HTC announces HTC One (M8)

HTC today announced the successor to last year’s HTC One, which is being referred to as the HTC One (M8). The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research.

The new HTC One builds on the success of the device HTC launched last year. Like previous HTC devices, the new HTC One features premium materials and majors on design. Apple and HTC continue to be the only manufacturers making really premium-feeling and premium-looking devices. The new device should be a great step-up for existing HTC users. The dual cameras give the company a hook to hang their innovation credentials on, but belie the company’s claim that it’s not doing gimmicks. It’s the sort of feature that makes for great demos but hardly anyone uses in practice and almost no-one buys a phone for.

The biggest challenge for HTC is not that last year’s phone was badly reviewed – it wasn’t. It just hasn’t been able to convince consumers that they should buy it. As such, HTC’s problems lie in marketing and brand awareness, not in the phone itself. Launching a successor, even with some innovative features, is far from enough for HTC to turn its performance around. Unless it manages to solve its fundamental problem with marketing, it could launch the best phone in the world and it wouldn’t matter. If you want a premium experience today, you choose an iPhone, and if you really want to use Android, you choose a Samsung Galaxy phone. HTC simply hasn’t carved out more than a tiny niche for itself in the market. In the US, HTC has fallen back into fifth place, as LG and Motorola have climbed the rankings. Less than 10 million people in the US use HTC phones, compared with over 40 million using Samsung phones and over 65 million using iPhones.

Amazon Prime price increase is about streaming, not shipping

Amazon today announced that it will increase the price of its Prime service by $20 to @99 per year, following through on its promise during its Q4 2013 earnings call in January. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

Amazon attributes the Prime price increase to the increased costs of shipping. However, Amazon’s net cost of shipping has actually stabilized over the last several years, as this blog post details. The real reason for Amazon’s price increase is that it has been giving away a video streaming service roughly equivalent to Netflix for free as part of Prime. Given the rumors about Amazon launching a music streaming service as part of Prime as well, it seems far more likely that Amazon is recognizing that it can’t continue to ignore the high costs of giving away so much content for free any longer. That model has broken Amazon’s usual model of aligning its own interests with those of its customers, as the more users use these services, the more benefit they receive and the higher Amazon’s costs.

Amazon has always been honest about the fact that free shipping was one of its most effective marketing tools, and it spends roughly as much on subsidizing shipping each year as it does on traditional marketing. Prime members buy much more from Amazon and it has always made up the cost of shipping through higher sales. But the big problem is that Amazon likely incurs a cost of around $60-80 per customer for offering Prime Instant Video, with no direct revenue at all, putting the service significantly in the red before it even provides any free shipping. That, and not shipping, is the real reason Amazon has to raise the price of Prime, and it should be honest about that fact. It’s disingenuous to pretend that giving away video streaming has nothing to do with the price hike.

Samsung’s new devices acknowledge industry maturity

Samsung today announced its latest flagship smartphone, the Galaxy S5, along with a fitness-oriented wearable, the Galaxy Gear Fit, in addition to providing more details about its new Gear smart watch devices, which were announced over the weekend. The following comment may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research:

“Samsung’s announcement was much lower-key than its recent events, which seems to be an acknowledgment that too much of the attention has been focused on the spectacle rather than the content at previous launches. But it also seems to have toned down its attempts at bombarding potential customers with massive numbers of new features, choosing instead to focus on just a few key features for each device. At the same time, Samsung made a big deal about meeting users’ needs rather than necessarily inventing anything itself. Samsung now appears to be focused on innovation by focus group, talking about new features as meeting the top three user demands in a particular area, for example. This is a recognition of the increasing maturity of the smartphone industry in particular, where we no longer see big leaps forward in core features, but instead are seeing the same features already present in other devices showing up on each new flagship from the major vendors. But it’s also disappointing to see Samsung so humbled by the relatively poor performance of the Galaxy S4 that it appears to have given up on inventing its own new ideas.

The fitness devices fix some of the problems that plagued the first Galaxy Gear, but without pricing it’s hard to know how compelling they will be. With the exception of the Pebble, most successful wearables today are in the fitness category, so it makes sense for Samsung to enter that market with the Gear Fit. The Gear Fit looks reasonably compelling, though the screen orientation is a bit odd, as the wearer will have to bend their arm in an unnatural way to get a clear look at it. The curved screen is the latest in a long line of display innovations from Samsung, but it’s not clear anyone is buying wearables for the screen. A simpler screen with better battery life might well have been a better investment from a user point of view. The new Gear watches also look like solid improvements, but they reinforce Samsung’s core strategy. Just as Apple won’t release iTunes for anything but iPhones, it appears Samsung won’t make its wearables compatible with anything but Galaxy devices. That makes sense from a strategic perspective, but limits the addressable market, though it’s now a large base at 200 million.

Samsung needs to prove that it can get back to the sort of growth it experienced in the smartphone space in 2011 and 2012, which means giving people compelling reasons to upgrade but also increasingly to switch from other vendors and platforms. The Galaxy S5 is a nice upgrade for someone with a two-year-old Galaxy S3, but there’s not much here to suggest it’s going to win many converts from other vendors or first-time smartphone users, especially as this is likely to be a premium device. The emphasis on wearables may be an acknowledgment of that fact: that growth will have to come from elsewhere in the future and not just from smartphones.”

 

AT&T shifts gears on Next and Mobile Share

AT&T announced today that it would be lowering the price to add a smartphone for customers on its Mobile Share plans using 10GB or more of data from as much as $40 to $15. The offer will also be available to new customers who pay for their own devices, either through Next, bringing their own phones, or paying for a phone outright. The following comments may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

AT&T’s change in pricing bucks the recent trend in the mobile industry by offering the best deal to existing customers. With all the effort currently going into getting customers to switch, AT&T’s moves seem to be geared towards keeping existing customers first and foremost. This is clearly a response to the aggressive price moves from competitors, especially T-Mobile, over the last several months. But they also reinforce the fundamental difference in strategy between AT&T and Verizon Wireless on the one hand and Sprint and T-Mobile on the other. AT&T has switched entirely to metered data, and as such the best way to grow revenues over time is to increase the amount of data people include in their plans. The introduction of Mobile Share paved the way, and thirty percent of people on Mobile Share plans already have 10GB or more of data. This move is clearly designed to make 10GB the new starting point for Mobile Share plans over time so that more and more customers are at this level. Sprint and T-Mobile are sticking with unlimited data, and so have to capture new customers to grow, hence their aggressive pricing moves recently. AT&T and Verizon will continue to try to attract new customers, but they can grow strongly by growing usage and growing the number of devices per account without necessarily adding huge numbers of new customers. That becomes all the more important as the market becomes saturated and there are few new customers to go around.

But this move is also part of AT&T’s push to get customers to pay for their devices explicitly. Lowering service plans is a great way to incentivize customers to switch to its Next program, under which customers pay for phones in installments over time, rather than having the cost of the device recouped through service fees. As such, both these moves can be seen as AT&T positioning for the future: shifting to data plans as the focus for growth, and breaking out the cost of devices so that service fees truly reflect the cost of service. Most customers will save significantly on their service plans by switching, but since they will have to start paying for their devices separately, those with expensive devices may end up paying more over time, while those who prefer inexpensive devices will be able to save money overall. (Compare the $25/month cost of an entry-level iPhone 5S on AT&T’s 18-month Next plan to the $25 saving per month under the new Mobile Share plan. Higher end devices will cost more, cheaper devices will cost less. And subscribers will save the up-front fee typical with 2-year contracts).

Overall, this is a continuation of several major trends in the US mobile industry: more intense competition as the market saturates and the two smaller national carriers start to become more aggressive, a shift to data rather than voice and messaging, and a move away from subsidies.

T-Mobile expands beyond wireless service with Mobile Money

On Wednesday, T-Mobile announced its new Mobile Money service would go nationwide after a trial in the Miami area from November to January. The new service offers a prepaid Visa card with various bank-account-like features behind it. The below comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

T-Mobile has focused its Un-Carrier efforts on undermining the competition in wireless services, kicking off a mobile price war. But until now, T-Mobile has shown little recognition that it needs to go beyond wireless services to build sustainable growth in the long-term. Mobile Money is the first sign we’ve had that T-Mobile is interested in going beyond the traditional wireless services business. It fits nicely with T-Mobile’s branding as a friend of the consumer and a company that does things differently, and the service should provide significant value to people who struggle to qualify for traditional bank accounts.

Serving the unbanked has been the key to success for mobile money services in the rest of the world, but with most of the US population having a bank account, the unbanked population here has been largely ignored until now. The two major existing mobile money services in the US – ISIS and Google Wallet – are both focused on people who already have bank accounts, and are arguably solutions to a problem that doesn’t exist. On the other hand, T-Mobile’s Mobile Money service isn’t really a mobile money service at all – it’s a banking service that happens to be owned by a mobile carrier. Making purchases still involves a plastic Visa card and not the mobile device. That may be a technicality, but it’s actually somewhat brilliant in that it avoids all the technical issues associated with most mobile money services. And there’s a good-sized target market for these services: the FDIC’s latest estimates showed that 8.2% of US households, representing about 17 million adults, don’t have a bank account, and these customers are prime candidates for T-Mobile’s service. Another 51 million adults live in households that have bank accounts but regularly use check-cashing, payday loan or other non-bank financial transactions which could be eliminated with T-Mobile’s service. T-Mobile has in the past served many customers in the sub-prime credit segment, since it has a high proportion of prepaid customers, although its Un-Carrier strategy has boosted its postpaid base. As such, T-Mobile’s customer base is a better fit with this segment of the population than the big three carriers, which sell mostly contract services to people with good credit.

The challenge with this service is that there is no obvious short-term revenue opportunity for T-Mobile. The services are all free to T-Mobile customers, who are the target market, except for the sort of fees T-Mobile itself has to pay and will pass on to consumers. This has to be seen today as strictly a competitive differentiator and not a revenue opportunity, though I would expect T-Mobile to offer a broader range of financial services over time, and perhaps try to make some money on those. For now, though, this is another marketing effort from T-Mobile that will cost money rather than make money for the company.

AT&T introduces sponsored data

AT&T announced today that it will start offering a “Sponsored Data” model for mobile data, allowing third parties to pay for mobile data used by consumers on smartphones, tablets and mobile hotspots. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

AT&T’s announcement has been rumored for some time, and has generated mixed feelings in the past, raising concerns about net neutrality, consumer transparency and other issues. The announcement itself has positive and negative implications, as outlined below.

Positives:

AT&T’s announcement is a rare sign of real innovation from a carrier in charging for services – the first time a carrier has charged anyone but the end user for mobile data – and that makes this an important milestone. This gives developers a great additional option for engaging users, and especially for lowering the barrier to entry from engaging with their apps. It will have the biggest impact for applications involving video, since that’s the biggest driver of bandwidth consumption, but it will be useful for other services too. It might also help solve the issue of who pays for the data when employees bring their own devices to work – today employees often bear all the costs of using their own devices, even when they’re working, and the solutions on offer have been pretty terrible. This offers a more granular, sophisticated approach to the problem.

Negatives:

Despite all this, concerns will remain. Some have expressed concern that only major content providers will be in a position to afford to sponsor users’ data, creating a two-tier system where smaller content providers can’t compete effectively. There is also potential for fraud, with bandwidth-intensive applications claiming to be providing sponsored data, much as premium rate phone lines once scammed users. The 1-800 number analogy therefore has a 1-900 number counterpart. AT&T will have to work to provide better verification for consumers to avoid this problem in the medium to long term. Educating consumers on this model will be challenging, too, as it’s very different from what’s been done before. The biggest challenge from a developer perspective will be implementing the technology in a way that takes advantage of AT&Ts network without confusing or frustrating users on other networks.

Overall, this is a good bit of innovation from AT&T, but a lot will depend on the early applications that make use of the model. If some applications get out of the gate quickly which show real consumer benefit from using sponsored data, that could help turn this into a real success for AT&T. But if there aren’t good, pro-consumer applications pretty quickly after launch, there’s a real risk that the negative publicity will overwhelm sponsored data before it has a chance to take hold.

BlackBerry takes baby steps towards a new strategy

BlackBerry announced its earnings for the quarter ended November 30, 2013 today. Among other things, the company announced a move to a new operating structure and a device manufacturing agreement with Foxconn. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

BlackBerry has struggled greatly over the last couple of years, and the latest results show a worsening in essentially every number the company reports. BlackBerry hasn’t shipped this few devices in a quarter since 2006, and revenues haven’t been this low since the iPhone launched. Importantly, BlackBerry actually sold 4.3 million devices to end users, of which 1.1 million were BlackBerry 10 devices. BlackBerry 10 continues to be a flop, while customers in emerging markets continue to buy older BlackBerry 7 devices.

John Chen announced a new internal operating structure around four major segments: devices, enterprise software and services, BBM and QNX embedded systems. This is an excellent step as it recognizes the three growth areas that are critical to the company’s turnaround and offsetting the declines in the core devices business. However, the company stopped short of reporting revenues in any of these new segments, which is a sign of just how small the revenues there are today. BlackBerry needs to grow these three revenue streams enormously in the near future to make up for the loss in revenues in the handset business (see this post for more details). The company’s BES10 enterprise management system hasn’t generated any revenue yet, BBM won’t generate meaningful revenue until late 2015 at the earliest, and QNX revenue also remains tiny. As such, the company will see continued struggles in core devices and services revenue for some time to come, and won’t become profitable for two years, and will burn cash for much of the interim.

The Foxconn arrangement is an enormous step forward in devices. The company would have found it impossible to turn around its device business if it had kept it in-house, so this is about the only way BlackBerry could have saved it. Foxconn clearly has huge experience in manufacturing devices, and massive scale thanks to partnerships with Apple and others. But this is the first time Foxconn will be taking the lead in designing hardware for a major manufacturer, and that creates uncertainty about the quality of the devices. BlackBerry’s own hardware has not been stellar, so there may be upside here as well as risk, but neglecting the hardware as a core capability suggests BlackBerry may be underestimating its importance. However, it will stop the sort of inventory write-downs we’ve seen the last two quarters, which make the headline profitability numbers look so awful. But it won’t turn around devices revenue (or the service revenue which follows it) for some time to come.

Jan Dawson is available for comment at jan@jackdawresearch.com and (408) 744-6244.

Carriers’ unlocking proposal de-fangs new FCC chairman

News: The five major US mobile carriers have today announced a voluntary code of practice regarding cellphone unlocking.

Comment, attributable to Jan Dawson, Chief Analyst, Jackdaw Research: The carriers are clearly responding to remarks by Tom Wheeler, the new FCC chairman, on the topic of unlocking. The threat of regulation is always a great way to motivate players to self-regulate, and this is in many ways a better outcome, because it will happen more quickly and more easily than through a protracted regulatory process.

The carriers clearly felt that if they were to change their unlocking policies, they’d rather do it on their terms than someone else’s, and as such they’ve taken important but not world-changing steps here. The biggest change is transparency and clarity about policies, which have been utterly opaque to consumers in the past. Consumers can now know exactly what their carrier’s policy is, and will even be proactively notified when they’re eligible for unlocking.

This move will likely benefit T-Mobile most significantly, as it continues to aggressively target AT&T’s customers, which are the best fit for switching networks. But as more carriers offer preferential rates for customers bringing their own devices, unlocking will become a more significant issue. This may lead to a rise in churn rates, which in turn will force carriers to respond more aggressively to competitive threats.

It’s clearly good news for consumers. They were never going to see carriers unlocking phones still on a two-year contract without early termination fees, but this was about the best they could have hoped for.

Comment on failure of BlackBerry buyout

BlackBerry has announced that it would receive a $1 billion investment from Fairfax Financial and other investors, representing the conclusion of its process of seeking strategic alternatives for taking the company forward. Fairfax had wanted to acquire BlackBerry outright, but with the deadline looming today it looks like it fell short of raising the necessary funds, so this represents plan B. Jackdaw Chief Analyst, Jan Dawson, has the following comments:

“The appointment of enterprise software veteran John Chen, former CEO of Sybase, as chairman and interim CEO of BlackBerry suggests that Fairfax and others see the company’s future in software rather than devices. This makes sense in light of BlackBerry’s sputtering device shipments over the past few months, but it’s still not clear where that growth will come from.

“BlackBerry’s new investors seem to see its future in software, which means using BlackBerry servers as the core of a broader enterprise device management platform, but this generates very little revenue for the company today. Though it’s achieved some traction with enterprises upgrading their BlackBerry servers, it has failed to sell many BlackBerry 10 devices, and this looks unlikely to change. This ultimately harms the unique selling point of BlackBerry server products leaving the door open to replacement by rivals that are better able to support the more popular Apple and Android devices.

“At the same time, it’s also too much to expect BlackBerry’s other software investments to ramp up fast enough to secure its long-term survival and return to growth. QNX, whose main value was providing an OS for its devices, currently generates less than $100 million a year. Equally, BlackBerry Messenger has had a good couple of weeks of downloads as a cross-platform messaging option, but continues to trail other similar messaging apps significantly.

“Fairfax’s investment will buy the company some time, which it badly needs, but the company needs a new strategy more than ever. If Fairfax had taken the company private, it could have kept that strategy to itself. But with BlackBerry remaining a public company, Chen and Fairfax Chairman and CEO Prem Watsa need to start communicating that new strategy very soon to inspire confidence in a turnaround.”

Comment on iPad Air and Retina iPad Mini launch

Following the raft of new products and price changes announced by Apple this evening, Jan Dawson, Chief Analyst at Jackdaw, has the following initial comments:

“As expected, Apple took some cues from the iPad Mini in launching the new iPad Air, which is thinner and lighter, while adopting many of the internal improvements first seen in the iPhone 5S. This represents a good enough boost to the previous version to trigger good upgrade sales and get iPad shipments growing again, which was a key objective for this launch. However, the company also took a step back from the strategy it adopted when it launched the first iPad Mini. When that device launched, it was with a sub-par display and specs that matched the older iPad 2. The new iPad Mini and iPad Air both have top-of-the-line specs, and start at $399, meaning that the minimum price for a high-performance iPad has actually gone up. Meanwhile, the iPad 2 and iPad Mini will remain on sale at lower prices, but with significantly less appeal given the gap in specs between them and the new iPads. It seems as though Apple is trying to push average selling prices for iPads back up again after they’ve dropped steadily over the past year. Both devices should sell very well, especially over the holiday period, but Apple held off being as disruptive as they might have been by pricing them relatively high.

“This is the clearest statement Apple could have made that it is only interested in competing in the premium tablet space. The yawning gap between the specs of the cheaper iPad Mini and iPad 2 and the new iPads signifies that it is only willing to compete at the lower price points with older models. This leaves a huge chunk of the tablet market unserved by Apple while others such as Google, Amazon and a raft of others aggressively target the sub-$400 market. This reinforces our view that Apple’s share in tablets will continue to fall as Android’s share rises over the coming years.

“Though the iPad news will generate the headlines, the changes to Apple’s software licensing for Mac OS X, iLife and iWork is also important, not least for Microsoft. Microsoft generates 96% of its operating margins from operating system and productivity software licensing, and Apple is now teaching people to expect both of those things to be free. While this won’t disrupt Microsoft’s business overnight, it will create further pressure on Microsoft to bring down prices for its productivity software and especially for Windows.”