Powerofone arete smart devices future view - nov 11
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Transcript of Powerofone arete smart devices future view - nov 11
November 2011 - 1Richard Kramer
Finance and Tech:Not a Pretty Picture
Richard Kramer, Managing Partner
November 2011 - 2Richard Kramer
About Arete
Left in disgust at ethics of investment bank world after four yrs. as #1 ranked Tech analyst,
Founded Arete in early 2000 on three principles:� No conflicts of interest � No money from
companies
� Select list of investors trust us to help them und. investment ideas
� No First Call, quotes, etc.
ExclusivityExcellence� All analysts w/ tech industry +
financial market experience� 200+ company visits/month
Since inception: profitable, low staff turnover;Looking at global trends with total freedom to tell the truth.
Unlike banks/industry analysts, we are entrepreneurs.
Integrity
Frequent presentations to companies’ strategy teams…
November 2011 - 3Richard Kramer
Tech vs. Rationality� Huge disparities in regional
importance, valuations of TMT� Investors dangerously susceptible to
hype in tech, far less so in telco
Tech’s premium is not rational: ROIC not above other sectors, more often prone to large losses
$6bnAMZN
$38bnGOOG
$8bnINTC
$17bnQCOM
$28bnCSCO
$45bnMSFT
$82bnAAPL
Net Cash
Key lessons of past 15+ yrs.: Tech companies cannot grow while restructuring
GOOG $192bn 16xYHOO $19bn 19xEBAY $42bn 16xAMZN $98bn 173xWALM $198bn 13xBAIDU $39bn 48xTCNT $43bn 26x ORCL $164bn 14xMSFT $221bn 10xVMW $42bn 47x
AAPL $372bn 12xSSUNG $118bn 12xRIM $10bn 4xHTC $18bn 8x NOK $25bn 18xIBM $220bn 14xHPQ $54bn 6xTSMC $64bn 14xINTC $125bn 10xQCOM $95bn 16xCSCO $97bn 11xJNPR $13bn 19xERIC $35bn 12xNLFX $5bn 21x
TWC $20bn 14x
CCST $62bn 15x
There is little logic to tech hardware vs. software valuations, most large cos. are already hybrids
Current M&A spree will aim to create illusion of growth, paper over failing strategies
November 2011 - 4Richard Kramer
Floa t.
D ate
D ea l S ize
( m )
Is s ue
Pric e
Free F loat O p en ing
P ric e
P erf. To
1 /9 /1 0
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Sin ce I P O
P TH-GB P rom ethe an Mar.’ 10 £18 6 200p 93% 2 10 - 38% 32 .75 -84% - 251
C ALX-US C alix M ar . 10 8 3 $13 18% 18 - 27% 6 .82 -62% - 52
M ERU -US Me ru Mar.’ 10 6 6 $15 30% 20 - 32% 6.3 -69% - 45
M XL -US Ma xLin ear Mar . ’ 10 9 0 $14 20% 18 - 36% 5 .35 -70% - 63
AOSL -USAlph a & O m e ga
S emi.
Apr . 10 9 1 $14 23% 18 - 36%7 .64
-58% - 52
M IT L-U S Mitel Apr . 10 14 7 $14 20% 1 2.75 - 53% 2.4 -81% - 119
M OT R-US Mo tric ity J une ‘ 10 5 0 $10 13% 10 - 25% 1 .73 -83% - 41
OCD O-GB O ca do J u ly ‘ 10 £36 9 180p 41% 1 80 - 13% 8 8.8 -51% - 299
SMT-US S mart Te ch . J u ly . ‘ 10 66 0 $17 88% 17.5 - 33% 3 .57 -80% - 525
N XP I-US N XP A ug. ‘ 10 47 6 $14 14% 14 - 15% 15 .98 14% 67
$2, 551 - $75 0 P& L -$1 ,38 1
excl N X P -$1 ,44 9
IPO’s: Crop Failure
Overall, $2.5bn raised from Mar.-Aug. ‘10
Within <6mos., this was -$750m, i.e. 30% loss
You’d have lost OVER HALF OF YOUR MONEY!
� Raised $2.8bn, but in <6mos., a 43% combined loss.
� Valuations anyways inflated by tiny free floats (c.f. Groupon)
November 2011 - 5Richard Kramer
Devices: Demolition Derby, Fight Club…Now Purgatory?
9M11 Sales/profits for vendors
HTC sold 35m smartphone in 9M11 = LGE (14m), Motorola (13m), and SonyEricsson (9m);
HTC = 15% margins vs. losses at all the Android vendors (ex Samsung)
PC model of std. HW + platform SW coming to handsets:
Largest end market in CE:
$230bn+ in mobile devices
$150bn+ in smartphones
Samsung 4Q11 Android volumes (~25m+) more than Nokia (<2M WP7), LG (<5m), SonyEric. (<5m) and Motorola (<6m).
$5.2bn$33.7bnSSUNG
Loss$7.0bnMOT
B/E$5.2bnSEMC
Loss$8.2bnLGE
$800m$11.3bnRIM
$1.9bn$12.5bnHTC
$0.8bn$22.9bnNOK
$14.2bn$36.6bnAPPL
Profit9M11 Sales
Huge differentiation problem for Mobile Device vendors
New entrants have 15% gross margin template
Clear message from Android to OEMs: Profit is your problem!
November 2011 - 6Richard Kramer
Standing On Its HeadGetting to 1bn Smartphones
High-end far larger than once imagined
Low-end will embrace smartphones as they reach $100 and lower BoM cost
Squeezing mid-range featurephonesSmartphones SustainingIndustry ASPs vs. Mix
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'15E
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-25%
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-15%
-10%
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15%
YoY ASP Variation (RHS) ASP in US$ (LHS)
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YoY ASP Variation (RHS) ASP in US$ (LHS)
ASPs actually rising
Consumers see higher marginal utility in device
Getting to an $80 BoMSmartphone?
(US$) Specifications Details
Value
'10
Value
'11
Value
'12
Commodity Tech
Touchscreen Display Size [inch] 2.8
Resolution [pixels] 240x320
Price per inch squared [$] 2
Touch Module Price per inch squared [$] 1 7.8 5.9 4.4
NAND Amount [GB] 1
Price per GB [$] 1.5
DRAM Amount [GB] 0.25
Price per GB [$] 15
Other Chassis, etc. 3.0 2.7 2.4
Total 31.8 21.9 17.5
Semiconductors
Connectivity Bluetooth, GPS, WiFi 3.5 2.8 2.2
Baseband Quad Band, HSPA
Application Processor Integrated ARM11 AP/Baseband
MEMs Compass, Mic, etc. 4.3 3.6 3.1
RF/PA e.g. IFX, ST, SWKS, RFMD, etc. 2.6 2.3 2.0
Other 4.0 3.6 3.2
Total 31.4 26.3 21.5
Hardware
Board Number of PCB Layers 4 3.5 3.0 2.5
Components Other Components (Filters, Bus, Conn.) 10.0 8.5 7.2
Camera module Resolution [MP] 3.2
Front facing Camera No
Li-Ion Battery Capacity [mAh] 1100 3.0 2.6 2.3
Charger, box, literature Price [$] 4.0 3.4 2.9
Total 24.0 20.3 17.2
Total component cost 87.1 68.4 56.3
Assembly cost Cost [$] 5.0 4.3 3.6
Total construction cost 92.1 72.7 59.9
Royalties (% of ASP) Qualcomm, Nokia, Dolby 7% 9.1 7.2 6.0
Total Direct Cost 101.2 79.9 65.9
Shipping/distribution Cost [$] 10.0 9.5 9.0
Provision Warranty [% of ASP] 2% 2.6 2.1 1.7
Total gross costs (ex D&A) per phone 113.8 91.4 76.6
Gross margin Implied (%) 12% 11% 10%
ASP [$] 130.0 103.0 85.0
2.3
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1.0
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11.0
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9.1
1.2
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14.017.0
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BoM cost <$100, going to $80, $60
Forget it!
“Segmentation”
~58% of smartphoneunits in ‘13
Emerging Markets
Too much focus on US/EU today; growth opportunities are in EM in 2011-2015
� High-end is >50% of total smartphone market – Apple iPhone $55bn, Samsung/HTC $20bn+
November 2011 - 7Richard Kramer
Example from Tele2 Sweden
Low-end creeping into the mix
Key questions we put to low-end smartphone vendors:
� How to make money? We don’t think ZTE/HW do!
� How to differentiate longer-term for any premium?
Where is WP7 in this world? Tango not cheap enough, OS not familiar enough
Mobile devices are NOT commodities!
Would also be bad for operators!
Consumer end-markets will demand local brands
Smartphone now half of market, and rising…
November 2011 - 8Richard Kramer
Software Ecosystem: New Control Point
Smartphone Shipments by OS ‘13E
Android, 57%
Symbian, 2%
MeeGo, 3%iOS, 15%
RIM, 13%WinMo, 8%Others, 2%
�AppStore = Content Store
�Consumers pick “their”favourite channels
Android, MeeGo, QNX/BBOS7, WP7, Bada, WebOS, Symbian, iOS: consumers don’t care about any of this!
Shift in innovation, R&D spend, profits from OEMs to software platforms.
By the time “third platform” hits “scale,” no one will care about OS anymore…can have mobile virtualisation
Cross product compute platforms: same OS on TV, Tab, Mobile
Android Dominating
� Nokia-WP7. Industry wants competition.
� Concerns w/ Android governance, security
� Operators want to contain Apple� Major Facebook push into OS/comms
� 50-100 most popular apps avail. on all platforms.
� Packaging content� Consistent UX� Stability and quality
� Not mobile-only
November 2011 - 9Richard Kramer
Hooked on TabletsTable 2: Tablet Forecast '10-'14, and Its Impact on Netbook Demand
2010E 2011E 2012E 2013E 2014E
Mobile PC Units (m)
Notebooks 181 230 280 317 358
Netbooks 40 33 31 30 28
Total Mobile PCs 221 263 311 347 386
Unit Growth (%) 19% 18% 12% 11%
Tablets Units (m)
Apple Tablets (m) 16 26 35 43 53
Market Share (%) 94% 49% 45% 43% 42%
Other Tablets (m) 1 27 43 57 74
Market Share (%) 6% 51% 55% 57% 58%
Total Tablets (m) 17 53 77 100 127
Unit Growth (%) 212% 45% 30% 27%
o/w 3G Enabled Tablets (m) 6 24 42 55 76
Penetration (%) 35% 45% 55% 55% 60%
Source: Arete Research estimates.
UX not from PCs, but smartphones: SSD, touch, 3G, all-day battery, cloud storage
Tablet Forecast� Apple’s low iPad gross margins are
#1 issue for Android OEMs.
� Who can match Apple’s tech specs AND ecosystem AND retail channel?
July ’10 = ~53m in 2011…
Jan. ’11 = ~55m, more iPad
Media consumption device, like TV or game consoles; further pressures PCs until Win8 comes
40% of BoM = display and touch, not AP or modem! $200 by mid-’12
Kindle Fire: $180 BoM cost? No 3G.Subsidy to Prime users ($80/yr.)
Puts virtual shop window in consumer’s hands 24/7. =
India = 54 languages, 8 major ones200m+ tablets in next 5 yrs.
Tablets will be the low cost computing platform in emerging markets.
OS = means to an end,
Apps a.k.a. Content
No need to subsidise (netbooks failed)
November 2011 - 10Richard Kramer
Apple: Secrets of the Temple
Vs.
T a b le 2 : A p p le 's G r o ss Pr o f it B o o s t F ro m N A N D F la sh
P r ic e C os t /G B E x t ra M em o ry
C o st
A dd ' l M arg in
pe r U n it
M arg in o n
Ex tra M em ory
A s s um ed /
In c rem . G P
G ros s
P ro fi t /U ni t
i P od To u ch 8G B $ 1 99 $ 1 .0 2 0% $ 4 0
i P od To u ch 32 G B $ 2 49 $ 1 .0 $ 2 4 $ 2 6 5 2 % 2 6% $ 6 6
i P od To u ch 64 G B $ 3 49 $ 1 .0 $ 3 2 $ 6 8 6 8 % 3 8% $ 1 3 4
i P h on e 3 G S 8G B $ 4 99 $ 1 .0 3 8% $ 1 9 0
i P h on e4 16 G B $ 5 99 $ 1 .0 $ 8 $ 9 2 9 2 % 4 3% $ 2 5 7
i P h on e4 32 G B $ 6 99 $ 1 .0 $ 1 6 $ 8 4 8 4 % 4 9% $ 3 4 1
S o u r ce : A re te R e s e a rch e st i m a te s , Co m p a n y a cc o u n ts .
$81bn cash+80% growth iOS notebooks TVs, next….
iTunes’ 220m+ billing accounts makes Apple a Top 15 telco w/ wealthier customers
A4/A5 processor = superior cost structure
Scale = could be 400m APs sold in 2015
� Vulnerabilities?
� Relies on operator SAC
�Rivals narrowing gaps
� Lagging on displays
Apple makes up to a third of its operating profit by marking up NAND flash -$100 for 16GB
Apple avoids paying chipmaker gross margin, and higher foundry GMs
� Less suited for EMs
Now recognising risks on IPR…
$30 profit x 11m units = $300m!
November 2011 - 11Richard Kramer
Samsung: Brute Force
Table 2: SG&A by Vendor, '09-'11E ($bn)
$1.5bn$1.3bn$1.1bnMotorola
$1.2bn$1.2bn$1.5bnSony Ericsson
$1.7bn$0.9bn$0.4bnHTC
$1.8bn$1.4bn$1.2bnRIM
$2.3bn$2.4bn$2.1bnLGE
$3.5bn$3.6bn$3.9bnNokia
$6.4bn$5.0bn$4.1bnSamsung
$3.5bn$1.7bn$1.4bnApple
'11E'10'09
Source: Arete Research estimates.
� Samsung sold c. 29m smartphones in 3Q11, up 40% seq., now #1 by volume
� Koreans obsessed with league tables, share ; 2012 aim to surpass Nokia as #1 overall volume share player
� Tablets lack content/cloud services � Recycling Galaxy S II profits into low-
end to build scale� Industry’s biggest marketing budget
0.0
5.0
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Margins
Samsung Telecom division is a distribution channel for memory, display, and in future, logic/AP, modem, etc. - Far greater returns in leverage of commodity dominance
Fight Apple on its own terrain….
November 2011 - 12Richard Kramer
HTC: The Old College Try
� Best example of innovation in both hardware and software from Asian vendor, ex-ODM
� Investment in software skills/UI� 35m units YTD, 15% margins,
$2.8bn of profit/$3.5bn of cashHitting a wall in 4Q based on US market share gains by Apple at Sprint, and pressure from Samsung … BUT, execution matters hugely here
Needs portfolio refresh in 1Q12 to keep up competitiveness
Taiwanese co.(former ODM)
making $500m of Acquisitions
in US/EU
Desire Sensation XL?XE?
Losing momentum?
November 2011 - 13Richard Kramer
Nokia and RIM: Troubled Twins
RIM: Doors of Perception,June ‘11
Sharp Turn for the Titanic,May ‘10
Blind Man’s Bluff, Feb. ‘11
Leap #1
(YE’11)
Make current portfolio & initial WP7 competitive; parity unrealistic
Leap #2
(1H12)
Leap #3
(YE12)
Make current portfolio & initial WP7 competitive; parity unrealistic
Aim for parity, or leapfrog next iterations of Android, iPhone5;“unique experience?”
Make current portfolio & initial WP7 competitive; parity unrealistic
Address lower-tier WP7 segment w/ Apollo release;
Hold Your Horses, Nov. ‘11RIM: Lost in Transition, Sept. ‘11
Key Issue: execution
Nokia and RIM both still profitable, w/ resources, and desperate … but v. hard to reverse market perceptionand make up for lack of Internet innovation.
November 2011 - 14Richard Kramer
Vampire Squids?
� Quasi-monopoly market share in search, brings with it FTC regulatory risk (AdMob)
� Challenge in how to monetise Android, not to mention countless other acquisitions…
Mult. failures: Gears, Wave, Chrome, GoogleTVInternal conflicts (e.g. Chrome vs Android)Needs systematic cross-platform “Google” UX
� Beyond IPR, is this just “boys with toys?”� Schmidt “just don’t let it lose money”� Home to forge a path for GoogleTV
Effort to “save” Devices was failure
45 cos. since ’10, 18 already in ’11
It looks inevitable that FB will expand into more ads, connectivity, own “brand” applications
November 2011 - 15Richard Kramer
Building Global Brains…
Internet brands will create significant niche device categories; Kindle Fire just the start, very culture-specific…
=
=
=
Vertical model? Or external reach of search?
Expect more devices – FB’s #1 priority is mobile
Does any of this link up or resonate with consumers?
You can see four clear product + services ecosystems forming upEach one trying to absorb data on connected consumer behaviour
November 2011 - 16Richard Kramer
Telcos in 2011:Stop Bullying the Fat Kid
Weighted Average European Mobile Revenue Growth
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
Se rvice Revenue Data ( In c. Messag ing ) R evenue
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
Se rvice Revenue Data ( In c. Messag ing ) R evenue
Source: Arete Research.
� VODA now 40% declining voice revenues, 60% growing data and emerging markets
APRU Uplift from S’phone
KPN’s profit warning -cannibalisation of high margin SMS by IP mess. on free data plans
Re-Price
Nasty data/ SMS shift
Gone from 0% to 88% in 8mos
Mobile data is 90% of network traffic/cost but only 10% of revenue. All operators headed to more data usage, until voice becomes an app
Re-Org (Again!)
Re-Duce Costs Google 31K staffn(!) FB 2,000…FT = 100,000!
Digital divisions aside, we still see 2-sided business models as mostly fantasy
Customer innovation has to mean letting customers innovate! NOT specialised customer care…
Unintentional slip?
November 2011 - 17Richard Kramer
Mobile Ads, Mobile Money
‘06 ‘07 ‘08 ‘09 ‘10‘08 ‘09 ‘10 ‘11 ‘12‘10 ‘11 ‘12 ‘13 ‘14‘12 ‘13 ‘14 ‘15 ‘16
Mobile Ad Forecasts
� Operators want NFC to be SIM based to manage authentication, security � Credit card companies do not want SIM and say telcos can’t manage risk.
IssuerBank<2%
Visa, MCInterLink
<1%
AcquirerBank<1%
MerchantHas to Pay
Some…
� Who makes money?
Not yet clear who monetises mobile advertising, under which model:� Telcos? ISPs? Web Brands? � Trad. agencies going digital?
Then mobile advertising Behaviour change?
PoS? Use case?
Regulatory issues
November 2011 - 18Richard Kramer
Please, Get Me Excited!
Are T-Mobile or Verizon doing something really different? Still the same old confusing tariff packages, offering same devices as competition
Price!
Device!
November 2011 - 19Richard Kramer
Get Me Excited, Part II!
Can Vodafone or Tele2 be like Apple – premium brand, connect consumers to platform, content, retail, billing? Then show me what I can do!
Price! Device!
November 2011 - 20Richard Kramer
Maybe T-Mobile Slovakia is on to Something Here?
At least I know T-Mobile is about chicks (and guys) at the beach, pool, Still no “use case” “demos” or “new services”!
November 2011 - 21Richard Kramer
Weiβer Spargel or Surstromming?
� So, what’s with weiβer Spargel?
What’s unique customer experience on Vodafone? Tele2?Any operator?
Develop X-platform Apps
Can apps help telcos offer tings that competitors won’t or can’t? Co-opt internet brands, rather than counter them…
� A few hit apps branded by operator that work on any platform: based on customer insight - location, contacts, usage, etc.
Create “radical chic” buzz in high-end: VodafoneVanguard? O2 Too?
Loads of scope for multi-SIM offers;
Get consistent UX on all devices!
Segment “leading-edge”customer base
Build communities!
November 2011 - 22Richard Kramer
OK, How’s ‘Bout Some Forecasts?
� A Billion Smartphone in 2013, dominated by emerging markets
By 2013, every smartphoneco-branded with Internet brand based on likely usage…
“Best for…” Twitter, Facebook, WeiBo, Yandex, LinkedIn, ESPN, etc.
� Tablets to follow…
By the time industry gets “third platform” scaling up, native apps will be in decline
� Device OS means zero w/o content ecosystem behind it;it’s a means to an end…the end is content consumption/creation/communities
Tech’s future in emerging markets, for innovation and consumer demand.
� Tech hardware in period of “scorched earth”competition; but risk of perception like PC.
Google, Apple, Facebook, Amazon are tech’s Hydras; as they get cut off or fail at things, they grow back in two segments; next as services providers….