Quick Thoughts: More Mobile Cowbell

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Another month, another major industry event.  While these things usually offer nothing particularly earth shattering – the main reason we decided not to foot the bill for a week in Barcelona this year – this week’s news flow filled in a few details to the always murky picture of the future.

Apple – Will it Be Smaller or Cheaper? The Wall Street Journal, which has been accurate in the past on its Apple scoops, is reporting that Apple will introduce a half-sized iPhone this summer, while the New York Times counters that the iPhone5 is the only new smartphone for the summer and that the company is considering a cheaper, but not smaller, addition to the line.  While expanding the product line could greatly increase Apple’s addressable market and counter the proliferation of Android devices, the decision does not seem as cut and dried as many assume.  A smaller product would still be an expensive phone to build, would be incompatible with many apps, and would likely compromise the user experience.  A defeatured model would be cheaper to make, but could also compromise the user experience.  In either case, removing mobile data connectivity would drastically reduce carrier subsidies.  Given the planned launch of the updated iPhone5 in June, it would seem unlikely that Apple would detract from it by launching a product line extension close on its heels.  Given this, we are more inclined to believe the Times than the Journal.

Lotsa New Androids. The drumbeat begun at CES continued at the Mobile World Congress.  This time the Asian’s took center stage with a panoply of smartphones and tablets built on the Google platform.  We have Facebook phones from HTC, 3D phones from LG, hard-core gamer phones from Sony Ericsson, bargain priced phones from ZTE and enterprise-focused models from Samsung.  We have tablets galore in a range of sizes, colors and configurations.  Add these to the Motorola onslaught from Vegas.  Moreover, chipmakers Qualcomm, Broadcomm, Nvidia and Samsung all announced new silicon platforms to power a next, next generation of Android devices next fall.  We expect the market for smart portables to power forward, consuming the sizeable markets for feature phones and PCs along the way to creating entirely new utility for users.  Apple’s brilliance in design makes them a formidable competitor, but their up-market focus, tight platform control and taste for high margins leaves much of the market to the Android ecosystem, and its wider range of niche products, price points and global carriers in distribution support.

Subscription Wars. The day after Apple revealed the details of its subscription program for publisher Apps on the iPhone/iPad platform, Google followed with its considerably more publisher friendly version of the same.  In Apple’s version, any publisher wishing to offer subscription-based content apps would have to offer the same or better price as available through other connections, could not offer links to other paid content through the app, would receive limited data about the purchasers of their subscriptions and would have to pay Apple 30% of the revenue.  Google will ask only 10% of its publishers, has no stipulations on pricing, will not restrict outside links and will pass through the relevant subscriber data.  The differences are emblematic of the differences in strategy between the two players – Apple is focused on control and margins, while Google is focused on gaining the largest possible audience for serving advertisements.  It will be interesting to see if any major publishers balk at Apple’s more onerous terms.  If so, it could greatly strengthen Android in the tablet market, and perhaps force Apple to reconsider the details of its program.  At this point, we suspect that the iPad/Android tablet dust-up will play out similarly to the Smartphone battle.

Microsoft/Nokia Start Their Survival Team-Up. The clock has started ticking on the much discussed Redmund/Espoo connection, as further details of Microsoft’s 10 digit financial support for Nokia’s development efforts, of products already underway, and of Mobile Windows licensee HTC’s thumbs up on the new ecosystem partner.  After four years of both companies standing immobile, mesmerized by Apple’s headlights, many investors are quick to right them off as roadkill, but we are somewhat more optimistic, as we wrote last week.  Regardless, the team-up of deep-pocketed mobile players is unambiguously bad for the other bronze-medal contenders Research in Motion and Hewlett Packard.  Global carriers remain the primary distribution channel – they have never been enamored by the Blackberry business model, which cut them out of the lucrative NOC revenue stream, and have little history with HP.  A viable Microsoft/Nokia alliance squeezes shelf-space for both alternatives and weakens Blackberry’s position with IT managers.

Dell Beats Expectations. 4Q beats by Dell, Lenovo and Nvidia have emboldened the dwindling crew of Wintel acolytes to call foul on the growing PC death watch.  We have been singing the requiem for the moribund platform as lustily as anyone, so the rebound in sentiment bears notice.   Dell and, particularly, Lenovo are share gainers, with Lenovo riding exceptional strength in China and emerging markets to 20%+ shipment growth in 4Q.  Both companies saw significant improvement in margins, as sharp reductions in component pricing were captured rather than passed through to customers.  While these numbers may seem encouraging, we note that overall industry PC shipments were estimated to have grown just 3.4% YoY in 4Q, with most industry observers continuing to take down full year expectations for 2011 market growth.  Moreover, the PC industry has not historically seen OEMs sustaining margin improvements, as price competition from share laggards erodes the benefits of cheaper components.  The demise of the PC market will take many, many years, but the inflection from growth to decline will be soon upon us.  As such, we see improving sentiment around the PC value chain as misplaced and only temporary.

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