23 percent -- That figure alone explains Amazon's goal for Fire TV. In 2013, it was estimated that the Kindle ecosystem was responsible for 11 percent of Amazon's revenue, but 23 percent of its operating profit. However, the revenue numbers also include $4.5 billion in Kindle device sales (6 percent of Amazon's revenue) which were sold at breakeven. This means that 23 percent of Amazon's operating profit came from a business that accounted for just 5 percent of its annual revenue.
Given the figures above, it is no surprise to see Amazon double down on its "razors and blades" strategy. By selling a low-cost ($99) box to consumers, Amazon gains access to a distribution channel for high-margin content sales. Amazon seems to have realized that this box would only appeal to consumers if it also provides access to third-party services like Netflix, Hulu, etc. (much like Kindle Fire tablets and third party apps). But more importantly, it also seems to be expanding its presence in the digital content business via Amazon Game Studios.
With Google's stock price hovering near all-time highs, the risks to its business model have become a hot button topic among industry observers. The dramatic shift to mobile computing has the potential to upend every single company and industry. However, few seem to understand Google's business model well enough to gauge its risks. Let's take a look at some oft-repeated arguments and compare them to the real risks facing Google.
Let's begin by explaining Google's business model -- the best explanation I've seen comes from VisionMobile:
Earlier this week, Nokia announced a line of Android-based smartphones with a combination of Nokia/Microsoft services replacing Google services. While some industry observers were quick to praise this move, there are many unknowns about the goal of this strategy.
In my opinion, Microsoft is following one or more of four possible game plans.
Yesterday, Nokia posted its final financial results before the Microsoft deal closes. Unfortunately, the part of Nokia being sold to Microsoft doesn't seem to be in great shape. Nokia's recent traction with the Lumia range seems to have stalled as it announced a 7 percent sequential decline in unit sales. Let's take a brief look at the causes of the decline and what Microsoft is really buying.
The chart above shows Lumia shipments and ASPs for the past eight quarters. As we can see the Lumia's ASP (Average Selling Price) has continued to decline as shipments grew. This reinforces the fact that the Lumia sales mix was dominated by low-end variants -- primarily the Lumia 520. We need to keep this in mind while examining the cause of the Q4 decline in shipments.
Yesterday, Verizon reported that it activated 8.8 million smartphones in Q4 2013, a 10 percent decline from the 9.8 million it activated in Q4 2012. While it declined to break out iPhone activations, we do have some data that could help us gauge the iPhone's sales performance in the US market.
The reason for the decline in Verizon's smartphone activations should be clear enough to regular readers. As smartphones have "good enough", replacement cycles have become longer. At the same time, the basis of competition in the market has shifted towards affordability and flexibility, which explains the popularity of T-Mobile's unsubsidized plans. Now, let's make an attempt to gauge how this decline affected iPhone sales at Verizon.
I have previously explained the concept of tablet market tiers and the pattern of upmarket competition among Android vendors as they continue to fight for reasonable hardware margins.
Recent tablet install base data from ABI research seems to support this hypothesis and describes the same pattern we saw in the smartphone market. This also helps explains why Apple needs an iPad Pro.
Today, Apple and China Mobile finally announce a distribution partnership that had been heavily rumored for months. While the deal to sell iPhones through China Mobile isn't surprising, the wild variation in analyst estimates is. Let's take a look at a few wrinkles that may be playing havoc with these estimates.
The easiest numbers to find on Chinese carriers are usually subscriber details. The chart above shows the 2G/3G subscriber mix on the three major Chinese carriers. Therefore, the details that analysts typically use to base sales estimates are -- subscriber base, 3G subscriber base and number of unlocked iPhones (2G) on the network. For China Mobile, these figures are 759 million, 176 million and 45 million respectively. Bernstein Research's survey also shows that some China Mobile subscribers use smaller carriers for data service, so these subscribers may have been excluded from these estimates. Analysts are also aware that China Mobile does not offer mobile number portability -- given the status granted by specific blocks of numbers, some analysts may have assumed a major sales impact.
Today, Microsoft finds itself in a curious predicament -- the Company is in search of a new CEO even as it remains in the midst of an company-wide reorganization towards a "devices & services" strategy.
While I will refrain from speculating on the identity of this mystery CEO, it would seem that his job will be to effectively execute this strategy, instead of undertaking a strategic review. This may seem like a handicap, but is there more than just one way to execute this strategy.
Over the past week, both BlackBerry and Nokia were in the news for very different reasons. BlackBerry abruptly abandoned its auction process and opted to raise $1 billion in debt to attempt a turnaround. Meanwhile, as the Microsoft deal awaits closing, Nokia announced that Lumia shipments hit an all-time high in the most recent quarter.
Let's take a deeper look at the prospects of each company.
IDC recently announced its tablet shipment estimates for Q3 2013 that showed a 6 percent growth over the previous quarter. This growth was entirely driven by large, branded Android tablet vendors as iPad demand declined ahead of the product refresh. This left the Android platform with a 65 percent share of the overall market. Let's take a deeper look at these figures in context of tablet market tiers.
As I had explained previously, the tablet market can broadly be categorized into multiple tiers, based on usage patterns. Here's a look at IDC's data in context of market tiers:
Apple's long-awaited iPad refresh is finally a reality. Apple's new full-size iPad, rebranded as the "iPad Air", starts at the usual $499 price. Apple also unveiled an iPad mini with retina display, with a higher starting price of $399 and retained the original iPad mini at $299. Finally, the aging iPad 2 was also retained with the price unchanged at $399. This essentially proves my theory that Apple's pricing strategy has nothing to do with a "price umbrella" and everything to do with margins.
Apple's primary business model is selling high-margin hardware, so this should come as no surprise. While many like to draw comparisons to the iPod, the limited set of "jobs to be done" allowed Apple to aggressively slash BOM costs, thereby allowing lower prices at higher margins. This approach is no longer viable for the iPhone/iPad because of broader use cases and competition from modular vendors. Based on this, let's take a look at the iPad product portfolio and gauge its impact on Apple's holiday quarter.
Earlier this week, the Prem Watsa-led Fairfax group announced that it was making a $4.7 billion bid to take BlackBerry private. This followed BlackBerry's pre-announcement of disastrous Q2 results that showed smartphone shipments crashing to 3.7 million units and total revenue collapsing to $1.6 billion.
The company also took an inventory charge of roughly $1 billion because of unsold BlackBerry 10 devices. However, since the funding for the deal has not yet been secured, it may also have been a pre-announcement to halt the company's stock decline.
After Microsoft announced that it was acquiring substantially all of Nokia's devices & services business, the stock market painted a fairly accurate picture of what this deal means -- Nokia investors were relieved as the stock surged by nearly 35 percent, while Microsoft investors responded by driving the stock down by 5 percent. Based on my prior experience in technology M&A (Mergers and Acquisitions), I wanted to take a look at the motivations for the transaction and the viability of Microsoft's long-term consumer strategy.
Let's begin by taking a look at the deal terms. Microsoft will be paying Nokia €3.79 billion for its handset division (including 8,500 design patents) and another €1.65 billion in patent licensing. As a part of the deal, Microsoft will gain rights to the Lumia and Asha brands, but Nokia will retain the rights to the "Nokia" brand. However, Microsoft has licensed the "Nokia" brand, exclusively for use on low-end S30/40 feature phones.
This week IDC released tablet market estimates and the figures are quite a bit off from my original Q1 estimate, but eerily similar to my revised estimate based on NPD's figures. Android tablets are poised to permanently steal the tablet market crown from the iPad, while Windows tablets continue to struggle. Let's take a deeper look at the figures.
Android now leads the tablet market, with a share of 56.5 percent, while the iPad's share falls below 40 percent. Windows tablets are still struggling, with a share below 4 percent and with struggling shipment figures, sell-through is always questionable.
Apple's stock price tanked more than 12 percent the day after announcing fiscal 2013 first quarter earnings. Nine days later, shares are still down about 10 percent, in part because Q2 guidance came in below analyst consensus. The guidance, in particular, seems to have spooked investors as Apple announced its intentions to provide a realistic guidance, as compared to the usual "sandbagging". The company also warned of lower margins -- between 37.5 percent and 38.5 percent. In that context, let's look at the average selling price movement chart and benchmark our previous iPad Mini cannibalization estimate.
The shipment chart above clearly shows that iPhone growth has slowed during the current product cycle, thanks to market saturation. This should give Apple even more incentive to launch a cheaper iPhone. In contrast, the iPad has seen reasonably strong growth, but as I predicted, iPad Mini cannibalization seems to have pushed Q1 shipments below market expectations.