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What more do we want? We have phones that can do outright amazing things…. to the point that I won’t even list them because I’ll offend by missing some cool feature – or worse yet – make myself look worse by not knowing about one.
BUT…
There is one thing that a phone (or watch for that matter) still can’t do – show you the world through my eyes (hat tip BP). Yes, we can record with our phones, and anyone who has been to a concert or sporting event or just a kids recital knows what that looks like.
What about sharing that experience without ever reaching into your pocket or altering your point of view? Without ever missing a goal or song…
As someone who is married to a photographer I am very aware of this concept of capturing the moment, memories, and emotion of something as it is happening and from a particular angle. This idea that Google Glass brings to life, of sharing from your own perspective matches very well with our increased familiarity and usage social networks and wireless data – and frankly, our increased narcissism as a society.
Yes, Google Glass has many other attributes and use cases that we will cover at a later date – but this concept of sharing is one that is not met by any other device. Food for thought.
The first two sectors for 2013 are beginning to overlap in a lot of ways – but for this purpose when we talk cloud we are focusing on providers and the data center while mobile is more equipment and service providers. In general, we continue to be positive on technology spending as a whole. There are not a ton of pie-expanding investments out there – tech spending is all about ROI now and the faster the better. Technology investments are enabling more efficient and nimble companies and helping profitability (and even morale in many cases). There are more themes and more specific niches to consider – but here are the major groups.
1) Cloud
a. Premise: I want what I want, where I want, on any device I want…
b. Delivery: leaders in the cloud services space are AMZN and GOOG. Names to watch: MSFT, RAX, CTXS, and HPQ (last hope). Specifically – CTXS, RAX, and NTAP get attention as acquisition candidates by Cisco
c. Data Center: the “cloud” is a generic term, but in general the idea of housing all of your data at remote data center and delivering it on a global basis instantaneously puts heavy demands on computing resources. The ability to cost effectively scale the data center and deliver speed is critical. Top names: EMC (has VMW and will spin out Data Analytics), CSCO, IBM
d. There are some consultant type plays that would include CTSH, IBM, SAP and ORCL
e. Salesforce.com (CRM) falls into the “cloud” and I love what they are doing, but the valuation, like Amazon, is difficult to digest. CRM represents the SaaS (software as a service) space which saw several M&A deals this summer. The recent darling IPOs are Workday (WDAY) for HR Solutions and ServiceNow (NOW) for cloud infrastructure management
2) Mobility
a. Premise: Freedom; flexibility, and the same premise as cloud only I want it NOW
b. Delivery: telecom networks are traditionally high div paying and we still think VZ and T are fair plays on sell offs – but nothing to be exicted about
c. Infrastructure: as the world seeks to build out 4G networks the lead players are CSCO, ERIC, …
d. Equipment: there are only 3 names to watch: AAPL, GOOG, Samsung. Hail Mary plays in RIMM and NOK
e. Components: QCOM, ARMH, BRCM
f. Mobile Ad Spend – the only pure play is Millenial Media (MM) – but the big guys to watch are Google, FB, and Amazon – Apple is trailing.
3) Data Analytics
a. Premise: the world is generating data on a exponential scale – but what does it all mean?
b. The only way to describe this space is to say there are lots of people working the solve the problem of extracting information from data – across nearly any end market – healthcare, utilities, retail, tech…etc. There are hundreds of small, private companies working on solutions –most are getting gobbled up by the bigger players: IBM, ORCL, SAP. This space is likely to see several smaller IPOs this year and many more acquisitions.
Niche to Riche?
1) 3D Printing – initial market for industrial prototypes becoming saturated – key to the story is first, low cost home/office printing. Second, improved material possibilities leads to new “mass customization” market: only two real public plays are SSYS, DDD – expect HPQ to try something (they currently license SSYS); Autodesk (ADSK) for software – they will be a part of this.
a. Unknown what Trimble may do – they bought the 3D CAD software from Google (SketchUp) – they likely want to integrate with construction GPS aided equipment but something to keep an eye on. We like Trimble as a productivity enhancement play for construction, agriculture and fleets
2) Social Networking – yes, overhyped and underdelivered in many cases… a lot of this has to do with the misconceptions of what these firms actually DO vs the optionality you are buying. Moving forward, LNKD and FB are interesting, they have the ability to monetize their users and to expand the optionality of their platforms. LinkedIn has an actual market, job placement, and is expanding its offerings. FB is facing lots of problems, the biggest being mobile. The good news is they were able to generate $3-4b in revs without trying – currently they are rolling out new services, revenue models like mobile ads and ad exchange networks at the fastest pace to date. YELP not working. Hail Mary in ZNGA on gambling legislation
3) Housing meets Data – Zillow (Z) and Trulia (TRLA)
Favorite large cap names:
GOOG, IBM, QCOM, ORCL, AMZN, EBAY, EMC, CRM
Turnarounds: MSFT (data center), INTC (servers), YHOO
SMID Names: high valuation – prone to blow ups but like the technology
FIO, FTNT, SPLK, WDAY
I want my, I want my…
The big difference in the adoption of any new technology, gadget, service, or any change really is the “total pain of adoption” (hat tip to Pip Coburn). What level of anxiety is relieved or caused by that change. Am I willing to change certain other aspects for the perceived benefit. We see this as an evolving issue in the privacy vs online world experience scenario. The world at your finger tips comes at a price particularly in the freemium model economy. The personalized experience we get on the web is a direct result of the ability to monetize our data stream, activity and potential for sale/upgrade. The privacy battle around that data is getting heated as more and more of our lives are spent and shared online. To the extent that consumers resist this intrusion, their experience will suffer. However, to the extent that companies overstep their trust, the same pain will be experienced in reverse. Security and privacy are very sensitive and convoluted topics. In general, people are willing to allow the data flow as long as the experience is enhanced. It is clear we need better tools to analyze the seemingly disparate data streams and enhance the experience; the old models are just not enough.
You want the world to be as open to you as possible…but at your discretion. If the web is to continue its evolution as part of our very human fabric, then the ability to turn on and off our privacy will be increasingly necessary. Yes, we want to share more, and by sharing data we improve our experience, much like entering a store and explaining what you want to improve the service…but, I also reserve the right for discretion and privacy – a very human feeling. This is as much about sensitive financial and health information as it is about what information I am sourcing and from where.
We anticipate that there will be more high level security breaches in the near future that cause consternation among regulators and consumers. One avenue we see as interesting in the future is the ability for a consumer to control, or even profit from the release of their personal information. Currently you get a discount on a product in exchange for the data, but you are not aware of what data they are collecting and how frequently. Think Google’s apps or Amazon’s $79 Kindle with ads. Instead, we see an opt in world where you are paid to provide accurate details regarding your habits and preferences in exchange for a fee and a more tailored experience, which could also include deals and ads that matter to you – like %50 off at a steakhouse instead of another spa treatment.
You see something you want to buy, done. You want to share something with one person or the entire world, done. You need information and to get something, done. The ONLY way to do that is with a smart device with dynamic security and privacy controls and high speed networks – otherwise the user experience is too subpar and will drive a negative feedback loop.
Positive: security software, data analytics, IBM, Splunk (private)
Negative: any privacy mishaps are bad for Google, Facebook and Apple
Note – of the three big personal data collectors, only Apple doesn’t NEED your info. Apple makes its money sell you devices, and takes a cut of apps and content. Google and Facebook rely solely on advertising and the ability to customize those ads to your data.
The Google Dilemma
By all accounts, and rightfully so, Google has been a smashing success as a company. They have achieved scale, prominence, profitability and brand. However, like most every innovation that emerges, there comes a time when the landscape shifts and they must shift with it. This topic is not new, and in fact, is covered in books like The Innovator’s Dilemma. Google’s main product is “search” – or the indexing of the internet’s content and calculating the most relevant information per each request. Google makes its money by selling advertisements against that page of information/links. Search for hotels in Miami and get ads for Priceline or Hilton – simple. Along the way Google has done two main things to enhance its business: 1) continued to improve the quality of its search results and the context of the ads it shows against them (adding display as well); 2) adding a variety of other products designed to capture more of your time spent online, therefore increasing the number of searches you perform on Google and therefore data you provide Google, and also providing more page real estate to display ads -think ads on Gmail. Both of these efforts have delivered wonderful results. That is the past – that is how we find Google at the top of the tech world, commanding ~70% of worldwide search, with a growing presence in e-mail, browsing, product and travel search, and business applications.
The dilemma that Google faces centers on the rapid shift from the desktop centric world that currently dominates search and most all web activity, to the mobile environment where 1) Google does not command as high a market share; 2) the monetization (or just ASP to think of it simply) of search activity is much less and 3) consumers growing knowledge of the internet landscape and lower tolerance for search time in the mobile environment is met by the advent of “apps” – which shortcut search activity.
So what? Doesn’t Google own Android the 1st or 2nd largest smartphone platform with over 250m installed devices and a large App store (renamed Play Store)?
Yes, they do – and much credit should be given to Page and Brin for buying Android and fostering its growth. Android filled a much need void in the smartphone category. The introduction of Apple’s iOS left the RIMM’s Blackberry OS, Nokia’s Symbian, and Microsoft’s Windows looking like MS DOS. On top of the fluidity of the OS itself, was the same tactic that brought so much success to the iPod, the marrying of hardware and software to a content delivery service. The iTunes store was extended to deliver apps – bite sized nuggets of web activity or entertainment at the touch of an icon. No typing, no searching – a custom built application to deliver most of what one normally seeks on the web, without the hassle of long load times and cumbersome surfing, in addition, games became a massive draw of attention. Aside from Apple, no one delivered this type of platform or ecosystem (these words often get thrown around but have specific meanings, a more in-depth topic for later).
In stepped Android, offering full touch screen with Google integration and an app marketplace. The UI was very similar to that of Apple and the software free (aside from the cost of internal tweaks) to OEMs – it was really obvious in hindsight that Google would take massive share. As Google has continued to improve both its OS and ecosystem along with Apple it left RIMM, Nokia and Microsoft in the distance. Android has 250m devices active and posted some impressive app download numbers – and aside from the holiday iPhone4S push one would expect the future for Google to be amazingly bright given brand, adoption rates, and OEM support (particularly with the advent of lower priced Android phones penetrating the market). However, there is one large problem (aside from the Motorola deal). The web activity on a mobile device monetizes at a far lower rate than the desktop, and the software itself is free – so how is Google going to make up for the lost economics? They don’t know yet.
The answer from Google thus far alludes to the idea that they should gain as much share as possible first and figure out monetization second (you can’t tweak to a bigger audience). They feel the monetization of mobile is comparable to search circa 2002-2005. Also, they faced a similar problem with YouTube – massive activity, volumes, and growth but terrible monetization. Google has slowly ramped up the efforts and economics, but it still pales in comparison to its activity levels. However, more importantly, the activity is additive to Google, not taking away from other businesses. The mobile opportunity is more complicated than search and YouTube though – the main intent of users and and flow of information is not the same.
On mobile; there are four key points 1) traditional web and search advertising is based on click through rates which are much lower on mobile devices; 2) the type of web search activity on mobile is slightly different – as is tolerance for tangent surfing; 3) apps completely circumvent the web; 4) to date, mostly all of the money made in mobile outside of ad platforms was made by Apple, Samsung and app developers.
Positives 1) the ability to cater higher value ads related to time and location; 2) the advent of HTML5 may put more activity back on web pages possibly allowing more ads vs content pages; 3) as mobile internet users mature, and tablet like devices improve, users may organically seek out more web resources – I often compare the app vs HTML5 idea to the AOL vs Netscape transition (the walled garden was great until we had a tool to tame the outside world).
Negatives 1) the Android kernel is free – and in fact, the two software companies that make money off the growth are Microsoft and likely Oracle; 2) as a free OS, OEMs are constantly tinkering with the UI to “make it their own” – this dilutes the brand power of the OS; 3) the very nature of mobile search is more action directed than desktop and the model needs to adapt; 4) social sharing and app marketplaces are the new form of discovery and take place on the “dark web” or password protected verticals that Google can’t see, track, and calculate.
So what might Google do?
Well, we’ve already seen several Nexus phones as a way to demonstrate their capabilities and improve the brand – if they can convince OEMs to follow more standards this would help a bit. They could charge for the OS… but this goes against their philosophy, and as a free kernel it would be difficult. They are planning a Nexus tablet and have revamped the app store – now the Play Store and it shares content across mobile, tablet and desktop.
But what we really want to talk about is Motorola. Sure, the IP portfolio was important… but what do you do with the hardware piece? Samsung is the 2nd largest smartphone player behind Apple, and largest overall, and you have the best or second best OS… do you compete with them? Do you run it “separate” and hope they make money on their own like Samsung? Or do you full-on integrate and run it like Apple and tell Samsung they need you more than you need them? At the end of the day the handset business is very much like the PC business and the straight sale of commodity hardware is a no win game over the long run. What Apple does is sell a premium product, AND a premium ecosystem. Google sells neither, they give it away. Recent news flow suggests that Google will launch a Nexus tablet with Asus, and it will cost $149-199. This is essentially the Amazon Kindle market. Google has tried a similar strategy with the Chrome OS, but has not had too much success. There certainly is appetite for another tablet, but it has to come with a premium ecosystem …Android does have an ecosystem, but the branding is changing and developers are not making any money. Much work needs to be done.
There remains a level of risk to the formidable Google model over the medium and long term. In Google’s favor is the lack of competitive threat from RIMM, MSFT/NOK and others at the moment. It takes time. The negative is that any agreement to pursue Motorola with an Apple-like model may hasten other partnerships and even the potential for a Chinese OS. We think Google’s current momentum in Android will likely continue, and monetization on mobile with slowly improve. That said, it remains a core holding for exposure to the secular shifts…particularly given the sell off around the Motorola announcement…oh, and they own the information side of the internet such as maps and knowledge – which will continue to matter.
Update 4/18/2012: Business Insider reports on 4/17 that people familiar with Google say they plan to work with the Motorola division to design build and sell hardware AND software for the phone…or basically copy the Apple model. This will make for interesting discussion as Samsung rolls out S-Cloud, its iCloud and Google Drive competitor, at its May 3 Galaxy event. The addition of Motorola to the Google model will cause some ripples as Motorola is questionably profitable. In addition, tighter integration with Motorola could mean an all out Google store to sell phones and tablets (already happening with Nexus). I don’t think Samsung will get too upset yet as they are almost half of the Android market…but they will start to hedge their bets.
The Change Investor 