Research Update – Mobile Ecosystems – Money Talks – Update

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16 03 Mobile Ecosystems

 

 

 

 

 

 

February 21st 2016:  Radio Free Mobile updates its ecosystem monetisation model with a new slide deck.

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Thanks to price erosion, the value of the smartphone and tablet markets are likely to decline this year. This will place even more emphasis on monetising ecosystems through advertising and subscription as revenue growth using these methods is based on subscriber numbers which are still growing nicely. This means that the fundamentals of Google, Facebook, Yahoo, Twitter, Amazon and increasingly Microsoft, will perform better than those of Apple, HTC, Samsung, LG and so on. However to access that growth, execution in growing the scope of the ecosystem has to be first class and here there are huge differences between the different players.

  • Money Talks. Rapid growth in the past has been driven by ecosystems monetising their assets more and more efficiently. Once the existing assets are fully monetised, growth returns to baseline unless either coverage of the Digital Life Pie is expanded or more users are added. This is difficult to achieve and many ecosystems are likely to see growth fall before their new strategies are in place drive the next leg up. Twitter is a great example of this problem.
  • Google’s long-term ability to control Android looks increasingly doubtful. This is because Google Play is no longer heads and shoulders better than anything else at emulating what the Apple App Store has to offer. To counter this, and to fix the chronic fragmentation within its ecosystem, RFM thinks that Google will take complete control of Android and turn it into a vertically integrated proprietary OS like iOS or Windows 10.
  • Facebook has almost completely monetised the opportunity open to it with its current assets. This is why RFM sees Facebook engaged on expanding its coverage to include gaming, media consumption and search. With these in place Facebook has a chance to become by far the largest ecosystem with a revenue line to match. This will take some time to come to fruition and there is scope for a slowdown before this kicks in. Facebook is now Google’s biggest threat.
  • Twitter has no respite in sight. It is attempting to develop a live video offering in order to expand into the media consumption segment. Unfortunately, Facebook and Google are already there with their own offerings. Twitter continues to lack a bold strategy to return the company to growth which RFM thinks is exacerbated by having a part time CEO.
  • Yahoo has given a knee jerk response to its problems by cutting staff and assets. Yahoo Games and (RFM assumes) Maps are to be closed bringing Yahoo’s coverage down to 41%. Even with 41% coverage of Digital Life, Yahoo’s underperformance of its potential is startling with 88% of the opportunity being missed every quarter.
  • 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.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.