31
Jan

Has the Apple Retail Store Business Peaked?

Peter Oppenheimer sums up the Q1 2014 performance of Apple’s retail store business as follows: “Revenue for the Quarter was $7 Billion, a new quarterly record, and an increase of 9% from the year ago quarter”. The remarks are included in Apple’s webcast of its Q1 2014 Earnings Report (http://events NULL.apple NULL.com NULL.edgesuite NULL.net/14pijnaefvpijbnfdbvpijnbaefgvpjbnaef01/event/). Readers assessing the real meaning of “record” need to keep the history of Apple retail stores in mind. The first store was opened 13 years ago, in 2011.

In comparison, McDonalds opened the first version of their current fast food restaurant brand in 1948. Despite 66 years of ongoing retail operation, same store sales for the chain, for the last quarter, decreased by only 1.4% (I excerpted this number from McDonald’s Reports Fourth Quarter And Full Year 2013 Results (http://news NULL.mcdonalds NULL.com/Corporate/Press-Releases/Financial-Release?xmlreleaseid=123043). There are other examples of retail brands, with many more years operating experience than Apple, still growing same store sales at a faster rate than Apple calls a “record”.

So readers might want to carefully study the performance of Apple’s retail store business, especially given the announcement of a new executive manager for this business, Ms. Angela Ahrendts, late of the Burberry women’s retail fashion business.

What I found particularly worrisome was Oppenheimer’s citing Apple’s use of RFID technology within the stores. He notes “[w]e were excited to roll out iBeacon technology at our stores in the U.S. during the quarter, enabling iPhone customers to receive notifications about products and services via the Apple Store App. . . . For example, customers walking by an iPhone table could receive a message offering to check their upgrade eligibility or trade in value”.

I have no issue with the use of location based services in the store, but I don’t like hearing about a business fine tuning methods of selling follow on products to the same customers and, perhaps, downplaying the importance of finding new customers.

Is Apple’s growth strategy built on re-eating its own lunch every year or so? If it is, then I fail to see the real growth opportunity in the retail business segment.

To sum up, I found Oppenheimer’s opening statements about iOS reach into global markets, and its dominance of those markets, to be inconsistent with his description of their retail business, which seems, to me, to be focused on a perpetual marketing strategy targeted to the same customer.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

30
Jan

Are App Stores a Looming Cash Machine?

Consumers opting to buy a Microsoft® Surface 2 will receive a $25.00 coupon in the box, along with some other promotional offers. This coupon can only be used to purchase an item offered in the “Store” feature of the Surface 2 Start Screen. But using this coupon can be a challenge. My review of the Apps offered didn’t produce much in the way of productivity. I noted lots of games, and lots of free Apps.

So why is Microsoft including the coupon in the retail customer product package? Anyone listening to Apple’s Q1 2014 webcast Earnings Call (http://events NULL.apple NULL.com NULL.edgesuite NULL.net/14pijnaefvpijbnfdbvpijnbaefgvpjbnaef01/event/) will hear Peter Oppenheimer sum up a very large business for Apple — it’s App Store. Oppenheimer estimates “[t]he App Store now offers 1,000,000 Apps in 24 different categories, and cumulative downloads have surpassed 65 Billion”. (quoted from the Apple webcast, a link to which has been provided in this post)

These numbers are not insignificant, especially for a company like Microsoft, which, historically, has always maintained a healthy developer ecosystem. Indeed, one can argue much of Microsoft’s success across the early days, following the launch of Windows, depended almost entirely on the third party developer community and the applications they brought to the public for the platform.

Oppenheimer goes on to present an even more important number: “Our App developers earned $2 Billion from sales of Apps for the quarter”. With an annual run rate of $8 Billion, any 3rd party business simply building Apps for Apple’s App Store might be looking forward to a very promising future.

