StrangePhones, Here We Come

November 13, 2012

Things have gotten weird enough across the smartphone ecosystem over the last 24 hours for us to (a) move back to the blog given what will be some speculative comments regarding a number of rumors and/or inadequately explained actual events and (2) reference one of the greatest albums ever made as our guide to the madness.

  • “I Started Something I Couldn’t Finish”-  Reports were confirmed last evening that the executive leading Microsoft’s Windows group, and a potentially successor to CEO Ballmer, had left the company.  This is clearly almost impossibly bad timing given the ongoing launch of Windows8, though interestingly mirrors recent senior management departures at Apple.  Combined with yesterday’s possibly misconstrued comments from Ballmer around “modest” initial sales of the Surface tablet, these events paint a picture of disappointment with the initial Win8 launch despite the massive (and effective, in my view) advertising blitz that has accompanied it.  Then again, what better time for an apparently polarizing, hard charging executive to make his move for the CEO position that in the midst of a “bet the company” launch with the potential PR disaster of his departure a huge leverage point.   Whether his bluff was called, or this was part of the plan, both represent  negatives at least from an external perception standpoint.  This is somewhat ironic given a massive, record breaking Halo4 launch confirming the company’s strong Xbox franchise and what looks to be a truly innovative ecosystem developing around Win8, WinPhone and the Surface (both of which I found very impressive in initial test runs), we have been seeing a lot of reasons to own MSFT lately and are intrigued with the sell off.
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  • “A Rush and a Push and the Land is Ours”-  Upset in Win8 land has clear potential negative implications for lead smartphone partner Nokia, which is interesting in light of a number of positive indications from around the globe, most recently in China, around the launch of the company’s flagship Lumia 920 device.  The launch is clearly receiving “plus” support from carriers, retailers and Microsoft, with featured displays both on line (the Lumia 920 featuring the Will Arnett ad is now the main landing page) and in stores and national advertising launched over the weekend.  While the market will focus on US progress we note that NOK has been out of the US market broadly for quite some time, though we expect steady progress and hold to our view expressed at the launch that the device is fully competitive and arguably superior to the market leaders from Apple and Samsung
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  • “I Won’t Share You”- The ongoing intellectual property battle among Apple and Andriod, in this case handset makers HTC and Samsung, has also been very much in evidence in the recent news cycle.  Following the official announcement of a patent settlement between HTC and Apple, somewhat of a non event given HTC’s struggles over the last year, come two far more interesting rumors out of Asia that may both speak to the Apple’s ongoing melee with Samsung.  First comes a fairly stunning story indicating early production of the IPhone5S targeting a Spring 2013 launch with the IPhone5 launch not yet two months old.  We would expect rapid denials unless (a) the company is intending to freeze the current I5 launch in its tracks or (b) the rumor is true.  The second story speaks to the latter point, with reports of Samsung pushing through a 20% price increase to Apple for the tens of millions of applications processors it produces for Apple, which certainly marries up well with the company’s recent weak gross margin guidance and could well represent a new front opened by Samsung in the ongoing IP battle.
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  • “Death of a Disco Dancer” Finally we have news of Research In Motion’s planned launch of it’s much delayed BB 10 operating system in January.  While it’s possible to see some value remaining in the current Blackberry subscriber base (though with a $2.5B enterprise value RIMM remains valued more than $2.5B higher than NOK’s smartphone unit), to the extent the market is having a tough time believing that WinPhone can emerge as a viable third O/S ecosystem it remains game over for RIMM

     

    We see one major theme arising from most of what we see above, along with one minor theme albeit with contradictory datapoints.  The major theme is management and execution, which we variously see as shockingly sloppy in the case of AAPL (supply chain, production delays, and as we initially noted really a me-too device), unsurprisingly sloppy in the case of Microsoft (at least from an optical perspective with the management departure, we remain impressed with both the style and substance of the Win 8 launch) and RIMM, and unsurprisingly crisp and brutal on the part of Samsung, which we continue to view as a leviathan (see our CES 2012 Wrap- It’s Samsung’s World and We All Just Live in It- 1/16/12 and also "note" the recent and amazing LeBron James ad for the Galaxy Note II).

    The minor theme focuses around end to end control of strategic technologies and/or the ecosystem. And here both the strategies and the outcomes are all over the map, though we note to date that the big winners here at present look to be those with favoring an at least somewhat open model with regard to hardware and operating systems namely Google and Samsung.  And one could make a fair argument that Apple’s closed end to end approach is finally catching up with them, as it has devastatingly caught up to RIMM, resulting in slower innovation on both the hardware and software fronts.

    Despite Microsoft’s foray into tablets and continued success in gaming consoles pushing them closer to straddling the open/closed line, we see the model as fundamentally software driven and benefiting from an array of hardware partners including Nokia.  And though we would love to see it, we don’t think MSFT buying NOK makes any more sense than AMZN buying TI’s processor unit.  This is again somewhat ironic given the apparent advantage that Samsung’s deep chip capabilities have conferred on them relative to Apple, though we view this more as a potential Apple supply chain management failure than an indicator of sustainable advantage by hardware integration from the device to the chip level.  Though consider that Apple is attempting to do all three, hardware, software and semiconductors, and that is a tall order.

    “Stop Me if You’ve Heard This One Before” - Harkening back to our post AMZN AAPL earnings rant  we see one aspect of our ire relieved, with AAPL down not $30 but $60 since it’s 10/25 report.  While AMZN continues to levitate up here mostly due to a lack of any meaningful metrics, we will leave that for another day noting only that we continue to find the GOOG AMZN pair compelling.   We also continue to look to sidestep the Apple/Samsung battle on the device side through a long position in BRCM. We finally continue to see a compelling proxy short in TROW (short 2) given its outsize exposure to AAPL (with GOOG and AMZN rounding out the top three holdings) as well as overall market weakness and a share price that has barely budged  in the recent sell off.