Month: April 2013

Apple: all news is bad news

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Apple’s stock has taken a rather spectacular dive the past 6 months. It’s almost halved in value, and market sentiment is continually abysmal on the stock. To me it has reached the stage where all news is bad news.

I’m not a proficient trader, so I won’t comment on whether it’s the right time to buy Apple. I only want to discuss the fundamentals, and why this current stock price makes little sense in the long term.

Apple is currently trading at a P/E ratio of below 9. Bears of the stock will say this is justified because they expect Apple’s future earnings to collapse – that’s where the fundamentals come in. I think I’ve observed Apple for quite some time and I’m generally up to speed on the mobile industry trends. My opinion is that little has changed in the market outlook for Apple between now and 6 months ago (when Apple stock reached all-time highs).

Think about these pieces of info:

  • Apple’s market share in the US has stabilized, if not straight up outgrowing Android
  • In the world’s biggest growth market, China, Apple has demonstrated tremendous growth and may have become one of the largest foreign companies in China (by revenue) in the short span of a few years
  • Out of all the PC manufacturers facing the momentous decline of PC sales, Apple is the best positioned as it is the company disrupting the industry in the first place with its tablets. Yet Dell enjoys a higher PE ratio than Apple (and yes, the buy-out talks buffed Dell’s price, but the argument is still valid)
  • Most data show that Apple still completely dominates in the tablet space (in contrast, Android tablets don’t seem to be selling), and the ecosystem is thriving – Supercell, a mobile gaming company that only has two iOS games published and is only focused on designing for iPads, is on a run-rate to generate $800MM in sales in 2013. Apple’s ecosystem is a king-maker; have we seen any case studies of remotely close feats from competing eco-systems?

Apple’s stock is a weird beast. When Jobs was alive, the price was continually under-priced with fears about what his health means to the company. After his passing it had a good rally in mid 2012, but even then at its peak it wasn’t that expensive (think about Amazon’s stock, at any given point in time). Nowadays bears routinely claim that Apple is dead, has stopped innovating, and that the management is dumb (“Tim Cook should resign!”). I struggle to find any evidence supporting these claims.

Perhaps people like nothing better than for the world’s most successful, yet obviously most contrarian (it has perhaps the smallest number of SKUs for any company of its size; it insisted on vertical integration when everyone said vertical integration was dead) tech company to stumble into irrelevance, so that conventional wisdom prevails once again (“Apple is repeating its mistakes of the PC platform wars!”) and Apple is nothing but a one-time anomaly that can be conveniently forgotten. I have a feeling that Apple will live longer than they expect.

Why did desktop messaging apps fail on mobile?

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I’ll start with clarifying the provocative title – when I say desktop messaging apps (referring to QQ, Skype, Live Messenger, Google Talk, Facebook Chat etc.) “failed” on mobile, I’m referring to their relative underperformance across the board compared to the pure mobile messaging apps (WhatsApp, Viber, WeChat, Line, KakaoTalk etc.). This defies conventional tech wisdom such as the power of network effects (the main driver behind the value of social network services) – why could these mobile upstarts so unanimously outperform the dominant messaging services with far greater user bases?

There are a few reasons I could think of.

One network to rule them all

To start off, it’s important to note one incredibly powerful network that has greatly leveled the playing field for mobile messaging startups – your phone book / contacts list. Phone numbers are by design unique identifiers, at a global level. Your phone book is usually far more important than your facebook friends’ list, as these are the people you’ve decided you need to be able to reach at a moment’s notice.

Mobile messaging apps such as WhatsApp use your phone book as a powerful boost to setting up your social network within these apps. This is analogous to Facebook / Linkedin asking to scan your email contacts list, but even more impactful (a stored phone number is usually more important than a stored email address). What’s more, because of the way smartphones work, mobile messaging apps generally have an easier time getting your permission to access your phone book (usually one click), compared to Facebook / Linkedin trying to access your gmail (need to type your username / password).

To make matters worse, few desktop messaging apps are designed to leverage your phone book. QQ or Google Talk has very little info to work on to merge your phone book contacts with your contacts on their network – any such process would likely be extremely manual with user approval entry by entry. Skype is perhaps the only desktop service that does somewhat better in this regard, as it has had to deal with phone-numbers for paying users of SkypeIn / SkypeOut.

Because of the above, network effects are actually working against the desktop messaging services, as they often poorly leverage the mobile social network (your phone book).

Cross-platform use cases work against the cross-platform services

At first glance, one could easily argue that the desktop apps benefit from being cross-platform (cross PC & mobile). What’s not to like about being able to chat with your friends, regardless of whether they are at their PC or just have their phones?

In practice, this again often work against the desktop apps. For one thing, users generally have very different communication habits when they are sitting in front of their PC versus holding their phone. Messaging on the PC is generally low commitment – your friends may not be online when you are, and even if they are, you often don’t know if your friend is watching a movie, playing a game, or working, so you don’t care whether they respond promptly or not.

Conversely, mobile messaging apps are meant to be always on, and market themselves as replacements for SMS. As such, mobile messaging can also be low commitment (useless texts), but carries with it a sense of immediacy not found in desktops. That’s why if you sign in to Skype/QQ/Google Talk on mobile you may prefer to make yourself invisible – you don’t want to be spammed on your phone with what you consider low impact messages/conversations from people idling at their desktops.

A sub bullet point here is that some mobile messaging apps have caught on via novel use cases – e.g. WeChat with the voicemail-like functionality. Such a function would sound ridiculous for a desktop app, but makes perfect sense on mobile.

As another aside, the difference in input speeds also make the cross-platform chat experience potentially undesirable to both parties.

At the end of the day, designed for mobile first versus “extending platform to mobile” leads to dramatically different use cases. Desktop apps make far too many compromises in being cross-platform to truly challenge the mobile first apps. A great example is actually to think about the other way round – how often would you use WhatsApp if it were available on desktops? Or even better, how often do you use iMessage, which is already cross-platform, on your Mac?

Geographic scope, focus and execution

This part is going to sound a bit fluffy. The first point is that few desktop apps have achieved global domination, which allows a mobile messaging startup to focus on cracking a specific geography and start growing its network. Indeed, there isn’t really one mobile messaging app that is ubiquitously used globally.

The second point is admittedly a bit of a conventional wisdom – mobile messaging startups have better focus, and are more agile, and therefore they have out-executed their desktop competitors. I do think this is the case, especially if you think about how WeChat caught on, but this shouldn’t be thought of as the sole reason. The above two sections cover some of the underlying enablers, and are more interesting from a strategy discussion perspective.

Facebook Home: good for Android, bad for Google

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Facebook unveiled the next major part of their mobile strategy today with the Facebook Home announcement. Let’s talk about it from a few different angles.

Presentation

The event itself was quite compact, a no-fluff, well-rehearsed show (perhaps they took note of Samsung’s controversial Galaxy s4 event in New York some weeks earlier). There seemed to be some ramblings from the tech press about seating arrangements (lack of space/tables). The appearance of the CEOs of HTC and AT&T are obviously for show, but it did demonstrate that Facebook’s all grown up now and can demand the attention of industry heavy-weights when they want support.

Implications to Android eco-system

To the Android eco-system as a whole, this is overall a great new product. Facebook Home is the type of customization that may well be unique to Android (both Apple and Microsoft likely want too much control of their OS to allow this type of customization), and helps improve Android’s position at the high end of the marketplace versus Apple.

Many commentators have noted that this is not a fork; some have claimed this is the first step to a fork down the line. I think those are valid points. The consideration from Facebook’s point of view should be, what kind of an experience are we aiming to offer to Android users, and do we need to go as far as forking to offer that experience? Right now, Facebook Home is primarily about raising mobile engagement with Facebook, and taking over mobile messaging. To that end, a fork is not necessary as long as Google allows this type of deep customization.

Should Facebook Home take off in the market place, it is not inconceivable to see Facebook advance lower into the software stack, and go into a full fork when it needs to. A scenario could be – Facebook Home takes significant market share within Android; Facebook then plans to roll out its own Android app marketplace, with built-in Facebook tie in (all apps come integrated with Facebook data); by wanting to roll out its own Android marketplace, Facebook would likely have to declare a fork as it is running right against Google Play.

Facebook Home also shows a new path for all parties interested in bending Android to their benefit. This halfway measure (to a full fork, which is costly to maintain) makes a lot of sense to many established Internet services. For example, why wouldn’t Tencent do something similar (outside of the fact that the Android landscape in China is a mess and it would be difficult to create a middleware offering)?

Implications to OTT messaging apps

Just yesterday, I had written about OTT messaging apps and their potential threat to Facebook. Facebook Home is a large counter-offensive in this regard. Facebook is putting its messaging service front and center. It wants Facebook chat to be the ubiquitous messaging service for Android users.

What’s curiously missing then, as I think about it, is the lack of details around how Facebook Home will tackle the issue of address book management. Will Facebook Home merge your address book with your Facebook friends data? When you create a new contact, would it automatically try to find the person on Facebook and add him/her as a friend? I don’t think Facebook talked about this topic at all today. It would be a jarring, disjointed experience if your interactions with your facebook friends were this beautifully designed flow, while your interactions with real-life people (the folks who call you and message you) is still the stock Android experience. Perhaps this is something next on the to-do list for the product.

In this one regard, OTT apps such as whatsapp still offer a better flow. It doesn’t have the legacy baggage of trying to match a phone number with a Facebook identity – your phone number is your unique identifier, so when you add someone to your phonebook, the person will show up in these OTT apps instantly. For example, WeChat gives you a hint whenever one of your contacts has signed up for the service.

As to whether OTT apps are seriously threatened by Facebook Home – I think the answer is yes and no. Yes, in that there will be a segment of users whose needs will be fully served by Home and therefore lost. No, in that Facebook Home is unique to Android (a small portion of Android too), and one of the biggest value propositions of these OTT apps is that they are ubiquitous and fully cross-platform. A great example to think of is Apple’s iMessage – I love the service since it comes right out of the box and requires no setup, but I still need to use whatsapp / weChat etc. because not all my friends use iPhones.

Implications to Google

Everyone is now eagerly awaiting Google’s response. Many have joked today that Google will unveil “Google+ Home” at Google I/O. In all seriousness, now is a great time for Google to reflect on what is the future direction of Android, with Samsung commanding 40% of all Android shipments on the one hand and Facebook launching a direct take-over of Android’s user experience on the other.

Google could choose to close off Android in the sense that if you want Google’s services (Google Play, Gmail, Maps, Youtube) on your phone, you cannot use such a deep customization as Facebook Home; but that would also take Samsung’s TouchWiz as collateral damage, and I’m not sure Google’s ready for that confrontation yet. Of course, it could make special deals with Samsung so that TouchWiz is exempt, but that could make relationships with hardware vendors even more complicated (side deals everywhere).

Google could choose to make pinpointed counter offensives, such as cloning Facebook’s Chat Heads so that there’s less value in installing Home. But such services would quickly run into the same problems Google has on the web – it doesn’t own the social network. A fancy Android-only chat feature is of little use if you need to add your social network into it first. It could be a cool OTT app, but it won’t have access to the rich sharing and interactions that are happening on Facebook.

Google could choose to stay the course and just focus on making Android and Google’s services on Android better. It could also focus on whatever plans it has for Motorola, should it go the direction of offering strong Google hardware. As long as users demand Gmail / Maps / Youtube, to a certain extent Google doesn’t need to respond. However, they will surely be constantly bothered by how Facebook has taken over all the real estate on their OS, which Facebook surely can use to promote other services in future.

Rise of the OTT messaging apps

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One topic I have been mulling over the past week is Over-the-top (OTT) messaging apps and their impact on the broader TMT space.

To start off, I would recommend a read of WSJ’s piece last week, which provides a good summary and features some good quotes from key players. The short story is that riding on the wave of smartphone adoption, a whole host of messaging apps have gained massive traction with mobile users. As Benedict Evans tweeted last week (side note – subscribe to his weekly newsletter, it’s a must read):

The notable leaders that people often mention are WhatsApp (US), Line (Japan), KakaoTalk (Korea) and WeChat (China). I’ve called out each app’s home base country, but really, these apps are fighting for every consumer across the globe. This feels eerily similar to the social networking hype cycle of the mid 2000s, in more ways than one (more thoughts on that below).

There are two major types of players impacted by the emergence of this category.

The first is telcos, whose SMS revenue is likely experiencing accelerating decline at the hands of these OTT services. (Apple’s own iMessage is also a big player in this regard.) I’m somewhat surprised at the lack of response from US telcos – SMS represent the most lucrative part of their service offering (the cost of one SMS is a tiny fraction of the rates charged). Perhaps they’ve prepared for this by tying expensive data plans to smartphone contracts – the increase in data ARPU certainly offsets the loss in SMS revenue, but from a profit margin stand point the story could be different. Another factor limiting US telcos is the topic of net neutrality, which hinders their ability to negotiate with / extract value from these OTT services.

In contrast, one of the biggest tech stories in China the past couple of weeks is telcos pressuring Tencent to pay for WeChat usage. That would certainly go against US net neutrality principles (it specifically discriminates against one application), but the underlying struggle is nothing new (or unique to China) – remember telcos trying to shut down VOIP providers to retain their voice revenue a decade ago? It is still unclear how the situation will play out, but Kaifu Lee has speculated that Tencent will bow down to the telcos and create some form of revenue-sharing partnership that telcos can be happy with – if that is indeed the case, it would be an interesting case study for companies elsewhere.

The second type of players impacted by these mobile messaging apps are the big social networks on desktops. I had mentioned earlier that the mobile messaging boom is similar to the social networking hype cycle a decade ago – one notable similarity is how these mobile apps have quickly tried to turn themselves into distribution channels for other apps (similar to how Facebook enabled the social gaming boom). A Reuters article on the topic points out that 8 out of the top 10 highest grossing apps on Google Play’s South Korea market are built on top of KakaoTalk.

There is a sub trend worth pointing out here. The mobile platform owners (Apple, and to a far lesser extent, Google) have far more restrictive terms on what functionality apps can provide, so turning these apps into app stores in and of themselves is a non-starter. That’s why these apps currently only promote 3rd party apps via an offer-wall type of interface – essentially, a list of recommended apps which will lead you to the respective official app pages on the official app store. This is obviously a far less integrated experience for users, and there may be problems with tracking the performance of these referrals. An interesting derivative, therefore, is the idea that these 3rd party apps are not native apps, but rather browser apps (e.g. a HTML5 game) that you launch inside the messaging app. This puts limits on app performance, but this scenario also more closely resemble Facebook’s browser-based ecosystem. It will be interesting to see whether platform owners crack down on this.

To wrap up, the growth of these OTT apps are clearly not over, and their experiments in building their own platforms are just beginning. I for one will be keeping an eye on this space.