The Sunday Brief: Google’s Got Power (Tooth) Brush Groove

July 17, 2011

Greetings from Kansas City, where the big news was the opening of the two new Trader Joe’s this week (their branded coffee isn’t bad!).  There’s a lot of analysis this week in The Sunday Brief about Google.  The bottom line is 3-6-9 months ago, people overreacted to Google’s “low” earnings which were unfounded, and they have overreacted to this week’s 2Q earnings, which are good, but largely driven by favorable exchange rates and “below the line” interest on their $39 billion cash and marketable securities stockpile.

I have a tremendous amount of respect for Google, and love the toothbrush analogy Larry Page used in the beginning of the conference call.  I do not have a tremendous amount of respect for those who follow Google, but industry analysts, the tech media, and the Wall Street folks (many of whom receive the email version of The Sunday Brief).

Welcome your thoughts and comments.  Click here to see this week’s Sunday Brief.

Have a great week!

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Posted by Jim Patterson

The Sunday Brief: Blackberry’s Evolution Strategy

September 19, 2010

Greetings from Kansas City, where we are abuzz with football hopes after Monday night’s Chiefs opening win.  I was reminded that the meteorological summer had not ended on Monday, when the “cash acquisition” theme was capped off with the $460 million cash acquisition of Cavalier Telelphone by Paetec.  That was a very nice punctuation to what had already been a very active M&A summer.  Paetec has been successful at integrating previous acquisitions, and will definitely be able to take advantage of the fiber resources of Cavalier.  And another great headline for M/C Ventures, Cavalier’s primary shareholder.

To carry through the themes from last week’s Sunday Brief, this week also witnessed the resignation of LG Electronics’ CEO Nam Young. LG, like Nokia, has struggled to find its footing in the smartphone world. The feature phone market is rapidly changing and being number three ain’t what it used to be.  Best wishes to the new CEO, Koo Bon-joon.

In a media world determined to pick winners and losers, Blackberry is a favorite target.  The Canadian-based smartphone producer and services provider announced earnings on Thursday, in which revenues grew 9% on a quarterly basis and 31% on an annual basis.  Gross margins were a respectable 44.5%.  They grew their base of Blackberry users by 4.5 million, ending at 50 million users.  Service revenues are now 17% of the company’s total quarterly revenue stream and are running at a $2.9 billion annualized rate.  They are diversifying globally, with 45% of their subscriber base outside of North America.  To satisfy nervous shareholders, they bought back shares at a rapid clip, but still have $2 billion in cash on hand and no debt.

Even with the strong report, many are questioning whether Research In Motion can survive by lumping RIM in the same category as Nokia, LG, and Sony-Ericsson.  If you look at a stock table comparing Nokia and RIM, it’s hard to get excited about either of them (RIM is down 42% vs. last year, and Nokia is down 36%).  But RIM and Nokia are fundamentally different companies with different survival strategies.

The Blackberry is synonymous with consistency and reliability.  It’s a fixture at most businesses, and, at least for now, occupies the position of affordability – the Chevrolet of smartphones.  Few complain about the battery life on their Blackberry.  And in email – the original paid app – they are the worldwide standard.

So why the dismal outlook and negative sentiment?  Three reasons:

  1. Blackberry has not achieved a foothold beyond email.  Their applications store has just over 10,000 applications, but 4,100 are wallpaper/ themes (24%) or reference/ eBooks (17%).   Compare that to the iTunes store at 43,000 books alone.  This column has criticized the lack of a serious business applications leader – Blackberry, it’s yours for the taking, but Apple is catching up – fast.
  2. Blackberry is not known for bandwidth.  We are in the infancy of 4G phones, while Blackberry touts the upgrading of their two most popular phones, the Curve and Pearl, to 3G.  They have more experience in global applications management (bandwidth, load balancing, redundancy, etc.) than any of their peers.  While they have the pieces in place to forge a 4G product line, do they have the strategy?  Could Blackberry overtake iPhone4 and HTC as a leader in high-end devices?  It’s not an impossibility – a business grade video product would be ideal.
  3. Blackberry needs business buddies.  Over the past three years, Blackberry has scaled.  Three years ago when Apple was introducing the first generation iPhone, RIM was shipping 3 million devices in the fiscal second quarter on a total base of 10.5 million users.  Since the iPhone launch, Blackberry shipments have grown four-fold and the base has grown nearly five-fold.  But they got that base on the back of (non-North America) consumer growth.  Consumer distribution has become harder, however, with everyone else jumping on the Android bus.  As we pointed out in the “Android Nation” Sunday Brief, Blackberry has no flagship carrier, and Android has become the flagship for Verizon, Sprint, and T-Mobile.  Blackberry needs business partners – Cisco, IBM, and an even stronger relationship with Microsoft would be a good starting point.  On distribution, they could be the thread that knits cable business product lines together.  Or they could enable challengers to the larger players, combining applications and bandwidth to create a secure, consistent solution for business that is carrier independent (imagine Blackberry as the M2M enabler for a host of business applications – not out of the realm of possibility).

On the conference call, the first question on Q&A was “Can/ how will you remain competitive?”  Here’s how their co-CEO answered the question (full Seeking Alpha transcript can be found here):

Sure. I mean, there’s such an interesting dynamic going on in the market because first of all, I mean, I think when you talk about sort of platform and design and future aspects, and I think you’re going to be pleasantly surprised at Dev Con in a week Monday, so I can’t really give you too much here but I think you’re going to be really interested there. So I think the more aspects design philosophy are going to come out there.

And I think in terms of what BlackBerry does, it still has a tremendous number of attributes that really serve the market in the way that we align it for the service and for the carrier and for the segment that’s supposed to address, and I think it’s dangerous to frame all this in a high end arms race and I think you’re going to see our capacity to go beyond what could have been expected by anyone and yet, still address the issues of cost effectiveness, security, efficiency, and desired form factors, so our specialty has been in resolving a paradox and if you don’t resolve that, if you don’t innovate to resolve that paradox, robbing Peter to pay Paul isn’t really a solution because you’re just shifting strategies and so the feature phone is upgrading to a Smartphone.

You know I think our guidance just shows what’s happening and if you saw the road map and you saw the engagement strategies you would see that we’re being very prudent in our approaches but this is really a promising space.

And we can address lots of segments and we can still respect carrier alignment and efficiency and different price points, but I think you’re going to see the ability to I don’t know how to say it better than – other than resolve the paradox because if you make these things so high end that they’re not addressable to the market or they are so consumptive of the networks they can’t scale, that’s not what we originally designed our business for and what we’ve done is innovate to really avail the capability but still not sell out our lineage and that’s the paradox that we’re resolving. So, but be careful that just because you don’t jump to Peter and abandon Paul, to sort of carry on with that sort of approach, that we don’t have an answer, but you know we’re trying to innovate forward our business, not be strategically erratic.

So the core BlackBerry aspects are well defended and while it looked after and protected but it’s in a space where people have mushrooming expectations of what these things can do, and that’s the essence of the paradox and all I can say is it won’t take long before you see how we’ve done that and I think Torch and BlackBerry 6 is really an excellent step forward and that’s why you’ve seen – you know the promo campaigns are just starting but that’s why you’ve seen the jump in guidance and subs in fact.

So, you know, I hope I answered your question. It’s a bit of a, it’s hard for me to answer too directly without sort of violating confidential road map stuff.

While it looks like we have the seeds of a strategy from this answer, it’s not hard to see why many analysts are sanguine on the company.

Bottom line: Google and Apple have moved beyond the carriers, drawing a line for control, but still demonstrating cooperation.  Blackberry, in order to survive, needs to grasp this change and understand that carrier penetration does not equate to success in the smartphone market.  They need to use their base as an asset and grow beyond email.  They cannot do this alone – they need partners.

Next week, we start to look at 3Q headlines.  There are many to choose from.  Thanks for your continued interest in this column – if you have ideas to make it better (topics, etc.) I am all ears.  We are heads down rolling out Mobile Symmetry and very excited by its prospects.

Now for five you may have missed:

  1. Google bullying?  Skyhook seems to think so.  More from this TechCrunch article.
  2. iPhone devotees are rejoicing that a Google Voice application is now returning to the iTunes store.  Hmmm.  Next up – Google Voice that is non-discriminatory? C’mon, FCC – you can do it.
  3. (This one may be a few weeks old – apologies).  Verizon released their restated financials excluding the Frontier spin.  It’s rough out there in the wired world.  Look at the “Wireline-Qtrly” tab.  More on this as we look at 3Q results.
  4. Samsung pulled a distribution coup with the announcement of their tablet distribution across AT&T, Sprint, Verizon and T-Mobile channels, garnering much applause.  However, if you are the AT&T sales rep, which one are you selling – the iPad, or the Galaxy?  I get it for Sprint, Verizon and T-Mobile (see “Android Nation” column), but the AT&T channel – don’t count on it.
  5. We have noted in several previous columns (notably the “Three Headlines No Telecom CEO Wants to Read” column from last spring) the combination of Chinese ingenuity, pre-paid distribution and Android operating system.  Well, Huawei announced the launch of several new Android-powered phones with cost points between $100-200.

And one:  an excellent analysis by Ars Technica on Apple’s loosening of its programming restrictions.  Have a great week!

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Posted by Jim Patterson

The Sunday Brief – Whistling Two Different (i)Tunes

July 18, 2010

We have yet to learn of the bottom line successes of the iPhone 4 or Incredible launch to AT&T or Verizon or Apple, but we did have some precursor events this week.  From Google’s earnings and the iPhone4 “bumper” press conference, we see two fundamentally different ways to handle the media.

First, an update on Mobile Symmetry.  I know that each of you are chomping at the bit to see how this works.  Last week, we discovered some significant recoding to the parental approval (of minor/ child profiles) that had to be undertaken, and one thing led to another and we found other things to fix.  While our developers continued to work around the clock to correct the issues and make the code more scalable, several of us completed the Mobile Symmetry business plan.  If you would like a copy (critiques welcome), please let me know and I’ll send it to you.  We are very excited about Mobile Symmetry’s prospects, and hope to have it in your hands very soon.

Now to Google and Apple.  Google reported earnings that missed estimates.  They had strong growth (24% annual growth rate for what looks to be a $27-28 billion company in 2010), yet maintained their operating margin at 35%.  Concerns mounted, however, because the first quarter margin was 37% (this as we consider whether Verizon’s telecom unit will actually post an operating profit in 2Q).  Google’s second quarter operating profits were $2.4 billion, generating $1.6 billion in free cash flow.  Google now has $30 billion in cash and marketable securities, and, just for grins, opened up $3 billion in commercial paper – a clear sign that stock repurchases are in the offing.  (As a reminder, Google has no debt, and no pension obligations.  As of Q1, Verizon and AT&T had $130 billion in long-term debt and nearly $60 billion in pension liabilities).

These earnings disappointed analysts and missed expectations.  Granted, you have to set proper expectations, but growing $1.3 billion in revenues and $500 million in operating profits is not enough?  The primary concern of the analysts was that Google was hiring too many people (1,200 in the quarter to be exact which included 300 from the AdMob acquisition) and that this was would drive up stock-based compensation expense.  Compare this to comments made on the Verizon Q1 earnings call (this is John Killian in the Q&A session – source is Verizon’s investor website):

Now, on the cost side, I hope you get the feel here that we are very focused on improving and continuing to improve the cost structure. I mentioned on previous calls the last couple of years we’ve reduced our wireline workforce by about 13,000 per year and I said we would do the same this year. I actually think we have now the ability to do more than that this year.

You’ll probably read in the press later today that we did reach agreement with our unions and our east coast unions, the CWA and the IBEW, on an enhanced incentive offer last night. That is going to allow us to take out a significant number of associates. One of our limitations on our ability to downsize the workforce was we were limited in our ability to layoff in our east coast contracts. We could layoff post 2003 hired employees and we did some of that last year, but beyond that it was voluntary incentives that drove it.

We reached agreement on an enhancement and I think this year we should be able to beat the 13,000 number. I’m not going to put an exact number on that yet because we’re still factoring through that based on the agreement. But I think we’ll be very focused on additional force reductions this year.

Taking out associates.  That’s strong language, even for a cost-focused CFO.  Compare that to the response from Patrick Pichette, Google’s CFO, to reasons why their hiring expenses are going up (source is from Seeking Alpha):

In terms of hiring I think that it really is the case that we – I am going to take a step back to three quarters ago when we said look for us the recession is over. For us we see great products and we have a mindset of the next half decade and the big platforms we are building that are creating these huge ecosystems, and for us search is one and then mobile and Android as we just talked is one. And then display is amazing, right. It’s really growing. And to not put resources to actually fuel this ecosystem, which is the next decade, it’s just such an opportunity. So that’s why we are investing aggressively. We think it’s the right thing to do at the moment in the company. So – and that’s the balance we are striving. Even in Q3, right, if you think of headcount, we have a lot of people – I should call them – the people that we just graduate form [sic] university that are going to [be] joining us, right. So there may be even be you can think of the bump of the accepted but not started because they are going to go backpacking for the summer before they come and join us. But I mean ultimately, right, we are looking at a trend of continuing to invest. And it’s the right thing at this time in the history of the company. So that’s on CapEx and on hiring

So one CFO is talking about taking out associates while the other is talking about their pending hires taking time off to backpack prior to starting their career at Google.  That’s where we are in the telecosm right now.  Two worlds colliding.  (My money’s with the guys with the $30 billion in cash and the employees fresh in from the Alps).

