Monday, October 22, 2012

Time for Nokia to replace Microsoft?

An article from the Oct 19 edition of Talouselämä, a leading Finnish news magazine:

Tutkijat: Android toiseksi kärjeksi Nokialle

Nokian olisi otettava Microsoftin rinnalle tai sen sijaan parempi kumppani, kirjoittavat tutkijat Timo Seppälä ja Martin Kenneyperjantaina 19. lokakuuta ilmestyneen Talouselämä-lehden Tebatti-palstalla.
The Google and Microsoft translations are a bit iffy, but here are some excerpts:
Nokia should take into Microsoft alongside, or instead of a better partner, write the researchers Timo Seppälä and Martin Kenney on Friday the 19th October edition of the magazine Talouselämä Tebatti column.

Timo Seppälä is a subsidiary of Etlatieto Ltd, a researcher at Etla, and Martin Kenney, Professor at the University of California (Davis).

The following post is part of a larger BRIE-ETLA research project.

Apple's iPhone revolutionized the mobile use of the Internet. In response, Google developed the Android operating system and offered it to phone manufacturers for free use.

In the past five years has led to a situation where Apple, as well as Samsung and other Android phone manufacturers utilize dominate the smartphone market. Nokia's "burning platform" has shrunk Symbian to insignificance and Microsoft Windows is still the underdog role.

Early last year, however, Nokia chose Microsoft's Windows [as its] only smartphone [platform]. In poker terms Nokia played all in, when the hand was a pair of jacks. Microsoft has no immediate risk at all.
The translation (from Finnish from the original English) is a bit hard to follow, but basically tells Nokia (in its home town) that it would have been better either with Meego or Android, and encourages Nokia to drop Windows (or at least choose a second parallel platform) rather than stick it out "until death do us part."

Saturday, October 20, 2012

Nokia: bad news without end

Like other CEOs of struggling companies, Stephen Elop has an unenviable job. He took over Nokia in 2010 when his predecessor had been unable to arrest the company’s decline.

Still, let’s not put too fine a point on it: Elop’s gamble to bet the company’s future on switching to the Windows Phone platform has been an absolute disaster.

In quarterly earnings announced Friday, the company lost €4 billion for the first 9 months of 2012 — nearly a billion of that in the 3rd quarter — versus €0.4 billion lost in the same period of 2011. This is not a one-time blip: here months ago, Nokia also lost money and announced massive layoffs.

Smartphone sales have been falling since 2010, but the major collapse came this year as the company phased out its Symbian handsets. (née published the damning chart:

[Smartphone Sales]

Nokia has been more successful at killing Symbian — by starving new releases — than getting people to buy Windows Phones. In fact, as late as Q2, Nokia was still selling more Symbian than Windows phones.

The only uptick in smartphone sales in Q3 came because during Q3, the company has rebranded its S40 (now “Asha Touch”) as a “smartphone” platform. Whether or not the new classification is accurate, it doesn’t reduce in increased sales and highlights how far the company has fallen since its 2010 peak.

It seems like the assumptions behind the Windows bet were flawed. Nokia (or at least Elop) hoped that being the big fish in the Windows pond would be better than slugging it out in the Android market.

Yes, Nokia (at least for now) has the majority of WP sales, but that's not much. The assumption was that Windows Phone would be competitive with Android and iOS, but so far it isn’t. Q3 numbers won’t be out until next month, but in Q2 WP was #5 at 3.5%, after Android, iOS, BlackBerrry and Symbian. Meanwhile, the transition has been managed in such a way to kill its Symbian cash cow before the customers embraced its new products.

For years, Nokia was the world leader in both smartphones and handsets. Now Samsung is selling almost 3x as many Android smartphones as Nokia is selling for WP, Symbian and S40. If Nokia isn’t ready to compete with Samsung, maybe it should just close the handset business and focus on infrastructure.

More realistic is the advice from former Apple Europe president Jean-Louse Gasée: fire Elop and switch to Android. If Nokia’s board believed in accountability, they’d lower the axe after the end of the Christmas quarter, but more likely they’re going to limp along until they can no longer deny the reality of Elop’s failed platform strategy.

Friday, October 19, 2012

Death of Newsweek magazine: inevitable or self-inflicted?

Along with newspapers, we also have dead tree magazines going away — the latest being Newsweek announcing Thursday that its print edition is finite at the end of 2012. MarketWatch went out on a limb and said that Newsweek “won’t be the last venerable media organization to take this drastic action.”

The NYT notes that the 80-year-old magazine recently took an odd turn with its forced marriage with The Daily Beast, an online-only opinion site. This came after audio magnate Sidney Harman bought this once lucrative weekly magazine franchise for $1 from the Washington Post Company in 2010. Harman’s heirs indicated earlier this year that they were no longer throwing good money after bad.

From the 1960s through the 1990s, Newsweek was one of the country’s most influential national media outlets, the Avis to Luce’s Time magazine. (The #3 magazine, US News, ended its print subscription in December 2010.) Today, information is no longer scarce, and killing trees is an inefficient way to deliver such information.

It’s certainly true that a weekly magazine delivered two days late to supermarket checkstands is a difficult sale in this era of instant Google-fed gratification. However, some commentators wonder whether the death of Newsweek is as much a function of its final (print) editor, Tina Brown. As the AP reported:

They say it speaks to the magazine's trouble connecting with and keeping its readers.

That brings to mind some questionable covers, like the July 2011 what-if image depicting what Princess Diana would have looked like at age 50, or last month's "Muslim Rage" cover depicting angry protesters, which was roundly mocked on social networks like Twitter.

