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Tuesday, 21 September 2010

Smartphones and Millennials

Lady Gaga, Mark Zuckerberg and Paris Hilton; we’ll stop right there, otherwise this would become an extremely long list. This trio is among the most famous representatives of the Millennial generation. Millennials are usually defined as those born between 1981 and 2002. In America there are 92 m Millennials, which according to the Census Bureau, makes this the largest section of the population.
Over the coming years, as more Millennials reach adulthood and enter the jobs market they will reshape society. On the early evidence Millennials might not be quite as selfish and self obsessed as the Baby Boomers who brought us Rock & Roll and birth control. In a reaction to their parents Millennials are said to be more respectful of rules and more interested in community. By contrast Baby Boomers were more into psychoanalysis and frivolous consumption.  Nonetheless, Millennials are proving to be a revolutionary force.
On average Baby Boomers are said to spend 7hrs a week reading work related emails. By contrast, Millennials spend just four hours, according to Accenture, the management consultancy. Millennials prefer to spend their time texting and communicating on social networks. No surprise then that Millennials are the most connected generation in history: eight out of ten of them sleep with a cell phone glowing by their bed. You might not be able to reach your doctor when you need him, but the odds are you can phone a Millennial. Don’t lend them your car though. Two-thirds of Millennials admit that they text while driving. The average Millennial is really quite manic when it comes to staying in touch.
Re-wiring society
The long march of Baby Boomers through the workforce changed the way business was done. Baby Boomers killed the mainframe computer and replaced them with personal computers and the internet. Just as rock music rewired our ears, the internet and GSM rewired society. Now Millennials are quickly taking the internet to the next level and making it borderless. 
If you are confused by what that might mean, consider the following numbers, which come from the CTIA, a non profit wireless industry organization. The CTIA estimates that in the US alone there were 257 m data capable devices in circulation at the end of 2009, compared to 228 m in 2008. Included in this number will be digital cameras, music players, personal computers, games consoles and the like. If a device is data enabled there is a likelihood that it can connect to a network. This is what is happening now. 
World wide Cisco and Forrester estimate that in 2007 there were more than 500 m devices that were connected to a wireless network. The iPhone was launched in August 2007 so most of the devices connected would have been Blackberries, a tiny number of smartphone and personal computers with a WiFi or 3G data card. This equates to about 1/10th of a device for each person in the world. By the end of this year the estimate rises to 35 billion devices, or about 5 per person. This number will include mobile phones with some kind of data connection, computers, printers and a growing number of sensors and other pieces of invisible electronics that are connected wirelessly. At the same time, using several different industry estimates, there are likely to be around 265,000 different mobile applications in use worldwide. 
These numbers are already striking but if the current trend continues it is expected that by 2013 there will be one trillion wirelessly connected devices. This equates to 140 devices for each person on the planet! By that time there is likely to be more than 600 m smartphone in operation and even with the extraordinary rise in tablet computers, such as the iPad, it takes quite a leap of imagination to get anywhere near 1 trillion devices. However, lets begin by considering the following - what would an average American college student now take away to college? At least one smartphone, an MP3 player, such as the Apple iTouch, a lap top computer, a digital camera, digital video recorder, E-reader, a digital television and two games consoles, one handheld the other fixed. Over the coming years most of these devices will come with a WiFi Direct chip that will enable them to connect directly with each other, without a wireless hotspot. Likewise, over the coming years the number of sensors that are WiFi enabled will rise exponentially. The world’s electricity grids are steadily being rebuilt using networked digital electronics and the same stead march towards the networking of sensors is taking place in oil, water and gas pipelines. Automobiles, medical instruments, road sensors, numerous monitors, sensors and meters within households and offices are now also being connected to the internet.
AT&T’s last set of quarterly results allow us to glimpse the future. In the second quarter AT&T saw 100,000 new data enabled devices, such as e-readers and a variety of monitoring systems, connected to its network. The estimates for connected devices is mind boggling and may prove to be far too high. However, when we look at the growth of data enabled devices they usually exceed forecasts. The sudden rise of the smartphone and tablet computers have taken most analysts and forecasters by surprise. 

