Monthly Archives: January 2014

Google, Lenovo, Microsoft, Motorola, Nokia

Google and Microsoft go in opposite directions

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With Google’s announcement that it’s offloading the Motorola smartphone business onto Lenovo, we face the intriguing picture of Microsoft and Google apparently moving in opposite directions, with one acquiring a handset business and the other divesting one. What explains this difference between the two companies’ strategies? Is one right, and the other wrong, or does it reflect a fundamental difference in their businesses?

The reality is that, since everyone else now gives them away for free, Microsoft essentially captures 100% of its two core businesses of productivity software and operating systems, and both are likely to shrink. Software may be eating the world from a functionality point of view, but hardware is eating the world from the point of view of revenues. The global market for consumer hardware (smartphones, tablets, PCs and gaming consoles) is about twenty times larger than Microsoft’s revenues from Windows and Office combined. And that explains its organic and inorganic forays into hardware as well as its Xbox business. If you have to choose between hardware and software to build a business in the consumer market, hardware is the way to go. Between Surface, Xbox and Nokia smartphones, Microsoft has around a $10 billion annual revenue stream from hardware already, and Surface and Nokia should grow well in the coming years. 

On the other hand, those aren’t the only two parts of the consumer technology market where you can make money. Consumer content and online services are another massive and growing market, and that’s where Google plays through search and advertising. Google’s addressable market is growing rapidly as the online population expands and as more and more of the worldwide advertising market shifts to channels in which Google competes, namely online and mobile. As such, Google doesn’t face the same existential challenge Microsoft does.

The key to Google’s future growth is threefold: the ongoing competitiveness of its online offerings (hence the DeepMind acquisition), the ongoing success of Android as a platform for Google services on mobile devices, and a continued ability to create vast data sets about its users and about the world (hence the Nest acquisition). The acquisition of Motorola was clearly intended to serve its goals around Android, whether by bolstering its patent position, providing leverage over its OEMs or pioneering features and functionality that would become part of the overall Android experience. But if Google believed it could turn Motorola around, it failed hopelessly. At this point there’s really nothing left to be gained by hanging onto Motorola. At its present scale, and with the dominance of Samsung in Android smartphones, there was no way Motorola on its own could ever have achieved the significant growth or margins that would have allowed to contribute to, rather than detract from, Google’s overall financial performance. It had become a millstone around Google’s neck, pure and simple, and had to be cast off.  If Google was able to extract some concessions from Samsung in return for the sale of Motorola, so much the better.

As the smartphone and tablet markets grow, Google benefits without having any presence in hardware because the majority of Android devices carry embedded Google services. But for Microsoft to benefit more than marginally, it has to be in the hardware business. Both companies see the same trends, but their positions in the market have led them – rightly, I believe – to radically different conclusions about whether they need to be in the hardware business.

As for Lenovo, they’re now in a very strong position to become the third major company in the consumer hardware business after Samsung and Apple. Last quarter they were number four in smartphones, number four in tablets and number one in PCs. It’s one of the few companies in the hardware business that’s grown profits over the last couple of years and the only one to have grown shipments across all three categories. The biggest challenge for Chinese vendors in the smartphone business has been moving beyond the white label business as HTC did a number of years ago. Both Huawei and ZTE have struggled to establish their own brands in the major carriers’ postpaid channels.  But Lenovo will be buying both carrier distribution and a known brand, which should dramatically simplify the process. Moving manufacturing to its facilities in China and taking advantage of domestic scale will also be hugely beneficial. Assuming regulatory approvals come quickly and Lenovo is able to make a quick start, it could quickly leapfrog much more established brands like Sony and LG and take a prominent position in the market.

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 →