Certainly Microsoft has not been slow to learn this lesson. The $25 box stuffer coupon makes sense as a means of driving customers to pump up the Store feature of the Surface, and the Windows Phone user experience. There are challenging impediments to Microsoft successfully kick starting this business, not the least of which being the small footprint of Microsoft’s mobile devices across the broad market when compared to Apple’s iOS. So a rapid, successful ramp up in phone and tablet units sold is a mandatory requirement of launching the Windows store App effort.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

29
Jan

Comments on Apple Q1 2014 Earnings Report

Peter Oppenheimer’s lengthy presentation at the start of Apple’s Q1 2014 Earnings Report (http://events NULL.apple NULL.com NULL.edgesuite NULL.net/14pijnaefvpijbnfdbvpijnbaefgvpjbnaef01/event/) left me with some thoughts perhaps worth consideration by some readers:

  1. Mr. Oppenheimer’s remarks, from a rhetorical perspective, are built to argue for Apple to be seen by the investment community, not as a niche player looking for the very top of the available consumers in the smart mobile device market, but, rather, as the leader in the North American market for smart mobile devices
  2. Numerous examples of enterprise business customers, and Apple customers from comparatively sized organizations in the public and the not for profit sectors are included in the preface remarks by Mr. Oppenheimer. Are they included to convince the analyst community to take Apple seriously as a vendor to the same enterprise customer base once owned by Blackberry? I think so. Readers should also note how Mr. Oppenheimer included IBM® in his remarks, much like an appeal to an authority. Perhaps IBM should take a look to ensure rigor mortis hasn’t kicked in, and the continued presence of “fire in the belly”.
  3. His remarks included comparative statements about Apple competitors, but included no mention of Microsoft® within the first 14 minutes of the webcast. Rather, his comparison about contenders in the smart phone and tablet markets were focused on Android
  4. Mr. Oppenheimer cited the IDC mobile device market report, which was published coincidental with Apple’s quarterly report. Nevertheless, the news about the IDC report (I’ve not read the report as of the publishing date of this post) includes some points at variance to the dominant position Mr. Oppenheimer claims Apple “owns” in his remarks

Here are some quick thoughts on each of the above points:

  1. In response to point 1), above: Perhaps Mr. Oppenheimer’s remarks are correct today, January, 2014 as far as the reach of Apple devices into the mainstream of the North American market for what I refer to as “small, smart, mobile devices”, But I don’t think we will listen to Mr. Oppenheimer make the same claim a year from now. From what I’ve read of the IDC report, Android devices are the fastest growing segment of the worldwide mass market for smart phones. The ultra competitive price point for Google’s Moto G smart phone, together with Microsoft’s soon to close acquisition of Nokia (and the changes in strategy and likely new attention to the lower end of the world wide market for smart phones) will certainly have a negative impact (the extent of which will have to be determined over time) on Apple’s claim.
  2. In reponse to point 2), above: Certainly Apple must be taken seriously as a vendor of choice for enterprise business customers — but only for small, smart, mobile devices. As far as the software they now ship to enable enterprise customers to manage large communities of mobile device users, I would keep my eye on Blackberry (as Citron Research has pointed out) as a real contender in this space, with the footprint required to perhaps deliver a crushing blow to Apple’s aspirations to control this market.

    I would also neither count IBM out of the market for MMS requirements, nor scoff at the improvements in market share Microsoft has likely achieved with the new Surface 2 products and the high end Nokia Lumia smart phones.

  3. In response to point 3), above: I refer, once again, to the IDC report, which notes a very strong force behind small, smart mobile devices powered by Android, world wide. I’m certain Mr. Oppenheimer has not fudged his numbers, or inflated his claims, but the future doesn’t look as promising as some of his audience might think.

    I also think Google’s Moto G is a very strong contender to both Apple and Microsoft products in the same category. The price point is “too good to be true”. I eagerly await some word from Google as to how this product is selling in the North American market.

  4. In response to point 4), above: I have more confidence in what I’ve read about the IDC report than I do in the importance of the points Mr. Oppenheimer has framed around his reading of the results. I don’t think it makes much sense to argue for Apple as the leader in the mass market for these devices. All of the steps the company has taken (at least as written about in the news) are to fortify a position as the dominant device in the very high end of the market, which makes more sense, especially over the long term, at least to me.

