companies effusively discuss but have no idea how they will fulfill. .

MWC Day 1 – The time machine

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The taxonomy of MWC is changing

  • Nokia has through nostalgia has created some excitement in the mobile phone industry but elsewhere the signs of maturity are everywhere.
  • The notable fall out coming from Microsoft, Blackberry, Huawei amoung others who have substantially reduced the sizes of their stands has been replaced with:
    • First: Automakers who outside of BMW still seem to be a little unsure of what they are doing at this show.
    • They have realised that mobile holds the key to preventing them from becoming Android handsets on wheels but are very uncertain how they intend to address this problem.
    • I think that Tesla has a very good idea of what it is doing in this space and consequently does not feel that it needs to be here.
    • Second: An endless list of handset brands who are all selling almost exactly the same device where the proposition is very unclear.
    • Two exceptions are Wiko and LeEco who are at least trying to offer points of differentiation on the device even if they are having a very hard time doing so.
    • Condor from Algeria and Accent from Morocco are doing stock Android but are attempting to achieve some differentiation by focusing on their respective regions.
  • Furthermore, the app industry, largely present in Hall 8,8.1 and the hallways, has moved into a new phase of development.
  • Gone are the heady days of 2015 when it was all a out adding users at any cost.
  • Now the focus is clearly on engagement, analytics and monetization.
  • Developed markets are pretty much saturated from a user perspective meaning that how to delight those users and making sure that they stay engaged is of paramount importance.
  • Consequently, the suit count in Hall 8.1 has gone up substantially as has the size of the average stand.
  • This implies that many of the smaller, ineffective players have been weeded out leaving the bigger players who have much larger marketing budgets.
  • Consequently MWC has revealed an industry that looks very mature (just like it did in 2005) but this time I can’t see anything on the horizon to upset the status quo.
  • I continue to prefer the ecosystems over the handset and PC makers in general as they, at least, have a way to differentiate

MWC Day 0 – Prominent feature.

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A feature phone steals the show.

Huawei – Rear view mirror.

  • Huawei launched its latest flagship the P10 and P10 plus but did not seem to be very excited about its products in a press conference that felt like it was simply going through the motions.
  • This was exemplified by the fact that Huawei had Pantone on stage talking for 15 minutes about two of the multiple colour variants in which the P10 is being launched.
  • Elsewhere, Huawei made incremental improvements to the camera and photography experience as well as marginal tweaks to the user experience.
  • At its heart, just like every other Android phones in developed markets, the P10 is a Google device and where Huawei is able to drive further usage, it will be Google that really benefits.
  • This is because, Huawei’s products remain largely undifferentiated to the user meaning that Huawei cannot charge a premium.
  • Huawei has made good progress with its brand this year rising to No. 72 (Interbrand) but even Samsung at No. 7 only really makes money from its volume, not premium prices.
  • Consequently, Huawei must find something with which to excite users otherwise it will continue to grind out 2-4% operating margins in the best instance.
  • Huawei has made good share gains but barely enough to be seen only as a dot in Samsung’s review mirror.

Nokia – No downside to old glory.

  • Nokia relaunched itself into the handset market with a throwback to its old glory days but the key ingredient, profit, looks unlikely to make a reappearance.
  • Global HMD, a company backed by Foxconn, launched three Android devices and new version of the classic 3310.
  • The 3310 has three features of note:
    • First: the battery lasts a month
    • Second: it has the Snake game
    • Third: it has the old Nokia ringtone.
  • Beyond that it is a design classic and while not sexy, it is likely to appeal in Africa and India where nearly 100m feature phones still sell each quarter.
  • Global HMD also launched the Nokia 3,5 and 7, which are three unremarkable Android devices that are really going to struggle to compete against the Chinese brands.
  • The real clue to the situation at Nokia and HMD Global is in the prices being charged for these new devices.
  • The 3310 is starting at $51 which in Nokia’s heyday would have been priced at almost half that and Nokia still would have made great margins on it.
  • The Android devices are priced at $150, $200 and $315 which in my opinion do not stack up that well against what the Chinese are offering.
  • This is clearly because Nokia no longer has the power of 40% global market share or its brand.
  • Consequently, if it wants to make headway in Android, it will have to do something interesting with the devices or cut its prices.
  • Good news for Nokia (the company) is that its exposure to this is simply the brand licence fee that it receives upon which gross margins will be almost 100%.
  • Consequently, there is no downside for Nokia if this does not work out as planned.

Samsung – Comes in the box.

