Month: Aug 2014

Will Attractive Profits in the Android Ecosystem Move to Component Makers?

In a previous post, I discussed that Clayton Christensen’s “Law of Conservation of Attractive Profits” predicts that attractive profits will move from the Android OEMs towards adjacent layers in the value change.

One possible layer is the SoC component manufacturers. I am very unfamiliar with this market, but I think that in this market, Qualcomm has historically been very strong with its Snapdragon series of chipsets. The new rising star is MediaTek which is very popular among the new OEMs like Xiaomi and MicroMax which sell their smartphones at very low costs. It seems like the rise of MediaTek is recently pressuring Qualcomm.

Unlike the Smartphone OEMs, many of which are having trouble generating profits, Qualcomm and MediaTek are quite profitable. Apparently due to its focus on emerging markets, MediaTek’s revenue growth is quite remarkable, up 62.7% year-on-year.

Whether or not the SoC component layer will earn attractive profits depends on the structure of the market, barrier to entry, capital intensity, commoditization or Android hardware, bargaining power relative to Android OEMs, bargaining power relative to Fabs, etc. It will be fascinating to watch how this market evolves. Unfortunately, I don’t have enough understanding of the market to make a reasonably informed prediction. My gut feeling however is that the situation may eventually resemble the PC market, where Intel owned a huge proportion of the attractive profits.

More on Attractive Profits in the Cloud

I’ve been touching on the subject of commoditization of the cloud a couple of times on this blog(1, 2.

Today, I’ll like to look at the current players and how a possible commoditization of the cloud will affect their businesses. That is to say, do the current players own an adjacent layer in the value chain that can reap the attractive profits.

Barb Darrow at GigaOM, citing Rick Sherlund from Nomura Securities, gave some estimates on which companies are are making money from their cloud business (below). It is clear that Amazon AWS is losing it’s position as the dominant cloud vendor. The other companies, Salesforce, Microsoft, IBM and Google are significantly narrowing the gap. Microsoft and IBM in particular have very high growth rates relative to AWS.

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Given that cloud services are in many ways similar to rental servers, and that it is probably difficult to maintain differentiation, it is likely that prices will drop and cloud services will commoditize. When commoditization happens, Christensen’s “law of conservation of attractive profits” predicts that the attractive profits will shift to an adjacent layer in the value chain. Here I would like to see if the current players in this market will be able to capture the profits as they shift.

  1. Microsoft, IBM: Both of these companies are very strong in enterprise IT. As the cloud commoditize and enterprises move their data centers into the cloud, Microsoft and IBM could easily provide value through consultation and customized services. They are both well positioned to take advantage of cloud commoditization.
  2. Salesforce: Similar to Microsoft and IBM, Salesforce will benefit through consultation and customization for the cloud services.
  3. Amazon: I can’t see any of Amazon’s strengths in the layers adjacent to the cloud. I don’t see them benefiting at all from commoditization of the cloud.
  4. Google: Google makes almost all of it’s money from advertising, and it doesn’t make much money (at least not directly) from other activities. Hence it is difficult to say whether they are capturing profit or not in any of their activities other than search. Likewise, it is difficult to discuss how the commoditization of the cloud will affect them.

Understanding Microsoft’s Business

Jan Dawson recently broke down Microsoft’s revenue and growth by business segments. This helped me to understand the significance of the enterprise segment and at least partially understand the direction in which it is moving.

Points that caught my eye;

  1. Windows revenue is dominated by sales through OEMs. “Windows OEM revenue” is 15.5% of total whereas “Retail and other sales of Windows” is only 0.5%. This means that very few consumers upgrade Windows themselves, and continue to use the OS that shipped with their machine. This suggests consumers are indifferent about the new features provided with new Windows versions. When you think about the new features in Mac OS Yosemite, you realize that a lot of these are actually about integration with iOS devices and not about Mac OS X itself. It’s something worth thinking about.
  2. Consumer Office revenue (3.0% of total) is puny compared to Commercial Office revenue (25.0% of total). Although this may suggest that Google Docs is dominating in the consumer space, I think this may also suggest that consumers don’t really use Office suites very much. I have seen very little data strongly supporting either possibility.
  3. Server products are really quite strong. It’s amazing that sales continue to rise despite the rise of cloud computing. I would really like to understand what is happening here, and whether this strength will continue.

Why I Think Zero Rating is Good

I have previously written about the rapid rise of “zero-rating”, that is the practice of carriers providing free access to specific web-sites or Internet services, but charging for access to other sites.

This is in direct conflict with the net neutrality ideology which argues that (citing wikipedia);

Internet service providers and governments should treat all data on the Internet equally, not discriminating or charging differentially by user, content, site, platform, application, type of attached equipment, and modes of communication.

Just recently, the Internet.org initiative sponsored by Facebook released an app for “zero-rating”. Through this app or the Facebook app, customers of Bharti Airtel’s Zambian subsidiary will be able to access the following services with free data charges.

  1. Facebook and Messenger
  2. Wikipedia
  3. AccuWeather
  4. Google Search (Search only. Data will be charged if you click a link to go to another site).
  5. Local services such as job portals.
  6. The women’s rights app WRAPP.
  7. A basic library of Zambian laws.

I really like the selection. It is so noble.

If I was somebody like Nelson Mandela, someone who was working hard to bring democracy, freedom and equality to Africa, I would probably select the exact same services.

At least for our children, I’m sure most parents would choose something similar to the above selection over the commercialism driven “net-neutral” Internet.

As these “zero-rating” data plans become more popular, we can expect many more services coming on board. I hope that Facebook and the carriers will manage to resist the lure of commercialism, and continue to select the good ones and reject the bad ones based on a high ethical standard.