The Smart Paradigm comes to Asia

After the great moderation comes the great rebalancing. If OECD economies are to reduce the amount of debt in both the public sector and within households, then saving has to increase. Just as falling interest rates and the decline in economic volatility, combined with a rise in credit, defined the world since 1982, the need to pay off debt in the OECD will define the coming decades.

Co-ordinated government stimulus and low interest rates have postponed the dreaded day that this will happen but investors can hear the clock ticking. One of the key elements of this great rebalancing will be that Asian consumers will have pick up the slack as consumers in the West consume less. Today, the US consumer represents $10.35 trillion in spending, compared to roughly $2 trillion for both India and China. However, Asia will represent an ever greater proportion of the growth in demand. This has long been the case for computers and, as Apple’s numbers demonstrate, it is now beginning to drive smartphone sales.  

Asia is becoming the greatest markets for tech goods but how should an investor play it? First off, ignore analysts who continue to focus on the corporate PC market. Better still,  sack them because they are in gross dereliction of their duty. Second, be suspicious of analysts who focus on networking equipment.

As Microsoft again affirmed, in its latest results, consumers continue to power sales, not corporates. As we have argued before, the super cycle that we are in the midst of is the networking of the private and public space. The mainframe and PC cycles of IT expenditure were about the networking of the corporate space. The life that is lived by ordinary people is of movement, in geographic and temporal terms it takes place in 360 degrees and not at a desk top within a corporate building. 

The blue line represents PC sales, the purple  line is mobile, the red lap tops and the green smartphone. All in hundreds of billions of dollars. Source: Cykepartners.com

The arrow of time in tech points to mobility becoming increasingly dominant. Mobile phone revenues overtook fixed line revenues around the mid point of the last decade, and lap top PC sales have been the fastest point of growth in the PC market for about 10 years. Tablet computers will accelerate the trend, particularly in Asia and emerging markets. Soon there will be a generation of young people. in emerging economies whose first experience of text has either come from a mobile phone or a small computer. In the first quarter of this year smartphone sales increased at 50%, if that rate were to continue there would be close to five hundred million on sale by 2011, by which point it will probably be outselling PCs.

Unlike the PC, smartphones are something of a fashion item, they are badges that we use to signal something of our selfhood. There appearance confirms what could be described as a super cycle. The first waves of technology were all about networking the corporate space. Smartphones, like tablets, netbooks, and notebooks play to networking of private and public spaces, in other words, society in 360 degrees.

A few years ago it was estimated that the average western home had twenty-six electronic devices. One trend, that is at an early stage, is that more of these devices will be linked to the internet. With this in mind, Ericsson estimates that by 2020 there will be 50 billion devices connected to the internet. Within the home there will computers, lap tops, netbooks, tablet computers, numerous phones, digital music systems and a TV. There may be something called a home media gate way, a server computer that stores digital media that can then be streamed around the home.

The simplistic way to play this trend is to buy Taiwanese companies, such as Gemtek, Realtek and Zyxel. The problem is that these companies have little pricing power. Networks are built using international standards, so it is difficult to add any value. Cisco might be a networking equipment company but its market position is built upon a proprietary operating system,.Like Apple, Cisco is not primarily a hard ware company. Some of the Taiwanese networking names might enjoy a moment in the sun, as sales take off but it will not last long.

The rise of the Asian consumer will, in many ways, be a reprise of the world that was dominated by the personal computer. Therefore, the Asian hardware companies that mainly win will be the ones who dominate the PC world now: Hon Hai, Samsung, TSMC, with the addition of newer names, such as Mediatek, would be a good place to start  

A Media Centric Age

In an age when billions of devices are linked to the internet, and when most of them are mobile, what we have is the mother of all networks. Increasingly, these devices and the internet will be used for communication and the creation of communities. This pattern has been under way for some years and is already affecting which brands consumers value. Yet it may be have its profoundest impact upon the consumption of media. Look at the following chart, which comes from the Silicon Alley Insider website. It analyses Amazon’s sales, which for the first time are now dominated, not by books or CDs, but by digital products.

The network is being built, rapidly it is being populated by devices, as our various charts illustrate. The next step is that networks and devices have to do something. Increasingly, what they will be used for is the consumption of content. This is one of the articles of faith behind our theme of the Smart Paradigm.

The future just happened. In 2009 mobile data, for the first time, outstripped mobile voice. Yet there are only 400m mobile broadband connections, compared to 4.3 billion mobile phone subscribers. By 2013, more than 90% of global consumer data traffic will be video on demand and TV. Today, Youtube traffic is greater than that of the entire internet during much of last decade. Each minute 24 hours of video are uploaded to Youtube.

Asia’s influence is rising, and as the power of the region’s consumers increases, then Asian   media companies and internet names, such as NC Soft, NHN, CTrip, Tencent, Baidu will continue to prosper. Over the coming weeks we will examine this theme further because there are obviously opportunities to be had within the Indian media scene. 

However, let us not forget the West. American culture shaped the 20th Century, there is something about the American sense of fantasy that is seductive. This may have something to do with the fact that capitalism is making us more infantile. Therefore, American and some other Western media giants, such as Disney, Time Warner and News Corp, will among the winners from the digitalisation of Asia. Apple would be the other name we would focus on. Our hunch is that Apple may be the Western company that benefits most from the rise of Asia. By contrast, Microsoft, like Nokia, is likely to be among the Western losers. 

Apple and Facebook Equal Content's New Golden Age

Without bandwidth everything sucks. But the big bandwidth problem is not the speed of your ADSL or your 3G connection. The bandwidth of human consciousness is the real bottleneck that slows internet access. Anyone who cracks this has a chance to be rich and  powerful like Steve Jobs, Mark Zuckerberg, Page & Brin or Rupert Murdoch 

The human bandwidth problem has googlesque implications for the sale of content and applications on the internet. One of the best surveys of the problem can be found in The User Illusion. 

We are only consciously aware of about one millionth of the data flooding into our subconscious minds from our senses. Apple, Google and Facebook grasped the issue of human bandwidth better than any other companies. Their success might lead to a golden age for media companies like New Corp. That's the good news. The bad news is it might lead to the balkinization of the internet.  The human bandwidth problem is easy to describe but close to impossible to solve. Apple cracked it, which is why the iPhone is so successful. Google cracked it too, which is why it is the dominant internet company.  

When you're sat at a desktop you have the time to doodle around the internet. You don’t have that time when you use a smart phone or an iPad. This year, according to Ericsson, most access to the internet will come from  mobile devices. Over the coming two to three years the number of users on the internet is likely to increase from 1.7bn users to close to 3 billion - nearly half the population of the world. The masses will not be able to use smartphones and other handheld devices unless designers crack the human bandwidth problem. Make access easy and quick. This will change the nature of the internet. 

The Future

The future of the Web is all around us. It is Facebook, and Facebook Connect; it is Twitter; it is the Apps Store and maybe it's Google Buzz. It probably isn’t Google Wave because this service requires too much time to master, it is aimed at Geeks.  The successful applications make life easier and more convenient in a way that Google search did for the desktop. Facebook Connect allows us to use our friends and contact group to filter our content. That is the neatest way of working with our bandwidth limitations. This method also allows Facebook to learn more about us so that it can better target content, services and ads. Better targeting is good for our limited conscious bandwidth.  

This could mean that content companies will find it easier to get paid. First off, there is likely to be a bidding war for good content as the world fills up with mobile devices.  When the iPad launched Macmillan books were pulled off Amazon's web site because the two companies couldn't agree a price for e-books. Instead, Macmillan did a deal with Apple. A day or so later Amazon relented and paid Macmillan more. This, I think, will become the sign of the times. There will be more bidders for content as the Android fiefdom, the Facebook fiefdom and  the Apple fiefdom - just to name a few- need content to keep their customers satisfied.

And what of those customers? You can still get free music and TV problems on the internet so why bother with iTunes? The reason we do is that these services make it easy to download and pay for content. We trust the service and know that we aren't breaking the law. 

Apple has a payment platform that works. The iPad will see the company expand this to other forms of content, such as newspapers, magazine subscriptions and books. This means that News Corp and content providers have a platform on which they can reach an enormous audience. In a world of specialist devices, like e-readers, iPads and smart-phones, it will be easier to get paid than in a world dominated by PCs. There is evidence that consumers find it easier to use a phone to pay for something than they do a computer.

From an investment point of view it's time to look at content again. As the internet becomes more dominated by fiefdoms, controlled by Apple, Google, Amazon, Facebook or someone else content is likely to become more valuable. Apple’s attempt to win Macmillan from Amazon is therefore a sign of the times. Some of the world's biggest media companies are selling on single digit PEs, have just increased earnings and are unloved. They also have good yields and global franchises. 

The flip side of all this is that the Web is going to become more corporate. Each of us is going to have to make a Satanic bargain - ease of use and richness of user experience in return for a lack of privacy and freedom. Are you prepared to make that bargain?

Sipping a can of Dead Bull

Google's Andy Rubin has been talking to the Wall Street Journal's Walter Mossberg about the new Nexus smartphone. Apparently, Google is planning to open some retail stores to sell the Nexus direct. 

Get the picture? First,  Google launches the Android platform and encourages the world's mobile companies to support it. Good thinking, that way you raise brand awareness and suck in legions of developers. Without developers the Android has as much fizz as a can of Dead Bull - which by all accounts is the favourite tipple of portfolio managers these days.

Then, as momentum builds you do what you were always planning to do anyway. Knee cap your customers by launching your own handset. None of this should come as a surprise. There has been a lot of hot air expended on the subject of smart phones. But one thing should, by now be clear. The Apple way - which is to be vertically integrated so you can control the product like a crazed control freak is the best way.

Microsoft might like to sing the old tune about horizontal value chains and how that worked best in the PC space. It is whistling in the wind. The smartphone is an embedded device, the PC by contrast is a generic device. A generic device is open, you can do with it what you will with it. You can run any software you want on a generic device. That's not the case with smartphones. You and I cannot take the lid off and write our own code. Instead, we have to get it from a registered supplier. Therefore, Apples plays the role of gate keeper in a way that Microsoft never could in the PC world.

The Apps Store has become the game changer. Just the other day LG Electronics' CEO said that the company was in a state of panic.   Finally, the penny has dropped even in Asia. We are living in the Smart Paradigm: content and applications is the key to hardware sales. Giants like LG and Samsung will thrive or die over the coming years on their ability to replicate the Apps Store. Don't hold your breath though, this is a fiendishly difficult trick to pull off. 

This is what makes Google's play so interesting. An Apps Store is really the marriage of software and content development with social networking. Therefore, the bigger your apps store becomes the less likely it is that a competitor will be able to build a successful one. Apps Stores, like any other networkable entity follow a power law - a tiny number will generate most of the revenue and control the market. Maybe just one or two - besides Google and Apple who are the other challengers? Nokia - possible but unlikely. A mobile operator - no way. 

As a character in the Wire might say - mobile handset industry has been played.

What is Finnish for Good Night Vienna?

Nokia’s top management are in rutting reindeer mode at the firm’s annual capital markets day today and tomorrow. As I write this the stock is up 1.6%, grab the gain while its lasts because the long boat is sinking.

Just as we predicted in last week’s Mash (No 47, 25th November 2009), Nokia is bellowing that it is “The World’s biggest platform for mobile.”

Outside of Helsinki, does anyone care? In terms of profits, both RIM and Apple earn close to 70% of what is available in the smartphones sector. But let’s talk about the future, not today, not the past. The omens for Nokia aren’t great, in fact they are awful.

The first piece of bad news comes from India, where the authorities recently blocked Chinese phones. Check out the link, it will take you to a fascinating piece on an Indian website called Techtree. The ban related to those same white box Chinese phones we talked about in last week’s piece on Mediatek. More than 25m of them have already been sold and Indian mobile operators succeeded in having them blocked in their county. However, for 199 rupees (£3), the Chinese handsets can now be unblocked. Nokia was circling the wagons and planning to make its last stand in both India and China, the world’s most populous mobile markets. As Apple, RIM and Android devices took the developed markets Nokia at least had the emerging world. To Continue go to the Cykepartners website.