Author Archive

-          Gamer perspective – PS4 beats Xbox One on its lower price point, used game leniency, and unconnected gaming support – but MSFT is delivering real innovation, going beyond gaming.

-          The new Kinect is a HUGE leap forward in gesture controls, the cloud resources devoted to Xbox live enable very new experiences, and MSFT’s restrictive policies are very developer friendly.

-          PS4 may have early advantage, but Xbox One will have greater long term impact, as costs/prices drop and MSFT’s innovations are absorbed into gaming and non-gaming applications.

-          Comcast’s X2 initiative looks to stave off “input 1” challengers like Xbox One with a modern user interface and support for 3^rd party apps, but stonewalling streaming competition

The bloggers have been quick to declare Sony’s PS4 the winner of this year’s E3 conference battle of the new consoles, a reversal of Microsoft’s victory in the 2005 faceoff between the PS3 and the Xbox360. However, the reasons for the enthusiasm for PS4 are decidedly conservative. The PS3, at $399, will be $100 cheaper than Xbox One. Unlike Microsoft, Sony is not implementing an anti-piracy DRM system, facilitating the used game aftermarket popular with hardcore gamers, although game publishers are free to implement their own solution. The Xbox One also must be connected to the internet and Microsoft’s cloud servers at least once a day, while the PS4 has no such requirement. Sony is not asking old school gamers to change much about the way they play games – a decidedly conservative strategy and one that may be rewarded in the early stages of inter-console competition.

Read the rest of this entry »

-          Xbox One is the FIRST real next generation TV solution, trumping Apple, Google, Sony and others by leveraging a gaming legacy, rich content partnerships, and groundbreaking interface technology.

-          The Xbox360 was already the #1 streaming TV solution, with 46M Xbox Live subs delivering the largest slice of Netflix traffic. Gaming? The exclusive Halo franchise has sold 50M+ units to date.

-          MSFT added a slick voice, gesture and mobile device interface that controls your set-top as well as the Xbox One, with split-screen multitasking, rich content discovery tools, and interactive apps. Special deals, with partners like EA, the NFL, and Steven Spielberg, promise exciting proprietary content and applications.

-          Enthusiastic gamers will drive FAST adoption of the platform – think 20M+ first year units – giving MSFT a huge first mover advantage vs. would-be rivals Apple and Google in the living room.

In his widely read biography of the Steve Jobs, Walter Isaacson quotes the late Apple CEO – “I’d like to create an integrated television set. It would be seamlessly synched with all of your devices and with iCloud. It would have the simplest user interface you could imagine. I’ve finally cracked it!” That quote, published just two months after Jobs untimely passing, has fueled a cottage industry of Apple iTV whisperers passing on reports of clandestine meetings, skunk works engineering teams and grainy spy photos from Asian manufacturing sites as evidence of that “One more thing” from Apple. While the iTV remains legend, like Nessie, Big Foot and the Abominable Snowman, Apple has traipsed forward with its “hobby”. The AppleTV alternative set-top is a me-too box, competing with the likes of Roku and Boxee, with a few cool proprietary bells and whistles. It is hardly the living room miracle promised by the Steve Jobs quote.

In the analyst sycophancy around the iTV, Mister Softy has generally been ignored. The Xbox360 model has been with us since Christmas 2005. It has sold 76 million units with 46 million households subscribing to Microsoft’s on-line Xbox Live service. With those subscriptions, Xbox Live members have access not only to multiplayer games and exclusive gaming content, but to streaming video from Netflix, Hulu Plus, YouTube, HBOtoGo, Amazon Instant Video, Microsoft’s own service and a host of other options. Those 46M households dwarf the installed base of AppleTV, TiVo, or Roku, making the Xbox360 the most important streaming platform in the market, accounting for the largest share of Netflix traffic.

The Xbox One leverages that legacy. The gaming community is famously filled with early adopters who have been champing at the bit for nearly a decade since the last major console upgrades. Given sales of the tired Xbox360 have been running at 10M a year in its dotage, the Xbox’s big time processor and graphics upgrades, souped up game controllers, hypersensitive Kinect motion sensors, 300,000 server-strong cloud processing network and blockbuster new title line-up should be good for first year sales topping 20M units. But the Xbox One will be a lot more than that.

Microsoft has serious chops in voice recognition and gesture controls. Most of the main system level commands can be spoken, including “Xbox On” to activate the whole living room entertainment system from sleep, without need for “training” or fear of inadvertent commands stemming from normal conversation. The new Kinect system is a wonder, able to detect the fine movements of 6 people simultaneously at distance and in wide angle, in low light or bright sunshine, down to finger movements and joint rotations. The 1080p camera system and sophisticated microphone systems are also there for Skype video conferencing, video recording, and other voice/video enhanced applications that developers come up with. If talking or gesturing commands from the couch is too much trouble, Microsoft’s SmartGlass apps will allow the Xbox One to be fully controlled by smartphones and tablets, along with synching the mobile devices for 2^nd screen applications tying to content fed to the TV.

Set-tops supplied by Comcast, AT&T, Verizon and others will feed directly into the Xbox One, replacing the God-awful blue grids and impenetrable menus with that nifty voice/gesture/smartphone interface. The spoken command “Xbox, Watch Game of Thrones” will show you options for watching the HBO broadcast directly, identify episodes saved in your DVR, and availability on the streaming services to which you subscribe. Using a feature called Snap, you can go split screen and pull up another application while you are watching a show or playing a game. Indeed, Microsoft’s Xbox Studios has cut exclusive deals with ESPN and the NFL to tie special 2^nd screen content to their broadcasts – e.g. fantasy statistics or user controlled replays. Xbox Studios has also been hard at work negotiating other exclusive content deals, including a live action series based on the iconic “Halo” franchise to be supplied by legendary director Steve Spielberg.

All of this will be backed up by Microsoft’s serious distributed cloud data processing infrastructure, the same one needed for Azure, Office365, DynamicsERP, Bing, Outlook, Skype and Microsoft’s other cloud-based initiatives. 300,000 server cores have been pledged directly to support the additional traffic on Xbox Live, a commitment that can be scaled upward as needed to deliver a superior user experience as demand grows. Microsoft’s cloud resources and expertise trail only Google and Amazon amongst potential competitors, giving at substantial and sustainable advantage over others.

For many investors and analysts, used to considering Microsoft as an enterprise software company only, except, perhaps, to belittle their progress with the Windows Phone mobile platform, the excellence of the Xbox One may be difficult to believe. Microsoft has had the good sense to give the Xbox team a strong measure of autonomy and some of the best and brightest engineers in the organization. The result is the most fully realized next generation TV solution announced to date, one with strong distribution and a full steam of customer anticipation to boot. Assuming availability ahead of the Holiday season, we expect Xbox One to be the biggest selling alternative TV device in the market by large measure, and expect a cheaper, media specialized version to follow for 2014, widening Microsoft’s already formidable head start toward leadership in the battle for the living room. Longer term, the success of Xbox One in the living room could be a spur toward wider adoption of Microsoft’s smartphone and tablet platforms should its interface and applications prove popular.

Meanwhile, the most likely challengers to Xbox in the living room, Apple and Google, have struggled to gain traction with their solutions. Apple TV has sold about 10 million units in its history and features a nifty Airplay function to mirror content from iPads and iPhones onto the TV, but the interface is pedestrian and the list of content partners is unimpressive, leaving analysts and bloggers to pine for the mythical iTV set. GoogleTV is even further adrift, with afterthought commitments from consumer electronics partners to load the software solution into a few models, but no real value proposition to distinguish it from other connected television solutions. Microsoft has thrown down its gauntlet, and we will see if its platform rivals can respond in kind.

For our full research notes, please visit our published research site.

-          Unlike last year’s Jelly Bean intro, Nexus 7 launch and Glass skydiving extravaganza, Google I/O 13 had no single OMG moment and introduced no major new product categories.

-          The 3 ½ hour key note reeled off more than 100 enhancements to core franchises – Search/Now, Maps, Google+, Chrome, Play, Wallet, and the Android developer kit all got major upgrades.

-          The All Access music service, the pure Android Galaxy S4, and new photo editing/sharing tools lead the headlines, but integrated functionality across apps and platforms is the big step forward.

-          Google’s mastery of the cloud is a powerful weapon as platform differentiation and monetization shifts from the device to the web-based services that will increasingly define the user experience.

Last year, Google closed the opening keynote of its I/O developers conference, with a team of extreme athletes skydiving onto the roof of the San Francisco Moscone convention center and performing a series of mountain bike half-pipe stunts, before rappelling down to street level and bursting into the auditorium, all broadcasted to the audience via the first Google Glass units ever seen in the wild. This “Dire Wolf and Unicorn Show” (dog and pony seems too pedestrian), launched a year of Google Glass mania in nerd world and nearly over shadowed the Android 4.0 Jelly Bean and Nexus 7 tablet launches that had come earlier in the program. A second keynote on day two of the conference more quietly launched Google’s Compute Engine cloud hosting program aimed squarely at Amazon Web Services. That was a lot of “all new” for a single conference.

Read the rest of this entry »

-          Current sentiment for Apple’s FY 2Q13 is horrible – consensus EPS is down 15% over the last 90 days and Cirrus’s warning drove shares back below $400, off nearly 25% over the same time frame.

-          Consensus says Apple is cheap – 5.8x estimated FY13 EPS and 5.2x FY14, adjusting for $137B in cash and investments – but consensus assumes double digit sales growth and rising gross margins.

-          2Q13 estimates for 8.4% YoY sales growth and 38.5% GMs are tenuous, yet analysts are backend loading 4Q at 20% sales growth and 39% GM, with 12% FY14 growth on stable 39% GMs.

-          Consensus forecasts of reaccelerating growth and rising margins are not credible. Apple may be cheap, but it is unlikely to perform until the megabulls have capitulated and estimates are reasonable.

“Apple under $400 has GOT to be cheap enough, right? It has $137B in cash and investments on the balance sheet and is projected to generate another $51.5B in cash from operations this fiscal year. It trades for just 9 times consensus EPS for FY2013, only 5.8x if you adjust for all of that cash. Sure the company has hit a competitive bump, but a low cost iPhone is on the way, just in time to dominate in China once China Mobile signs that inevitable megadeal to carry it. Furthermore, a new, larger screen iPhone and a major iOS upgrade are also coming to put Samsung and Google in their place. By the way, don’t forget about the Apple Television – Asian manufacturers are working on prototypes as we speak – and the iWatch wrist-based peripheral. That’s two more legs for the Apple stool. Once the big increase in the dividend is announced, watch out! Reiterating strong Buy, with a price target of a ba-jillion dollars.”

It must have been tough being an Apple Bull this past quarter – publishing that same call for the umpteenth time and subjecting yourself to yet another perp walk performance on CNBC. Still, at some point, the national nightmare will have to end, Apple will hit bottom and the bulls will be right again. However, no amount of cheerleading is going to hasten the coming of that day, and in fact, the cheerleaders may, in fact, be their own worst enemies. Buy-side sentiment is indeed bad, but sell side estimates are nowhere near bad enough.

Read the rest of this entry »

-          Fox and Univision are threatening to stop over-the-air broadcasts in the wake of an Appeals Court ruling in favor of Aereo’s clever system for delivering the signals to consumers over the web.

-          The threats are empty, given contractual agreements with local affiliates, but bare the anachronism of over-the-air broadcasts, seen by just 10% of TV households yet stifling retransmission fees.

-          The network vote of no confidence in broadcast TV could make station owners more open to monetizing their spectrum in the upcoming FCC incentive auctions

-          TV status quo is seriously threatened by improving on-line alternatives, by rising on-line video ad spending, by high cable prices, and by new technology like Aereo

The network hissy fit over Aereo’s recent win at the US 2^nd Circuit Court of Appeals was predictable, but ultimately toothless. On a 2-1 ruling, the Court held that the broadcast networks were not entitled to injunctive relief from Aereo’s service, which uses thousands of individual antennae located in a Brooklyn warehouse to offer $8-a-month steaming of over-the-air broadcasts. While the morality of providing this on-line access via a convoluted technical solution designed to keep each user’s signal separate from the others could be debated, the legality will be settled by the courts, and this decision was an incremental victory for Aereo. Should this ruling be followed by a win at trial and affirmed on further appeal to the U.S. Supreme Court, the company would be able to offer on-line access to broadcast stations and DVR functionality across the country without fear of legal reprisal. Thus, the fighting words from Fox and Univision threatening to stop free over-the-air broadcasts, comments given verbal support from NBC and CBS executives as well. Taken cynically, the threats are fodder for industry lobbyists looking to strong arm Congress into closing the legal loophole that enables Aereo’s existence, in the name of protecting the rights of the 10% of Americans that do not choose to subscribe to multichannel TV service provided by cable, satellite or telco networks.

Read the rest of this entry »

-          Facebook Home subverts Google’s control over Android, replacing the lock and home screens with Facebook content and unifying device messaging under the always-on “Chat Heads” app.

-          Home is a very clever way to jump in front of Google, but gaining critical mass will be very difficult – distribution is narrow, execution must be perfect, and Google could retaliate if it is too successful.

-          To less fanfare, Twitter launched Cards, expanding the content that can be appended to tweets, including direct links into e-commerce apps, driving new advertising and transaction revenues.

-          Arguably, Twitter is further along in establishing mobile monetization – Home is a gambit in the right direction, but it is far from certain to be successful.

On first reflection, Facebook home is REALLY clever. I’ve written repeatedly that apps companies, such as Facebook, are subject to the whims of the platform owners – Google, Apple and maybe, Microsoft – which are free to cherry pick from amongst the most useful apps to integrate their own home-grown alternatives directly into their operating environments. Witness Apple’s poorly received landgrab against Google Maps, or the lawsuits that Google has drawn from the likes of Yelp and Expedia for favoring its own reviews and travel services. Mobile users strongly tend to use the default apps that are given to them, even if there are superior versions available a click away. Arguably, Google’s aggression with Android was in anticipation of its own fate in an all Apple iOS world, and not surprisingly, Jeff Bezos was also prescient enough to greenlight Amazon’s own forked version of Android for its Kindle tablets with home grown e-commerce apps front and center.

Read the rest of this entry »

-          Samsung announced its hotly anticipated Galaxy S4 with a Radio City Music Hall extravaganza that emphasized a laundry list of new bells and whistles for its TouchWiz Android skin.

-          The S4 hardware pushes processor performance, screen resolution, and camera megapixels to predictably impressive levels – but have the spec wars hit the point of diminishing returns?

-          The many software innovations were an intriguing surprise, but only time will tell which of them will click with consumers and deliver real daily utility rather than mere marketing sizzle.

-          Samsung is casting its net wide for the next big smartphone differentiating technology, but doesn’t seem to have found it for the terrific and sure to be successful, but still incremental, Galaxy S4.

The history of the cell phone is chock-a-block full of wrenching changes. Just when one competitor thinks they have it all figured out, someone comes out of left field with some unanticipated innovation that happens to capture the zeitgeist and power them to the top of the market share charts. Nokia doubled the size of the display just as text messaging took off and invented an internal antenna, zooming past Motorola and Ericsson to the lead. Seven years later, just as Nokia, with its 44% global market share and 24% operating margins, seemed invulnerable, Motorola returned the favor with the RAZR, and suddenly thin was in. Next the BlackBerry made QWERTY keyboards the rage for a while, only to see Apple change everything with the iPhone. I wrote about this pattern two weeks ago as one of “TMT in 2020 – 8 Things We Think”.

Read the rest of this entry »