Android's opportunity to jump ahead of iTunes (July 8, 2010)Next generation music platform is the major battle in the smartphone wars over the next 12 months. Last week's announcement that Google is activating 160K Android devices per day (a run rate that exceeds 14M per quarter), demonstrates Android’s ability to attract new users when combined with focused carrier marketing. Clearing that hurdle, the next test will be “stickiness”; the platform’s ability to retain users through several generations of replacements, as well as entice them to purchase secondary devices such as tablets and set top boxes. Apple's iTunes sets the standard for a sticky application by providing seamless content management across products, which leads to an investment in time and money that makes switching costs prohibitively high. Their success is a roadmap for Android, which must achieve a comparable level of stickiness without copying the Apple model. To this end, Google should offer the functionality of iTunes in a cloud based model, easing the cost of switching to Android, while increasing user loyalty.
Zeitgeist: A cautionary look at the world’s appetite for handsets. (June 19, 2010)The recession is in check, worldwide sales of handsets are up, demand for mobile semiconductors is booming and OEM inventory in the April reports remained below normal; everything seems to be going great so why are we so worried? Our growing apprehension stems from a slew of data points that individually may not mean much but in aggregate seem to spell trouble. Indeed, the fact that almost every one of the top handset OEMs is cutting expectations for its own sales can be explained away as product transition missteps. The hand-waving argument being that it’s all just part of the old giving way to the new; and all that Nokia is losing in sales is being made up at Apple, RIM and the Asians with everything balancing out in the wash. The problem is the number and size of suppliers cutting forecasts far outweigh those holding firm or increasing; so in the big picture a bullish stance based on last quarter’s demand feels like whistling past the graveyard now.
Zeitgeist: Arguing RF Semiconductors. (May 2, 2010)Nokia’s implosion last week stoked investor’s concern that the handset food chain is headed for leaner times, particularly the semiconductor manufacturers which posted record results even as Nokia’s margins reach record lows. The idea that component suppliers can’t do better then their customers is rooted in years of experience with the boom-bust cycles of the PC semiconductor industry. The rollercoaster of scarcity and surplus that drives that cycle is a direct consequence of Moore’s law and the inertia inherent in multi-billion dollar fabs.
Zeitgeist: Drifting from Reality in Phones. (January 31, 2010)We were asked to comment on an article from Thursday's Financial Times that endeavored to explain motives behind the big moves in mobile phone stocks over the last week. While well written, we found almost nothing in the article we could agree with but found it be an excellent summary of popular misconceptions about smartphones in general and Nokia/Motorola in particular. We present the article and our analysis below.
Zeitgeist: Barbarians at the Gate (March 7, 2009)My first introduction to the concept of handsets as commodities occurred in 1999 in a rapid fire debate with the head of a large technology fund who ran through the logic of why it was inevitable that handsets would follow the path of PCs and see margins plunge to low single digits. He had good reason for concern given that year saw Qualcomm-Sony, Philips and Lucent exit the business, Ericsson fall into losses and Motorola struggle to remain profitable after losing its lead to Nokia. Clearly mobile phones seemed to be following the curve of other consumer electronics where fat profits on early volumes disappear as manufacturing scale expanded and competition intensified. Everyone knew what Moore’s law had done to PCs and with cell phone volumes already eclipsing computers there was little reason to expect things would be any different for mobile phones. It was a familiar story that seemed to make sense but it didn’t come to pass and by 2002 Motorola rebounded to almost 10% operating margins in phones while Nokia was collecting 20¢ in profit on every dollar in handsets at almost twice the volumes of ‘99. Moreover the resurgence in profits didn’t come at the expense of competition, which actually increased as Samsung and Siemens grew their shares and LG joined the fray.
Zeitgeist: Dance partners are being chosen at the baseband ball. (February 14, 2009)In the next several weeks, Freescale will announce the divestiture of its cellular business in what will be another major step in the ongoing consolidation of the baseband industry. The genesis of this divestiture goes back to Chicago 2000 when a small group of Motorola engineers began work on a credit card sized device that would become the RAZR. That phone’s success redefined the definition of style in handsets and set in motion events that would lead to the consolidation we are now witnessing.
Deconstructing the Decline: Separating inventory burn from declining demand in 4Q08 reports. (January 20, 2009)For the first time in history, the number of cell phones sold in the fourth quarter was lower than in the third period. Fourth quarter sales, which are typically up 20% sequentially, ended the year about 2% lower than in 3Q. Worse still was the timing. The freefall in late October hit manufacturers after the annual production ramp for the Christmas selling season had already begun, leading to bloated inventories even after production was cut-back in November. Excess inventory is now pushing down gross margins, with more of the same in ’09 as manufacturing output and utilization fall more than orders to allow vendors to sell off excess finished goods. The damage caused to revenue and margins by lower utilization will become increasingly severe as order cancellations move up the food chain. This was evident in the November preannouncements which had handset sell-through down 10% y/y in 4Q08 while sell-in at OEMs is off by 15% and component suppliers preannounced declines of almost 20%. How much of this decline is due to excess inventory versus slowing end-demand can be approximated by analyzing quarterly results.
Finding a Stable Bottom. (October 12, 2008)Now that the market has broken anchor from fundamentals and is in freefall, investors are wondering when we will see a stable bottom. Because failures in the financial sector and concerns about the economy are fueling the sell-off, it won’t be remedied by positive data points out of any of our companies in the short term. Indeed, the only thing that can stem the tide at this point is an end to the cascade of defaults and the collapse of confidence in the credit markets.
Google, Inc. – Special Report: Google enabled phone. Devil is in the details but potential exists for big gains. (November 5, 2007)Marketing splash aside, it is too early to tell how the Google enabled phone will differentiate itself or how popular it will become. If Google concentrates on delivering seamless local based services (LBS), it could see dramatic gains. Location information is inherently valuable to mobile users, but is difficult to deliver seamlessly given the variety of technologies involved and the requirements for a visual interface. Improving ease of use and lowering costs could hasten deployment of LBS which would increase phone replacement rates and carrier data revenue. Indeed, we’ve long maintained that cell phones are ideally suited for LBS given they possess both location and personal information and can therefore tailor general location data to the specific needs of the subscriber. Unlike general 3G data services, LBS can enhance mobility by addressing subscribers’ need to know “where” on both an absolute (“where am I in the world”), and relative (“where do I need to be”) basis.
Multimedia Phones - Revisited: Review, Update and Outlook Since Our 2004 Report (October 6, 2006)Two years ago we analyzed multimedia functions (pictures and music) in cell phones using their impact on handset mobility as a framework. We argued that pictures or music would be popular with subscribers only to the extent their utility in a mobile world outweighed their impact on the cost, size and power consumption of handsets. We concluded that imaging would not be popular with most subscribers because making handsets more appealing as cameras makes them less appealing as phones. Music, on the other hand, complements mobile phones because much of the utility of a standalone music player can be achieved with little impact to handsets, and music, like mobile voice service, can be used on the go.
Multimedia Phones: A Quantitative Analysis of the Impact of Imaging and Music on Mobile Phones (September 10, 2004)After years of anticipation, the age of multimedia cell phones seems finally upon us. Phones capable of more than just talk are populating the product lines of all major phone OEMs which now offer models that support data, music, imaging and video. Like PDA1 phones before them, multimedia handsets represent the state-of-the-art in radio and semiconductor engineering, boasting more performance and features than any other handheld device. But while technology has made such products possible, it has not always made them profitable. Demand for feature rich smart phones usually falls well below that for entry-level models to the point where several handset OEMs have narrowed their offering of high-end phones to concentrate on main-stream products. That may change with the advent of digital imaging and music. The early success of camera phones suggests low-resolution imaging resonates with cell phone users. Rapidly increasing demand for these products reignites the debate over the viability of an all-in-one device centered on the mobile phone. Enthusiasts project a mobile phone invasion of everything from digital cameras to video recorders and televisions. Perhaps so, but given the checkered history of gadget laden handsets, it is important to understand that just because it can be done, does not mean that it should.