  • Samsung launched a series of devices that I think need to have the accessories included in the box to drive user interest high enough to make a purchase.
  • Following a pitch on the needs of 5G and the launch of some infrastructure, came 2 tablets of which innovation around the new S Pen was the most interesting.
    • First: the Samsung Galaxy Tab S3 which was an unremarkable Android Tablet other than it has four speakers and that the S Pen comes in the box.
    • Second: the Galaxy Book which is a Windows 10 Pro tablet that is very thin but in my opinion is far from cutting edge.
    • At the cutting edge, I find the Eve V which is 7th generation i7 and is remarkable in that the device is fan-less.
    • The Eve V is a little thicker at 8.9mm but it delivers a more powerful processor, double the RAM, double the storage, more USB ports and a kickstand.
    • To jazz the Galaxy Book up Samsung is including both the S Pen and the type cover in the box with the device.
  • The S Pen stole the show in my opinion as it works with both Android and Windows Tablets, is integrated with Photoshop and Staedtler is doing a version of the S Pen that looks just like its classic yellow and black pencil.
  • Finally, a new version of the Gear VR was launched in conjunction with a hand controller that, of course, also comes in the box.
  • Of software, services, artificial intelligence and ecosystem there was no real mention other than a nod to Samsung’s cross device strategy powered by Samsung Flow.
  • The net result is that with the launch of the Galaxy s8 now on March 29th, these launches are unlikely to have any real financial impact this year even with the accessories already in the box.

Take Home Message

  • The launch of the new Nokia 3310 was the highlight of my day which is an indicator of how difficult it has become to innovate in smartphones.
  • Industry profits are gobbled up by Apple, Google, Baidu, Tencent and Alibaba leaving those without an ecosystem struggling for relevance.
  • Add this to a market that is unlikely to grow much in unit terms and may decline in monetary terms leads to a pretty grim outlook all round.
  • This is why I continue to prefer the ecosystems of whom Tencent, Baidu and Microsoft are my top choices.

Research Publication – Reality Bytes – Its master’s voice

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February 23rd 2016:  Radio Free Mobile launches a new product category looking at shorter topics relevant to the ecosystem. Issue No.1 deals with the usage of voice in digital ecosystems.

RFM research subscribers will receive their copy directly by email. 

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Voice is where much excitement and hype is to be found. Every ecosystem is developing a voice controlled digital assistant with which it hopes to enrich Digital Life and control the homes of its users. However, RFM finds that voice suffers from significant limitations meaning that the user experience and functionality that it can offer is way behind that that can be achieved using a visual device. This combined with the fact that the intelligence of voice based systems remains rudimentary at best means that voice is unlikely to replace screens any time soon.

  • Three stages of understanding. RFM defines three stages in a machine’s development to be able to understand voice commands. These are: 1) High word accuracy, 2) understanding of the request in multiple word orders and formats and 3) understanding of context and circumstance. RFM thinks that it is not until machine understanding reaches stage 3 that voice can have any hope of challenging the established man machine interfaces of screen, touch, keyboard, haptics and mouse.
  • Defining voice. Despite these limitations, voice usage in ecosystems is growing very rapidly. RFM research indicates that voice usage is really growing only as an alternative to typing a request rather than as a rich two-way voice interaction with the ecosystem. Hence it is important to separate the two types of voice usage to understand voice’s place in the Digital Lives of users. RFM has termed these as one-way voice and two-way voice.
  • One-way voice is where voice is used as an alternative to using a keyboard. Most ecosystems have reached stage 1 making this use case viable. While, input is voice based, the response is delivered through the usual visual method. RFM thinks that the vast majority of voice requests in digital ecosystems use this method which will have no effect on the monetisation methods currently used by Google, Facebook etc.
  • Two-way voice is where voice is used as both input and output. It remains almost exclusively the realm of home speakers such as Amazon Echo and Google Home. RFM finds that the rudimentary AI of digital assistants combined with the limited amount of information that voice can convey, often has these systems falling back on displaying results on a screen.
  • Voice in ecosystems. Digital assistants and voice based interfaces are driven entirely by the artificial intelligence that powers them. Although the search engines are leading the development of AI, all systems are far too rudimentary to replace visual based devices for the foreseeable future. Facebook is still the laggard when it comes to advances being made in AI.

India e-commerce – Unicorns and Donkeys Pt. V.

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Flipkart likely to buy Snapdeal. 

  • The latest in a series of woes that has hit the Indian e-commerce market reinforces my view that in network based businesses, there really is only space for one player to do well.
  • This time around it is Snapdeal which is cutting costs by laying of 800 people, cutting the salaries of its founders to zero and exploring the sale of its mobile wallet FreeCharge at a big discount to what it paid for it in 2015 ($400m).
  • The founders of Snapdeal admit to spreading themselves too thin and not executing optimally, but I think that the real issue here is much more fundamental.
  • Snapdeal and Flipkart like Alibaba and to a lesser degree Amazon are market places which bring together merchants and buyers in one easy to use location and from which they can take a small cut.
  • In effect, they are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
  • 18 months ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
  • This, in a nutshell, is the problem faced by both Flipkart and Snapdeal in India.
  • Flipkart is bigger than Snapdeal and so it is in a slightly better position but it is not double the size of its nearest rival.
  • Furthermore, both have to contend with Amazon which is determined not to make the same mess of India that it made in China when it went up against Alibaba and lost.
  • Amazon is not the largest in India, but it has the backing of the mothership meaning that it can lose money for far longer than either of the other two.
  • Flipkart has the best chance of reaching this hallowed status as it is the largest in India with around 35% of monthly active users but it will need to reach at least 50% before it is double the size of Amazon (7Park Data).
  • This is why I think it could end up acquiring Snapdeal, because adding Snapdeal’s users to its own would get it pretty close to achieving that milestone.
  • Without this combination, we are likely to be left with 2 unprofitable donkeys that are slowly ground out of existence by the vastly more powerful foreign player.
  • This uncertainty keeps me from recommending investments in either of the Indian e-commerce companies even at the discounts now being offered but if I had to go for one, it would be Flipkart.

