Categories

Category Industry

Unforgiven, Continued

In June of 2011 I asked “Does the phone market forgive failure?” Not much time has passed since but the answer still seems to be no. The trigger I was using for this point of no return when the vendor began making losses.

The list at the time consisted of 13 phone vendors who either merged, were liquidated or acquired after this trigger point was reached. There were no examples of vendors who recovered. Since then two more vendors reached the threshold (Nokia and RIM) and a third will do so this quarter (HTC). One vendor (LG) may be recovering but Nokia has just been acquired and RIM has put itself up for sale. Some Japanese vendors like Panasonic have also called it quits since then. So the score so far is about 18 triggers, 15 exits and three pending.

Some of this data is summarized in the following graph:

AMP Index update

The following graphs show the most visible global phone brands and the approximate percent of value they captured since 2007.

Screen Shot 2013-08-21 at 8-21-6.17.19 PM

The graphs each show trailing four quarter average of shares of units shipped, revenues, operating profits and smartphones shipped. I also averaged the four shares into a single share number called the AMP index (Asymco Mobile Performance).

That Competition Thing

Bill, I think the smartphone market has always been competitive. [Only] the names have been changed.

Tim Cook responding to Bill Shope’s question on the competitive landscape, April, 2013.

Indeed, over the years, the companies considered Apple’s primary competitor have been many.

In years gone by in the phone market there were RIM and Nokia and Palm and HTC. In the iPod era there was Creative and Sony and innumerable others long forgotten (not to mention the tyranny of DRM).

Even today we struggle to decide whether Apple competes with Google first or Samsung. Or perhaps with the iPad it’s with Amazon or  Microsoft. Or maybe iTunes is threatened by Netflix or Spotify. The Mac surely competes with HP and Dell and Toshiba. What about iCloud? Clearly it’s Dropbox or Google Drive. iWork? Both Office and Google Docs.

Doing a competitive analysis for Apple is then mostly a struggle of whom to compare it to. So forgive me that I only track the few challengers shown below.

Screen Shot 2013-08-13 at 8-13-2.14.59 PM

Apple's biggest acquisition

At the end of the first quarter 2013 there were 946,035,000 fully diluted shares of Apple stock outstanding. At the end of the second quarter there were 924,265,000. The 21,770,000 shares that disappeared were purchased by Apple and retired. Apple shares traded between $390 and $463 during the quarter so it’s hard to know exactly how much Apple paid for them, but at an average of $426.5 per share Apple would have spent $9.3 billion

Management explains:

In late April we executed a very successful debt offering issuing 17 billion of debt across 3, 5, 10 and 30 year maturities. We paid $2.8 billion in dividends in the quarter and we also utilized a total of $16 billion in cash on share repurchase activity through a combination of a new accelerated share repurchase program and open market purchases. $12 billion of the $16 billion was utilized under a new ASR program initiated with two financial institutions in April.

An initial delivery of 23.5 million shares was made under this program with the final number of shares delivered in average price per share to be determined at the conclusion of the program, based on the volume weighted average purchase price of Apple’s stock over the program period, which will conclude in fiscal ‘14. In addition to the new ASR, we executed $4 billion of open market share repurchases, resulting in the retirement of 9 million additional shares.

Later, during Q&A:

Switcher

Nokia’s Windows (Smart)Phone performance was drowned out last week by Microsoft’s big announcement of the Surface inventory write-off. They are pieces of the same puzzle however.

First, a look at Nokia.

There were 7.4 million Lumia phones sold in Q2 with 0.5 million sold in the US. Although Windows Phones grew sequentially from 5.6 million the previous quarter, and up from 4.0 million in the same quarter last year, total smartphones are down y/y and nearly flat over the last four quarters. This is of course because Symbian phones have finally disappeared from volume shipments. The following graph shows the history of Nokia’s smartphone shipments.

Although it’s tempting to compare Lumia to iPhone (given the premium positioning in the US) the average price of €157 or $206 shows that Lumia is more adequately compared to Android. This is about a third of what Apple gets for its iPhones.

That’s not necessarily a bad thing. Nokia’s always had a knack for mass-market phones and certainly that was one reason Microsoft was attracted to them. Presumably, the promise of the relationship was to insert Windows Phone into the Nokia development and distribution pipeline, squeezing out costs and filling up channels.

Screen Shot 2013-07-22 at 7-22-3.24.21 PMThe problem for the brand has been that although priced at Android levels, volumes are nowhere near and the gap is widening. At current activation rates, Android is selling 16.5x faster than Windows Phone (assuming 90% of Windows Phones are Lumia).

The PC Calamity

As Intel has improved its products, their demand has decreased. Enormous efforts put into improvements are neither valued nor absorbed. The problem is not with the processors themselves but with the systems within which they are built:

Screen Shot 2013-07-18 at 7-18-11.16.38 AM

PC sales fell again last quarter and the contraction is likely to continue. We received affirmation of this as Intel cut sales and earnings forecasts and the crucial capital spending that creates supply in the longer term.[1]

At the same time, computing device sales have soared.

Screen Shot 2013-07-18 at 7-18-5.07.35 PM

Even excluding Android devices which don’t register with Google’s Play Store (and excluding Windows Phone devices), mobile ARM devices are selling at 2.6 times the rate of Intel-powered devices. Put another way, since the birth of Android nearly as many iOS and Android devices have been sold as PCs.

In terms of install base, a computing category that did not exist six years ago has come to overtake one that has been around for 38 years.

The calamity for Intel has been that they have had no part to play in the new category. Perhaps that is because they had every part to play in the old category.

Notes:

  1. Intel said it was cutting 2013 capital spending to $11 billion. The cut follows a reduction from $13 billion to $12 billion in April. Apple’s budgeted capital spending for fiscal 2013 (ending September) was set at $10 billion.

"Everybody has got a smartphone"

… says UBS analyst John Hodulik, as quoted by the Wall Street Journal.

No they haven’t.

According to the latest comScore survey data, 98 million Americans above the age of 13 don’t use a smartphone as their primary phone. That’s 41% of US mobile phone users.

What’s more, 2.5 million more people first started using smartphones in the three month period ending May vs. the three month period ending in April.

The switching rate to smartphones is shown below:

Screen Shot 2013-07-17 at 7-17-10.32.09 AM

What's a BlackBerry user worth?

Last week BlackBerry announced that it had 72 million subscriber accounts. The current market capitalization is $5.4 billion and enterprise value (i.e. excluding net cash) is about $2.8 billion.

That implies a net present value of about $40 for each account. This is quite a drop from early 2010 when the value was $866.

The graph of BlackBerry subscriber accounts and EV/account is shown below:

Screen Shot 2013-07-01 at 7-1-10.09.16 AM
I’ve also added a graph showing a derived value of US consumer BlackBerry users (derived from comScore’s survey data).

There are several patterns which intrigue me:

What's an Apple user worth?

This week Apple announced that iTunes has 575 million accounts. This is the 8th update (that I know of) over the last four years. The history of this data is shown in the following graph.

Screen Shot 2013-06-14 at 6-14-1.13.02 PM

The number of accounts has increased by almost a factor of six since late 2009. It amounts to an account growth rate of about 500,000/day or 44% compounded annually. Not bad, but along with this increase what happened to revenues per user?

Forecasting Windows market share

Last week Frank X. Shaw, VP of corporate communications at Microsoft stated:

 … most of the people around me were using their iPads exactly as they would a laptop – physical keyboard attached, typing away, connected to a network of some kind, creating a document or tweet or blog or article. In that context, it’s hard to distinguish between a tablet and a notebook or laptop. The form factors are different, but let’s be clear, each is a PC.

Actually this “admission” that iPads are PCs is not something new. Steve Ballmer made the same assertion in 2010 pre-iPad (though calling them slates). Arguably, the notion that tablets are PCs has been dogma at Microsoft for over a decade and Windows running on all form factors has been a strategic guiding principle.

Which is why I’ve always added the tablet data to the PC data to create a picture of the “personal computing” market. And this is what that picture looks like today:

Screen Shot 2013-06-03 at 6-3-5.31.21 PM

Note how the share of various platforms has evolved over this brief time span: