The Death Of The Deadbeat Carriers, Part 2 - Apple Avoideth, Google Destroyeth
Yesterday I claimed US Cellular Carriers Are At Risk Of Being Marginalized Into Nothingness Unless They Learn To Think Outside The Box... Yesterday. There are some who allege that the US cellular carrier industry is a government protected triopoly, hence they have no true incentive to innovate. I cry bullshit! The faster, more innovative companies such as Apple are scheming on marginalizing the carriers to the utility status they are role playing as. The self-proclaimed shepherds of global data, Google, are looking to eliminate the need for carriers... Period!
I look at these things from a very analytical, very strategic, and longer term perspective than sell side analysts and many investors. See Analyzing Apple's Q2 Earnings for a recent and fresh look at Apple that you won't see anywhere else, and Cloudy Days Ahead For Google for the same on Google. When others may have rose colored glasses on, I took the lenses out of my glasses out of paranioa for fear of the glass denying my raw access to the visual data:-)
One should be expecting soft sim iPhone coming out in iteration 5 or 6. Why? Because the carriers exercise too much control over Apple's distribution system. Yes, Apple has succeeded in virtually benidng AT&T (among other select carriers) over and sodomizing them for what amounts to the right to sell aan expense sinkhole with the hope of stuffing overpriced data plans down said hole after it was dug, but as the competition heats up with Android carriers are actually starting to push back a little. Gone are the days where Apple can get AT&T to overpay for iPhones then take the risk of reselling them, all the while sharing the data/voice revenue. Now, carriers are actually reading the contracts before signing them. Next thing you know a calculator, then spreadsheet may come into play. uh Oh!!! When carrier start to excersise their muscle as the gatekeepers of the average consumer's limited attention span and easily swayed marketing awareness, they can exert undo control over hardware vendors. Apple is a hardware vendor. So, Apple is apparently actively developing and testing soft SIMs (ex. SIMs that are based in the firmware of the phone versus burned into a physical chip).
What does this mean? It means that you can OTA update your iPhone with a new carriers identifying info on the fly. Layman's terms: You buy your iPhone unlocked from Apple and you can swittch between carriers at whim. This carrier has a cheaper rate or roaming, simply click icon for carrier A. The same goes next month for carrier B, C or D. No more contracts! No more termination fees! And most importantly, at least to Apple, no more carrier ass kissing and lock in! Search the web for yourself...
Feb 10, 2011 – Apple: Smaller iPhone, Soft SIM Coming, Says Bloomberg ... the iPhone 4 — that may help stem the advances of Google's (GOOG) Android, ...
Sep 14, 2011 – This post talks Sim-free or soft-SIM solutions and implications. At one time it ... When will we tire of Apple or Google being our gatekeepers?
Dec 13, 2010 – So the Apple UICC containing soft SIMs and an SE may not be such a bad ... the NFC interfaces that will be built in by Google, Apple and RIM.
Oct 27, 2010 – It's rumored that Apple and Gemalto have created a SIM card, which is ...by putting its own SIM inside the iPhone, it could do what Google with its ..... IC radio chips and radio software stacks – in *addition* to the SIM card.
Nov 22, 2010 – ... reportedly up in arms over Apple's plans to integrate a "soft Sim" into it… ... Hey, Google, you took advantage of that whole Android/iOS war ...
Oct 28, 2010 – Apple's 'Soft-SIM': Not Too Useful in US ... definitely save money over time by paying more upfront for the Samsung Galaxy Nexus from Google...
I have alledged that Google is MASSIVELY undervalued and grossly misunderstood. This is actually a very good thing for Google, for management has demonstrated that they are in this for the long term and the less resistance they get to their Borg-like initiatives, the better. This is probably a good thing for investors as well, for it the market corrects (as it damn well should) astute financial types can pick up massive parts of the future of computing and data at very, very low prices. All it would take is time and realization of reality to accrue significant value appreciation. Many know of Google's Android, Google's search and ad networks, Google's YouTube and TV initatives and Google's cloud offerings, but most are not aware of Google Fiber! The following is taken directly (with my annotations) from Google's Asheville blog:
“Google fiber” is shorthand for the “Google Fiber for Communities” project.
The goal of the project is...
... to build a fiber optic network – your connection to the Internet, more or less – right to your door. This network would be different than what you have now in that it would be a lot better and more stable. It would be, for example, 100x faster than the maximum speeds you have now and it would be open source (think the opposite of a toll road). It would also be capable of carrying enough stuff so that TV, phone, web would all fit in one connection. And it would all be very fast. Google has stated that they are willing to spend up to 500 million dollars (probably split among a few spots) and then charge for Internet access at a “competitive rate.”
Like you, I thought Google was a search company. Why do they want to build an experimental network and sell me broadband services?[tweetmeme source="googleavl" only_single=false]
That's right! Google is looking to directly commoditize the broadband carriers, just as they did the news organizations, the online ad agencies, currently doing the smart phone industry... No, Google is not a search engine company, as I have said so often in the The mobile computing wars series. Google is a data company, and as such, anything that has to do with the movement, storage, organization, manipulation, control and intelligence of said data, Google either has their hand prints on it or are reaching for it. May the ignorant, and the slower moving competiion, beware!!! Again, excerpted directly from the Google AVL blog, which is the blog that is detailing Google's buildout of the high speed fiber network to the doorstep in the city of Asheville as well as Kansas City, both of whom competed against many other cities for this privilege. That's right! This is not a pie in the sky initiative, this is something that is being built right now by a company that is not know for taking its time... I stronly suggest interested parties visit this site after persuing my thoughts on Google, in order to get a clearer view of the BIG PICTURE...
1. Google needs lots of data so they can organize it.
Google doesn’t want to be a broadband provider (my opinion), but they do want to manage and organize the world’s data.
That business mandate puts them in direct conflict with anyone who limits the flow of information that Google seeks to manage. Google needs you to take full advantage of your digital connections to the world so that they have a profitable job – with room to grow – making up clever ways to organize your data. The most basic way they do this now is with search. Another is with maps. And so on.
But what if we stopped making so much data? That is exactly what is happening in the U.S. – only we didn’t stop creating data. We just stopped adding the capacity to transmit it, which, from Google’s point of view is the same thing.
2. Our slow-ish broadband network means there is less for Google to organize, potentially capping Google’s growth.
In the U.S, during the last 10 years, broadband companies have been relatively content with their profits, consumers have had only one choice or two choices for service (cable vs dsl), and no outside software has been desirable enough to make everyone want anything different (in the way that the iPod made everyone ditch CDs).
How slow are we? In 2007, the average advertised bandwidth speed in Japan was 96 Mbps. My Charter connection at home right now is supposed to be 5 Mbps but rarely exceed 3 Mbps. You can see for yourself by comparing broadband costs and bandwidth among countries or examining this article.
Or better yet, test your current connection and see what your bandwidth number really is.
It looks to me like we are somewhere between 15th and 23rd in the world (and falling) in terms of broadband.
This problem is most acute at the so-called “last mile,” which includes the connection from the pole to your house. Also during the last 10 years the speed and capacity of the backbone, aka the bigger cables between cities, has increased in speed pretty dramatically. When you read about “dark fiber,” you are often reading about the unused capacity that lies just beyond your yard, past the pole as you head upstream from your cable or phone jack. Not only has your current broadband provider refused to consider alternate technologies like fiber optics, they’ve gone ahead and planned some upgrades that use their existing cable technology in order to appease a part of their customer base. Those upgrades are detailed in the just released National Broadband plan. One of the problems with that plan is that it ignores the best technology – fiber optics – which the rest of the world is increasingly using.
3. Google enters the market with a better plan in order to spur competition among existing broadband companies.
Google wants to shake things up by building something better than what you are used to. And not just a little bit, either – they want to build an open network with 1) much better speed and service than you have now AND 2) they want to do it using better technology (that’s the fiber part of the project) AND 3)they want to use a different business model than your current provider. It is a lot to get your head around, I know. Those three things, taken together, are what make Google’s fiber project so exciting.
"they want to use a different business model than your current provider..." Put plainly in layman's terms, Google will cost shift, and basically provide the high speed broadband for no out of pocket expense in exchange for access to your behavioral data, advertising consumption activity or subsidize the broadband as your corportate and high use neighbors take advantage of cloud services. To make a long story short (if it ain't too late), you'll get cutting edge broadband access for what you would consider free - much like how you get YouTube HD video for free. Where does this leave the big Telcos????
The open network is the hardest of the three ideas to grasp, since most people in the U.S. have never had one. Normally, it would work like the street in front of your house –tax payers pay for it, anyone can use it, and some of those uses allow us to do profitable things. The open network model is in use in other parts of the world and open networks are quite successful*. They are usually built, like roads, with at least partial taxpayer funding. In this case, Google is proposing that they pay for the road on Asheville’s behalf.
4. If they wait, they could lose a lot of money.
If they wait, they have less data to manage. This is because the U.S. just released the national Broadband plan, and the plan is not good enough. The plan settledand accommodated existing industry at the expense of innovation and competition**. Our new broadband plan does not require or even suggest open networks, it advocates speed increases that are small in relation to what technology allows, and, generally speaking, it keeps the old way of doing business alive and well for the current broadband companies. Google, who had input into the national Broadband plan, no doubt saw this coming and intends for this experiment to help create an alternate path to a better network.
And that’s why, right now, they are running a competition to build a fiber optic network (speed and reliability fixed), to your door (last mile problem fixed), with an open network (competition problem fixed, control shifted back to the customers). And they will build it with their own money.
- * Asheville is already one of the few places in the country with a functioning open fiber network – ERC Broadband. Open networks are opposed by your current broadband provider, but strongly supported by some very smart people. One is Vint Cerf who is widely known as father of the Internet
- ** In the National Broadband Plan, we settled for slower speeds 10 years in the future than some countries have now. Ch 1 page 2. The plan has a goal of 100 Mbps, much slower than Google’s proposed speed of 1000 Mbps. We accommodated by obfuscating the decision to go away from open networks, allowing current companies to justify exclusive control of the wires because of the high cost of installing them (Ch 4 page 36 and 37). Roads are expensive too, but I note that we have found ways to build them without requiring tolls at the end of our driveways.
Industry Leading, Subscription Based Google Research
Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.
Google Final Report 10/08/2010
A couple of bits from our archives...
The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as valuation for each business line.
Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.
Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.
Fresh and Very Accurate Apple Research
For all of those near fanatics who do not subscribe, I suggest you ask a friend who does subscribe to share with you the difference between last month's valuation note target price (page 10 of Apple Margin & Valuation Note) and the price of Apple today, the day after earnings (click here to subscribe).
It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth ******* in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters.
Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.
What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, "But wait, the company reported an INCREASE in margins while you said there will be a decrease!". Yes, that's true and both can exist simultaneously.
I will discuss nearly all of the stocks in the CNBC stockpicking list above in the next few posts on my way to studios via BoomBustBlog and ZeroHedge. Comments are always welcome. Follow me: