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My take on the Apple iPad

January 29, 2010 By in earnings conference calls, Industry Analysis, Stock ideas, Technology Tags: , , , , , Leave a comment

The spectacle…

I haven’t really paid attention to AAPL product launches, even though I’ve been an owner of the stock (not now) for many years.  To my mind, this one broke the hypemeter.  Maybe that’s just the way AAPL does things, but I now know that the iPad is “real,” “natural,” “awesome,” “rad,” and “intimate.”

It does look great, though.  Reviewers have also said the screen is spectacular and the software is up the AAPL’s usual high standards.

…the specs…

The iPad (Fujitsu apparently owns the rights to this name in the US) has:

–a 1GHz Apple-designed microprocessor

–a 9.7″ (diag) backlit LED color touchscreen with 1040 x 768 pixel resolution

–solid-state (flash memory) storage

–10 hour battery life

–9.6″x7.5″x.5″ dimensions, weighing 1.5lb (wifi only) or 1.6 lb (wifi + 3G)

The iPad comes in two versions:  wifi only starting at $499, and

wifi + 3G starting at $629.

The basic units come with 16Gb of storage.  For $100 extra, you can up that to 32Gb and for $200 extra, to 64Gb.

In the US, ATT is offering a 3G connection for either $15 or $30 a month.

A plug-in keyboard is available for users who don’t want to use the touchscreen virtual keyboard.

The iPad also runs iWorks (–does anyone actually use it?).

Engadget has a good review of the iPad, including video from the press conference.

…and the (non) specs. Continue reading →

smartphones, netbooks…now smartbooks?

January 7, 2010 By in Industry Analysis, Technology Tags: , , Leave a comment

At the CES…

On the eve of the annual Consumer Electronics Show, which opens today in Las Vegas, Freescale Semiconductor, among others, has been generating a lot of publicity about a new kind of internet-connected mini-PC to be debuted there–the smartbook.

…the smartbook comes out

Intended to be a cross between a smartphone and a netbook, the smartbook is a multimedia, internet tablet device that has the following features:

–ARM-based microprocessor, manufactured by cellphone-oriented semiconductor companies like Freescale, Qualcomm or Texas Instruments

–Linux/Android operating system, therefore instant boot up

–7″ touchscreen

–4-64 GB internal storage

–10 hour+ battery life

–wi-fi, GPS, optional G3 connectivity

–sub-$200 price point

The target market seems to be teenagers who don’t need wordprocessing or spreadsheet capability or iTunes (according to the Wall Street Journal the ARM processors aren’t powerful enough to handle any of these jobs) but who want to sign up for a 3G cellphone data plan to keep them constantly online.

It sounds like the original netbook idea…

Apart from the lack of a productivity suite, the smartphone sounds a lot like the original netbook idea from Asus–small screen, light, linux os, wi-fi, little internal storage.

…that didn’t work out so well

Although the original Asus machine sold well, it’s important to note that customers quickly voiced their preference for a larger screen, more internal storage and an(y) operating system other than linux.  And they were happy to pay extra to get all that.  Given this experience, why would anyone go back to the original design?

Relevant data from Apple?

There’s also an interesting, if vaguely weird, report from mobile consulting firm Flurry suggesting that sales of the iPod Touch are beginning to outpace sales of the iPhone.

Assuming the analysis proves to be accurate, why would that be?  Is the ATT mobile service so poor that consumers are keeping their traditional cellphones and getting their Apple fix through the iPod Touch?  Or is it that buying a $200 iPod Touch for a teenager or sub-teen and having him use free wi-fi is a much different economic proposition from buying a subsidized $200 iPhone and contracting to spend another $100 a month on a two-year data plan?

My money is on the latter.  In fact, I think that even if someone paid me $1,000 to take a smartbook, the cost of the data plan would make it a bad deal.  Maybe that’s just me, though.  (By the way, if investors make the leap from the Flurry report to the notion that the iPhone market in the US is becoming saturated, the fact that sales of the much-less-lucrative iPod Touch are booming will be cold comfort.)  My instinct is also that the chipmakers sponsoring the smartbook asked their engineers what they could make rather than their marketers what customers would want to buy.

It will be interesting to see if/how the market for smartbooks develops.  One positive note:  I’ve read that an Asus subsidiary is very enthusiastic about them.  And Asus seems to me to have its hand squarely on the pulse of the computer market.

MSFT’s Sept ’09 earnings (ll): MSFT and netbooks

October 28, 2009 By in Industry Analysis, Technology Tags: , , , , , , Leave a comment

The netbook transformation

1.  The idea

The netbook was invented by the Taiwanese tech manufacturer, Asustek (ASUS), a couple of years ago.  It was designed to be cheap (about $300), compact (8″ screen), light (2 lb.+) and fast (linux OS for quick boot-up and 30MB of flash memory for storage).  It’s very useful for email, web browsing, word processing and simple spreadsheets.

ASUS seems to have envisioned the netbook being used by young children, or perhaps as an upscale alternative to the machines developed by various $100 computer projects for emerging markets.

2.  The reality

Despite initial skepticism, netbooks have been a smash hit.  Sales have gone from zero to become 17% of all laptop purchases worldwide in about two years.  The users haven’t just, or even mostly, been the ones ASUS envisioned.  Netbooks have become a staple for business travelers and university students, as well as functioning as an “extra” computer for home use.

3.  The transformation

It turns out that netbook buyers don’t like linux.  So out that went.  Virtually all netbooks being sold today have a Windows operating system installed.  Initially this was XP; from now on, it will be some version of Windows 7.

But Windows uses up a lot of storage, about 12 MB worth for XP.  So solid-state storage has been replaced with small form factor hard disk drives in the 160 MB range.

Where to from here?

Open questions:

1.  Are netbooks popular because of recession-induced trading down that will disappear as the economy recovers? MSFT’s tone of voice when talking about netbooks makes me think this is what they believe.  There may be some truth to this.  Of course, MSFT also makes much more money selling software in a traditional notebook than in a netbook.  So they certainly would like to think buyers will trade up as the world economy recovers.

Most others–myself included–think netbooks are here to stay, and already comprise a new category that adds to overall laptop computer sales.  My guess is that traditional desktop-substitute laptops will stay as they are, but that the rest will strive harder to emulate the netbook’s portability–a feature consumers clearly want.  But I don’t see how they can adopt the netbook form factor without implicitly inviting potential buyers to expect a netbook price point.

2.  Will netbooks remain Windows machines? Netbook makers would prefer that they don’t.  There’s a strong economic reason for this.  If the manufacturer has to pay, say, $30, to MSFT for a low-end copy of Windows 7 vs. equipping a netbook with linux for free and can charge the same price for either, the profits are much higher if the customer picks linux.  The big problem so far is that linux has proved too hard for the typical netbook user to use.  Although netbooks can be ordered with linux, almost everyone chooses a Windows machine.

Google aims to change that, by introducing its Chrome OS in netbooks next year.  Chrome is based on linux and, like other versions of linux, is free.  The big question is whether the Google name or the Chrome performance will be enough to persuade consumers to turn down Windows.  No one knows yet.  If we look at Google’s other products, Google Groups, Picassa and Gmail are great, in my opinion.  But Google Documents are just not good enough.

3.  Will they use Intel processors? Again, it’s not clear.  The OEMs are going to introduce linux notebooks next year that are powered by microprocessors designed by the UK company, ARM.  ARM chips are commonly used in smartphones, so the move introduces a competitor to Intel, enhances the netbook communications capability and allows linux to be used as the OS.

Intel’s response?  It’s modifying its Atom chips so they can run linux machines.  It’s also joining ASUS and Acer in opening apps stores, like Apple has for the iPhone, for linux machines.  In other words, Intel is trying to make its position more secure by making it easier for OEMs to replace MSFT.

3.  Will there be an Apple entry? There have been persistent rumors on Apple-oriented websites for a long time that AAPL will soon offer a large screen, tablet-like, iPhone that will also be an entry into the netbook market.

I don’t understand what AAPL has to gain by doing so.  The company may produce a tablet (again, I don’t know quite why), but a netbook is a low selling price, low profit item made by high volume producers.  This really clashes with AAPL’s image.

An interesting spectator sport

What I find fascinating about netbooks is the battle of industry titans, each looking for a way to enter another’s key product markets.  It’s Google vs. Microsoft, Intel vs. ARM, ASUS and Acer vs. Dell and HP.  So far the field belongs to the Taiwanese and the Wintel alliance.  But for how long?

MSFT’s Sept. ’09 earnings (I): is MSFT a stock for 2010?

October 27, 2009 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Stock ideas, Technology Tags: , , , , , , Leave a comment

MSFT reported September-period earnings (the first quarter of its fiscal 2010) last Thursday, the day after the official introduction of Windows 7.

Earnings were surprisingly good, for two reasons.

X-Box continues to be the major force in this generation of console video game machines.  X-Box Live was up 50% year over year, and the latest installation of MSFT’s Halo has been a very big seller.   Yes, MSFT has been helped to some degree by Sony’s missteps, but the operational improvement at MSFT during this generation is still impressive.

Also, the consumer PC business is picking up again for MSFT, everywhere in the world ex Europe.  Netbooks are a big reason.  They’ve come from zero to 12% of the PC market in a couple of years.  Virtually all netbooks now sport a Windows operating system, although not many users opt for an Office suite.

The case for MSFT as a stock

Two points:

1.  better management The company has known intellectually for a long time that it is no longer a fast-growing company.  I recall vividly at a MSFT analysts’ meeting in Seattle early in this decade a questioner asking Bill Gates and Steve Ballmer when 20% eps growth would resume for MSFT.  The MSFT top managers were stunned.  Their somewhat scornful reply was that it was an heroic achievement just to get a company as big as MSFT to grow at 10%!

It seems to me, however, that MSFT hasn’t until recently accepted this fact emotionally.  That is to say, management continued to act as if MSFT were still a secular growth company and not a cyclical manufacturer of semi-commodity products.  The company hired a veteran of the forest products industry (the ultimate non-grower) as CFO in mid-2005.  Over the past year or so it has begun to tighten its belt.  It is paying increasing attention to costs and has even reduced its workforce by 4%.  It has also backed away from plans to acquire Yahoo, opting for a search joint venture instead.

Bears worry that MSFT will go back to its old free spending ways as recession abates.  For the sake of argument, thought, let’s assume MSFT understands that as a value company it is called to a different standard of management competence than it could get away with when the business was growing rapidly.

2.  strong cyclical recovery MSFT, like most other firms, believes the low point for world economies came (and went) in the June quarter.  The consumer is slowly reviving now.  Businesses, however, are simply adhering to the spartan budgets they developed last December at the height of economic uncertainty.

Large firms are already signally that they will boost their capital spending significantly next year if the recovery, weak though it may be, stays on course.   Their spending on new desktops and laptops may be unusually strong and they are wedded to MSFT products.   How so?

The PCs businesses are now using are on average about five years old.  Maintenance costs are too high.  According to Intel at least, firms are unhappy with the level of support available for the XP operating systems they’re using.  They would have upgraded long ago, except for two things:  recession; and Vista, the operating system no one wants.  But cash flows should be substantially stronger next year.  And Vista has been replaced by Windows 7, which reviewers have reported to be far superior to Vista.

Unlike netbooks owners, business PC buyers will doubtless also buy large amounts of the new Windows 2010 Office products.

So the second half of the current fiscal year, and all of fiscal 2011, could be unusually profitable.

By the way, MSFT has almost no debt and around $2.60 a share in working capital.  The stock yields 1.9%.  It has performed about in line with the market since the lows in March.

My conclusion:

I’m not sure this is an overwhelmingly convincing positive case.  On the other hand, the company’s strong cash generation and its near-monopoly with businesses seem to me to limit the stock’s downside.  If the market becomes convinced that the company has two years of 15%+ annual growth ahead of it, I think the stock will go significantly higher.  It may also benefit from the facts that:  as a multinational, it gains from dollar weakness; and, although consumers may not spend on luxury goods, they clearly have not lost their appetite for technology gizmos.  And, having followed MSFT since the late Eighties, this is the most positive I’ve been for almost a decade.

Tomorrow:  MSFT and netbooks

Microsoft and Yahoo: the ten-year search agreement

July 31, 2009 By in Industry Analysis, Portfolio management, Technology Tags: , , , , , Leave a comment

Two days ago MSFT and YHOO announced an agreement to pool their web search resources for ten years.  In general terms, MSFT will provide the search technology through its Bing search engine, YHOO will sell the service to potential advertisers.  At the end of the first five years, the terms of the deal are subject to a reset, but the companies didn’t say by how much or at whose option.

YHOO expects to have extra cash flow of $275 million a year from the deal.  MSFT said little other than it expects to spend several hundred million dollars in the initial years.  Let’s say this means $2.75 billion (around $2 a share) for YHOO and that MSFT breaks even for the decade-long partnership.

Several aspects of the deal and its announcement are worthy of note: Continue reading →