Source: US Gov Stats and Cyke Global Estimates

The chart above is based on a well known one produced by the US Department of Commerce, which examines the time it took new technologies, such as cars, TVs, radios and telephones to reach 100 m of the population. The main point to take from this chart is that in an age of networking, new technologies and new types of behavior spread more rapidly than before. Facebook is a powerful demonstration of this trend. The service was launched on Harvard University campus in 2004 and was opened to the general population in 2006. The site now claims to have 500 m registered users and recently overtook Google as the US site with the most internet traffic. A network gives a device power and in the modern world power resides in community and the ability to access applications and content. Today we live in a world where the private and public space through which individuals move is immersed in radio waves: we are always connected. There is now a small industry dedicated to examining and speculating on how all this connectivity might be reshaping human brains and behavior.
Baroness Susan Greenfield’s book ID, is an early example this genre; a more recent one is The Shallows: What the internet is doing to our brains, by Nicholas Carr. No surprise then that one of the most in vogue areas of scientific study today is neuro dynamics and mirror neurons. What this type of research strives to understand is how brains function in a society that can increasingly be described and understood using the terminology of complex networks. The discovery of mirror neurons at the University of Parma in 1995 reveals how much of human behavior is a result of sub-conscious mimicking of others in our social group. A famous experiment by VS Ramachandran, the noted neuo-scientist, examines what these neurons may mean for the destiny of Mankind. A taster of his exciting work can be seen at the following linkTED lecture  One area of research, which is generating interest addresses the question of conscious will and our idea of self. Daniel Wegner, one of the leading scientists working in this area has written a book called, The Illusion of Conscious Will. The title gives a flavor of where all this is leading us. An excellent tour d’horizon can be found in a work I have mentioned before called Herd, by Mark Earls. Rather than being an academic, Earls is a senior advertising executive. He therefore manages to show how recent breakthroughs in neuro dynamics and the study of social networks has a commercial endpoint. As someone who has always been rather skeptical about the use of charts in stock analysis I am being forced to review my prejudice. Earls’ main contention, which summarizes recent scientific work and comes from his own experience in advertising, is that that society is not made up of individuals who exercise free will. Although he doesn’t mention Mirror Neurons, he, like scientists who are examining them, has  arrived at the conclusion that very few of us are individuals, mostly we function as part of a herd. This is why stock charts are useful, they plot group behavior. They many not always be right but, as many experienced and successful investors know, often they are on the money. In my experience some investors are extremely skilled at reading them.
Now consider the following finding, which came from Accenture’s study: 45% of employed Millennials use social networks while at work, but only 32% say that this is supported by their IT departments. Millennials are addicted to being connected. The table to the left comes from another study carried out by Cisco, which examined how its customers use Facebook. It found that 7% of them spent an average of 68 minutes a day playing a popular interactive game called FarmVille. Mafia Wars was the second most popular game.
This underlines a theme that will be familiar to 5th Column readers - IT has become consumerized. Today, even the enterprise, once the bastion of the IBM mainframe and Microsoft compliant PCs, is becoming dominated by consumer choice. This explains the success that Apple is enjoying with the iPad and iPhone. Both products were aimed at consumers but more companies are being forced to adopt them because their employees use them. This goes for social networking too.We saw the same pattern with the adoption of the personal computer which, as we discussed last week, took place despite the protestations of corporate IT departments. They correctly saw that the PC would undermine their power. 
What is cool for Millennial consumers is also cool for business. This is why the giants of the PC era face a daunting problem. Their shares have underperformed the likes of Apple over the last decade. It is not just that they are falling behind in  consumer markets, it is that consumer markets have begun swamping business.  Microsoft spotted this trend a decade ago, which is when it teamed up with two companies, Sendo and HTC, to produce smartphones. Microsoft’s  plan was to topple the Black Berry and Nokia and dominate the enterprise. It has not happened and now it is never likely to. Androids and iPhones are sweeping in from the consumer plane, like the Mongol hoards and are storming the Great Wall of Enterprise. 
There is gold to be found by studying how groups use social networks and other types of communication technologies. Over the last five years IBM for one has spent $11 bn buying up companies that provide network analysis software . IBM says that its annual sales of such software will exceed $15 bn by 2015 and is growing at a double digit rate. By one estimate there are more than 100 programs now available for network analysis. Gartner ranks this type of software as number two in its list of strategic business operations meriting significant investment this year. 
Mobile phone networks are at the forefront of those who use this software. As mobile networks carry more services like Facebook and Twitter, this software can be used to create a completer picture of how large populations of subscribers function. The aim is to examine how subscribers operate within their social network. A recent article from the Economist gives us a taste of what is to come. 
The police department of Richmond, Virginia, has pioneered the use of network-analysis to predict crimes. Police officers know that crime increases at certain times, such as on paydays and when there is a full moon. The software lets them analyse the social networks around suspects, such as dealings with employers and collection agencies. The goal, according to Stephen Hollifield, the department’s technology chief, is to “pull together a complete picture” of suspects and their social circle.
Richmond’s police have started monitoring Facebook, Myspace and Twitter messages to determine where the rowdiest social gatherings will be. On big party nights, the department now saves about $15,000 on overtime pay because officers are deployed to areas that the software deems ripe for criminal activity. Mr Hollifield claims that crime has declined as a result.
Investment Opportunities 
So far we have surveyed how demographics and technological innovation are combining to create a society that is networked. We have also seen that the number of devices linked to networks is rising exponentially. In last week’s Fifth Column we looked at some estimates from Cisco, which underline that the place where the networking of human society will happen at the most rapid pace will be wireless. From 2009 to 2013 Cisco believe that wireless network traffic will increase more than 30 fold, compared to just over a four fold increase in fixed network traffic over the same period. 
Due to this the number of mobile broadband subscribers is expected to rise to 2.7 bn. This is the number of subscribers who are expected to be using the high speed data variety of 3G known as HSPA. By that time another 100 m are also expected to be using LTE, which is a mobile technology specifically designed for high speed wireless broadband in dense urban areas. Within five years, close to 40% of the world’s population will be using wireless data over mobile networks. Now look at the chart below. What this illustrates is the speeds achieved by mobile networks compared to fixed line networks.Despite the improvements in wireless technology there is still a gap of ten years separating what a fixed line network can offer compared to what is available on a mobile network. Two of the most successful ways to invest in technology is to find bottlenecks and also to invest where the pace of innovation is the greatest. Wireless lives up to both of these rules

Let me explain. In the fixed line world, which is where the personal computer industry resides - bandwidth is not a constraint and neither is memory size, or power consumption. Another constraint that is lacking in the fixed wire world is human bandwidth. When someone is sat at a desktop they are able to concentrate better on the task at hand, even if that is a user manual.
If power and memory are not a problem, and neither is human bandwidth then electronic and software design can be loser. Microsoft is free to write bloated software and Intel is able to pack billions of transistors onto a piece of silicon without needing to worry too much about power consumption.
None of this works in the wireless world. Yet a growing number of wireless consumers will expect to receive the same services and applications over their mobile networks as they do on a fixed wire network. However, there is less bandwidth, less power and less memory than the fixed world can offer. This represents a barrier to entry and goes a long way to explaining the problems that PC centric companies, such as Microsoft and Intel, face when attempting to move into the wireless domain. By contrast, the constraints of the wireless domain represent the moat around ARM’s business. Arms’ devices were designed from the beginning with wireless in mind. As we saw earlier, with the number of electronic devices rising exponentially this puts ARM in a position that closely resembles that of Intel’s in the PC domain.  Thanks to Moore’s Law each year Intel has been able to add more value to its microprocessors at the expense of other parts of the PC value chain. ARM is following the same progression; like Intel it has added graphics to its microprocessor cores. Over time other functions will follow. This is why Arm attracts takeover speculation.
The constraint in the speed of mobile networks  explains why mobile operators can charge more for data delivery compared to an operator in the fixed world. Today, mobile voice and SMS represents about $800 bn globally. Data will eventually take most of this and also add new revenue. It will also increase margin.

Operator Capex+Opex Costs to deliver 1GByte of data

low ratings and typically offer yields of more than 5%.
The chart below, which was compiled by Rysavy Research plots data and voice usage over 3G networks. In the US data  already represents just over 20% of the ARPU for the leading operators. However, 
  as the chart on the left illustrates, the speed of increase in data volumes is accelerating. The reason is not hard to locate - the availability of high speed mobile data networks is growing, the penetration of smartphones is rising and the number of Millennials who are entering the working population, and therefore have more money to spend is also increasing. Ingredient X, which feeds off of each of these developments, is that the pace of innovation in the mobile data domain will continue to accelerate.
By 2014 the number of 3G subscribers in the world is expected to be more than 3.3 billion, of whom 2.7 billion will use high speed data services delivered over the higher speed versions of 3G. The chart at the bottom o this page concentrates solely on mobile data volume and so gives a clearer picture of what is taking place. Over the coming few years the speed of growth will accelerate. By 2014 there will be more than eight times as much mobile data.
Over previous issues of Fifth Column and before that, when I wrote the Mash, I have often addressed the subject of smartphones and mobile operators. It must by now be clear that the key to successful investment in technology is to understand the characteristics of the Millennial generation and the dynamics of mobile data growth. As we saw last week, the estimates for the number of smartphones has been increased yet again; currently the market for these devices is growing at more than 50%.
Now it is time to look at some other areas where investors may want to consider investing. In a world dominated by wireless networks and social networking services, such as Facebook, it is clear that  security becomes a more serious concern than it was when PCs dominated the IT environment.  Security has become so important that the computer hackers themselves have taken to patenting their own technology. 
The latest version of the Zeus banking Trojan, which has long been a threat to financial institutions and delivers lucrative financial information back to a botnet command and control server, includes the type of copy protection that one usually finds in enterprise software. The creators of Zeus have added a hardware based licensing system to the Trojan builder kit , which only allows the kit to be copied on a single computer.  