Disclaimer: I have no position in Apple, but am long Microsoft.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

28
Jan

Additional Comments on Microsoft’s Q2 2014 Earnings Report

Three other topics included in Microsoft’s Q2 2014 Earnings Report (http://www NULL.microsoft NULL.com/Investor/Events/Presentations/2014/ERFY14Q2 NULL.aspx?eventid=138992) may benefit from comments. The three of interest to me are the quarter’s Cost of Goods Sold (COGS), sales of Windows Phone licenses to OEMs, and sales of commercial cloud products.

COGS

Chris Suh noted a substantial, 46%, increase in COGS for the quarter. This topic comes up elsewhere in this presentation and impacts on margin considerations for the business. I think Microsoft is uniquely capable of absorbing this increase, with subdued impact on the broad product margin discussion for the overall business.

The COGS jump can be directly attributed to the Device and Consumer Hardware (D&C Hardware) business. Q2 2014 saw the commercial release of the new XboxOne and Surface 2 products. But the strength of traditionally much higher margin businesses (approaching the 83% “Nirvana” number, Amy Hood mentions early in the presentation); specifically, the combination of satisfactory growth in their Commercial Licensing Business (7%, year over year, but SQL Server business grew over 25% over the same time period), and rapid growth in the “Commercial Other” segment, which includes Azure, Office 365 and Dynamics CRM (doubling year over year, albeit with substantially smaller impact on the bottom line), will, in my opinion, pay for a lot of this front-end hardware hit to COGS.

Windows Phone Sales to Oems

Windows Phone Sales to OEMs are included in the Devices and Consumer Licensing (DCL) business segment section of Microsoft’s Earnings Release FY14 Q2 (http://www NULL.microsoft NULL.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY14/Q2/default NULL.aspx). Year over year, revenues from this segment were down 6%, from $5.703 Billion to $5.384 Billion. Chris Suh commented on this number noting the revenue decline reflected prevalent ” . . . PC and device market trends . . . “. I need to note, while Chris Suh specifically mentioned a 3% decline in Windows sales to OEMs, he doesn’t mention the specifics about the decline in sales of Windows Phone to OEMs. At the start of her forward looking comments, Amy Hood, CFO remarked about Nokia: “All guidance here assumes no impact from Nokia.”

But I think the drop in sales of Windows Phone licenses to OEMs, perhaps, correlates to Nokia’s announcement, a day in advance of this earnings report of a 29% drop in handset sales. In my opinion this drop is attributable to much more competition at the high end of the smart phone market. A quick look at Samsung’s report for the same calendar quarter reveals a 9% drop in year over year sales for its IM/Mobile business segment (http://www NULL.samsung NULL.com/us/aboutsamsung/ir/ireventpresentations/earningsrelease/downloads/2012/20140124_conference_eng NULL.pdf).

In fact, I think the Google Moto G, together with a robust effort by Lenovo to become a major manufacturer in this product category, has resulted in a broad drop in market share for each of the traditional major players in the market. It will be very interesting to study Apple’s report for the same calendar period. I would attribute any subdued forward looking comments about iPhone sales, once again, to these two new developments in the high end smart phone market.

Commercial Cloud Products

Microsoft reported Q2 2014 sales of $1.78 Billion, which amounts to a year over year 28% increase, in its sales of “Commercial Other” product segment offers, including Office 365, Azure and Dynamics CRM. In contrast, Google reported $1.23 Billion in “Other” (I presume this segment includes Google Apps) revenue for the 3 months ending September 30, 2013 (http://investor NULL.google NULL.com/pdf/2013Q3_google_earnings_data NULL.pdf), and Amazon appears (I find it very difficult to breakout the actual cumulative sales figure for Amazon AWS for the quarter) to have reported $1.011 Billion in “Other” sales (which includes AWS) for the calendar quarter ending September 30, 2013 (http://phx NULL.corporate-ir NULL.net/phoenix NULL.zhtml?c=97664&p=irol-newsArticle&ID=1868092&highlight=).

I leave it to the reader to draw conclusions from the above figures as to the comparative rank of each of these companies in the broad cloud computing services category. Certainly, anyone reviewing the statistics must at least acknowledge Microsoft’s ascendance to one of the leadership positions in this category in a very short period of time.

It’s important to note Microsoft’s report of a substantial 24% drop in consumer licensing for its Office products elsewhere in the quarterly report. Chris Suh provides further detail on this number, estimating 16% of the total as directly attributable to consumers abandoning on premise Office for Office 365, consumer. The next few quarters will provide important indication of how the ongoing erosion of this product segment is progressing.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved

27
Jan

Microsoft Buys Market Share in Consumer Tablets in Q2 2014 with its Surface and Surface 2 Products

Microsoft reported a doubling of sales for its Surface tablets in its Q2 2014 earnings report. As the report illustrates, despite this growth in sales, year over year, the product line is not yet generating profits. In its webcast for the quarter, Amy Hood, Microsoft CFO reported ” . . . sequentially, both units and revenue more than doubled this quarter.” (quoted from Microsoft’s Q2 2014 webcast (http://www NULL.microsoft NULL.com/Investor/Events/Presentations/2014/ERFY14Q2 NULL.aspx?eventid=138992)) Nevertheless, included in the report is a 46% decrease in gross margin, to $411 million, for the Surface and Xbox product lines. A slide was presented depicting this year over year decline, during Chris Suh’s portion of the presentation, but he added no verbal commentary on this point.

Heather Bellini, an Analyst from Goldman Sachs, put the broad product margin question on the table during the question and answer session. She asked Amy Hood, CFO ” . . . How do you see the gross margin profile of the company changing as [Microsoft] continues [its] journey to a devices and services company? And as you look out to when the transition is complete, [understanding] you probably don’t know when that’s going to occur, how do we think about what it will look like?”

Amy Hood audibly hesitated prior to answering this question, as if to illustrate how big a question Ms. Bellini had asked. Ms. Hood’s answer began with a citation of where Microsoft’s margin is holding up very nicely, namely, for its Commercial Segment. Despite ” . . . investments in infrastructure . . .” ” . . . our actual gross margin remains flat”. The infrastructure investments were made for the commercial cloud business, where Microsoft, Ms. Hood notes, ” . . . continues to see traction.” She goes onto sum up the impact of commercial cloud business for Microsoft. From her vantage point ” . . . moving to the cloud is a net positive” for the company, and will be a significant contributor to net profit.

She characterized the commercial segment, which maintains an 83% gross margin, as a ” . . . separate bucket from [Microsoft’s] Devices and Consumer (DC) business.” The Surface products are included in this segment. But Ms. Hood’s response, while noting the Surface products are a “separate model”, within this segment, from the XBoxOne product, which, historically, has proven to be ” . . . margin negative at the front . . . “, did not provide a specific comment on the details of how this product is differentiated from the Xbox line within this segment.

Keith Weiss, Morgan Stanley, added another question on the gross margin topic, this one pointed clearly to the DC business: How did this segment exceed expectations and year over year performance for the gross margin metric? Ms. Hood’s answer included an acknowledgement of ” . . . increased COGS [Cost of Goods Sold] . . . ” for the segment.

So the comment by Nick Wingfield of the New York Times, ” . . . The bad, though, is that Microsoft’s gross profit from the hardware business actually fell to $411 million, compared with $762 million a year ago, despite the surge in sales.” (quoted from Mr. Wingfield’s article Microsoft Earnings Illustrate Move to Devices and Services From Software (http://www NULL.nytimes NULL.com/2014/01/24/technology/holiday-sales-help-push-profit-up-at-microsoft NULL.html?_r=0)) is entirely accurate and a worthwhile summary of the real cost of entry for this company as it builds a base in an entirely new market — consumer devices.

But it’s also very important to keep in mind the vitality of the commercial software segment and, in particular, the commercial cloud segment. If this segment continues its strong performance for the next few quarters (and I see no reason why it wouldn’t), then the substantial cost of entry will likely be subsidized, which can only be good news for investors. Disclaimer: I am long Microsoft.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

24
Jan

ProofPoint Uncovers Successful Malicious eMail Activity and Finds Security Holes in the Internet of Things

On January 16, 2014 ProofPoint published a press release, titled ProofPoint Uncovers Internet of Things (IoT) Cyberattack (http://www NULL.proofpoint NULL.com/about-us/press-releases/01162014 NULL.php). According to the company, some 750K “Phishing and SPAM emails” were uncovered through ProofPoint’s efforts. The sources of these attacks were traced back to a set of home entertainment centers, televisions and “at least one refrigerator”.

This information should help people interested in the notion of IoT to better understand the range of devices included in the scope of the first significant hack attempt on this type of data communications.. Conspicuously absent from the list of compromised devices included in the release are smart thermostats, electric meters, HVAC systems or even home security systems. But it is increasingly likely the attackers will soon begin to penetrate HVAC systems, etc. Certainly the risk of successful attempts to compromise an HVAC system is a magnitude greater, even than the risk of a rogue smart refrigerator sending spam emails.

The ProofPoint release also helps us better understand why hackers are targeting IoT devices. The malicious exploits amounted to efforts to turn smart appliances into broadcast resources for junk email, and phishing attempts. The objective is clearly nefarious as ProofPoint’s release points out: “Cyber criminals intent on stealing individual identities and infiltrating enterprise IT systems have found a target-rich environment in these poorly protected internet connected devices that may be more attractive and easier to infect and control than PC, laptops, or tablets.” (quoted from ProofPoint’s Press Release. I’ve provided a link to the complete press release earlier in this post).

Consumers of these smart appliance and home convenience devices may want to read ProofPoint’s release before connecting one of them to the Internet. Investors keen on the IoT trend may also want to read the release, if for no other reason than to get a sense of the magnitude of a negative black swan event, and its potential destructive damage on businesses marketing IoT solutions.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

23
Jan

What is Google’s Acquisition of Nest All About?

Back on April 1, 2013 I wrote a post to this blog about the Nest home thermostat, The Learning Feature of the Nest Thermostat is Interesting, But the Zigbee Internals and Compatibility with Smart Meters is More Important. On May 7, 2013, I interviewed Kate Brinks of Nest Labs and wrote a follow on post, which I published on June 4, 2013, Nest Labs Acquisition of MyEnergy Makes Sense.

My interest in Nest Labs grow out of my first hand experience in the Smart Home effort of 2003 – 2004. I was also directly involved with some entrepreneurs working on Radio Frequency Identification (RFID), and Industrial Ethernet hardware. I had frequent conversations with several of the early pioneers of industrial process control solutions, and built a couple of business relationships, which transpired over the next few years (please contact me for the specific names).

But the assumption I included in my first post on this device, the one about bi-directional data communications capability with the Smart Grid, was not correct. Nest Labs bought the technology when they acquired MyEnergy, as I wrote in the second post on the topic.

The point is, from what I found through my conversation with Kate Brinks, and my own research, Nest Labs didn’t have especially deep experience, nor did it have especially deep technical understanding of the industrial side of automated process controls systems, at least back in the spring of last year. It’s very likely they’ve invested in hiring this expertise since then, so I’ve little doubt of their technical capabilities, now, to do some original, pioneering work in this area.

I think Google acquired the company to bring the superb technical product management Nest Labs exhibited with the original debut of its home thermostat, in house. Disclaimer: I have had no conversations with anyone, neither at Nest Labs, nor at Google, to support this conjecture, but I can’t help but think this acquisition is Google had a burning need to acquire the best product management expertise with consumer hardware devices they could find. Makes sense when we consider their Chromecast product line, Google Play, the MotoX smart phone effort, etc.

But I think all the talk about the “Internet of Things” and what this acquisition will do for the effort, is pure conjecture and off target. As I wrote elsewhere in this blog, Cisco tried drumming up all this effort 10 years ago with little lasting success. I don’t see the latest iteration going any further. The real key to the Smart Home is to be found elsewhere, somewhere closer to the industrial automation and process control technologies required to make it work.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

22
Jan

Is Blackberry Firing Up the Enterprise Software Market for Mobile Device Management?

Citron Research thinks Blackberry will capture the dominant position in the enterprise market for Mobile Device Management (MDM) solutions. Enterprise business and comparably sized organizations in the public, and not-for-profit sectors need MDM solutions to successfully, manage secure remote data communications between smart phones and tablets and internal networks and data sources.

In a research report titled BlackBerry: Why the Shorts and Analysts Have it Wrong
Citron looks at a $15 Target – Minimum (http://www NULL.citronresearch NULL.com/wp-content/uploads/2014/01/the-new-bbry-final NULL.pdf)
Citron Research argues BlackBerry has been misunderstood by investment analysts and the financial news media. They also like the appointment of John Chen as the new CEO, and his stated intention to transform the company.

There can be little doubt of the depth of consumer interest in an effective MDM solution. Demand for tablet computers is strong. More low cost windows tablet computers are coming to market. At the same time, in April, 2014 Microsoft® will stop supporting the Windows XP® operating system. Some portion of today’s market for windows tablets can likely be attributed to enterprise customers replacing laptop Windows XP PCs. This portion looks to grow even further post April. So Enterprise IT organizations have a burning need for an effective MDM solution.

With regards to smartphones, the lower end of the market is broadening, while the capabilities of leading products in the category is increasing. Once again, Enterprise IT will look to leading MDM solutions to help them protect the internal users looking to communicate with internal networks with consumer grade android, windows, and iOS smart phones.

Citron’s presentation is certainly compelling, but conspicuously absent from the list of BlackBerry’s competitors for this business is IBM. One can convincingly argue IBM is more embedded into enterprise software markets than BlackBerry, and possesses the quality sales force required to service customers. On December 18, 2013, just 2 days prior to BlackBerry’s quarterly report, and Mr. Chen’s conference call, which Citron thinks “[a]ny serious investor in BlackBerry should read . . . ” (quoted from Citron Research’s report on BlackBerry. I’ve provided a link to the full report earlier in this blog post), IBM announced its acquisition of Fiberlink Communications and its MaaS360 MDM application (http://www-03 NULL.ibm NULL.com/press/us/en/pressrelease/42752 NULL.wss).

A careful study of the landscape of the enterprise software market for MDM solutions should certainly include mention of offers from more appropriate competitors to BlackBerry under Mr. Chen — namely IBM, Microsoft, Oracle, SAP, Verizon and AT&T. Each of these businesses possesses the enterprise software sales teams and experience to make Blackberry’s transformation a bit harder to accomplish.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

21
Jan

Comments on Intel Q4 2013 Conference Call

Intel’s Q4 2013 Earning Report triggered a now familiar pattern of analyst commentary. Pundits focused more on management’s very conservative forward guidance — flat year over year earnings for 2014, continued shrinkage in legacy PC markets, modest gains in enterprise markets, and comparatively larger gains in tablets, and other smaller form factor computing devices — than they did on the reported resilience of this business, which made it through fiscal 2013 with only minor bruises (gross revenues down 1% year over year). Even better, management reported on a greater market appetite for PC computing devices (Q4 2013 actually delivered 2% year over year growth) than I would have expected.

I’m confident Intel will eventually establish itself as one of the most important producers of chips for new mobile devices — tablets and smart phones. In an article titled Intel Inside Your Portfolio? It Should Be (http://online NULL.barrons NULL.com/article/SB50001424053111904681004579325003104040342 NULL.html#articleTabs_article%3D1), Dimitra Defotis wrote in Barron’s “Intel has invested a cool $60 billion on manufacturing in recent years, and says it will give the company a leg up as chips advance from the current standard of 22-nanometer circuit dimensions to 14 and even 10 nanometers” (quoted from Ms. Defotis’ article, a link to which has been provided in this paragraph). Smaller mobile devices, like the “wearable” concepts attracting a lot of commentator interest, will benefit from these smaller circuits. Consumers will also benefit: Smaller circuits are less costly to build than are their larger siblings. Bottom line: I’ve invested in Intel in the past and am bullish on their near term future.

