Android, Licensing, Microsoft, Microsoft Earnings, Nokia, Patents, Windows Phone

Calculating Microsoft’s Windows Phone revenue

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I was going through Microsoft’s 10-Q for the quarter ended December 2013 when I discovered that, for the first time as far as I can tell, there’s enough information in the discussion of the results to derive a figure for its Windows Phone bucket for the quarter. In fact, there’s enough information to derive the number for three other quarters as well. Armed with this information, it may be possible to have a pretty good attempt to estimate revenues for other quarters and therefore the run-rate for this business. Let me walk through those numbers first. The key sentence in the 10-Q is this:

Windows Phone revenue increased $340 million or 50%, reflecting higher sales of Windows Phone licenses and an increase in mobile phone patent licensing revenue.

There are two things to note here:

  • First, the company gives both a percentage and a number for the first time (it’s previously only ever given numbers without percentages), which are enough to calculate last year’s and this year’s number. If $340 million is 50% of the number for Q4 calendar 2012, then the number for that quarter was $680 million, and the number for Q4 calendar 2013 is $1.02 billion 1.
  • Secondly, Microsoft makes clear (as it has in previous quarters) that what it describes as Windows Phone revenue actually includes its patent licensing revenue too, e.g. from Android devices. So this isn’t just license fees from Windows Phone OEMs, but that’s one chunk of it and patent licensing makes up for the rest.

A couple of paragraphs down we get this additional information for the six months ended December 2013, i.e. the third and fourth calendar quarters combined:

Windows Phone revenue increased $440 million or 46%

With the information previously given, we can now deduce revenue figures for two additional quarters with reasonable accuracy: $277 million for calendar Q3 2012, and $377 million for calendar Q3 2013. In the 10-Q for calendar Q3 2013 Microsoft said that Windows Phone revenue increased by $102 million, which more or less matches up with the $100 million difference in my numbers, suggesting we’re on the right track here. Digging back through other previous filings, there are quite a few instances where Microsoft gave a growth figure for Windows Phone in dollar terms, which helps get a sense of overall growth rates and allows us to fill in some gaps in between these numbers. I’ve had to play around with the numbers quite a bit here, but at this point my numbers fit exactly with the growth numbers provided, so I feel pretty good about them. Here are my estimates for the last ten quarters: Continue reading →

Notes:

  1. When using percentages to make these calculations, your results might be a couple of million dollars off, but they’ll be very close. ↩
Big picture, Google

On Google’s purpose

Horace Dediu at Asymco has been pondering recently the purpose behind Google – its motivating force. This is something I’ve been thinking about too in my research, and I thought I’d put a few thoughts down by way of a response, or a contribution to his thought process.

I think Google’s purpose is very closely aligned to the founders’ personal objectives to a degree that is relatively rare in public companies. More often than not, founders get pushed aside as the need for “adult supervision” outweighs the desire to indulge them, especially in the run-up to an IPO. But even when they stay, it’s often because they’ve mastered traditional business management techniques (often with lots of help) and therefore somewhat lost sight of their own purposes or at least subjugated them to the needs of a public company to satisfy shareholders. Steve Jobs arguably tried this for a long time and eventually found himself forced out, only returning to Apple when he had learned how to reconcile the two.

But at Google today, it’s really Larry and Sergey calling the shots, with Larry once again at the helm after that period of adult supervision under Schmidt. But even under Schmidt, Larry and Sergey called the shots to a great extent. I’ll draw on several excerpts from Steven Levy’s In the Plex book here, starting with one about the dynamic between Schmidt and the founders:

His anecdotes about disagreements with Sergey and Larry followed a consistent storyline: Schmidt expresses a tradition-bound preconception. The young men who, technically at least, report to him, reject the idea and demand that Google pursue an audacious, seemingly absurd alternative. The punch line? “And of course they were right,” Schmidt would say. (p.81, Kindle Edition) Continue reading →

Intel, M&A, TV, Verizon, Video

Verizon, Net Neutrality and Intel

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This past week has seen two major news items featuring Verizon: the defeat of the FCC’s net neutrality regulations in court, which was instigated by Verizon, and the acquisition by Verizon of Intel’s Cloud TV business. So far, I haven’t seen many articles drawing a connection between the two, but in reality they’re both part of the broader picture of Verizon’s video strategy.

FiOS has been the focal point of Verizon’s video strategy

That strategy was kicked off years ago, when Verizon launched its first video services over 3G and then over its FiOS networks. Over time, those two efforts were united to some extent as a more coherent video strategy emerged, and  it eventually became clear that FiOS was the focal point of Verizon’s video strategy, with mobile efforts merely appendages to that. The FiOS video offering has since grown to five million subscribers, representing just over a third of the homes where it is available. This business generates several billion dollars a year in revenue for Verizon, alongside FiOS broadband and voice services, and represents Verizon’s main video business today.

However, Verizon appears to recognize that this opportunity may be under threat from trends in the market. A recent interview with the guy who heads Verizon’s consumer and small business wireline operations, Bob Mudge, hints that the company sees the writing on the wall for traditional pay-TV services from cable and satellite companies and telcos:

The pay-TV market is shrinking. It’s a slow shrinkage…
Data connectivity is what you must have. That gives the customer more options, whether to get traditional video or to use that data pipe for over-the-top (OTT) video and other online applications.

The key point here is that Mudge recognizes that many consumers will not want to buy classic pay-TV services, and that many of their needs may be met by other options. I think he’s wrong about broadband being the key service (though it’s understandable why he’d make that argument given Verizon’s strength in this area). Consumers fundamentally want content, not connectivity. Connectivity is a means to an end, and if it’s the right combination of fast and good value, they won’t care who they get it from. The TV offering is going to be the key differentiator in the consumer space, not broadband.  Continue reading →

Apple, iWatch, Smartwatches, Wearables

Why Apple may not launch an iWatch anytime soon

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Everyone seems to assume that Apple is working on an iWatch, an entry in the emerging smartwatch market, and it’s likely that it is. But a secondary assumption has been that this launch must be imminent, because of the other entrants in the market, notably Samsung. However, the history of Apple’s entry into new markets shows that it bides its time, rarely entering right as a market begins, and often waiting until the combination of technologies required has evolved to the point where they’re ready for a truly compelling product. The chart below shows the timelines for Apple’s entry into three previous product categories, those which fueled much of its growth from 2000 to the present:

Apple product timelines Continue reading →

Adoption, Android, Android versions, data, Google

Thoughts on Google’s Android version charts

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Google regularly updates the data it provides to developers on Android versions in use, screen sizes and screen densities, and I’ve been diving into this data today for a report I’m working on. In the next few days, Google will update the data again and there will no doubt be the usual flurry of blog posts and news items about Android fragmentation. But I wanted to share some thoughts that occurred to me as I looked through this data that go beyond the usual rhetoric. Some of these are original, some of them likely aren’t.

Firstly, a fairly predictable pattern has emerged in the adoption of the versions of Android, as follows (and as illustrated by the chart below) 1:

Android Major Version Distribution Continue reading →

Notes:

  1. It’s worth noting that the methodology Google uses for all these numbers changed in April 2013, and now reflects only devices actively using the Google Play store, and not all devices as previously. From what I can tell, it hasn’t made an enormous difference, but has slightly increased the representation of newer versions while decreasing or eliminating the representation of older versions. ↩
Carriers, M&A, Sprint, T-Mobile

Why Sprint – T-Mobile makes sense

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There were rumors today – not for the first time – that Sprint might be interested in making a bid for T-Mobile. This is not all that surprising given recent remarks from T-Mobile execs and Dan Hesse that they would be open to a merger. But there’s been a predictable outcry about the possibility of the US’s three major carriers being whittled down to two, and especially about the presumed loss of T-Mobile’s recent disruptive approach to the industry.

There are several good reasons to take this view:

  • T-Mobile has indeed been disruptive, and has caused real change in the industry. Its shift away from 2-year contracts and towards easier, more frequent upgrades sparked the other major carriers to follow suit. It has won subscribers from Sprint and AT&T in particular as a result.
  • There’s an instinctive reaction to a reduction in the number of players in any industry, and it would follow years of consolidation in the US wireless market. It’s easy to argue that a market dominated by three players would be less competitive than one with four major players.
  • The US has a huge population, and it seems like it ought to be able to support four or more players without too many problems, given that there are other markets around the world with more players and much smaller populations.
  • The two carriers use incompatible network technologies. After Sprint has worked so hard to eliminate iDEN and WiMAX and focus on its core CDMA, EVDO and LTE networks, it would be a shame to complicate things by adding T-Mobile’s GSM-based networks to the mix. Given the focus on LTE this might be less complicated than it once was, but it’s still a non-trivial issue.

However, I think this knee-jerk reaction opposing any consolidation among the big four may be misguided, and here are the reasons. Continue reading →

BlackBerry, Earnings, Whole company analysis

What John Chen needs to tell customers (and investors)

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Earlier this week, BlackBerry’s CEO John Chen posted a letter to customers. While he provided some sense of his strategy going forward, he unfortunately continues the tradition started by his predecessors of failing to answer the most compelling questions customers (and investors) have:

Is there any reason to believe the atrocious trend in device sales will turn around? If so, what?