The creators of SpyEye, which competes with Zeus, have now also included a hardware lock, developed by a Russian programming team, in their software.
Over the last few months Intel has launched a takeover of McAfee, a security software company and Hewlett Packard has announced the acquisition of ArcSight, another US based computer security company. Both Checkpoint Systems and Radware, two Israeli security companies quoted on the Nasdaq, have leapt in the wake of these bids. Symantec, another US security stock has also risen. In Asia, Trend is one of the big security companies, while in Europe F-Secure is another company that specializes in anti virus software. 
We have looked at mobile operators on numerous occasions  just as we have discussed the prospects for Apple, Google, Arm, Imagination, Mediatek, Cambridge Silicon Radio. Broadcom and many others. An investment in the right lithium battery company is another option. However, it is time to revisit a theme that I have not looked at since April 2009, and that is new screen technologies. A number of the new devices that link to wireless networks will use screens. Remember, one of the rules of investing in technology is to locate a bottle neck. Handheld devices are battery powered so energy consumption is an issue. At the same time, these devices are also required to run high quality video images, which represents a drain on power consumption. 

Wednesday, 19 May 2010

My iPad fantasy

Sunday was good; in fact it was better than good, it was sensational. I spent the morning in bed with a rather toothsome new friend. Outside it poured with rain. Perfect, we didn’t need to go anywhere because I was having more fun running my hands over her curves.

 She’s slim; even sleek, and she is so damn responsive when I stroke her. When I clasped her I felt a buzz, a thrill. This, I thought, is definitely the one for me. She was so beautiful, like she might have fallen out of an alien space ship. What I mean is, she looked like she came from the future. A celestial future, where everything is perfect. 

Yes, over here in London, I  managed to get its hands on an iPad for the weekend ahead of the official launch. The publishing industry has taken to calling it the Jesus Tablet and if you ever get your hands on one you too will get that surge of faith, you will see, touch and believe. You’re doubtful I can tell, but I have an advantage over you - I’ve already used one.  Over the last few months The Mash has talked often about the iPad and even suggested that it will revolutionise media and the web. Here’s the scoop, that may be an understatement.

The point I am making with the purple prose and fevered day dreams is that the iPad changes your experience of the internet. With an iPad you consume content, rather than surf the net; the experience is sensual and absorbing. One reason for this is that absence of a keyboard means that you can hold it in one hand like a book, or magazine. You are going to find this so much more comfortable than cradling  a PC in your lap. For starters, it reduces those aches and pains you get from staying on a key board too long. With an iPad you can lie in bed; or crash out on the sofa and experience the web in comfort. As more of us spend our leisure time communicating on social networks, adding pleasure and ergonomics to the equation is something of a great leap forward.

In a year or so when the price has dropped by a third, or a half, The Mash suspects  households will buy several. If you think that’s a bit rich, look at the
chart above, which is of US TV ownership. More than half US homes now have three or more TV sets. The iPad’s screen is sensational, so viewing videos is much more fun than on a PC. To tell you the truth, now that I have experienced the iPad I am not so sure there is much of a future for Amazon’s Kindle. As far as most homes go a device like an iPad has many more uses than either a TV or a computer, but most of all it is personal. Just like with mobile phones, the Mash suspects that consumers are going to become wedded to their iPads.

This might seem like hyperbole but just as Avatar has changed people’s expectations of film so the iPad will change our expectations of the internet and digital content. In two or three years, when the price is closer to two hundred dollars, devices like the iPad will take the emerging markets by storm and when they do the consequences will be profound.

Within the next five years the Mash suspects that a whole generation of children will have their first experience of reading on an electronic device such as the iPad. They will grow up imagining books and newspapers as digital. You might disagree and speaking as someone who owns a rather substantial library, it is with some regret that I write these words. Yet, let’s not forgot that once books used to be on lumps of clay, then they moved to papyrus, or where even chiselled into sheets of copper. No doubt there were those who moaned when the first paper back appeared. In each turn of the evolutionary cycle Marshall McLuhan’s famous dictum operates: The medium is the message. In other words, the medium through which content is presented changes the consumer’s experience of that content. The iPad brings the power of digital technology and the breadth of the internet and marries it into a desirable and useful object. The iPad will become a talisman, a treasured object with almost magical power.

What a difference 85 years makes

The chart above plots the concentration of wealth in the US. As you can see, we are back to the levels last seen in the Jazz Age, when F. Scott Fitzgerald was America's most celebrated writer. My goodness, what an innocent time that must have been. Today, Cormac McCarthy harrowing tale the Road is the big hit - Go Figure!

Monday, 10 May 2010

Chinese Property and Tech Demand

Lets begin with what we know: China’s appetite for high tech gadgets is exerting a mighty influence on global demand. The recent results from Samsung Electronics, Asia’s leading technology company, give one reason why. The South Korean giant estimates that China’s flat screen TV market is now as large as America’s, and is doubling. 
Industry wide smartphone shipments were up 50% in the first quarter and as Apple’s astonishing first quarter results demonstrate, China is making its weight felt. iPhone sales in China were up 900%.  China is also having an impact on the PC market. It is likely that close to 350 m PCs will be shipped this year, a 17% gain on 2009. As the recent results from Microsoft and Intel illustrate, consumer demand in both China and other emerging markets has more pull than Western corporate buyers. Yet it will serve investors well to remember an old stock market adage: news follows share prices.
China’s stock markets have been among the worst performing indices this year. On queue over the last few weeks concern has risen about the nation’s property market and slower economic growth during the second half of the year. Some analysts are citing a drop of 40% in property transactions during the second quarter, in some of the largest cities. There is also the realisation that the shockwaves spreading out from Greece might hit China. 
A quarter of China’s exports go to Europe. Yet the Euro has been sliding against the dollar, as the markets worry that growth might falter.  China pegs its currency to the dollar, which has been rising against the Euro and so making its goods more expensive.  
China’s Property Market
Late last year Jim Chanos, one of the world’s leading short sellers, began voicing concern that China’s property market was in a bubble. You do not have to look very far to see that he has a point: last year, according to Morgan Stanley, sales of residential property were up 87%.  There can be no surprise then that residential construction has also taken off, rising some 20% according to CLSA. It is still expected that growth will be of the same level this year. 
With low interest rates and limited opportunities for alternative investments, property speculation is a popular way to make money. Particularly, as buyers of second homes were offered mortgage discounts. Chinese state enterprises have also been encouraged to join the property market. In a report earlier this year CLSA estimated that nearly a fifth of recent properties bought were kept vacant.
However, China’s many bulls will point out that the picture may not be quite as dire as critics, such as Chanos, make out. The four leading cities, Beijing, Shanghai, Guangzhou and Shenzen only represent 9% of the urban population and 8% of property sales by floor space. There are a 150 other cities with  populations of at least a million. When it comes to floor space, China’s second tier cities represented 33% of residential sales last year. Prices in these cities are 60% below the tier one cities. In the third tier of cities prices are 74% below places like Beijing and Shanghai.
Another encouraging feature of the Chinese property market is the high proportion of cash transactions. The ratio of consumer debt to GDP in the country is just 17% compared to 95% in the US. Mortgage loans as a per centage of GDP are also low when compared to that of the Anglo Saxon economies. In China the figure is 14% compared to the US, where it is just below 80%. All the same, the cost of servicing a mortgage for the average family is 43% of income, according to Morgan Stanley estimates. 
A Bear in the China Shop
China’s bulls have many convincing arguments, but so far this year, Chanos’ view has been the more accurate. He pointed out that investors ought to focus their attention on international stocks that were exposed to China’s infrastructure and building markets. In other words, steel and cement. In the month to 7 May, the SLX steel ETF had shed 18%, and Cemex, one of the world’s leading cement companies, lost almost 14% last week.
Falls like these, in combination with the growing nervousness shown by some of the analysts and strategists who follow China, give us reason to be nervous. Yet, for the time being, most of the evidence from the tech sector has been very upbeat. However, if the Chinese property market is weakening as some say, there is still time for the shock waves  to be felt in Silicon Valley. 
Over the medium and longer term China will  become  the biggest consumer of PCs, smart-phones and the like. What worries me is the following few quarters, we need to pay close attention to what is happening to tech demand in China.

