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RIM Passes the Torch
Last year in June I wrote a piece about Research in Motion (Nasdaq:RIMM), maker of the Blackberry. At that point the stock closed @ $76.55. After a 42% drop is it probably time to cover our shorts to avoid a repeat of Palm? After the latest results release, RIM showed progress on earnings, but decrease subscriber adds and more importantly is draining cash. Being acquired seems to be their best option. Not that there are dozens of companies with billions to spare on an ailing smartphone maker. But it only takes one; and there is one who is also struggling to get a piece of the smartphone market: our beloved Microsoft.
Now why would Microsoft pay big bucks (really big bucks) for RIM only to combine a decreasing market share with an almost non-existent one, may I ask? I don’t seem to find the right answer. I struggle with the idea on any synergy that the merger will bring. RIM needs to invest to bring products up to par with Android and iOS based ones. Their Acquisition of Torch Mobile (who brought you the Torch) was an attempt to do that but it seems to fall short: it is not a wow phone. Even if corporate fans buy them, we’ve all seen Androids and iPhones show up in the enterprise and for the most part successful using them for the same applications.
At a first glance, the synergy seems to be there. RIM’s corporate fans and huge installed base of BES – which happens to mobilize Microsoft Exchange for the most part – and Microsoft has been unsuccessful in bringing a decent smartphone to the party with their Windows Mobile, Windows Phone, and other inroads, but understand well how to sell to the average consumer. Add a bunch of cash to mix and it is seemingly a marriage made in heaven. But not so fast, my fellow reader (singular)! RIM’s market cap is in the neighborhood of $25B plus the typical premiums tech deals get may drain all of Microsoft’s cash. Although it seems like a better investment than dividends or buying back stock it will probably not leave enough room to invest what it takes to win in this market.
Both companies need a miracle in the smartphone space. But Microsoft has other legs in the stool, albeit declining too but at a slower pace. And most likely want to conserve some cash to maintain Windows and Office in the spot they have as well as their Bing and Xbox franchises. Whereas RIM doesn’t have pagers anymore and more and more viable alternative devices are popping up in the market and making their way to the enterprise. So while RIM passes the Torch (pun intended), Microsoft passed on the Kin and both are being left behind in the race.
Now, a 42% drop is good to cover our short positions because you don’t want to be that greedy, especially after what happened to Palm (which I predicted the exact opposite). Nobody will blame you for covering in the vicinity of $45. But, if you don’t believe in Microsoft’s acquisition: short, short away till the cows come home or the stock dips another few bucks!
Enjoy.
Two Recent Deaths in the Smartphone world. Long Live the Emperor.
Within the last couple of weeks two surprising deaths happened in the Smartphone world: Kin and Nexus One (direct from Google); both of whom I had blogged about before here and here. Similar to my predictions on tablets, the world has decided to make me look bad.
I can’t say either action is a real surprise, given the success – or lack thereof – of both products, but it begs the question of what the hell is so unique about Apple that makes them so successful? Both products were reasonably good and both came out with some marketing strength and high hopes, albeit none had Jobs sticking his turtleneck out for. In fact one can almost say they are truly cleverphones. Nexus One sold directly by Google lasted a few months but managed to sell more through the carriers than direct. Kin, on the other hand, didn’t even last enough to hear comments about it. Microsoft has decided to protect their channel by pulling it out of the market and allowing HTC, Dell, Samsung, and LG who will release Windows 7 Phone Series (gotta love Microsoft’s marketing) devices this year for the “holidays”.
What I think is really happening is that even strong players like these tend to underestimate the power of the wireless carriers. They own the customer since people buy phones in order to get a service, not the other way around. Smartphone OEMs have learned the game and have succumbed to the carriers’ will, quite successfully I might add. The market has turned into a selection of services where you pick a desirable phone for. In other words, I know I want AT&T, Verizon, Telus, Vodafone, etc. for whatever reason and then I select my phone. Nexus One tried to separate it out unsuccessfully, even given the fact that Google didn’t need to make money on the phone! People still bought the subsidized phone through the carrier in spite of a long term commitment.