Newsweek is using a difficult print ad environment as an "excuse" for its decision to end print runs, said Samir Husni, director of the Magazine Innovation Center at the University of Mississippi School of Journalism. He lays the blame at the feet of Tina Brown, the editor who took control of Newsweek when it merged with the news website she ran, The Daily Beast, two years ago.

"Tina Brown took Newsweek in the wrong direction," Husni said. "Newsweek did not die, Newsweek committed suicide."

Sunday, October 7, 2012

Is Pandora boxed in by supplier pricing power?

The 1990s brought numerous dot-com companies that never turned a profit, but had a “business model” of selling themselves to the greater fool, whether it be public shareholders or acquisition by a large firm. (This trend confused my students, who after several years of bad examples thought flipping a money-losing company counted as creating a business model).

Most of those companies are long gone. Instead, we have Pandora, which has yet to show a profit since its June 2011 IPO, but has a market cap of $1.7 billion.

To be fair, it has survived predictions of failure from four years ago. In a difficult market segment where firms have little control over costs (i.e. royalties), Pandora remains the most successful Internet radio service of all time, with Last.FM swallowed up (and largely forgotten) within the bowels of CBS, Live365 remaining privately held and most of the other firms now defunct.

The recent interest (and speculation) in Pandora centers on Apple’s rumored plans to create its own music streaming service. (More recent accounts say Apple’s plans have been delayed by the greed of the same record companies that make it impossible for Pandora to turn a profit.) The speculation knocked Pandora’s stock off its highest price since March, but other than that temporary blip, the stock has been trading in a range of $10-11 per share for nearly five months — although below its $16 offering, that would be a raging success by Facebook standards.

Now some (including Business Week) speculate that Apple’s interest will prompt Apple’s major rivals to buy Pandora to compete. Google competes with Apple on cellphone platforms, while Amazon is its major competitor in music streaming.

This comes despite analyst predictions of 2012 Pandora losses nearly doubling to $30 million. As with three years ago, Pandora is losing money on every sale but making it up on volume. (Thanks to the IPO, the company’s balance sheet is solid enough weather several years of such losses, even without any secondary offering).

Business Week even speculates that Clear Channel might be interested in supplementing its online service with Pandora (much as CBS bought Last.FM). This seems the least plausible, given all Clear Channel has spent on iHeartRadio, the mobile clients and even live concerts to promote the brand.
So as in the dot-com era, we have the hope that losses will be redeemed by a beneficent acquisition before the company runs out of money. But where is the business model? If it’s not possible to make money with current pricing (and cost structure), will volume solve the problem?

From following the cost structure of Internet radio for more than a decade, I see no cause for optimism. Facing a collapse in their core business, Hollywood labels hope extract every penny from newer (and smaller) channels, including Internet streaming. The bigger and more successful Pandroa gets, the more money record companies will seek to extract. Like a Dumas musical, it’s unlikely to turn out well for the protagonist.

Wednesday, October 3, 2012

T-Mobile's exit strategy

Since having its $39b sale of T-Mobile USA to AT&T nixed on antitrust grounds, Deutsche Telekom AG has been trying to figure out another way to exit the US market.

Today DT announced that its US subsidiary (#4 with 33.2 million subs) will be merged with the #5 US carrier, MetroPCS (with 9.3 million subs). The press release is here and the story is covered by Fierce Wireless (among many others)

It’s being called a “merger” but it’s clearly an acquisition (structured as a recapitalization), since T-Mobile USA will retain its name, technology, HQ and CEO — while MetroPCS will lose all four. It will retain its NYSE stock listing but presumably not its PCS ticker.

Although the cash payout is only $1.5b — funded by a $2.4b sale/leaseback of T-Mobile USA towers — MetroPCS shareholders will own 26% share of the new company. I haven’t seen any estimate of the value of the acquisition. The market suggests that the cash only accounts for one third of the value: today MetroPCS has a market cap (on inter-day trading) of about $4.5b, vs. $4.2b yesterday and $3.5b a month ago.

So instead of being paid $39b to exit, DT is paying $1.5b cash to build up a more stable company. I would presume that DT hopes that it will be able to gradually unload its 74% holding in the combined company through open market sales.

The two companies will be run as separate operations until T-Mobile can get all MetroPCS customers to phase out their CDMA handsets in favor of GSM ones. At today’s press conference, T-Mobile said it hopes to pull the plug on the MetroPCS network by the end of 2015. In the meantime, T-Mobile gets cheap LTE spectrum that both types of customers can share as the CDMA voice footprint goes down and the GSM voice footprint goes up. Or perhaps both end up on VoIP, i.e. VoLTE) which MetroPCS announced it plans to introduce in 14 US markets by early next year.

The acquisition puts pressure on #3 Sprint (56.4 million subs), which was a more obvious buyer for MetroPCS (which would have avoided the disastrous technology incompatibilities of its Nextel purchase). But so far, Sprint shareholders seem not to have reacted (either way) to the news.

One thing I haven’t seen mentioned: this is the merger of the iPhone outsiders: the #1, #2 and #3 carriers have the iPhone but #4 and #5 do not. Perhaps this will make Sprint want to buy the #6 carrier (which does have the iPhone): San Diego’s Leap Wireless which has 5.9m subscribers on its Cricket network.

However, the two hitches are technology and pride. Sprint is migrating its 4G strategy from WiMax to LTE, while Cricket uses TD-LTE, the Chinese variant not used by the top 5 carriers. (However, Cricket only offers LTE service in Tuscon right now, so perhaps it could drop the incompatible LTE if its acquired soon).

The other problem is that Leap turned down acquisition efforts by MetroPCS since 2007. Perhaps its due to bad blood between the companies that wouldn’t apply to Sprint, or perhaps Leap will realize that it lacks scale to operate its own network indefinitely in an ever-commoditized market.