Sunday, 2 May 2010

A Coca Cola for the 21st Century

The Financial Times has just published a survey of the world’s top global brands. The world’s three most valuable are Google, IBM and Apple. Microsoft made it into fifth spot, behind Coca Cola. Tech companies took seven of the top ten positions and most of the top twenty positions.  We live in a technology dominated world, yet you often come across professional investors who would rather take a bath in battery acid than buy a tech share. 
The problem is that tech is two faced. On one side you find dozens of companies that look, for a moment like winners, then flare out. Others, like Sun, Compaq and Palm do well for years before evaporating Then there is tech’s other face, the totalitarian one. In its day, IBM controlled between 60% to 70% of the mainframe computer market. Intel takes around 90% of the microprocessor market, and there is not much worth fighting over in the PC software market that isn’t owned by Microsoft. Google rules the hill in search and Amazon has cornered the electronic sale of books.  These are businesses with moats around them, the kind of brand names that a young Warren Buffett would buy ahead of Coco Cola, or the Washington Post.
Now, I am going to make a crazed, typically top of the market prediction, within ten years Apple will be the largest consumer brand in the world. Furthermore, some media giants, it could be Disney, News Corp or Time, will ride the same jet stream. The key has to do with understanding where we are in the tech cycle and the rising power of the Asian consumer.  
Over the last week we have seen Corning increase sales by 57%, citing strong demand for flat screen TVs and computer monitors, particularly out of Asia. Likewise, Samsung Electronics, Asia’s largest technology company, has just reported that Chinese consumers are showing a keen interest in higher specified flat screen TVs. A few weeks ago it was Apple’s turn. Analysts had been expected around 7 m iPhones to be shipped, instead the company sold 8.7m and earned nearly 30% of its profit from Asia. In the previous quarter, 20% of the company’s profits came from Asia. 
Asian Demand
The strength of demand in Asia is the thread linking each of these results, but there is a noted change to the pattern of this demand. Chinese consumers, on the eastern seaboard, were the first to ship in container loads of high ticket luxury items and high tech goods. About 300 m live in eastern cities such as  Shenzhen, Shanghai and Beijing.  What has changed is that the 1bn or so Chinese consumers in the more Western provinces have begun spending. CLSA, the specialist Asian broker, estimates that these consumers have, when it comes to tech goods, close to the spending power that those on the eastern seaboard enjoyed in 2005. 
Salaries are rising in China, while at the time the price of tech goods is falling. Since 2004, the price of notebooks, PCs and handsets has been falling at 12% a year. For LCD TVs the rate of decline is more like 20%. If these trends continue then, by 2013, it has been estimated that China will be the largest market in the world for high tech goods. By 2012, when it comes to electronic goods, rural China will have the same buying power as those on the eastern seaboard have today. By 2013, China could account for close to 30% of the world’s LCD TVs and smartphones and one in five of the computers made.
The ability of the average Indian to afford such tech products will reach those that existed in China over the last couple of years, by 2014. Just as Western consumers have driven the purchase of PCs and smartphones during the first decade of the century, Asian consumers will take the lead during this decade. The song, therefore remains the same: consumers buying not corporate expenditure is what drives IT sales. Microsoft’s most recent results are further confirmation of this trend. 
The challenge for investors
One of the challenges facing investors will be to find the stocks that benefit most from this colossal shift in consumer spending. While the American consumer represents about $10.35 trillion dollars, compared to just $2 trillion for both China and India, Asia will dominate the growth in demand. This, of course, is the same pattern we saw in the oil market, as explained in the Energy Anomaly. Emerging markets represent 95% of the growth in demand for oil. Therefore, even as demand for oil dropped in the West the price rose because countries, like China, increased consumption. This shift will gain momentum just as Western consumers and governments enter the Great Contraction and cut spending to reduce debt. 
If you want a sign of the times then here is one. In the UK, the Governor of the Bank of England has just warned that which ever party wins next week’s general election, it is likely to be out of power for a generation after. The reason, because the decisions needed to reduce debt are going to be so harsh and unpopular. 
How to Play This Trend
Asia has a special affinity for technology. After all, tech products and computer games played an influential role in the rise of the Japanese economy. Accenture, the consultancy, has conducted research globally into consumer buying patterns and concluded that Asians are twice as likely as a westerner to have bought a computer, or mobile phone. Asia led the West in the use of the internet for building social communities and in the adoption of massively multi-user role playing games - MMPG. Across Japan, South Korea, Taiwan and now in China too, there is a problem with Asian youths becoming so addicted to the cyber life style that they withdraw from society. In Japan such youths are referred to as Otaku. Otaku culture is spreading rapidly across Asia. 
How best then to play the Asian high tech Tsunami? This is where we need to revisit the secret of those global brand names and reacquaint ourselves with the two faces of tech.
History shows us that it is fiendishly difficult to make money from hardware companies. With a few exceptions hardware shows us the wrong side of tech.  The pace of innovation is destructive and margins are atomized.
The 1980s were decade of the personal computer and it was also the decade that Sun, Microsoft, Compaq and names who would become leading tech companies went public. Yet, if you look at a chart of the market capitalization of US tech shares, as a per-centage of the overall market capitalization of US shares, you will see that as a group tech fell over the course of the decade. How can that be, when Sun, Microsoft, Intel and others were among the best investments of the 20th Century? Part of the answer is that most of the profits that were available in the PC industry were taken by two companies: Intel and Microsoft. The same pattern appears to be  happening today with the PC’s replacement, the smartphone.
Have you noticed that it is becoming harder to find smartphone stocks to make money from? In the first quarter of this year, smartphone sales probably rose by around 50% in unit terms. Yet, at Cykepartners, we estimate that Apple took around 40% of the smartphone sector’s operating profit. 
Apple is rampant while other smartphone makers, such as Nokia and even RIM, are finding it tough to stay with the pace. Don’t therefore be surprised if there are more rescue missions like the one that HP launched for Palm. 
The reason that Apple’s growth has gone up a gear is because of Asia. Sales in China, Taiwan, Japan and South Korea rose several hundred per cent. Nonetheless, skeptics will point out that a competitor might emerge with a cooler device that will topple the iPhone. They might also argue that the new iPad might yet underwhelm. The latter, though unlikely, might be true. As for another device wasting the iPhone, that would be a tall order. Apple only spends 3% of its sales on R&D, and apart from a few cosmetic changes, the iPhone hasn’t been fundamentally altered since it was launched in 2007. Increasingly, the key to its success is the Apps Store. Just as hundreds of thousands of developers were really the key to Microsoft’s dominance, those Apps developers are Apple’s foot soldiers. To beat Apple now someone is going to have to find a way of inducing those foot soldiers away. Google’s Android has the best shot, but I am not convinced it will be able to pull it off. The momentum looks unstoppable and like Intel, Microsoft and Google before it, Apple has a good chance of establishing a hammer lock on what is the fastest area of growth in consumer electronics. 
Therefore, as we saw in the age of the PC, power is being concentrated in a few hands when it comes to the smartphone. By 2012 there could be more than 500m of these devices on sale - which will be well ahead of the combined sales of laptop and desktop PCs. Besides Apple, and a handful of specialist chip and software companies, we still haven’t answered how will investors make money?
One answer is to look at content. We now live in an age of ubiquitous broadband, often it doesn’t feel that fast, but mostly we have access to it. By the end of last year there were 1.7bn internet subscribes and by 2012 there will be around 3 bn, close to half the population of the globe.    Households around the world will increasingly have WiFi and a broadband connection. With these networks in place the desire for electronic devices will multiply. Ericsson, the world’s leading telco equipment maker, believes that by 2020 there might be as many as 50 billion devices. If that sounds incredible, try counting how many digital cameras, music players, games consoles, PCs etc you have in your house; well over 20 would be my guess. 
In a world of devices and widespread networking, the stage is set for the consumption of digital content. Each minute of the day 24 hours of video are uploaded to Youtube. By December of last year mobile data traffic overtook mobile voice traffic despite there only being about 400m mobile broadband accounts world wide, which is a tenth of the number of mobile subscribers worldwide.
We have entered the content centric age and history shows that American content plays well around the world. Check out the performance of content shares over the course of this year. Stocks like News Corp (producer of Avatar), Disney and Time are out performing Google. With advertising rates rising and a revolution in high definition and 3D underway, media stocks are cheap and facing the benign version of a perfect storm. The iPhone and more lately the iPad point the way to future where digital content becomes pervasive and some of the big content names will shine as a result. My guess is that over time Apple itself will mutate more towards content, which is one reason why its recent move into mobile advertising is so interesting. 
Apple’s Xen like coolness, is appealing to aspiring Asian consumers in a way that no other high tech brand appears to be able to rival. It is early days but I think Apple’s first quarter revenues, where Asian sales leapt points the way to the future - this is the Coco Cola of the 21 st Century.

Saturday, 1 May 2010

ARM vs Intel


Apparently, both HP and Microsoft have announced that they are shelving plans to launch tablet computers. HP has been reported as saying that Windows 7 and Intel microprocessors, are too energy intensive for such a device.

This is terrific news for ARM, the London quoted company that supplies about 95% of the microprocessors used in mobile phones. On the basis of its last numbers, on average 2.4 ARM processors can be found in each smartphone. While an ARM device consumes about 3 Watts of power, the comparable Intel device needs 6 Watts.

Make no mistake, this is a problem that Intel will have to get sorted, because the growth in  so called embedded devices, such as smartphones, and now iPad like computers, is astonishing. With networking spreading through the consumer sector, both as WiFi and mobile broadband, the market for devices has gone exponential. Asia is just coming on stream, which adds to the growth. Ericsson estimates that by 2020 there will be 50 billion devices connected to the internet.

That number is astonishing but if you want a clue as to how it might come about, count how many electronic devices you now have in your home. Then, consider that today there are about 1.7bn people on the Internet, but that by 2012 (why does 2012 keep cropping up- ED), this will have risen to around 3bn, close to half the global population.

The chart above, which examines Amazon's latest financial quarter gives us a squint of what is taking place. Amazon is now selling more electronic gadgets than books and CDs.

The way I read this is that the internet is increasingly becoming dominated by 'embedded devices', that are still tethered to their manufacturer.  You or I cannot freely program these devices and the software that we can run is dictated by the manufacturer, or possibly, by the network operator. This is a world that is familiar to ARM and less familiar with Intel. Intel will stay as the dominant force in PCs, but ARM is where the growth is.

Recently, there were rumours that Apple would buy ARM. Personally, I don't believe it. ARM is an intellectual licensing company, most of the world's device makers and chip companies are its clients. If Apple owned the company it would harm Arm's business model.

None of this is good news for Microsoft either. The Wintel duopoly does not play well in the embedded arena. But hey, we knew Windows was in long term decline anyway, didn't we?

Blackberry Crush Time

The dramatic arc that RIM is following is now clear for all to see. It goes like this. In 2008, RIM achieved an average selling price of around $400; by the middle of last year this had fallen to $356, and by the last quarter of 2009 it had fallen again to $311. Next stop will be closer to $305. Yet, as Best Buy has just confirmed, the fourth quarter of last year was an exceptionally strong one for smartphones, Apple’s average selling price rose above $600. If you are a seller of smartphones, life had never been better, so why did ASPs drop for RIM?

RIM is following the same path beaten by Nokia at the beginning of the last decade. Average selling prices will continue dropping because RIM’s product is becoming passe, just as Nokia’s did. The next step will be that RIM’s market share in the US will drop as Apple picks up Verizon and Google’s Android operating system gains momentum. As they say in the pantomime, it’s curtains.

The latest results from Apple and others highlights the problem. On our estimates, Apple has taken about 40% of the smartphone industry's profits. But the REALLY big news, as highlighted by me in a SeekingAlpha piece back in January is that Apple is now sweeping through Asia. For the quarter just reported, Asia represented close to 30% of Apple's profits. Asia had been Nokia's last hiding place and RIM was hoping to move into the same fox hole. Not any more, because Asia is developing a crush for Apple.

Or maybe we should call that Blackberry Crush. On the one side you have Apple rampant, on the other you have the Android. In the middle there is the Blackberry. Let's face it, Google’s Android is really aimed more at the Blackberry than the iPhone. The Android is a device that offers businesses the secure email that the Blackberry offered them. Secure email has, so far, been the Achilles heal for iPhone, which is a product that is largely focused at consumers.

 A recently published survey by Crowd Science, a US based market researcher, found that 40% of Blackberry users would make the iPhone their next smartphone. However, coming up quickly on the inside, Google’s Android operating system appealed to a third of Blackberry users.

Another recent survey, this time from ChangeWave, specifically looked at US corporate IT budgets. A total of 1,702 respondents involved in IT spending replied. Importantly, the Apple iPhone saw a five per centage point rise in share, while Google’s Android device saw a 4 per centage point rise. The Android is at an earlier stage of development, so as hardware vendors and Google continue to enhance the design it will become more competitive. In particular, there are more than 20 companies supporting the Android, so we can expect prices to fall rapidly, which will bring further pressure on RIM.There will come a day when even Apple has to drop prices.

Smartphone Ecosystem
 Smartphones are computers first and phones second, which means that applications and content are more important than the quality of voice calls. This is where RIM comes unstuck. There are now seven smartphone operating systems out there: iPhone, Symbian, RIM, Google, Windows, Palm and Meego(Nokia and Intel). This presents a headache for the hoards of developers who are, in reality, the people who decide which smartphones become successful. The developer has limited resources so they have to make a carefully considered decision over which operating system to commit resources to. The phone that gets the developers’ attention becomes the phone that has most to offer subscribers; more subscribers then buy the phone; result: a virtuous circle. The release of Apple’s iPad will make this even more apparent.  At present there are 75 million users of the iTouch and iPhone users, within a year another 6m or so million iPads will be sold. These three devices all share the same operating system, which in turn is supported by Apple’s wildly successful Apps Store. From the point of view of developers, Apple offers you a great environment to write for, a tremendous storefront from which to sell your software and a large and fast growing user base.

Like Nokia before, RIM has been slow to recognise that the market has changed. The Blackberry’s operating system is old, the web browser primitive and the device itself is still largely keyboard based.  Meanwhile, the market and even Nokia, has moved to touch sensitive screens. Eventually, RIM will launch a proper touch sensitive Blackberry and will improve its operating system, but by the time it does the market will have moved on. RIM is in catch up mode, it is not a leader.

What Blackberry does have going for it is market share. It has about 20% of the global smartphone market compared to Nokia’s 39% and Apple’s 20%. Mobile operators like the Blackberry device because it uses less bandwidth than either the iPhone or Android and, as we have seen, corporate like the email function. Kids like the Blackberry messaging function and, for the time being at least, the device is popular in emerging markets.

RIM is not yet in a dire state. However, from the point of view of investors, the stock has a half life, despite the recent share buy back.  Before feeling more confident about this stock I think we need to wait  until there is evidence that ASPs have become stable.  That is unlike to happen anytime soon because it looks ominously as though RIM’s market share in the US is poised to implode.