Microsoft on the other hand didn’t try to sell direct, but attempted to bypass OEMs, where carriers buy more devices from. So it is easier for them to add a Windows 7 Phone from HTC to the portfolio they already buy from them. Besides, Kin was a succession of project “Pink” in which Microsoft had an agreement with Verizon to supply a device. This contractual agreement forced Microsoft to release Kin with an OS that was not quite Windows 7 Phone. In addition to that Verizon changed data plans and made the Kin less than attractive cost wise. Again, a wireless carrier took control of the market.
One can also blame Palm’s near demise (and HP’s gain) on carriers’ acceptance or choice.
Whatever the reasons are, wireless carriers will continue to dominate and control the market. Granted, both Google and Microsoft have a potentially great future with their mobile OS without their own branded phones as long as they follow the desire of the carriers they sell through.
The only exception so far is Apple. AT&T has gained millions upon millions of customers that wanted one and were willing to compromise their carrier selection for the privilege of carrying an iPhone. When Apple opens up to Verizon we’ll most likely see them run back and abandon AT&T. Apple will churn the base, Verizon will add users, and AT&T will lose them. Very few new iPhone users, but Apple will continue to sell them new ones. Will Jobs be open to have an unsubsidized dual system (AT&T and Verizon) iPhone to sell direct so users can declare him his loyalty? I can see it if AT&T and Verizon decide to create cheaper iPhone plans since they will not subsidize the phone anymore and create a price war. We’ll see.
But for the time being iPhone remains the only device requested by name and the carriers maintain control over everything else. For how long?
Enjoy.
Apple or Microsoft, which is cheaper?
It is all over the news that Apple (AAPL) surpassed Microsoft (MSFT) market capitalization last week becoming the largest tech company from that metric perspective. The question is which one is more expensive?
Assume you have $500 to invest and you are trying to decide which one is a better bet. Let’s see. On June 10th, Microsoft opened near $25 and Apple near $250. So you could buy 20 MSFT or 2 AAPL. So what are you really buying with your hard earned bucks? Based on the prior 12 months and latest financial statements these are the numbers (rounded):
AAPL: revenue $51B, Net Income $10.7B, Cash and Short term investments $23B, and a market cap of $227B (908 M outstanding shares).
MSFT: revenue $59B, Net Income $17.2B, Cash and ST investments $39B with a market cap of $218B (8720 M outstanding shares).
So if you buy 2 shares of Apple your $500 buy you $112 in revenue, $23.50 in NI, and $50.70 in cash. Microsoft’s 20 shares are $135.3 in revenue, $39.4 in NI, and $89.4 in cash. In other words, picking one metric, let’s say cash, Microsoft is trading at 5.6 times cash, Apple at 9.8 times cash. That is 1.76 times more expensive!
Now, let me throw Google (GOOG) into the mix, just for kicks: Google was trading at around $480 with a market cap of $115B (240M shares). Revenues of $25B, Net Income of $7.1B, Cash $26B. You can buy 1.04 GOOG, meaning $108 in revenue, $30.8 NI, and an impressive $113 in cash (4.44 times cash).
So you tell me which one is more expensive? I know, I know, this is based on past results and does not factor in growth potential, investor’s sentiment, cult followers, and other factors. But for the same reason it clearly paints a picture of which company is more favored by investors and which one is less.
Consider one last point: Microsoft hit an all time high of $58.37 on December 31, 1999, Google $724.80 on December 14, 2007, and Apple hit $272.40 on April 26, 2010. Investor’s favoritism has been shifting over time. What’s next for all these three? If I knew, I wouldn’t be blogging about it but it is definitely interesting behavior of 3 of the most traded stocks.
Quoting Scott Adams, the creator of Dilbert, “I remind you to ignore me”. By no means this is an endorsment to invest in any of these companies. You, my fellow reader (singular) make your own judgment.
Enjoy.
iDon’t Flash, say the Steves
To start off with a cliché, it is true that “the enemy of my enemy is my friend.” But to have the Steves ( Balmer -Microsoft’s CEO and Jobs – you know who he is) agree on bashing a competitor is unheard of, at least for this humble blogger. Apple has been criticized not only for not supporting Adobe Flash video player in the iPhone, iPod, and iPad (i’Ve had it with Apple’s naming) but for banning apps that have their roots on it. To make matters worse, Silicon Valley’s more revered deity sent out a letter saying that Flash sucks – battery, that is, as well as making devices crash and causing other problems. Balmer agrees. They both are in favor of the open standard video version called html5 video.
Hey, we’re all for standards, even better if they are open, but is it realistic to essentially ban all Flash designed websites from your mobile iProducts? Microsoft definitelly adds some muscle to the fight, but Shantanu Narayen (Adobe’s CEO) got there first. An estimated 70% of websites with video use Flash. It has a great advantage over html5: it exists today. It has also a huge installed base, works across browsers, and makes it easier for non-geek developers to use. The question is: will the the explosion of browsers (especially mobile) makes an open standard needed even more? Indeed, but it will not happen overnight, even with the Steves’ weight behind it.
Claiming that Flash crashed devices and drains battery is a bit too extreme, unrealistic, and quite frankly arrogant. Not that there’s anything wrong with that. But when you consider that the iPad has a 6000 mAh battery compared to the 1200 mAh battery in the iPhone 3GS sure, I’ll give you 10 hours of video too! Simply put, battery problems are solved with batteries. You want more battery life? put a bigger battery in. Granted, it drives the device’s weight, but so does the display. Palm Pre, RIM, Windows Mobile (and soon Android) devices that support Flash lite are roughly the same weight than the iPhone, and crash just as often. Reality is, Flash provides the programmer control over the video experience and that makes Jobs angry. He wants to control it all! As per Microsoft’s motive? Well, it just sounded like a good idea to blame computer crashes on somebody else’s software for a change.
Flash’s biggest limitation is the lack of mobile platform support. It is a heavy weight platform that so far only works well on “big” desktop OS’s. There is a Flash Lite out there but it is not 100% compatible with all Flash’s features. But that will have to change soon, if Narayen wants to stay on top. But then again, with more powerful processors and graphics coming to a mobile device near you will make this limitation a thing of the past. In any case, it is this bloggers opinion that html5 video will eventually take over video on the internet. The timing is the unknown. But I don’t think one should start to short Adobe (ADBE), at least not because of Flash. Au contraire mon fraire, this makes them a pricey acquisition target for cash rich software companies.
Enjoy.
Palm got a hand
Well apparently there is some hope for the nearly dead. One more time I’m wrong and someone did find enough value for Palm, unlike I had predicted before. Although in this blogger’s humble opinion $1.2B seems a little excessive. Sure, HPQ has the cash to spare, but a Webkit browser on top of Linux does not take that much money. Granted Palm has a good device or two, but in this environment it takes more than a good device to unseat the emperor. I guess they’d figure they’d offer a sign-on bonus to Palm employees ($5.70 / share is a bit too distant to the $17+ back in October 2009) since they would really struggle to assemble a team like that on their own.
Sure there’s some intellectual property and some innovation left in the inventor of the category. And it is the fastest growing and one of the most profitable markets in the industry but the world does not need that many mobile Operating Systems (OS) to choose from. I’m sorry. As I’ve pointed out before, to unseat the iPhone it will take more, a lot more than multitasking, a cool form factor, and a clever UI. I’m sure HP will make products people want to buy, but the question in my mind is will HP be able to create the ecosystem that will finally challenge Apple? I quite frankly doubt it. Not because it is impossible, or because HP doesn’t have the skills, it is because it is not in their DNA and Palm does not bring that to the table.
Other bloggers (the real ones) are talking about tablets and netbooks using WebOS. Now that is even crazier. If a stretched out iPhone makes little sense, a bloated Pre (will they call it HP-Pro or the Maxi?) doesn’t make much sense either. A clever-phone OS will make a tablet look like a dumb keyboardless PC (no offense Steve). Besides, with no app store, no cult to follow you, no content delivery, no store chain, no Steve (sorry Mark) things don’t look too promising. Besides, HP is a much more powerful brand than Palm, so it’s not that they’re bringing that to the table.
So, my dear follower (singular). Let’s just regret having covered our short a day too late and wait for their next move. An app delivery company? video distribution? or perhaps music delivery? We’ll see. But one thing is certain: there will be more of these moves (some may be really big). Microsoft, Dell, HTC, RIM, and others will be on the M&A news soon.
Enjoy.
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