I would point to one other set of data included in the presentation, which I think anyone appraising Intel’s near term future fortunes should consider: Intel ” . . . saw strong tablet growth in the back half of the year, and inclusive of PC and tablets, [Intel’s Tablet] unit growth in the fourth quarter was up almost 10% from a year ago.” (this quote is excerpted from Intel’s CFO Commentary on Fourth-Quarter and Full Year 2013 Results (http://files NULL.shareholder NULL.com/downloads/INTC/2904284312x0x719433/39163c4d-27ee-49d5-8043-9f33cf8559a5/CFO_Commentary_Q4_2013 NULL.pdf)). The Atom processor is doing much better than almost anyone would have expected. Dell’s Vue 8 tablet appears to have done well during the 2013 holiday shopping season. HP, Lenovo, and Asus each have their own entries in the same tablet device category. So I wouldn’t be surprised to see some positive upside in this segment when Intel reports for Q1 2014.

However, as Tiernan Ray noted on Saturday, January 18, 2014 in his Technology Trader weekly article for Barron’s, A More Mobile Intel Still Must Fix Its Financial Reporting (http://online NULL.barrons NULL.com/article/SB50001424053111904681004579320581802558944 NULL.html?mod=BOL_twm_col#articleTabs_article%3D1), ” . . . Other IA is where the company records sales of smartphone and tablet chips.” (quoted from Mr. Ray’s article) Investors must take the following point, made by Mr. Ray (and substantiated by the CFO Commentary materials for this quarter) into account, in order to put together the whole story of Intel’s foray into improving its performance in the tablets and smart phone chip markets: “Other IA ran an operating loss of $620 million in the latest quarter, quite a contrast to the 40% operating profit of the PC division and the 49% of the server business. And that’s before Intel even reached its goal of taking market share in mobile—that is, before the rebates kick in. (Intel plans to cut some 5% of its workforce to reduce its costs.)” (ibid).

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

17
Jan

Federal Appeals Court Ruling on Net Neutrality, If Upheld, Looks Like a Game Changer for High Speed Data Providers

On January 14, 2014, the news broke of a Federal Appeals Court ruling, which blocks the Net Neutrality rules of the U. S. FCC. If this ruling is upheld, then high speed data providers (Verizon, AT&T, Sprint, etc) can begin to capture much more value from their current plant in terms of larger profits.

I’ve posted my opinion of what appears to me to be curiously limited profits for providers of high speed data services. I based it on a combination of indicators. One of these is my observation of recent efforts by Verizon, the largest wireless data provider here in the U.S., to sell bandwidth. The other is what I refer to as wireless data customer “recycling”, which goes like this: The major U.S. high speed data providers each make what I consider to be overly aggressive offers to consumers. The consumers who bite on these offers are expected to simply shuffle from one provider to another for essentially the same service.

Does it make sense for Verizon, AT&T, et al to pay for the early termination charges consumers will incur by switching plans? Before this ruling I answered this question in the negative. The only justification for the cash sign-on bonus for consumers would have to be an effort to reduce competition in a market where high speed data is a mere commodity.

Please note the timing of the first sighting of this phenomenon — AT&T kicked it off after Sprint announced its interest in acquiring T-Mobile. Funny, I thought a few months ago AT&T wanted to buy T-Mobile, right? So wireless customer recycling, as I see it, is a fancy version of a very primitive “scorched earth” policy. Welcome to the new dark ages.

But this ruling will likely change everything, which I take to be very good news. For some reason most analysts are more concerned about the negative impact the ruling will have for businesses like Netflix, than they are taken by the brand new blue sky it opens for Verizon and its peers.

My dictum is the following: If no one can afford to put down the pipes required for all this high speed data, and operate a viable business from them, then the high speed data services are going to eventually go away, anyways. Therefore it’s better, overall, to make sure the providers are fed properly, or else the rest of the food chain (including Cisco, etc) will be hard pressed to make it through to the next meal. Netflix, Skype, etc are simply icing on the cake.

Ira Michael Blonder (https://plus NULL.google NULL.com/108970003169613491972/posts?tab=XX?rel=author)

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved