thinking about tablets–and ecosystems

my tablet

I’ve owned a iPad for several months.  I use it much more than I expected.  I’d use it even more than I do, but the AAPL “walled garden” prevents me.

My only real complaint is that the wi-fi chips AAPL uses in its tablets appear to be relatively weak, so mine (a “new” iPad) often wants to make a cellular connection.  My wife’s (an iPad 2) has the same problem.  Here on my back porch, my Macbook hooks up to our wi-fi without a problem; my iPad can’t make a connection.  Design defect  …or concession to the mobile network operators?

One more thing–I’ve spent much too much time playing Kingdom Rush.

in the schools

The iPad has picked up momentum in areas I hadn’t really thought about.  For instance:

–AAPL commented in its 3Q12 earnings call that it is beginning to sell a ton of iPads to schools.  They’re all iPad 2s, which apparently have hit a price point low enough to trigger mass orders.

–an interesting article in the Financial Times from late July outlines changes tablets are making in the scientific/medical press.  It’s short and worth reading.

professional journals

Its message is that there is a surprisingly quick transition to online delivery going on with professional journals.   For doctors’ publications, the positive points of online are:

-most physicians have and use tablets, especially for reading between patient appointments;

-doctors read close to double the amount of a journal’s content when they access it online rather than in print;

-they appear happy to watch video advertisements imbedded in the online articles; and

-the publisher has precise data to show advertisers about what online ads have been seen.  For print, the publisher has to rely on surveying users–and who’s going to say he doesn’t read the journal from cover to cover?

Googling “tablets and medical journals”

My results were mostly about the perils of sleeping pills.  But I did come across a medical student’s blog post on the merits of various tablets.   Steven Chan’s conclusions are about what you’d expect, with one exception:

–using a tablet is a lot better than carrying files around with you

–if you’re hopeless with tech, get an iPad.  It’s easy to use, but limited by the AAPL “walled garden”

–Android tablets are harder to get up and running but are much more useful

–the iPad is too big to fit into a standard white lab coat pocket.  If you use an iPad you should get a new iPad-friendly model (this is the one I didn’t think about).

my investment point?

It’s about ecosystems.   In a world of cloud storage, where individuals own multiple devices–smartphones, tablets, laptops–that they may want to function for both personal and work tasks, the choice of what products to use becomes less about how cool the individual device is and more about how the device allows one to access, share and save data.

Yes, everyone believes this, to one degree or another.  In a “cloud” world, though, AAPL has two (well-known) weaknesses, I think.  One is its “walled garden” approach, which makes it seem a little like AOL when the WorldWide Web was opening up in the 1990s.  The other is how weak AAPL’s browser and productivity software are.

Again, no secrets here.

What’s interesting, though, is how this leaves the door open for MSFT, even after more than a decade of bungling, to become relevant again.  It has an adequate browser, which seems to be losing its my-way-or-the-highway attitude.  Its productivity suite is the world standard.  More than that, MSFT seems to me to understand the new opportunity its position is giving it, and (for once) to be taking intelligent steps to exploit it.

Anyway, I’m starting to think I may have to take MSFT more seriously as a potential investment, for the first time this century.  If I only thought MSFT had good management…

tablets as online retail magnets

tablets as online money machines

Yesterday’s Wall Street Journal has an article about tablets and online spending.  Its conclusions:

–9% of online shoppers own tablets and half use them to shop.

–conversion rates (that is, the percentage of site visitors who actually buy something) for tablet users are typically 4%-5% vs. 3% for PC or cellphone users.  One site mentioned reported a whopping 10% conversion rate from tablets.

–tablet users spend 10%-20% more than PC or cellphone users when they buy.

–tablet users don’t like apps.  They use browsers to visit retail sites.

–retailers are starting to tailor their sites to make them more enticing to tablets.  This means more slideshows and videos.  Because virtually all tablets are iPads this implies using alternatives to Adobe Flash.

A bit of arcana:  a huge amount of web design time and effort goes into designing attractive buttons on websites (strange, but true).  All of that needs to be revamped so buttons are big enough for fingers to use them.

my thoughts

Retailers don’t seem to know why tablet-wielding visitors are so much more attractive customers.  That they are seems to be enough to spark a website gold rush to attract them.

