At a time when Google steps out of the hardware business, Microsoft steps in. Satya Nadella, Microsoft’s incoming chief executive, faces some urgent questions: Does the Nokia deal still make sense? And how does Microsoft expect to survive, let alone prosper, in a cut throat hardware market where Google is giving up?
Windows and Nokia marriage makes sense in combining hardware, software and appware – but Nadella and Microsoft are 4 years too late. In an email to Microsoft employees on February 4, his first day as chief executive, Nadella said, “Our job is to ensure that Microsoft thrives in a mobile and cloud-first world.” It’s hard to imagine how Microsoft could be “mobile and cloud-first” without mobile. Does mobile necessarily have to be owning a mobile company?
The basic problem with Microsoft is not technology – but choice and the effects of scale. Android had an opportune entry when Smartphones were gathering momentum and Android took the game away from every one – Symbian, Apple, Blackberry and Microsoft. Now with the effects of scale – Android is the best suited for low end smartphones where as others are still planning forays into $50 smartphones. The basic problem for Microsoft is that Android has won the smartphone war. Not withstanding the din of the third eco-system, Android has taken it away. Today Messrs Brin and page are not worried about Android on smartphones, that is a default arrangment – they are looking at Android in Cars, Android in Glasses, Android in the toaster, fridge – Android as the enabler to Internet of things.
That in sense and effect is the crux of Microspoft’s problem – in a post PC world, where devices are increasingly non- enterprise – they have lost their raison d’etre. Google has successfully migrated itself from Search to the OS synonymous with all things internet. Apple is very clearly the best in terms of combining hardware, OS-ware and App-ware. Come to think of it Microsoft is missing a very clear proposition like Google or Apple. It has enterprise, it has cloud, it has search, it has some gaming, it has a mobile OS, it has a hardware company, it has many things – but it doesnt have the ONE BIG THING. The one big thing from which the future roadmap follows – it is key that Mr. Nadella defines that ONE BIG THING – and creates that. So long, Microsoft continues to be a relic of the past – a jack of many spaces, and the master on none.
Nokia’s not finished, Nokia’s device division is going out with a bang, and while most view Nokia as a device-less company once the Microsoft deal closes in Q1 2014, this post delves into the other halves of Nokia and the tricks up its sleeve.
Microsoft paid $7.2bln for the Nokia devices and services portfolio – expected to close by Q1, 2014. However the other “not so significant” parts of Nokia could provide the value up end in the next 2-5years horizon.
While Nokia hasn’t really created any splash around its Lumia range of smartphones, but it is in the process of diversifying portfolio to phablets, tablets and wearables (smartwatch). Wearables alone are expected to number 485million by 2015. However, analysts and industry mavens are betting their monies on Nokia diversifying its portfolio from phones to “any communication” device. This includes amongst others cloud operated devices, sensors and receivers powering the Internet of things.
However it is the alternate portfolio of Nokia that is particularly interesting-
1. Nokia Networks which contributes to 90% of the Nokia (minus devices and services) is a key holder of 4G patents and has been on a comeback trail with associations with Sprint, US Cellular, T Mobile working out post the Nokia takeover of the better half. Nokia Networks also has a good patent portfolio in the 5G space and is expected to be a network driver in this technology.
2. Here Maps – is possibly the unsung Hero in the Nokia portfolio. What started as acquisition of Navteq has ended up in a strong suit of solutions around Mapping- It allows Offline use, Augmented Reality wrappers and a good accuracy (compared to Apple atleast). However, it is Here Map’s telemetry portfolio that is the strongest asset – Here Maps can leverage a robust and long standing relationships with key car makers to push the solutions to driverless cars. Here maps is quite clearly a very strong alternative to Google maps.
3. Finally, Nokia has a good portfolio of patents. Nokia has allowed Samsung to continue licensing its patents for 5 years (2010-15), with a settlement amount to be determined by arbitration in 2015. Nokia will also receive additional compensation beginning in 2014. Given the number of smartphones that Samsung is selling, there is a significant windfall from this settlement that is due to Nokia. Nokia’s venture into 5G technology, self-driving cars, Graphene, and its current core holding of essential 4G patents should ensure royalty fees from many technology companies for years to come.
Bottomline – Nokia after Nokia looks to be a great series of propositions. Now then, do we expect the rise of the phoenix?
The cost and benefits of options and opportunities not taken can never be estimated in its entirety. The same could be said for Nokia rumoured move ( Plunge be abetter word) to Android.
Before the 23rd August 2013, Nokia Microsoft deal was announced, Nokia was considering options in Android on Lumia. This isn’t surprising – rather it was in common sense not to load up all its devices on Windows platform. It was a huge risk- which i am not sure has benefitted Nokia. Stephen Elop has himself accepted that this move was not considered in 2010 because of the dominance of Samsung on the Android platform would have meant Nokia being relegated to a lesser-than-what-was-expected status in the Android hierarchy.
Considering that Nokia lost market share from 32% in 20110 to 3% in 2013 – the Android shift as a plan B hardly comes as a surprise- rather it is much too obvious that the maturity of Android as a platform and the hardware competence and scale of Nokia would have made a great combination.Nokia would have saved money, reduced development costs and still play to its hardware design strengths. The Android scale would have also helped Nokia enter mid and low end of the smartphone markets earier, faster with greater acceptability.
Nokia had an option to exit the partnership late next year, but that certainly can’t happen now. It’s interesting to think about how differently things could’ve gone if Nokia had decided to go with Google rather than Microsoft, but it looks like we’ll never know now.
Guess the latest gate crasher on the Smartphone party? The rumours have been doing rounds for a while now – But Amazon, the king of digital distribution seems set to take on the likes of Apple, Google and Samsung on smartphones. Amazon already has a current portfolio of Kindle Fire tablets and Kindle eBooks – and is reported closing down on 2 smartphones and 1 audio streaming device.
One of the devices that Amazon is working on is a 3D screen smartphone. Details are sketchy – but this could be Amazon’s flagship device – with retina movement sensors and a 3D effect overlay.Also of interest is the rumour that Amazon could release a smartphone for its consumers free of charge without a wireless contract. That could be a very significant departure in pricing strategy in smartphones.
The smartphone game is changing. New smartphone entrants Amazon and Google are beginning to generate revenue primarily through e-commerce sales and online advertising, respectively. As such, they are more willing than their competitors to sacrifice device profit for market share and reach to build on their digital distribution networks.
Its interesting to see how the Apples, Samsungs, Microsoft-Nokia’s of the world react to Amazon’s disrupting pricing. Amazon is doing a Gillete with a easy entry price for the razors and making the consumers pay for catridges.
1. The key for Amazon is to establish a user experience and interface so uniquely engaging that users would stayed hooked to it. Associate that to the Gillette shaving experience and how the user was not able to get rid of the Gillette habit and would spend more and more monies on catridges, foams and others… Yes, Amazon must do the Gillette magic.
2. It has the digital content that can upend a lot of device-only players – such as Samsung.
3. Also key to this equation is the reach and penetration of Digital content in the third world countries – it will require a lot of different other monetization models for Amazon to get threshold volumes in such markets.
In an earlier post dated July 2012, i had quoted Eldar Murtazin on a supposed rumour of Microsoft buying out Nokia. The moment has arrived as Microsoft has announced take over of Nokia’s portfolio of smartphones, patents and services to mount a more formidable challenge to Google and Apple.
The 5.44 billion euros ($7.2 billion) deal announced late Monday marks a major step in Microsoft’s push to transform itself from a software maker focused on making operating systems and applications for desktop and laptop computers into a more versatile and nimble company that delivers services on any kind of Internet-connected gadget. The proposed price consists of 3.79 billion euros ($5 billion) for the Nokia unit that makes mobile phones, including its line of Lumia smartphones that run Windows Phone software. Another 1.65 billion euros ($2.2 billion) will be paid for a 10-year license to use Nokia’s patents, with the option to extend it indefinitely. It will represent the second most expensive acquisition in Microsoft’s 38-year history, ranking behind an $8.5 billion purchase of Internet calling and video conferencing service Skype.The operations that are planned to be transferred to Microsoft generated an estimated 14.9 billion euros, or almost 50 per cent of Nokia’s net sales for the full year 2012.
