Today Reuters reports Samsung Electronics loses $12 billion market value on smartphone worries while yesterday Barron's reports Apple, Samsung Sees Weakening Smartphone Sales. You know, reading BoomBustBlog is like reading the pre-eminent news sources of the world, just 3 months into the future. March 7, 2013, BoomBustBlog posts Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!
I'm preparing a brief report for my subscribers to illustrate a potentially highly skewered risk vs reward opportunity for equity investors in the tech space. It's borne from the battle for mobile computing supremacy, opportunity lies with more than just Google! As a recap, now that Google Has Officially Gone On Record To Confirm Reggie Middleton's "Negative Margin Business Model" Tactics used to cut Apple's, et. al. margins down to size, most observers are just getting a taste of what BoomBustBloggers have known for years, ie. Blackberries, Apples & Fruit Borne Successitis - The Problem With Excess Profits Is Hubristic Management Tends To Take Eyes Off The Prize!!! As I have said several times, it's not just he high flying fruit names that will see #MarginCompression in the upcoming years, though. Remember, I proclaim smartphone hardware vendors are dead! Google's recent comments support that assertion, as well as recent market activity. If that's the case, then what happens to Google's hardware and OEM partners for Android? Well, even the most popular one's may succumb... Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!
What's Samsung to do? Well, if you haven't realized it yet, Samsung management is highly astute. They shoved Apple a fat one, and don't think they will take Google's marginaliztion of their core revenue and profit drivers (now, smartphones) lying down. Of course, as I mentioned in the above-linked article, Samsung's margins are already slipping - even as its revenues and profits rise. This is a dangerous sign that Nokia, HTC, Blackberry and Apple ignored (and I warned years in advanced for the "fruit" companies - Blackberries, Apples & Fruit Borne Successitis). Apparently, someone at Samsung reads my blog, for they have decided to take the battle to the cloud to compete with Google.
How would they do such, you ask? Well, in order to compete with Google you'd need data... LOT's of DATA! Where in the world would Samsung get that much data, enough to compete with world's current shepherd of global data? Well, here's the crib notes answer. Samsung has sold over 220 million phones thus far. It has sold over 120 million "S" series smartphones (the higher end smart phones with extended capabilities) and about 20 million of its current high end flagship, the "S4". Each of these phones contain an array of sensors which measure and collect vast amounts of data about you and from around you. The higher end the phone, the more advanced and plentiful the sensors. Here's what last year's Samsung tech look liked...
That's a lot of stuff! Samsung is most assuredly gathering data through all of those little portals. Take a look at how many "what're you doing now, where, and how?" sensors are in its new flagship phone...
They're probably going to be up to 125 to 150 million of these little privacy pits walking around by this time next year. Imagine the type of data that Samsung can amass in the cloud if it just executed with the slightest modicum of competence!!!
Google, the modern day master of the cloud is releasing a phone with even more sensors and more interactive intelligence. It was previously known as the Motorola X Phone, but is now called the Moto X. Gotta Be Mobile broke it down just as well as I would:
Google executives have been underplaying the potent power of Motorola Mobility’s X Phone, which has was recently referred to as the Moto X, but the device could signify trouble for dominant smartphone-makers Apple and Samsung.
The Price is Right
Google had aggressively priced its Nexus devices in the past to come with competitive specs and a very competitive price. And even with the Nexus devices, the specs may not be bleeding edge compared to rival flagships, but Google offered nice trade-offs with pricing and an unlocked strategy. Likely, the Moto X Phone will be priced aggressively and carrier subsidies will make Motorola a good bet for those looking to upgrade.
Hitting the Competition Where It Hurts
Where the X Phone really is important is its pricing strategy. Google has demonstrated that its Asus-made Nexus 7 tablet with a $200 price point could dominate the smaller form factor tablet market. With the X Phone, Google could deliver a better than decent phone experience and change the market.
Apple and Samsung, which are known to be the biggest winners in the smartphone industry and share the bulk of the market’s profits, will have to price their flagships down to compete against Google. Since the Nexus 7 debuted, Samsung’s Galaxy Tab series have seen prices dropping from when the slates first debuted.
For Samsung and other smartphone hardware companies, selling a product at or near cost may not make sense. For Google, this strategy is effective, as it doesn’t need to profit on hardware–it just wants to sell you another portal so that you’d want to use Google services. It’s like Gillette giving away free razors so you’ll buy the blades later, or HP handing away free printers so you’ll get the ink cartridges when you run out.
So on the surface, the Motorola X Phone may not wow you with its mid-range specs, but it will be an industry game changer where it matters: a good user experience with solid specs, pricing that’s affordable, a mainstream distribution strategy, and forcing industry pricing downward.
And my #MarginCompression thesis marches on into the mainstream!
Appealing to Your “Senses”
One area that Motorola’s new head Dennis Woodside had hinted to was a sensor network for Motorola’s future phone. Woodisde had stated that the company has been applying what it learned about always-on sensors and low power consumption as a result of the Motorola MOTO ACTV sports watch, and those battery-lengthening technologies could allow Motorola to construct a phone with more sensors.
motoactv-press-shotConsumers would benefit from graphs and analysis of the distance they walked or drove in any given day, the changing temperatures, and other information that embedded sensor networks may provide.
Google, on the other hand, could benefit if it could find meaning in the information it collects to improve its anticipatory Google Now search. It’s a win-win on both ends.
And given Google Now, a service, is a big draw to Android right now given how well it works in presenting data it learns about users in a meaningful way, the experience may be best experienced on a Motorola phone given the added sensors and data that Now could collect, process, and learn.
Just Plain Smart
At the end of the day, your smartphone experience isn’t about having the fastest and best specs on the market. It’s about the device being smarter, more agile and nimble to anticipate your needs and deliver you information as you need it.
And today, with cloud services, specs increasingly don’t matter on a phone. You no longer need a powerful phone to edit photos thanks to new Google photo and editing cloud services through Google+. As services move to the cloud, an entry level smartphone could become just as powerful as a high-end model, just with less cost.
Google is in a good position to start the next mobile revolution through its large Internet empire, and given the right pricing, the Motorola X Phone could be an invaluable, affordable gem that has the power to change the industry.
Then there's always Google Glass - the game changer! In closing, let me excerpt from Samsung Will Be Ready To Do That Fruit Thing, Just Like Blackberry & Apple - Courtesy Of Google, #MarginCompression!.
So, you ask, "How is it that hardware is dead?" Well....
- The open source OS paradigm calls for rapidly improving hardware specs at ever lower prices. I have pointed to evidence of this above, as these Asian OEMs produce ever better product at ever lower prices - just like the old school PC industry. This drives Google's info-centric business model which is why Google pushes free Android.
- After years of outsourcing manufacturing tech and IP integration to low cost labor Asian countries, those countries have found a way to produce trinkets of their own. Of limited quality and value so you say? Well, remember the iPhone is a Chinese phone, through and through -at least Chinese built. So now you argue, it's American designed, just Chinese made! Please peruse the Oppo Finder 5, a phone that's drastically superior to the iPhone 5 in practically every single way, retailing for $100 less than the cheapest iPhone 5 made. Low cost, low margin products combined with Google's free OS will drive the price of hardware down to near zero, if not negative. Google even has its own hardware arm now (Motorola) to facilitate this downward march in margins and prices. Suppose Google decides to create best of breed Nexus devices and give them away just below cost? Imagine the best smartphone available in the world, unlocked, without a contract, for the cost of a single monthly wireless phone payment??? Google's Nexus program is acting as a training ground to teach Google's Motorola division to build best of breed! Google's biggest and most successful partner - Samsung, is an Asian company. Samsung Electronics of South Korea reported today that its quarterly profit jumped 76%, as its Galaxy smartphones beat rival Apple's iPhone in each quarter of 2012. What many seem to have missed is that EBITDA, Operating and Gross margins all slipped QonQ though. A sign of things to come??? Remember, Google benefits most when the barriers to access information are least. Reference "Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!" as well as my videos below...
Subscribers, click the following links for my updated price targets on Google (click here to subscribe) and read Google Q2 2013 Update: Valuing Possibly The Most Powerful Co. In The World?:
- Google Q1 2013 Valuation Note - Retail
- Google Q1 2013 Valuation Note - Professional & Instititional
The biggest risks to these price points are:
- A market that's being levitated by central bank magicians running short on magic spells...
- Regulatory pressure, which I feel is quite material and inevitable, but will not be a major factor in the near term.
For those interested in a long position in Apple, see