Google faces a set of problems that cannot be ignored:   Google Voice, Nexus One inventory, China, Apple, net neutrality (if they spent $100 million on the Viacom lawsuit, how much do you think they will spend to defend net neutrality?), fueling future growth (acquiring Level3? How about Adobe?) all present a wide range of outcomes.  But with $30 billion (+ $3 billion in a line of credit), $10+ billion in operating profits, 25% annual growth, and a best-in-class recruiting machine, who cares?

Bottom line: Google silenced their critics by deftly explaining why expenses were rising faster than expected:  They are investing for the future, and they are defending the Internet to keep YouTube relevant.  And, with all of their problems, they continue to whistle a happy tune.

*********

Now we turn to Apple.  If you have not seen Friday’s Apple iPhone4 press conference on You Tube, please watch it here after you finish the column.  It’s four ten minute segments, and 10x better than any Sunday Morning news show.  The Scribd version of the presentation can also be found here.

In three weeks, Apple has shipped three million iPhone 4 devices.  This on top of the iPad success, on top of the App Store success, on top of a long string of successes that have made Apple the most valuable technology company in the world.  They are the leader, and have accelerated the advancement of computing and phone design more than any other company in the past decade (maybe ever).  And shareholders love Apple.  To put in context, Apple has created nearly as much shareholder equity value – $138 billion – in the past 19 months as AT&T has in the past 100+ years.  Apple is not a powerhouse, they are the powerhouse.

Then why are they letting a handful of the media get under their skin?  Here’s a brief synopsis of what they said on Friday:

  1. If you don’t like the phone, don’t buy it.  If you bought a phone and don’t like it, take it back. (Here is the video of the iPhone “Antenna Song” they showed prior to the press conference).
  2. Every smartphone has this problem.  (So AT&T drops calls even on the Blackberry Bold 9600 and Samsung Omnia II).
  3. This is a new problem to us and we are working very diligently to solve it.  We solved the signal strength problem through a software fix.
  4. It’s not a problem because no one has called us about it.
  5. It’s not a problem because no one has returned it.
  6. It’s not a problem because AT&T’s dropped call rates haven’t risen more than 50% (< 1 additional dropped call per 100 is likely more than a 50% increase).
  7. We love our users, and try very hard to surprise and delight them every day.
  8. We are a great company.  Don’t forget, we brought you the iPod, iPhone, iPad, the Apps store, and everything else in between.
  9. You want something? Here’s a free bumper.  If you still aren’t happy, please return the phone for a free refund (including your AT&T early termination fee).
  10. (Q&A)  Stop picking on us.  You (media) are making stuff up.  We make America great, and put America on the map as a technology leader (Google, too).

I have watched this video three times.  I can’t help but think about how the media would have responded to a Johnson & Johnson if they had the same tone with the New York Times about the recent Tylenol recall (read more about that here – there was nothing wrong with the product, except for the fact that the packaging smelled musty – apparently, really musty).  What if Dell had taken this approach in 2006 with their laptop battery recall?  What about Toyota with the Prius brake issue (which everyone knows also impacted the Ford hybrids as well)?

When you ascend to the leadership throne, you have to lead.  No one wants to hear excuses – to use a Nascar term, Apple can’t draft if they are the lap leader.  No one wants to be insulted with “You’re holding the phone wrong” comments. And none of the 1% of Apple users who are having problems wants to be dismissed for bothering to speak up about them.

Bottom line: Apple abdicated the technology leadership throne on Friday.  The end (free bumpers, full refunds) was right, but they forgot that leaders should be “swift to hear, slow to speak, and slow to wrath.”  That’s some advice from a sage man named (the Apostle) Paul.  Apple needs whistling lessons.

Next week, the start of  the 2Q earnings review.  More on www.thesundaybrief.com throughout the week.

Now for Five You May Have Missed:

  1. Breaking news on the Gizmodo/ Apple front.  Jason Chen appears to be willing to allow certain devices to be searched.  Latest on the story can be found here.
  2. Gizmodo’s review of Verizon’s Incredible.  Read beyond the headline – there’s a lot of Sunday Brief themes here.
  3. Speaking of Verizon, a CNBC essay on why the company should be broken up.
  4. To follow on an earlier Sunday Brief theme (the Julius Jolt), calls for “search neutrality” are intensifying.
  5. AT&T and Cablevision reached a retransmission deal to keep AMC and other channels on the air.  It was a “fair deal” according to AT&T.

Thanks again for your comments and suggestions for future articles.

13 Comments | Sunday Briefs | Tagged: , , , , , , | Permalink
Posted by Jim Patterson

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