Time to Say Goodbye

April 26, 2015 by · Comments Off on Time to Say Goodbye
Filed under: Business, Finances, Technology 

The need to say goodbye is one of the most basic emotions.  It is always hard, never comes intuitively, and we struggle to say the word and stick to it.  There are myriads of songs on the topic.  One of my favorites will have to be Can’t Let You Go by Rainbow.  It is probably the right time for Mr. Nadella to sing goodbye to Microsoft’s mobile operating system.

The industry reported that in 2014 Microsoft had a pathetic 2.7% market share in the Mobile OS, dominated by Google’s Android and Apple’s iOS.  The thing is, Mobile OS’s are successful if developers create apps for them.  Obviously all developers are focused on one of the two mentioned above or perhaps, both.  There is little room for a third.  But that is not really the issue.  Strategically, Microsoft has decided to give away Windows for any device smaller than 9″, or any tablet or phone.  But it collects a $10 royalty or more on most major android devices.  2014 estimates put the royalties at around $3B.  This cash goes directly to the bottom line.  Sure, software has great margins, but not 100%, royalties almost do.

But wait, there is more.  Microsoft has reported hundreds of millions of downloads of Office for iOS and Android.  Office, the defacto corporate suite is Microsoft’s money making machine. It is a mind boggling product. Last fiscal year it was responsible for 40% of Microsoft’s OE and 33% of its revenue.  It operates at an outstanding 56% OE.  So, my loyal reader (singular), who do you want to protect?  An OS franchise that is going the way of the dodo or your money printing machine.  Microsoft will be better served, and it actually is, but the downloads and product of Office 365 for Android and iOS.  And, of course, the insane royalties it is collecting for android devices.  And then focus on cloud and other services.

So, Mr. Nadella, it is time to say “goodbye” to the product that made Microsoft exist and dominate the PC industry, at least the mobile kind. In case you don’t know it, I’m taking the liberty to post the entire lyrics of Rainbow’s song on this piece since it seems that Master Richie Blackmore and Joe Lynn Turner had predicted the demise of Microsoft’s Mobile OS and wrote this song.

“Day after day I’m waking up
To find that you’re slipppin’ away
Night after night
I can’t fight the emptiness inside

There’s nothin’ I can say
Now I know you’re turning me away
It’s only you know disguise but you don’t have to hide
The truth is in your eyes tonight

I don’t wanna live a lie
But I don’t wanna say, “Goodbye”
And I can’t let you go, even though it’s over
I just can’t let you go
I know your love is growing colder

One look in my eyes and you’ll realize
You got my heart in your hands
Won’t you let me know somethin’ more
Where did we go wrong, girl?

I don’t wanna fight
All I wanna do is try and understand, yeah
I’m reaching out for you, babe, what can I do?
I’ve been holding on so long

I don’t wanna live a lie
But I don’t wanna say, “Goodbye”
I can’t let you go, even though it’s over
I just can’t let you go
I know your love is growing colder
And I can’t let you go, even though it’s over

I don’t wanna live a lie
But I don’t wanna say, “Goodbye”
I want you by my side
And I can’t let you go, even though it’s over
I just can’t let you go
I feel your love growing colder

And I can’t let you go, even though it’s over
I just can’t let you go
Feel your love is growing colder

Don’t go
Though I know it’s over
I just can’t let you go.”



Is there an end to Apple’s growth?

March 20, 2015 by · Comments Off on Is there an end to Apple’s growth?
Filed under: Business, Finances, Technology 

apple-logo1What do you do if you are the richest company in the world?  What next steps should you take?  Is there really an end to your reign?  What are you paranoid about?

Look at Apple’s last quarter:  $75.5B in revenue with a mind boggling operating income of  $25.2B.  That is 33.3%;  a third of every dollar Apple sells goes to the bottom line (pre-taxes).  Another way to look at these numbers is (are you ready?) $838M in revenue profiting $280M per day.  Or $35M of revenue with profits of $11.6M per hour.  $3,236.50 of profit per second.  But wait, there’s more!  After a super aggressive dividend and stock buyback program, Apple carries $32B in cash, and $145B in long term investments.

If there was ever a money printing machine, that would be Steve Jobs’ legacy.

Wall Street values Apple at close to $750B in market cap.  Just to put this in perspective, Saudi Arabia’s GDP is close to $750B and it is the 19th economy in the world. And it is not an expensive stock in Wall Street’s terms.

The question is, where is this going?

It is evident that last quarter, closing on Dec 31st, 2014 was hugely benefited by the iPhone 6, a long overdue overhaul of Apple’s flagship product so it can get close to the spec of Samsung’s money losing, much better (spec-wise) Galaxy S5 and Note 4.  The thing is, as impressive as it sounds, Apple sold 75M iPhones in the last quarter of 2014.  This represents close to 70% of their revenue, which makes them very, very vulnerable to disruption. Remember Blackberry or the Motorola Razr?  Yeah, I didn’t think you would.  My apologies to all Apple fans for comparing.  I know it will take a lot more than a better device to disrupt the iPhone hegemony, but you can see how history can repeat itself.  It took less than 2 years for the indisputable market leaders to fall like a rock. Innovation came and went.

Now, I’m not saying that Apple has stopped innovating, but it is so dependent on a single product that, as an investor, I would be concerned.  The watch, as interesting as it sounds, cannot cover for what iPhone has done for the company, and perhaps never will.  iPod started a trend, iPhone disrupted and improved on it, iPad was supposed to do that, but it didn’t.  It just helped sell more iPhones, not a bad thing, but is is sustainable?  What is the next iPhone?  Nobody knows.

Analysts and pundits claim that the next step is for Apple to reach $1T in market cap.  If the P/E multiple says constant they would need to make more profit or $33.5.  At constant margins it will mean $100B in revenue in a quarter, or around what Walmart’s revenue was in 2010.  It seems far fetched, don’t you think?  But then again, $75B in revenue in a quarter and $750B in market cap seemed unfathomable just a few years ago.  It is a fact that AAPL has broken all common sense with a focus on 1 simple thing:  delight customers with a great product.

So, my loyal reader (singular) go buy an iPhone, it will cost you about the same as 5 shares of AAPL if you buy it un-subsidized but it will not make you money as the shares would.  Have you bought 5 shares of AAPL at the launch of the first iPhone, it would have set you back a little under $82.  They will be worth today a little under $640. Or you could have bought back then 39 shares of APPL for the cost of the iPhone that would be worth today close to $5000. So you’d have made almost 30% annually over the past 8 years.  Impressive?  For sure!  Sustainable, I think not.



Wearables for the Enterprise

January 19, 2015 by · Comments Off on Wearables for the Enterprise
Filed under: Business, Technology 

WearablesIt seems that all the craze at the end of 2014 and CES 2015 is about wearable computing.  Definitely a relatively new computing paradigm that promises to put more computing power in the body of consumers.  If we put aside the fact that we already carry several cables and chargers for our phones, tablets, and laptops, needing more for our watches, glasses, or other form factors seems a little unwieldy, the paradigm maxes sense for applications like fitness or gaming.  But what about the enterprise?  Is this new trend going to affect productivity applications as well?

The industry seems to be set on adding the adjective “smart” to any wearable component, and call it a wearable computer.  But, in my opinion, to do something really useful particularly for the enterprise, they have to go well beyond that …

There are a few common form factors that have been popular with consumers.  Watches, of course, currently dominated by Samsung, at least from the lineup perspective and with the world patiently waiting for Apple’s watch that promises to be a hit for Apple fans.  These form factors are typically centered around notifications of email, text, calls, etc., which means an accessory to a phone.  There are also the fitness band form factors, like fitbit or jawbone’s specifically to track activity and sleep.  Most watches track these too, but are not dedicated or optimized for it.  Then we have glasses, made so popular by Google Glass, now not for sale anymore, that promise to move the displays to a more intimate experience.  Gaming and information “snacking” tend to be the ideal use cases for them.  The least popular form factor is the smart badge.  Companies like Zebra (formerly Motorola Solutions), Vocera, etc. have been bringing some to market for vertical applications like retail task management and healthcare patient care.  These offer little future for consumers in this blogger’s opinion, but perhaps a better option for these niche vertical applications.  However, all of these lack the proverbial “killer app” to make them not only mainstream, but the next money maker for tech companies.

Enterprises have been working with wearable computers from quite some time in productivity applications.  The obvious benefit is the ability to work hands free in environments where the job itself requires the continuous use of the hands.  But we have not seen them in customer facing applications, mainly because most designs are really a handheld mounted on the body.  Hardly an aesthetic thing you will be comfortable wearing when you are assisting, let’s say a patient in a hospital.  Miniaturization in technology, the ever advancing Moore’s law, printed electronics, and sensors are changing the way these devices will be designed for sure.  This last area, sensors, it what perhaps provides the most attractive reason to adopt wearable technology in enterprises.  If you think about highly physical tasks, like warehouse or construction workers, imagine looking at these activities as we see athletes today!! That looks very promising and it also seems to be a necessary stepping stone to adopt automation in these activities.  You first need to fully understand how an intelligent human performs a task like that before you teach a machine to do it.  In any case the biggest hurdle is that it is still another battery to manage.  If you have ever used a smart watch or a bluetooth headser, for example, keeping it charged is one more thing to worry about.  So that will limit their appeal particularly in productivity applications, since battery management is usually a complex chore that needs to be minimized.  Advances in battery and wireless charging technologies are what will eventually make these really take off.

One more problem for massive enterprise adoption is that most of the current wearables are not stand alone.  Few are, but the battery life is abysmal.  This means there is a “real” computer somewhere else, typically a smartphone, doing the task and the “smart” accessory just presents the information it in a different way.  This not only means another device and battery to manage with its cost implications, but adds unnecessary information “jumps” that will cause latency and inaccuracy problems.  Hardly a good thing for productivity applications. So, my loyal reader (singular) for wearable technology to really take off it will have to be either a true computer that is worn, or with a dedicated cloud with low latency that provides the computing power for the task.  That doesn’t mean it won’t happen, it just means it will happen through a different paradigm than that of consumers.  And that may be a good thing.

There is also the additional problem that most workflows are not designed for wearable technologies.  Except for some of the top 100 companies in the world, there is little activity designing and optimizing tasks for wearable technology.  This is of course a “chicken and  egg” problem.  There are not enough wearables to optimize workflows to and there are not enough workflows optimized for wearables to drive mass design and adoption. However, this will probably be changed by consumer wearables.  We already see enterprise application giants the likes of SAP and Oracle experimenting with Google Glass for warehouse and healthcare applications.  Granted, these are not the right devices, but they do give the idea of what can be done.

So, advancement in electronics, computing power and the never ending need to make every operation more efficient will be the catalyst to a significant growth in wearable technologies in the enterprise.  But before it becomes the preferred paradigm, battery and charging technologies need to improve.  And when they do, workflows will be redesigned to account for the new, more efficient way to do them with wearable technology in workers’ bodies.



A Falling Knife?

September 9, 2013 by · Comments Off on A Falling Knife?
Filed under: Business, Finances, Technology 

It is widely known that two turkeys do not make an eagle.  I’m not sure what made me think of this, I’m not even a golfer. But it seems to me that Microsoft just handed a bunch of their cash to Nokia for what seems to be a desperate move.  Let me explain.

Nokia operates 3 businesses.  For the first half of 2013 none actually made any money.

  • Nokia-Siemens network (~ 50% of their revenue) which is 11% below last year’s revenue and operating at roughly break even.
  • HERE, formerly Navteq, which has imploded to EUR 233M in revenue and losing EUR 100M per quarter. (amazing what an $8B investment can turn into in a few years)
  • Devices and Service, which is what Microsoft made an offer to buy, is responsible for roughly the other 50% revenue, which for the first half of 2013 was EUR 5.6B vs 8.3B for the same period last year.

This business lost “only” EUR 75M for the first half vs EUR691M for the first half of 2012.  So it is improving.  What makes up this revenue, you may ask?  That’s where it gets interesting.  EUR 2.3B is made by the sell of 13.5 mostly Windows based smartphones.  EUR 2.9B from 109.5 million of what they call  “Mobile Phones”, which do not run Microsoft’s operating system.  The rest is services, whatever that really means.  So, a little over a half of their revenue is not only non-Microsoft products, but at an ASP (average sales price) of EUR 26 (yeah, not missing any zeroes, it is twenty six euro per phone).  This is just a small, very, very small fraction of what an Office or Windows license go for these days.  The other 40% is Smartphones, which are mostly Windows based.  Those sold at an alarming EUR 175 ( $232 US) average price.  Compared that to above $600 for an iPhone and above $500 for a Samsung Galaxy makes them one of the lowest in the industry.    They are actually great devices, but they have to almost give them away for the carriers to take them to their customers.  No wonder the division is not making any money!

So, Microsoft handed $7.2B (which is actually less than 10% of their cash at the close of last quarter) for a shrinking business with the lowest sales prices in the industry, 60% of which they have no interest in.  Not surprisingly, Microsoft investors did not like the idea and drove the stock down around 10% in the first couple of days.  One has to imagine that Microsoft thought this was their only chance to get into the fast growing mobility business.  On the other hand, Nokia investors loved the deal.  The stock shot up 50% in the first couple of days!

So what can the deal do for Microsoft?

In their fiscal year 2013, which ended June 30th, Microsoft ran 5 business that produced $77.6B in  revenue with mind-blowing operating earnings of $33.4B.  Every one of these businesses grew from a year ago, except for Windows, which was roughly flat.

  • Business Division, whose main product is the ubiquitous “productivity” suite Office, was 31% of their revenue and 48% of their OE (operating earnings)
  • Servers and Tools, which sells servers, had around 24% of the total revenue and 24% of their O.E.
  • Windows, which was 25% of revenue and 28% of O.E.
  • Online services, which manages Bing among other online offerings, was 4% of revenue and operated at a loss that represented -3% of O.E.
  • Entertainment, which sells Xbox, Surface PCs, and Windows phone was 13% of revenue and produced a modest 2.5% of Microsoft’s yearly earnings.

The latter is where they will probably merge Nokia’s business if the acquisition goes through and probably spin Xbox out as it has been rumored for a long time.  Assuming the revenue stays flat (a big if), it will represent around 20% of Microsoft’s total revenue, but no earnings to speak of.  Their only hope is to drive ASP (average sell prices) up.  And, my fellow reader (singular), there is only one way to do that:  with unique products that customers value their differentiation.

Consumers don’t particularly like Microsoft, but there is a group that has had a long lived love affair with them: I.T.  Most corporate I.T organizations in the world prefer Microsoft to any other operating system.  They trust them and have been supporting them for years.  Microsoft’s only hope is to leverage that.  They will have to relentlessly push for Windows based phones to become the Blackberry of Christmas past.  Focus on professional users by making email, calendar, office, and corporate apps a seamless experience.

That’s all they’ve got.

However, the world of mobility is that of 99 cents apps and free OS.  Clearly not where you want to take a $43.5B business that throws $24.7B in earnings per year selling operating systems and corporate applications. That is a boat load of 99 cent apps.  Apple and Samsung have shown that making significant amounts of money with differentiated hardware in the mobility industry is possible.

The question is, is there room for a third one …



The $100 Billion Dollar Apology

November 4, 2012 by · Comments Off on The $100 Billion Dollar Apology
Filed under: Business, Technology 

What do you do when you are the most valuable company in the world, you have a cult following your products even when you make huge mistakes like placing the antenna on the wrong place? You become arrogant.  The iOS6 maps disaster has really been a problem for Apple despite the fact that they have an amazing lineup of products.  Google has been improving the Mapping apps for years, so Apple decides to 1-up them for iOS6 and screws up big.

Granted, Tim Cook apologized to Apple fans a few days after.  It took Steve Jobs weeks to acknowledge the “death grip” and that didn’t even make the stock blip.  On the other hand, iOS maps has been more than a blip.  A few days after iPhone5 was announced, AAPL hit above $700 / share.  last week it dipped below $600 meaning more than $100B in market cap loss.  Granted, not all can be explained  by a lousy app, but a big chunk of it can.  Don’t get me wrong, I’m not saying that iOS6 maps itself is to blame for the whole $100B,  but it signals what Apple rarely does: screw up functionality.

As I commented here Samsung is starting to become a real competitor thanks to an aggressive product development lineup and a very, very different strategy. They are both vertically integrated, although in a different way.  Samsung fabricate the chips and make the displays Apple uses, but they don’t have the software ecosystem Apple does.  But with the new Galaxy III and Note lines, they are really, really whipping out outstanding products.  Thanks to Android, they have also improved, in this blogger’s humble opinion, the smartphone experience.

But anyway, Apple strategy is a few products, very well done,  not leaving anything to chance, whereas Samsung is a “shotgun strategy” by doing lots of products and then next generations of those who are successful.  Neither does marker research in the traditional sense, but they both know their markets well.  This product development strategy has worked well for both, but has hindered Apples ability to anticipate new needs, like larger screen on phones or smaller screens on tablets.  Apple has just matched Samsung’s successful lineup to a certain extent.

Another difference, again, in my opinion, is recognizing what they do well and double down on it.  Samsung is a strong hardware company and uses third party software to complete the products.  Apple believes they can do software better than anyone else.  That’s their DNA.  I guess Apple’s recent apology that automatically hides itself from users of their UK site kind of proves that.

Well, my loyal reader (singular), they were wrong.  Google Maps is years ahead of iOS maps and that is where arrogance played.  The $100B loss is not due to the maps app, but it is the market recognizing that Apple’s arrogance took the best of them in what could have been the best product they ever made.  I wonder how many consumers decided for Samsung when they were on the fence, just due to Map?   That is one of the most critical in a smartphone!

Now what will Apple’s most faithful followers do is, of course clear.  But since there are also rumors of Samsung doing their own OS this is all for grabs.  If that happens, it will render this blog totally wrong.  But in my defense it will not be the first or the last one like.



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