Yahoo & Verizon – Final execution.

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Finally, Yahoo executes.

  • Yahoo may have badly failed to create any value for investors in mobile, but its execution on the sale of its core business is finally generating significant value for its long-suffering shareholders.
  • Verizon will now pay $4.48bn to acquire the core business of Yahoo a reduction of 7% of $350m and the two companies will share any legal and regulatory liabilities that arise from the two massive data breaches that Yahoo has suffered.
  • I think that this is a triumph for Yahoo which is capitalising on Verizon’s apparent desperation to build a digital ecosystem.
  • For the last 10 years Yahoo has neglected its Internet assets but it has still managed to enjoy high usage and engagement in the fixed Internet despite its failure in mobile.
  • It is this engagement that Verizon is paying $4.48bn for.
  • However, recent events have given users the perfect excuse to finally close their Yahoo email account and move to something else.
  • I have long believed that Yahoo Mail is the service that generates most of the usage and should users leave Yahoo, then the value that Verizon is attributing to Yahoo will have to be written off.
  • Top of the list of Yahoo’s many misfortunes are two massive hacks, one of which took Yahoo 4 years to detect.
  • Over the last 12 months, Yahoo has admitted that around 1.5bn user accounts have been compromised in two very large break ins.
  • This is more accounts than Yahoo actually has, implying that every account that Yahoo has been compromised with a good number of its users having suffered the indignity twice.
  • If this was not enough, Yahoo’s Q4 results showed improving margins solely due to cost cuts which deflected attention away from the fact that revenues are still falling, albeit more slowly than before.
  • On top of Yahoo, Verizon already owns AOL and is trying to rebuild its Go90 mobile video service using the team and assets acquired from Vessel in 2016.
  • The problem I have with Verizon’s strategy is that it is late to game meaning that it has ending up acquiring all of the assets that no one else wanted.
  • Furthermore, Yahoo and AOL have both badly failed to generate any traction on mobile but somehow Verizon seems to think that putting all of these together will create a thriving ecosystem.
  • This is of course possible, but if Yahoo was unable to hold onto the talent capable of executing this dream, I think that Verizon has very little chance.
  • Consequently, instead of a thriving ecosystem, I see a bunch of disparate assets from which users are likely to drift away from at the first opportunity.
  • The real winner here is Yahoo which is receiving far more value for this asset than I think that it is worth and has also managed to halve its exposure to liabilities that I think it should be fully on the hook for.
  • Combine this value with the continued strong performance of Alibaba and Yahoo Japan, and it is not difficult to still see upside in the Yahoo share price.
  • Marissa Mayer may have been terrible at executing on a digital ecosystem but she seems to be a great salesperson.

Samsung – Residual fall-out.

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It is still the long-term damage that I fear. 

  • While Samsung appears to have contained the disaster that was the Note 7, I remain concerned that the reputational damage could have an impact in market share in developed markets and especially at the high-end.
  • Samsung has taken a massive $5.4bn hit to profits, apologized profusely for the recall and admitted shortcomings in its quality and assurance process but I don’t think that the full effects of this issue have fully hit home.
  • This is because there is also the potential for market share and pricing pressure to materialise from the weakening of its brand and its reputation as a vendor of high quality consumer electronics.
  • The first sign of this is in with a survey from Harris Poll which shows that Samsung reputation has fallen from No 7 in USA to No. 42, just one position above the US Postal Service.
  • Apple and Google have remained pretty steady at no. 5 and 8 respectively but Samsung is now thought to be less reputable than Hewlett-Packard, GE and Sony, which are competitors that do date, Samsung has had no trouble in defeating.
  • What concerns me is that when the Galaxy s8 and s8 edge are available, users in developed markets are likely to think a little bit harder before purchasing and may go so far as to consider something from LG, Google, Sony or Huawei.
  • Hence, I think that Samsung will have to price the Galaxy s8 and s8 edge quite carefully as well as go on a major charm offensive to calm user fears that these products will suddenly burst into flames.
  • I am certain that these products will be the safest that Samsung has ever made but that is not how the mindset of the average smartphone buyer operates.
  • Both of these charm offensives will cost money in terms of pricing and marketing spend.
  • The high-end devices that Samsung makes generate the majority of its handset profits and I am somewhat concerned that profits could suffer as the aftershocks of this disaster make themselves felt.
  • This is why I have been cautious on Samsung since the problem with the Note 7 surfaced, and why I would be thinking of taking some profits following the recent excellent performance in the share price.