Device shipments have now dropped 75% from their peak in 2011, and although it’s possible we’ll see a small blip next quarter from steep discounts on the Z10, the trend is likely to continue downward. Chen needs to explain what, if anything, will cause these same poorly-selling devices to start selling better, or allow any future devices to be more appealing to users. As of right now, there’s no evidence of either of those things, and as such we have to assume shipments will continue dropping, and with them what has historically been the largest chunk of overall revenues.

In the absence of that, is there any reason to believe service revenues won’t follow suit very soon?

Service revenues make up most of the rest of BlackBerry’s overall revenues, which is why some people seem to think it’s the most promising avenue for BlackBerry going forward. But the reality is that these service revenues are directly tied to the installed base of BlackBerry devices, each one of which generates a few dollars every month for the company. But, if device shipments go down dramatically and existing BlackBerry users churn to other platforms, this service revenue will merely lag falling hardware revenues by a few quarters but generally follow the same path. BlackBerry has already stopped reporting subscriber numbers, which started falling late last year, and had dropped from 80 million to 72 million by the time BlackBerry closed the door on that metric.

Continue reading →

Ads, Advertising, Google, Instagram

Instagram’s advertising problem

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Companies participating in the consumer technology market have to generate revenue in one or a combination of these four ways:

  • Charging users for hardware
  • Charging users for services
  • Charging users for software
  • Charging advertisers for eyeballs.

If you don’t make hardware, then you’re limited to the other three options. The vast majority of companies that fall into that category are opting for the last option, because it lowers the barriers to entry for users, but perhaps also because it allows those seeking funding to avoid the difficult question of revenue generation until they have an audience.

The assumption seems to be that, as long as you have eyeballs, you can find a way to turn those into advertising dollars. And that’s true to a certain extent, but the ability of different consumer services companies to make money from advertising depends varies very greatly, in a way that is rarely talked about. This has come up a bit recently in the context of Spotify, because the ephemerality of the content is supposedly poorly suited to advertising. But there’s a much bigger problem that affects not just Snapchat but also many others in the current crop of messaging and photo sharing companies, which is that they know almost nothing about their users that’s relevant to advertisers. Continue reading →

Carriers, T-Mobile

The risks in T-Mobile’s Un-Carrier strategy

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Laptop Magazine just made T-Mobile one of their “Game Changers” for 2013 for its Un-Carrier campaign. I spoke with the author of the piece on T-Mobile and emphasized some of what I perceive as the risks around the campaign, but many of my thoughts didn’t make it into the piece, so I thought I’d share them here.

The concerns I have with T-Mobile’s Un-Carrier strategy are two-fold:

  • Though there are one or two truly disruptive things in T-Mobile’s new approach, much of what they’re doing boils down to discounting
  • Though some of their early moves took advantage of the flexibility in accounting afforded to owners of networks, the more recent ones are taking real risks with inflexible third-party costs.

I’ll take each of these in turn. Continue reading →

Big picture, Whole company analysis

Articles of Faith in tech

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Each of the key companies in the consumer tech market has its fans and its detractors – those who believe the company is destined for future success, and those who believe it’s doomed to fail. Some of these beliefs are founded in facts and figures, while others stem from gut feel, emotional investment in a company, or something else entirely. But ultimately backing any one of these companies requires faith that certain things are true.

This has been borne out to me by recent coverage of Amazon, which has focused on its supposed ability to ‘flip a switch’ to shift from breakeven to profitability at some future point. Some of the smarter commentary makes clear that the picture is a little more complex, but it also illustrates just what you have to believe in order to have faith that Amazon will eventually be able to pull off that sort of a transition.

The stories yesterday about Snapchat turning down a $3 billion cash acquisition offer from Facebook also highlighted divergent opinions about whether Evan Spiegel was right. Though most observers seemed to think Spiegel was nuts to turn down an offer, whether you believe that depends on whether you believe in Spiegel’s vision for how high Snapchat’s valuation could go. He – and presumably his investors – have faith that a certain series of events will play out in a certain way, ensuring Snapchat’s eventual profitability and thus an even higher valuation. 

Each company in this market has a similar story that it tells investors, and your view on these companies and their futures ultimately depends on your ability to have faith in those stories. Some of these stories are told explicitly, whereas others are secret (either because the companies are private and have no obligation to share their strategies with the world, or because of some perceived secret sauce they would rather keep to themselves). But ultimately, each tech company has what you might call articles of faith you’re required to sign up to if you want to believe in its long-term success:

Article of faith – n. something that people who support a particular religion or idea believe completely, although it has not been proved

– Macmillan English Dictionary

Let’s look at those articles of faith for some of the most important companies in this space: Continue reading →