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Will Google Win The Mobile Computing War?

Reggie Middleton's picture




 

BoomBustBlog is just about the
only financially orientated publication that declared for nearly a year
now, the inevitable conquest of Google’s Android OS and ecosystem. I
feel our highly contrarian research and analysis has been proven correct
beyond a shadow of a doubt. Fresh off the heels of
“If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors…” and Sony’s widescale adoption of the Android platform, we have Nokia’s apparent capitulation and what could be the (inevitable) assimilation into the “Borg”. After
all, they are just the largest manufacturer of phones (both feature
phones and smartphones) in the world – that is, at least they are for
now.

Google topples Symbian from smartphones top spot:

(Reuters) – Google’s Android dethroned Nokia’s Symbian as the most popular smartphone platform in the last quarter of 2010, ending a reign that began with the birth of the industry 10 years ago.
Research firm Canalys said on Monday phonemakers sold 32.9
million Android-equipped phones in the last quarter, roughly seven times
more than a year ago, compared with Symbian’s sales of 31 million.
The landmark piles pressure on Nokia as it struggles to reassert
itself at the top end of the mobile handsets market. The success
of the open-source Android operating system, which has become the
standard for most phone makers, leaves Google well placed as cellphones
are due to surpass computers for accessing the web. Among key players in
the industry so far only Nokia, Apple and RIM have not resisted using
it. … Canalys said the overall smartphone market grew 89 percent from a
year ago in the fourth quarter, with all vendors in total selling 101.2
million smartphones.

Stephen Elop, the Nokia CEO, is quoted as saying during the firm’s latest conference call (via endgadget):

“In Q4 we delivered solid performance across all three of our
businesses, and generated outstanding cash flow. Additionally, growth
trends in the mobile devices market continue to be encouraging. Yet,
Nokia faces some significant challenges in our competitiveness and our
execution. In short, the industry changed, and now it’s time for
Nokia to change faster.”

And from All Things Digital, he is quoted:

“The game has changed from battle of devices to war of ecosystems,” Elop said, adding later that “Our industry has changed and we have to change faster.”

Although Elop didn’t name any names, he did talk about the need for the company to “build or join a competitive ecosystem,”
suggesting that it might be open to shifting to a competing platform.
And while he wouldn’t confirm such a move, he said that the company
could pull off such a switch because of its strong brand and
relationship with operators.

Nokia’s operating profit dropped from €1.47b (€950m net) a year ago
to €1.09b (€745m net), suffering from the margin compression that I
warned would also befall the other two companies that have not embraced
Android as an OS, having decided to build their own – Apple (Apple on the Margin) and Research in Motion (Blackberries
Lost More Market Share Than We Bearishly Anticipated While RIMM’s
Share Price Spikes: Is It Time To Revisit the Bear Thesis?
).

Straight from the source, Canalys press release:

Canalys today published its final Q4 2010 global country-level smart phone market data, which revealed that Google’s Android has become the leading platform.
Shipments of Android-based smart phones reached 32.9 million, while
devices running Nokia’s Symbian platform trailed slightly at 31.0
million worldwide. But Nokia did retain its position as the leading
global smart phone vendor, with a share of 28%. The fourth quarter also
saw the worldwide smart phone market continue to soar, with shipments
of 101.2 million units representing year-on-year growth of 89%. The
final quarter took shipments for the year to fractionally below 300
million units, with an annual growth rate of 80% over 2009 (see table
below).

In Q4 2010, volumes of Google OS-based
smart phones (Android, OMS and Tapas) were again boosted by strong
performances from a number of vendors, notably LG, Samsung,
Acer and HTC, whose volumes across these platforms grew 4,127%, 1,474%,
709% and 371% respectively year-on-year. HTC and Samsung together
accounted for nearly 45% of Google OS-based handset shipments.

… The United States continued its reign
as the largest country market in terms of shipments, at more than
double the size of the Chinese smart phone market. RIM recaptured first
place from Apple, as the latter experienced its usual US seasonal dip,
and RIM benefited from the first full quarter of shipments for the
BlackBerry Torch. HTC successfully maintained its third-place ranking
in the US for the third consecutive quarter, driven by its speed to
market with the latest Android updates and new Windows Phone 7 devices.

‘The US landscape will shift dramatically
this coming year, as a result of the Verizon-Apple agreement,’ said
Canalys Analyst Tim Shepherd. ‘Verizon will move its focus away from
the Droid range, but the overall market impact will mean less
carrier-exclusive deals, while increasing the AT&T opportunity for
Android vendors, such as HTC, Motorola and Samsung.’ Android was by far
the largest smart phone platform in the US market in Q4 2010, with
shipments of 12.1 million units – nearly three times those of RIM’s
BlackBerry devices [the 2nd largerst platfrom]. Windows Phone 7 devices
appeared too late in the quarter to take full advantage of holiday
season purchasing. As a result, Microsoft lost share in the United
States, from 8% in Q4 2009 to 5% in Q4 2010.

Analysis of the published country-level
data shows that, around the world, the strength of smart phone
performances remained diverse. In South Korea, for example, shipments grew from under 700,000 units in Q4 2009 to just under 3.4 million units in Q4 2010, making the country a top 10 market. In Japan, Android
shipments have taken off over the past year, with nearly 1.4 million
units shipping from local as well as international vendors, such as HTC
. More Japanese vendors have also announced plans to launch Android devices in 2011, such as NEC Casio and Panasonic. Under pressure from Huawei and Samsung in particular, Nokia’s
share in China slipped to 56%, down from 76% a year ago, despite
growing its volume in the country by over 70% in the same period
. Albeit
from a smaller base, the Chinese market grew 134% year-on-year,
notably faster than the US market, which grew at 64% in the quarter
.