To me, the marriage has been in the making for long – ever since Stephen Elop joined Nokia as CEO in 2010. Elop has been single handedly instrumental in aligning Nokia to Microsoft – at the cost of cutting out other platforms from Nokia – Meego in particular which was a very promising platform. The fabled act of putting “all eggs in one basket” i.e concentrating all of Nokia’s high end effort on the Microsoft platform bypassing Android as an option. The Lumia series of Nokia smartphones has not exactly set the Nokia Cash registers on fire. Elop also worked out to lean out Nokia moving out 20000 workforce/jobs. Nokia has lost more than 5 billion euros in nine quarters as Elop’s comeback bid hasn’t reversed market-share declines. Through Elop’s tenure, Nokia’s basic phones have been losing users to Chinese rivals and new smartphones have failed to stop shoppers from picking up Samsung and Apple devices. Nokia Smartphone business hasn’t been performing very well. Nokia which sold close to 28 million smartphone handsets not long ago in December 2010, has managed to sell only 7.4 million Lumia handsets in Q2 2013. That said, Nokia’s low end handset business and its Asha platform hasn’t been performing well.Stephen Elop sets out from Nokia and into Microsoft to possibly see the acquisition to a closure by early 2014.
Microsoft bets on Nokia for its formidable patents and the hardware edge that Nokia brinsg to the table. Microsoft’s attempts at making its own device (Surface & Surface RT) have been less then spectacular given the $900million write off for last year.
My take on the take over – (It hasnt changed over the past 4 years)
Both Nokia and Microsoft really missed the boat in terms of smartphones, and it is extremely difficult to claw your way back from that. The question is whether combining two weak companies will get you a strong new competitor. It’s doubtful.
As tablets continue to pound on Laptop and Netbook segments – and the Laptop/Netbook segment is at best projected to be stagnant if not decreasing in terms of y-o-y shipments it is difficult to harbor any significant optimism about Intel. Intel has been trying to migrate its business to the Handhelds given the impending fall of the Wintel Franchise. It is clearly trying to move away from the Wintel Monogamy to separate alliances with Android, Samsung (Tizen) apart from the Windows Phone platform. However, creating a platform with meaningful revenue stream to replace its Wintel franchise is a long shot – something it has not been able to do for a very long time.
Highlights of Intel’s Performance
Full-Year 2012 Key Financial Information and Business Unit Trends
Full-year revenue of $53.3 billion for FY2012
PC Client Group had revenue of $34.3 billion, down 3 percent from 2011.
Data Center Group had revenue of $10.7 billion, up 6 percent from 2011.
Other Intel architecture group had revenue of $4.4 billion, down 13 percent from 2011.
Gross margin of 58% not broken down by group.
I am listing out a few thoughts on the Intel prospects going forward-
1. Intel Versus Qualcomm: Qualcomm with its leadership of the mobile space is possibly Intel’s biggest competitor in the mobile space. What works for Qualcomm is its economies of scale – hence allowing it to price itself very suitably. Intel chips in its current state would be 5X costlier than Qualcomm.
2. Intel’s specialty was the Windows platform and its complete monopoly. I don’t think they can repeat the same success with Google’s Android because the spots are already taken.
3. The low end growth in volumes will be typically driven in low price markets such as India, SE Asia. In this segment, there are pretty strong guerillas such as MTK, Allwinner and even Qualcomm has a spot of bother targeting these segments
• The problem with these markets is that none of them seems to offer the kind of margins that Intel has become accustomed to–even *if* Intel is successful in those markets
4. Either in terms of competing with Qualcomm or finding new markets, If Intel was to beat the market by considerably pricing itself lower (assuming very high volumes) – it would impact its profit margins dearly.
5. Intel has been innovating at the high end of the market. Thus, the cleverness that has gone into Intel’s current generation of high-end processors is simply stunning, but the market that benefits from that cleverness, and the margin that goes with it, is disappearing.
6. The only saving grace to this equation could be Microsoft – but the platform had its share of problems with Windows 8 and I am not sure if Windows Blue can reverse the tide.
7. Intel’s share of the server markets is also under threat with the ARM architecture and Atom like low margin chips being purported to be lopping off a big chunk of the server markets in near future. The driver is the cost of electricity and of cooling data centers. (Low power rules)
8. The third of Intel’s strengths – high-reliability enterprise computing and high-end analytics for business or national security applications is also moving the IBM way. IBM doesnot make any profits on its processors – its makes it dough from the services.
Finally, from cumulative experience of high end technology industry – any incumbent Goliath who missed one technology cycle – cannot by any means play catch up unless it re-invents the whole industry yet again. Intel doesnot have to look too far – beyond Microsoft – to learn missing out a technology cycle and losing the plot.
The Apple board is concerned about its “dry spell” in producing innovative products. Apple has been missing in action for a while – October 23rd, 2012 was the last time, Apple launched the iPad mini. Ever since then the Cupertino giant has been largely missing in action. Twitter and Blogospehere – which was alive and abuzz disecting Apple’s latest launch or new launch have largely falled silent and one gets to read more about Cook versus Jobs comparison which is reminiscent of Apple’s Phoenix tale.
This post is to put Apple’s profiling Apple’s share of problems.
1. iPhone and iPad both played a significant role in its growth since 2009. However there is slowdown in Apple sales and prices have gone southwards for a while now. In other words, loss of momentum. Apple seems to be not only losing its pricing power but also its sales growth despite the lower prices.
2. Going by Apple’s own statement- the loss in pricing premium and numbers is not just a temporary loss-
“The Company expects its gross margin percentage to be lower in 2013 than experienced in 2012, and the Company anticipates gross margin to be between 36% and 37% during the fourth quarter of 2013. The lower gross margin expected in 2013 is largely due to anticipation of a higher mix of new and innovative products with flat or reduced pricing that have higher cost structures and deliver greater value to customers and anticipated component cost and other cost increases.”
Financials Q3, 2013 (page 30)
3. The decline in numbers can also hurt the iTunes, software and services, and accessories segments.
4. More importantly, the loss in momentum is showing on its technology leadership – and top of the mind recalls. Apple is suddenly a “has been” from “aspirational” and “ahead of the curve”
5. There have been fiascos such as the Apple Maps which have robbed the sheen and the Halo. Apple was never accussed of being a “half baked device/service”
While it is understood that Apple needs to target the China and the SE Asia markets with its low cost iPhone – iPhone 5C which should take on the mid range Androids and Windows Phones – this would translate in reduction of the overall margins. At the same time, Samsung Galaxy SIII has taken over as the Smartphone tops – disrupting iPhone’s positioning in consumer mind as the best smartphone.
Microsoft has been in mobile since Windows CE for PDAs in 1998. Inspite of 15 yrs of presence, the latest reports don’t inspire any much confidence at Microsoft writes down huge losses on its ambitious Surface RT tablets
1. Microsoft’s Surface tablet generated $853million revenues in 8 month period (Launched late October 2012 to End of Q2, 2013). However, Microsoft has written off $900 on the Surface line – thus re-iterating that the whole premium pricing strategy was to no vain.
a. To put the $853 million in perspective, Surface revenue equaled about 5.5% of the Windows Division’s $16 billion in sales in the last three quarters, and just 3.3% of the $25.8 billion that Apple’s iPad generated in the same period.
2. Microsoft cut the price of Surface RT by as much as 30% in July 2013 and given that the number for the $899 Surface Pro have been poorer, there could be another inventory write down of Surface Pro over the next few quarters
3. Surface RT has also seen a huge attrition of OEMs which starts with HP & Toshiba (Committed to Surface RT- but never launched a device), Samsung (Which cited lack of demand for ditching the platform in January 2013), Acer, Lenovo and Asus (Mid July 2013).
a. There may be a few backers in terms of Qualcomm, Nvidia and Dell – But the fact remains – Windows RT is challenged and OEMs are simply not interested in RT.
b. This could be a spanner in the works of Windows RT 8.1 – It already is out of all momentum.
4. Microsoft has the choice of continuing on the Surface RT Tablets – but it is very highly unlikely that they would be able to turn the platform around. Keeping Surface RT alive would be a game of diminishing returns and would bleed Microsoft.
Microsoft may have deep pockets – but that really doesnot justify the undying faith on Windows RT.