Canalys Smart Phone Analysis, Quarterly Shipment Data

Worldwide smart phone market

If there is any doubt to the Android onslaught, NPD has similar findings to that of Canalys, in that Android is outselling everything in sight.

… the Android smartphone operating
system (OS) significantly increased its market-share lead by 9
percentage points, since the prior quarter, to reach 53 percent of the
U.S. consumer smartphone market. According to The NPD Group, a leading market research company,
Apple iOS share declined 4 percentage points to comprise 19 percent of
unit sales in Q4; RIM OS fell 2 points to tie Apple’s 19 percent;
Windows Mobile, Microsoft’s legacy OS, fell 3 points to 4 percent, as
the new Windows Phone 7 OS debuted at 2 percent; and Palm’s WebOS held
at 2 percent.

… Despite buy-one-get-one promotions
at both AT&T and T-Mobile, the Windows Phone 7 OS claimed less
market share than its predecessor, Windows Mobile, for which handsets
are still available at all four major U.S. carriers. Windows Phone 7
also entered the market with lower share than either Android or webOS
at their debuts, according to NPD’s Mobile Phone Track.

“At CES there were announcements from
several handset providers of the intent to use the Android OS to bring
new capabilities to market, including dual-core processors, 4G network
speeds, and larger displays that seek to expand on the success of
handsets like the Motorola Droid X and HTC EVO 4G,” Rubin said.
“Android will encounter greater competition this year, however, as
Apple’s iPhone 4 — the best-selling handset in the U.S. — debuts on
Verizon Wireless.”

Top Five Handset Models Were All Smartphones in Q4 2010

Based on U.S. consumer purchases of
mobile phones in Q4 2010, for the first time there were no
feature-phone handsets in NPD’s top-five ranking. All top-selling
mobile phone models were smartphones, as follows:

1.    Apple iPhone 4
2.    Motorola Droid X
3.    HTC EVO 4G
4.    Apple iPhone 3GS
5.    Motorola Droid 2

Hat tip to BoomBustBlogger  H.Kwint for the following articles: Android gains 22 pct tablet market share -analyst

Bloomberg – Google Inc.’s Android software boosted its share of tablet computers almost 10-fold in the fourth quarter, narrowing the lead of Apple Inc.’s iPad, market researcher Strategy Analytics
said. Android devices captured 22 percent of global tablet shipments in
the three months to Dec. 31, up from 2.3 percent in the preceding
quarter, the Boston-based researcher said in a statement today. The iPad
accounted for 75 percent of shipments in the period, down from about 95
percent, it said.

This is absolutely amazing performance on behalf of Android.
Amazingly enough, none of these media outlets have commented on just how
amazing said performance actually was. You see, Android has not even
released a tablet OS yet. What Samsung, et. al. have been selling has
been hacked up versions of the Android smartphone OS, complete with
weaknesses and inconsistencies that come with forcing a small screen OS
onto a big screen. If you think Android has taken significant market
share from Apple thus far, wait until there are actually Android tablets
for sale!!!!

Apple’s iPad, which has sold more
than 14.8 million units worldwide since its introduction in April, faces
intensifying competition from Android tablets made by Samsung
Electronics Co., Motorola Mobility Holdings Inc. and Acer Inc.
Google gives away Android for free to boost revenue from services such
as mobile advertising and expand the market for its search engine. A
wider range of cheaper devices with Google features like YouTube and Google Maps will probably erode the iPad’s market dominance, said Neil Mawston,
director at Strategy Analytics. Its share of the global tablet market
will probably drop to 67 percent this quarter, he said. The cheapest
version of the iPad, which only has Wi-Fi connectivity and 16 gigabytes
of memory, costs $499 in the U.S. Acer plans to introduce an Android
powered tablet in April that will likely sell for as little as $299, Jim Wong, Acer’s head of information-technology products, said in November.

Expect to see Google shoot to the number one spot in the tablet
market just as rapidly (or not more) than they did in the smartphone
market. For those who have not recognized the difference between a
smartphone and a tablet OS interface, this video may help.

Larry Dignan, over at ZDnet,
feels that Android’s growth will be harder to replicate  for 2011. I
seriously disagree and (respectfully) don’t believe he could be any
more incorrect. He is referencing Verizon’s sale of iPhones as the main
reason. Let’s run down both some observations and facts to the
contrary.  To begin, let’s recap what appears to be the source of
Larry’s claim:

‘The US landscape will shift
dramatically this coming year, as a result of the Verizon-Apple
agreement,’ said Canalys Analyst Tim Shepherd. ‘Verizon will move its
focus away from the Droid range, but the overall market impact will
mean less carrier-exclusive deals, while increasing the AT&T
opportunity for Android vendors, such as HTC, Motorola and Samsung.’
Android was by far the largest smart phone platform in the US market
in Q4 2010, with shipments of 12.1 million units – nearly three times
those of RIM’s BlackBerry devices [the 2nd largerst platfrom]. Windows
Phone 7 devices appeared too late in the quarter to take full
advantage of holiday season purchasing. As a result, Microsoft lost
share in the United States, from 8% in Q4 2009 to 5% in Q4 2010.

To begin with, I think the Canalys analyst characterization is innacurate.
The iPhone/iPad will most likely divert Verizon’s focus from that of
mainly Android, but the Android has proven to be a true money maker and
has driven profits for all of the major carriers already and all but
three of the major handset vendors. Those three handouts failed to
triple or better revenues because they didn’t adopt Android (Nokia,
Apple and Research in Motion). Since Verizon really doesn’t have a dog
in this fight, it would be very unwise for them to pick sides,
particularly prematurely – that is unless they have signed some sort of
exclusivity agreement with Apple.

The iPhone is really just shifting distributors, while Android will be NET ADDING vendors.
As iPhone gains on Verizon, it loses on AT&T. Those who feel that
Verizon will offer better service should realize that they are just a
carrier and they can and probably will get bogged down by the extra
bandwidth use just as AT&T did. After all, they all basically lease
the spectrum from Sprint/Clearwire anyway. The only way Verizon can
prevent this network degradation is to implement caps and surcharges
which I can tell you as an ex-Verizon customer they are very prone to
do. Verizon is putting some marketing muscle behind Android, offering
deals to adopt new iPnones, but this aimed primarily at pulling existing
iPhone business from AT&T, not netting new iPhone subscribers. In
the meantime, AT&T is offering a trade in your old [iPhone] promotions, touting its newer, higher-powered Android offerings as an enticement. From BGR.com:

If you have not witnessed the AT&T dual core Motorola Atrix  in
action, you may be missing a new paradigm in form factors and usage. See
If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors
Though Verizon is probably slated to sell a lot of new iPhones, many of
those new phones will most likely be to existing iPhone users. AT&T
on the other hand, will most likely join the extreme revenue that every
other carrier enjoyed (but them due to being wedded primarily to the
iPhone) and sell (net, net) more new Androids than Verizon will sell
iPhones.

Then we have the margin issue with Apple again. I have been clamoring
that Apple’s margins will get chopped by Android’s commoditizng the
smartphone space – both on the lower and and the higher end. See Apple on the Margin
and my on air proclamation just hours before Apple released earnings
and declared – surprise, surprise – a drop in margins. Go to 3:40 in the
video…

Apple needed the Verizon distribution deal much more than Verizon
needed it. Android has already surpassed Apple by a significant margin,
and the iPhone hasn’t started selling from its new home yet. Thus when
it came to negotiating terms, it is essentially guaranteed that Apple
got nowhere near the sweetheart deal that it originally negotiated with
AT&T at $600 per phone plus a cut of the servicing fees. Although
AT&T consequently negotiated that outrageously Apple-centric deal
towards a more neutral perspective, it was still quite rich. Expect the
Verizon deal to come in at a fraction of that struck with AT&T,
which means that Apple will have to push more phones through Verizon
than it did/does through AT&T just to break even on previous
numbers.

The Canalys report is quoted: “More Japanese vendors have also announced plans to launch Android devices in 2011, such as NEC Casio and Panasonic.” Add to this the fact that Sony Bites The Bullet & Joins The Android Camp, Adding Its Entire Suite of PSOne Games To The Android Platform and even Nokia, currently the world’s largest smartphone vendor by installed base, may join the Android camp.

Then there is the most obvious. Larry Dignan is quoting a Canalys report which literally starts as follows:

Canalys today announced its
projection that Android will continue to grow at more than twice the
rate of its major smart phone competitors in 2011, despite market
concerns over platform fragmentation and the arrival of the iPhone 4 on
Verizon in the US. According to Canalys Q3 2010 estimates, the
Google-backed platform already claims a 25% share of the worldwide
smart phone market, with over 20 million shipments of Android-based
worldwide.*

‘The growth of Android has been
phenomenal, but so too has the number of related devices launched with
different hardware and software specifications,’ said Canalys Principal
Analyst Chris Jones. ‘This has led to the market perception of it as a
fragmented platform, though we believe that growth will continue as
the pace of Android OS upgrades slows.’

The analysts actually agree with the BoomBustBlog in full, save for
the fact that I don’t believe the rapid growth of Android innovation
will slow anytime time soon. This rapid innovation is how Google keeps
copycats at bay who wish to fork Android. Anybody, ex. Chinese companies
who attempt to fork will have an outdated OS in a matter of months,
about the minimum amount of time it would take to get a differentiated
product to market if you were one of the fastest vendors on earth.
Basically, Google is arranging it in such a fashion in that the only way
to benefit from the latest and greatest Android is to have Google’s
Android.

The momentum behind Android is indisputable now that it is the number
one selling OS in all markets. There have been several pundits stating
that this is not a zero sum game and that their is room for more than
one OS vendor to co-exist. While I agree that this is not a zero sum
game, it is far from a linear one, and the net effect may be similar to
zero sum. I have explained the logic behind this several times in the
past, from different perspectives:

  1. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  2. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  3. Apple on the Margin
  4. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  5. More of the Android Onslaught: Increasing Handset Revenues and Growth

Long story short, the more handsets carrying a specific OS sold, the
more advertisers and developers will be drawn to that platform. Google
can afford to compress margins to ZERO because it is not in the
hardware business and its OS is open source. Apple, Nokia and RIM have
no such luxury. Thus as the space is inevitably commoditized, margins are
compresses yet volume of units sold actually increase – Google
benefits at all other manufacturer’s loss… That is unless they are able
to do what Google has accomplished, and that is change the actual
business model of the industry versus combating the industry leader on
their terms.

Illustrative valuation model examples and complete interactive market share models embedded into the web page can be viewed in the original version of this post on BoomBustBlog.

More Reggie Middleton on Google:

  1. The Complete, 63 pg Google Forensic Valuation is Available for Download

  2. Navigating BoomBustBlog Subscription Material To Find The Google Valuation Drilldown

  3. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours

  4. Google 4th Quarter Performance: Strong Performance, & Better Yet Healthy Investment Into The Business

  5. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All

  6. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift

  1. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  2. This article should drive the point home: 
  3. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  4. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  5. RIM Smart Phone Market Share, RIP?
  6. Android is gaining preference as the long-term choice of application developers
  7. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  8. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  9. Apple on the Margin
  10. RIM Smart Phone Market Share, RIP?
  11. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  12. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  13. More of the Android Onslaught: Increasing Handset Revenues and Growth
  14. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  15. The Complete, 63 pg Google Forensic Valuation is Available for Download
  16. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  17. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  18. As
    I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing
    War! Their Marketing Campaign is PURE GENIUS! and it Appears as if
    the Phone Ain’t Bad Either
  19. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?

More Reggie Middleton on the Future of Mobile Computing

  1. The Future of the Mobile Computing Wars: Contiguous Rich Client Computing!
  2. Blackberries
    Lost More Market Share Than We Bearishly Anticipated While RIMM’s
    Share Price Spikes: Is It Time To Revisit the Bear Thesis?
  3. Will
    The Meritocratic, Playing Field Leveling Nature Of The Web Fall Victim
    To The Net Neutrality Scheme? If So, Many High Traffic Low Margin
    Sites (Read The Little Guys) May Go Bye-Bye
 

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Wed, 02/02/2011 - 12:12 | 927511 Reggie Middleton
Reggie Middleton's picture

Mid-2009 predates Reggie’s prediction of the “inevitable conquest of Google’s Android OS and ecosystem”. My contention is that claiming to have “been proven correct beyond a shadow of a doubt” for the past year (Reggie’s timeframe, not mine) is disingenuous in light of Google’s relative performance.

It is 2/2011, and Google's Android is number one. I believe I was correct, and I don't believe there is much doubt either. I don't give share price estimates out for free since I cannot generate them for free, but if you bother to purchase a subscription and check the price targets and the actual performance of Google and RIMM you will see that I have been quite accurate - to within a few dollars. Of course it doesn't always work out that well, but it did this time around.

You are suffering from short termism, a very widespread condition and you are extrapolating and reaching in an attempt to try to prove me wrong. I said Android will outstrip Apple and Blackberry, and it has. You cannot refute that. Thus far there is every indication that Google will outstrip Apple in the medium to long term in terms of fundamentals as well, but it is a process. Things may change and Apple may alter its course, there's just no indication that is happening as of yet.

Wed, 02/02/2011 - 14:29 | 928123 No-1-U-Know
No-1-U-Know's picture

 

It is 2/2011, and Google's Android is number one. I believe I was correct, and I don't believe there is much doubt either.

As of 2/2011, Google and its hardware partners are selling more smartphones than Apple but Apple is generating more profit than all of them combined. Since the name of the game is making money, it’s Apple’s iOS that is currently number one. The issue must be judged from the profitability perspective, in my opinion.

I don't give share price estimates out for free since I cannot generate them for free, but if you bother to purchase a subscription and check the price targets and the actual performance of Google and RIMM you will see that I have been quite accurate - to within a few dollars. Of course it doesn't always work out that well, but it did this time around.

You are suffering from short termism, a very widespread condition and you are extrapolating and reaching in an attempt to try to prove me wrong. I said Android will outstrip Apple and Blackberry, and it has. You cannot refute that.

Since you claim exceptional success over a stated period (“nearly a year now”), the onus is on you to provide evidence for that exceptional success over that time frame. Like I wrote, your market share prediction has panned out: you are correct in that regard.

However, you have a higher standard to live up to: the measure of your success as a financial analyst rests not in the correct projection of a particular metric, but in using metrics to predict asset appreciation. Your free commentary suggests that Google and its hardware partners, because of their tremendous unit growth, should be outperforming Apple, which has not been the case for most over the defined period of nearly a year. You might provide additional insight in your subscription material (different time frame, specific stock recommendations and targets) but I can only comment on what I see, and in light of the results (the financial underperformance of Google and most of its partners), you are wrong to claim being correct “beyond a shadow of a doubt”. I don’t refute the correctness of your market share prediction, I challenge its pertinence and value.

Thus far there is every indication that Google will outstrip Apple in the medium to long term in terms of fundamentals as well, but it is a process.

I also believe Google will eventually be highly successful, but not at Apple’s expense: Google (like Microsoft in PCs) will capitalize on its volume and Apple (as it does in PCs) will keep on capitalizing on its leadership in innovation and its distinction.

Things may change and Apple may alter its course, there's just no indication that is happening as of yet.

You have suggested that Apple license its software to try to reverse the unit share decline relative to Android. What would hapen if it did? It would lose its main differentiator and enable other phone manufacturers to compete against it, bringing prices down. This might increase iOS’ market share, but would decrease Apple’s profitability. It’s not a solution. As a matter of fact, the problem doesn’t exist: Apple doesn’t need to alter its course, as it’s not pursuing the highest unit share, but the most valuable unit share. It’s based its iPhone strategy on the proven success of its Mac business. Apple will probably end up with a lower market share when the dust settles, but just like in PCs, that lower share will be a lot more profitable.

Google’s mobile business should also become very profitable over time, but Apple will not sink if it keeps trailing Android in unit share. It will sink if it loses its grasp on the most profitable part of the market.

 

Wed, 02/02/2011 - 11:41 | 927358 No-1-U-Know
No-1-U-Know's picture

 

Nowhere in my comment do I claim you indicated to sell Apple.

You did not "claim" it but you very much implied it in your reply to Reggie:

Hence the readers who followed your contrarian research and analysis would have been richly rewarded by selling Apple and buying Google over the past year, right?

 

Selling Apple and buying Google can be implied from his analysis, that’s why I pointed out Google’s underperformed Apple over the past year, the timeframe he provides.


"Anyone playing the Android related ecosystem for a bit longer than "past year" (say since mid-2009 - by which time the post-2008 general run-up has been finished mostly, to keep the stats fair) had been richly rewarded: long HTC, Motorola, Google, short NOK - just to name a few."

Mid-2009 predates Reggie’s prediction of the “inevitable conquest of Google’s Android OS and ecosystem”. My contention is that claiming to have “been proven correct beyond a shadow of a doubt” for the past year (Reggie’s timeframe, not mine) is disingenuous in light of Google’s relative performance.

"Shorting the bubble itself directly (AAPL) is difficult - it's always difficult to short long-running bubbles. Also, AAPL does make a ton of money and stock valuations are extrapolated based on that, so shorting it without direct, immediate financial signs of trouble would be more than silly."

I made no mention of shorting in my post. I only supposed that a reader who sold his Apple shares and bought Google instead based on Reggie’s analysis, not his explicit recommendation, would have vastly underperformed.

Apple grew its earnings by an average of 63% over the past 16 quarters (http://www.asymco.com/2011/01/20/apples-growth-scorecard-63-average-earnings-growth-over-16-quarters/) and shows no signs of letting up. Yet AAPL’s PE is only 19.22, compared to the S&P’s 14, putting its ttm PEG at 0.3. Those are not bubble metrics. Apple’s growth is being discounted by the market.

“Btw., I don't agree on everything with Reggie - for example I think his call on the further collapse of real-estate (and banking) were a bit too pessimistic - once it was clear that US policy makers chickened out from letting any big bank go bust in early 2009 it was clear it was a one-way road up, with the costs and risks of banking socialized in essence. But his Android call was spot on.”

He got Android unit share right, but fails to see a significant part of the big picture, in my opinion. Those who read his initial analysis a year ago and decided to buy Google or most Android phone makers (even though there's no explicit recommendation) instead of Apple have underperformed. He’s hence been far from “spot on” or “correct beyond a shadow of a doubt”.

 

Wed, 02/02/2011 - 12:21 | 927569 More Critical T...
More Critical Thinking Wanted's picture

 

Selling Apple and buying Google can be implied from his analysis, [...]

But he did not say so and did not suggest any specific price levels, right?

Just like you just acknowledged that there is a material difference between implying a future direction and suggesting specific trades (you just two replies before vehemently denied claiming something but then acknowledged that you implied it), can Reggie point to that material difference as well, don't you think so?

 

Wed, 02/02/2011 - 15:55 | 928419 No-1-U-Know
No-1-U-Know's picture

 

Selling Apple and buying Google can be implied from his analysis, [...]

But he did not say so and did not suggest any specific price levels, right?

Right. But he does provide a time frame of “nearly a year now” to claim his “research and analysis has been proven correct beyond a shadow of a doubt”. Since Google has underperformed Apple during his stated time frame, it casts a doubt on his claim.

Just like you just acknowledged that there is a material difference between implying a future direction and suggesting specific trades (you just two replies before vehemently denied claiming something but then acknowledged that you implied it), can Reggie point to that material difference as well, don't you think so?

Absolutely: suggesting a trend and making a specific recommendation are very distinct. The difference is material. Reggie explicitly claims exceptional success over a specific period (“nearly a year now”). As such, the onus is on him to provide evidence for that exceptional success over that time frame. It’s this claim that I challenge, not a specific trade. I compared the performance of the protagonists of his analysis to illustrate that his overconfidence is unwarranted. I acknowledged that his market share prediction has panned out: he is correct in that regard. But, as I further comment in reply to his post below, the correct projection of a metric is insufficient for a financial analyst to claim being correct “beyond a shadow of a doubt”. Financial outperformance is the standard, and it has not been demonstrated.

 

Wed, 02/02/2011 - 02:45 | 926499 No-1-U-Know
No-1-U-Know's picture

“Again, I'm wrong often enough, so I don't need anon commenters making things up.”

Thank you for replying to my post. My original comment was confrontational, so a parting jab was probably deserved. Whether anonymous or not however, the question I raised is pertinent and I made nothing up.

“Actually sir, no where on my site did I indicate one should sell Apple - at least not yet. That's your first error.”

Nowhere in my comment do I claim you indicated to sell Apple. I pointed out that, since you have been pitting Google against Apple and congratulate yourself for “our highly contrarian research and analysis” having “been proven correct beyond a shadow of a doubt” “for nearly a year now”, Google would logically have been the superior investment over that period, which is far from being the case.

“The second is I went bullish on Google in the mid $400s or so. It is somewhere around $620 now and the options on Google were much, much cheaper than the calls on Apple since Apple is on everyone's radar while Google was (and is) underestimated. More bang for the buck, you know.”

I made no claim as to any of your personal positions or the relative value of options, so there is also no error there on my part. But since you bring it up, you provide insufficient context to judge the quality of your trades.

“Your 3rd error is that I have a considerably longer horizon than "the past year".”

Your horizon may be longer but, again, since you pat yourself on the back for your outstanding research “for nearly a year now”, you should demonstrate superior results over that period. Granted, you had predicted that Android would overtake the iPhone in terms of market share and that prediction has come to pass. As such, you are partially correct. However, you are a financial analyst, such that the yardstick of your success is making your clients money. In that context, because the company you favor, Google, has underperformed the competitor you target, Apple, the claim “I feel our highly contrarian research and analysis has been proven correct beyond a shadow of a doubt” is much exaggerated.

“I look forward, and looking forward Apple looks to lose this race. If or once Apple is relegated to a smaller, slower growing niche, both developer and advertiser's hearts will drift towards the faster growing and more populated platform - undercutting the source of Apple's outsized profits. Of course, you will not be able to see this if you are looking at this quarter by quarter or even year by year.”

It’s possible, but there is an important precedent that you are unaware of or fail to acknowledge that weighs heavily in Apple’s favor: Apple’s Mac business has shown that the company is able to generate the lion’s share of profits (35% in 2009) with minimal revenue share (only 7%). Also, the iPhone should by now have begun to feel the effects of the Android onslaught. Yet, as I pointed out, it’s been able to maintain its huge profit share and has forced Verizon to see the light and add the iPhone to its lineup (http://www.asymco.com/2011/01/11/verizon-back-at-bat-revisiting-the-last...).

“Methinks that this time next year, this will be quite obvious, though. This is a very dynamic and fluid market, but thus far Google is in the pole position and pulling even farther ahead with a plethora of entrepenurial initiatives that are only starting to sprout.”

I believe your focus on unit share as the ultimate measure of success is misguided. The two protagonists have different models that can both win. As things stand, evidence suggests that the iPhone and other iOS devices will keep making a lot of money, that Android will win the greatest market share in smartphones, that Google will eventually come up with ways to monetize Android’s market penetration and that the Android phone makers will be competing on price to sell commoditized clones, just like Windows PC makers. More simply, things are shaping up as Apple-WIN, Google-WIN, Android phone makers-LOSE.

“The tech company that I did recommend to sell dipped about 20%… So, the brilliant analysis has paid off already.”

Again, without context, judging the quality of a trade is impossible.

Wed, 02/02/2011 - 03:37 | 926546 More Critical T...
More Critical Thinking Wanted's picture

 

Nowhere in my comment do I claim you indicated to sell Apple.

You did not "claim" it but you very much implied it in your reply to Reggie:

Hence the readers who followed your contrarian research and analysis would have been richly rewarded by selling Apple and buying Google over the past year, right?

Anyone playing the Android related ecosystem for a bit longer than "past year" (say since mid-2009 - by which time the post-2008 general run-up has been finished mostly, to keep the stats fair) had been richly rewarded: long HTC, Motorola, Google, short NOK - just to name a few.

Shorting the bubble itself directly (AAPL) is difficult - it's always difficult to short long-running bubbles. Also, AAPL does make a ton of money and stock valuations are extrapolated based on that, so shorting it without direct, immediate financial signs of trouble would be more than silly.

Shorting other, non-bubbling members of the same ecosystem and going long on the contrary forces was much easier.

Btw., I don't agree on everything with Reggie - for example I think his call on the further collapse of real-estate (and banking) were a bit too pessimistic - once it was clear that US policy makers chickened out from letting any big bank go bust in early 2009 it was clear it was a one-way road up, with the costs and risks of banking socialized in essence. But his Android call was spot on.

 

Wed, 02/02/2011 - 01:36 | 926417 Hephasteus
Hephasteus's picture

Reggie reggie reggie.

It's a new decade.

Here's the menu.

Java becomes closed source, Apple becomes a monopoly, Microsoft is the underdog and Google is evil.

Google using cia spooks to manipulate sales figures.

http://www.tuaw.com/2011/01/31/ipad-not-losing-share-to-android-tablets/

Strategy analytics are spooks. They spook for both apple and google but they are trying to play a game here.

Tue, 02/01/2011 - 16:04 | 924815 No-1-U-Know
No-1-U-Know's picture

"BoomBustBlog is just about the only financially orientated publication that declared for nearly a year now, the inevitable conquest of Google’s Android OS and ecosystem. I feel our highly contrarian research and analysis has been proven correct beyond a shadow of a doubt."

Hence the readers who followed your contrarian research and analysis would have been richly rewarded by selling Apple and buying Google over the past year, right?

Wrong. Apple has appreciated by over 70% in the past year, while Google has only risen by a little over 10% (http://finance.yahoo.com/echarts?s=GOOG+Interactive#chart2:symbol=goog;r...).

Why are you wrong? Because you focus on the wrong metric: unit share matters much less than profit share, and Apple kept raking in over 50% of all mobile industry profits in Q4 2010 in spite of the growth of Android, which Google gives away for free

(http://www.asymco.com/2011/01/31/fourth-quarter-mobile-phone-industry-ov...

and

http://www.asymco.com/2011/02/01/the-iphone-share-17-25-of-smartphones-4...).

When should one expect your brilliant analysis to pay off?

 

Tue, 02/01/2011 - 18:20 | 925394 Reggie Middleton
Reggie Middleton's picture

Actually sir, no where on my site did I indicate one should sell Apple - at least not yet. That's your first error. The second is I went bullish on Google in the mid $400s or so. It is somewhere around $620 now and the options on Google were much, much cheaper than the calls on Apple since Apple is on everyone's radar while Google was (and is) underestimated. More bang for the buck, you know. Your 3rd error is that I have a considerably longer horizon than "the past year". I look forward, and looking forward Apple looks to lose this race. If or once Apple is relegated to a smaller, slower growing niche, both developer and advertiser's hearts will drift towards the faster growing and more populated platform - undercutting the source of Apple's outsized profits. Of course, you will not be able to see this if you are looking at this quarter by quarter or even year by year. Methinks that this time next year, this will be quite obvious, though. This is a very dynamic and fluid market, but thus far Google is in the pole position and pulling even farther ahead with a plethora of entrepenurial initiatives that are only starting to sprout. 

The tech company that I did recommend to sell dipped about 20%. Again, I'm wrong often enough, so I don't need anon commenters making things up. So, the brilliant analysis has paid off already. Apple

Tue, 02/01/2011 - 23:11 | 926149 More Critical T...
More Critical Thinking Wanted's picture

Actually sir, no where on my site did I indicate one should sell Apple - at least not yet.

I don't see an efficient way to play an AAPL long-term short either.

The puts are overpriced and in contango and the moment there's a bad quarter the stock will implode overnight.

And there's no dependent economy worth speaking of - the Apple universe is all concentrated into AAPL.

 

Tue, 02/01/2011 - 14:17 | 924382 Cognitive Dissonance
Cognitive Dissonance's picture

Jeez, I don't know what to do.

Here I am a Verizon customer off contract and looking for a new phone. Banzai7 tells me the new Verizon iPhone4 is my ticket to happiness. And since I'm an existing customer I'm pretty certain they will let me in on the pre-public sale.......assuming I get up at 3 AM Thursday morning to order.

But Reggie tells me my future is with Android and he makes what appears to be a reasonable business and user experience case.

What to do, what to do? :>)

Tue, 02/01/2011 - 18:25 | 925416 Reggie Middleton
Reggie Middleton's picture

I suggest you spend some time with the top of the line of each camp and make the decision based off of what's best for you. The main reason why iPhones and Blackberries sold so well was aesthetics, marketing and the perception that everyone else had one. I have converted many Blackberry and iOS people over to Android simply by using my little mini-computer in front of them.

Those who don't like it have plenty of other options. I actually do recommend the iPhone for people who just want to pick up a phone and go, or into the strong fashion sense thing. Anybody who craves, power, flexibility or raw functionality will feel left out by not getting the high end Androids, IMO.

Tue, 02/01/2011 - 13:11 | 924098 the grateful un...
the grateful unemployed's picture

has anyone considered that as manias go, this smartphone mania is our tulip moment?

Tue, 02/01/2011 - 13:19 | 924127 Reggie Middleton
Reggie Middleton's picture

With banks trading higher on loans against depreciating collateral, you comment on smartphones??? Smartphones are simply the next generation of PCs (personal computers). Some companies (the one's that put function over form) may actually benefit if/when things pop since they increase productivity and decrease cost, particularly the next generation that are set to come out assuming the come out at competitive prices. Since competition is thick, I belive that is a given.

Tue, 02/01/2011 - 13:19 | 924126 Reggie Middleton
Reggie Middleton's picture

With banks trading higher on loans against depreciating collateral, you comment on smartphones??? Smartphones are simply the next generation of PCs (personal computers). Some companies (the one's that put function over form) may actually benefit if/when things pop since they increase productivity and decrease cost, particularly the next generation that are set to come out assuming the come out at competitive prices. Since competition is thick, I belive that is a given.

Tue, 02/01/2011 - 22:57 | 926127 More Critical T...
More Critical Thinking Wanted's picture

 

I am really curious what will happen once Google tries to enter the corporate phone market.

So far Google has not even tried to compete with RIMM heads-on: the Blackberry just died off accidentally in essence, as collateral damage while Google was targeting web consumption.

 

Tue, 02/01/2011 - 13:04 | 924064 imapopulistnow
imapopulistnow's picture

Android is much better than Blackberry, but no where near Apple.

Tue, 02/01/2011 - 13:09 | 924088 Reggie Middleton
Reggie Middleton's picture

Anybody who says this has obviously not tried ANY of the high end Android phones, which may I add are no more expensive than an iphone yet handily runs circles around it. Try this, If You Need More Proof Of Apple’s Inability To Keep Up With Google’s Android & Over 100 Other Android Hardware Vendors…

Tue, 02/01/2011 - 13:03 | 924063 Drag Racer
Drag Racer's picture

S&P500 - 1300

Tue, 02/01/2011 - 12:54 | 924034 savagegoose
savagegoose's picture

the os is free but someone has to writre the apps.

Tue, 02/01/2011 - 12:46 | 924013 pragmatic hobo
pragmatic hobo's picture

since android is free, and mostly open, if android wins the "war" I don't see how GOOG can benefit from it?

Tue, 02/01/2011 - 13:50 | 924268 williambanzai7
williambanzai7's picture

I will only recount what I see on the ground in Hong Kong, one of the most intensive mobile handset markets on this planet.

The iPhone has clobbered the competition in terms of customer perception. That does not mean it is the only phone out there, but it is the phone everyone wants. Pretty impressive considering they are a latecomer to this market. I hear the same goes for the Mainland.

Similarly, the iPad is in high demand despite the added cost.

I don't think APPL want to sell to everyone based on a lower price point. They are focused on the high margin end of the market with lots of customers who are inclined to spend their money instead of looking for freebies. They have barely scratched the surface.

I dont know about you, but that is exactly where I would want to be. 

APPL has a constellation of synergistic elements that the rest of the playing field does not:

1. Extremely well designed hardware covering all angles (handsets, portable players, tablets, PCs and LTs)

2. Coupled with well integrated software platforms that they mange very well.

3. Existing customer base willing to pay for content and Apps that allow them to leverage all of their personal content (private and commercial).

4. Excellent customer service.

5. The innate ability to connect the preceding dots and implement a revenue generating social platform in the APPL user-verse. The trade are already noticing that AAPL are positioning themselves quietly. 

I don't consider Mobile me to be a serious cloud effort. I think it is a placeholder for what will inevitably follow. 

It is too early to see where the dust will settle in the living room. But everyone knows it is one of Jobs' hobbies, which means something is in development there as well.

Number 5 is their secret weapon. If they execute that right, they could blow the socks off everyone again. To date, Google has failed miserably in this regard, with the exception of uTube which is essentially an advertising platform. Facebook fails in terms of attentiveness to user concerns where as APPL gets an A+ in terms of customer respect. It is amazing how long it is taking for Web 2.0 montization mpdel to take hold.

In summation, the issue with AAPL  is not its business model, execution or performance to date. They have exceeded everyone's wildest expectations.

It is the hedge hog feeding frenzy driving up the name. APPL is not the only tech concern suffering this phenomena. But you can bet the people deciding strategy there are not people who make decisions based on what the stock will do tomorrow. 

It will be interesting to see how it all plays out.

Much more interesting watching two well run companies compete head to head than watching pinstriped conmen figure out how to swindle their next QE dime.

 

Tue, 02/01/2011 - 23:20 | 926001 More Critical T...
More Critical Thinking Wanted's picture

 

I don't think it's possible to argue that AAPL is not a success or not a fashion article at the moment - so you are certainly correct to that extent.

The argument is to just observe the sheer, unprecedented inertia Android has achieved in the most hotly contested platform space, and to remember what happens to fashion article companies, inevitably.

In two short years Android has come from zero to hero. It leads in the US in web consumption - so like Apple it's a high margin business concentrating on high-value consumption individuals too, just not in the hardware space but in the digital consumption space. It clearly clicked both with a lot of customers, with a lot of developers and with a lot of companies.

Demand for Android tablets is so high that it has grabbed 25% of the tablet market without even trying. That is, at minimum, impressive.

I see this as an open versus closed race, free market versus centrally planned play.

Apple keeps tight control over distribution and features: it does not allow any free market competition with its own features in the application space - full stop. If you do any 'meta' App or replace  an Apple feature too well (see Google Phone) you are out of luck: Apple will control that market brutally, and all the (constantly shifting) ground rules of the Apple platform are set out in a way so you will stay small, isolated, individual and fragmented.

That is as anti-free-market as it gets. Yes, there's 300,000 Apps - but none are allowed to threaten Apple's authoritarian views about the platform and none are allowed to integrate with the platform like Apple's own features.

Should any of the 300,000 apps become too successful Apple will implement a competing in the platform - and thus kill much of the market of the original app - regardless of how smart, innovative and business-savvy the App developer individual or company was. With rules like that is it really any surprise that it is Apple that provides the most stunning, most integrated features on that platform?

If you think about it for a moment you'll see that App developers are not free citizens of the Apple universe but expendable corporate agents of it. There are no rights and there is no concept of an independent judiciary, only obligations and rules to follow - else you are out overnight and there's no appeals process: the whole 'judiciary' process of App approval, denial or forced removal occurs under an NDA - anti-free-speech censorship in essence.

Maybe Jobs will be able to play Dear Leader of the smart-phone universe for decades to come. Maybe people, developers and companies will accept Jobs's role as police, prosecution, judge, jury and executioner over their market destiny.

I just have my doubts about such central planning schemes and personally prefer the more colorful free market, free choice, free speech model over tidy, well-managed corporate dictatorships. YMMV.

 

Tue, 02/01/2011 - 13:02 | 924056 Jim in MN
Jim in MN's picture

Reggie has it in the article tag up top: "Being that Android is essentially a front end to Google's cloud services and apps, does this mean that Google now has (or soon will have) more application reach than Microsoft - the world's largest software company?"

They can benefit any way they choose to.  They'll have the whole world--in your hand.

And with Google's TV fix coming on strong, they may simply take over content provision and intermediation delivery, the whole value added middle of the information universe.  Other than hardware and data per se (including the cute little kitten pictures, er content, that we mere humans provide), they're positioning to take a little slice of everything.  EVERYTHING.  Oh OK maybe not...radio...'cept if it's streaming online radio....and newsprint....whatever that is/was...

Is there a Google moviemaking effort?  ICANHAZCHEEZBURGER in Omnivision 3d? 

Tue, 02/01/2011 - 12:43 | 923995 topcallingtroll
topcallingtroll's picture

Yes

Tue, 02/01/2011 - 23:17 | 924287 More Critical T...
More Critical Thinking Wanted's picture

 

Looking at the market share and growth stats it's also an interesting that Microsoft's 7th version of its phone OS has largely failed in the marketplace. Windows once had nearly 20% of the phone market ...

If MSFT buys RIMM or NOK then it sets up itself for an even bigger failure: to drive down a 20%-30% combined market share to near zero by merging two failed product lines? Does that make much sense?

Also, risking that and running into a spectacular and expensive failure would surely mark the end of Ballmer as CEO of Microsoft - not sure he wants such a legacy - he's probably already considering a soft exit.

What looks more logical (and more surprising) would be for Nokia to team up with Google to merge Meego/Maemo and Android and acquire some special edge in the Android space that way? With Intel in the mix perhaps?

Will the ex-Microsoft exec Nokia CEO be able to bridge his probably deep cultural and technological gap to the Linux based Android OS though?

Interesting questions.

 

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