It may be that tablet owners are more affluent than the general online population.  That might explain the higher average purchase.  On the other hand, the article mentions that QVC, which doesn’t attract a wealthy demographic, is particularly enthusiastic about its tablet business.

It could be that, because they’re instant-on and portable, tablets encourage impulse purchases.  That might explain the higher conversion rate.  If so, the tablet edge should vanish as solid state memory laptops, like the MacBook Air or ultrabooks become more common.  Given that the latter two are significantly more expensive than tablets, that may take some time, however.

(By the way, conversion rates are a bit more complicated than bigger-is-better.  It’s generally agreed that a conversion rate below 1% is bad and that 5% or higher is unusually good.  But if traffic is directed to your site through search engines, the cost of keyword purchase has to be factored in as well.)

It’s also possible that there’s something addictive about the tablet experience, sort of like that way people spend a lot more when they use a credit card than when they use a debit card.  If so, big spenders may end up getting unsolicited gifts in the mail of tablets with retailers’ catalogs and URLs pre-loaded.

investment implications

It seems to me this phenomenon is a mild positive for AAPL, but nothing to run out and buy the stock for.  For retailers, the quality of their websites may become more crucial in their sales efforts.

Anyone with a Flash website may find his popularity diminished–although I understand this is a much bigger problem in Europe than elsewhere.

This isn’t a positive for ADBE, but it remains to be seen how significant a negative it is.

I’m suddenly a tablet advocate: here’s why

my take on tablets

I like gadgets.

I’ve had my eye on a tablet since I first saw one in a university bookstore (a MSFT product) almost a decade ago.  But that one was very clunky and didn’t let you do much more than highlight Word documents.  I looked at a Lenovo combination laptop/tablet a few years later, but it was very underpowered.  And there was still no infrastructure of applications to justify the tablet part.

Now there’s the iPad.  It’s the usual well-designed AAPL consumer device.  But to me it has seemed little more than another device to lug around that’s not much more than an expensive e-reader and an extremely costly way to play Angry Birds.

my newspaper problems

Then the Financial Times newspaper stopped coming to the house.

Yes, I still read the physical newspaper.

I read:

–the FT (comprehensive global business news; a UK perspective on US/world economic and political developments),

–the NY Times (reasonable, US-oriented business news, good–though weakening–sports coverage) and

–the Wall Street Journal (good sports, lots of gossip in the NY section, almost no useful business coverage–meaning I won’t renew).

why the physical paper

I’m not a fan of wood products per se.  But I’ve thought the physical paper has several advantages over the web version:

–the amount of news in the physical paper is greater than on the front page of the newspaper website.  So the editors’ selection of what’s most important is a greater influence on what you see online than in the physical paper.  As a result, the chances of finding information whose significance is not adequately understood is greater in the physical paper.

–I think the web presentation is organized to highlight stories that will maximize visits.  In contrast, the physical paper is organized to deliver information.

–I thought (not any longer) that it’s easier to reconstruct with the physical paper a timeline of information flow by reading back editions you might not have gotten on the day of publication than it is to go back a day or two in time on the website.

my call to the FT

When I called the FT last Saturday to get replacement copies of the papers that didn’t come, the representative I talked to mentioned the e-paper that’s available through ftnewspaper.com.

The site is run with software from Olive Software, a private company in Aurora, Colorado.  ftnewspaper.com has daily back editions.  You can turn the pages of each edition, just like an online catalog.  You can pop out to larger size and different formats the articles you want to read in depth.  I also discovered that, through FT email alerts, I had already read most of “today’s” paper online yesterday!

ftnewspaper.com has been around for a couple of years.  I just didn’t know about it.

my calculation

Anyway, I can cancel my physical paper subscription and save a couple of hundred dollars a year.  No more worries about cancelling delivery when we may be travelling.  No more toting around piles of unread orange newsprint.  Less recycling to do.

All of that just means that I can rationalize paying for a tablet with the money I’ll save by stopping a newsprint subscription.  But I’ve also found a sophisticated and valuable application, other than email, that’s completely suited to what a tablet can do and that I use every day.  This means that I have a positive reason to buy one.

I’d like to see the new Google tablets, as well as iPad 3, before I take the plunge.  I have only one concern.

one concern

In my career on Wall Street, I’ve observed the long struggle for control of brokerage houses between researchers and traders that has been decisively won by the latter.  I’ve thought of this as somewhat like the age-old high school contest between jocks/cool people and the nerds.

It seems to me that the same battle is going on in newspaper firms between traditional reporters and online search engine optimizers–the latter being more interested in eyeballs than in information.  As I study successful financial websites with an eye to improving this blog, I can see the same dynamic in play in this arena–well-crafted and very popular websites with lots of advertising, but almost no useful investment information.

By shifting my financial support from the reportorial nerds to the online jocks, I’m most likely speeding the day when even the FT will suffer from a content deficiency.    But that’s a problem for another day.

 

will INTC make tablet/smartphone chips for AAPL: the AAPL point of view

Yesterday I wrote about this topic from the INTC point of view.  My main thought:  INTC is an attractive stock to own whether the answer to this question is yes or no, so you don’t need to figure this out to be a holder of the stock.  Having AAPL as a foundry customer would be a useful vote of confidence in INTC process technology, but it’s not necessary.

For AAPL, the answer isn’t so easy.

If we turn back the clock to the beginning of the year, AAPL was buying the processors for all of its Macs from INTC and having the ARMH-based chips it designs itself made by Samsung.  Why the split?

the semiconductor “arms race”

In simple terms (which is the best I can ever do), ten years or more ago the high cost of owning a fab forced the semiconductor makers to morph from integrated design/manufacturing firms to the current situation, where a large number of companies design chips and another, smaller and very capital-intensive, set makes them.  The design firms generally customize templates created by ARMH.

ARMH-based chips tend to be highly flexible and to consume little electricity.  But they lack raw processing power.   INTC, one of the few companies big enough to follow the older integrated model, makes chips that have immense processing power but aren’t very customizable and use a lot of electricity.  Mobile devices use ARMH chips.  PCs and servers use INTC chips.

ARMH is trying as hard as it can to boost the processing power of its offerings, so they can displace INTC chips in PCs.  The light bulb finally went on at INTC a few years ago that much of its market had changed and th customers no longer were lining up to buy the latest chip INTC engineers chose to fabricate.   INTC is now racing to make chips that customers wnat–that is, ones that are more flexible and use less power.

APPL’s situation

Mac:  Until 2005, IBM made the logic chips AAPL used in its Macs.  But this was, for IBM, a low-profit business that the company wanted to deemphasize.  As a result, IBM was unable/unwilling to produce the volumes AAPL needed.  INTC chips were better, and were readily available.  AAPL switched.

iPad/iPhone:  Several years ago, AAPL started an in-house effort to design ARMH-based chips to use in its smartphones and tablets.  It selected Samsung, another integrated firm and a competitor in the phone/tablet market, as its foundry.

Samsung trouble

But AAPL is now suing Samsung for copying its smartphone and tablet designs.  And, according to the EETimes, APPL is also beginning to shift its foundry business away from its Asian rival–presumably because of this.

Where should AAPL go?

One possibility is a foundry like TSMC, UMC or Globalfoundries (the combination of AMD’s former manufacturing + Chartered Semiconductor).  Another is INTC.

why INTC?

With either “pure” foundries or with INTC, APPL’s intellectual property will be equally safe.

The foundries would presumably be lower cost.  Also, they all have, to different degrees, databases of intellectual property that APPL could use.

On the other hand, INTC has a one-two year lead in process technology.  This means a chip design it produces for AAPL today on its machines would be smaller, faster and use less electricity than the same design made by a foundry.

TSMC is the safe choice

The safe choice for AAPL would be to go with TSMC.  It’s also the option that opens AAPL to the least second-guessing.  The main distinguishing features of the iPhone or iPad using TSMC chips would be the aesthetics of the device’s appearance, the app store and the status value of the Apple brand.

Also, if INTC is the permanent invalid that the stock price suggests, by selecting TSMC AAPL may dodge any future trouble that a weakened INTC may generate (what that might be, I have no idea–the worry would be that something would adversely affect the quality of foundry output).

the risk

On the other hand, it’s possible that some other tablet/smartphone maker–Asus, Acer, even Nokia–might link up with INTC instead.  If the INTC process technology works as claimed, then non-Apple devices would start to appear that process data faster and have longer battery lives than AAPL’s.  The “cool” factor might then start to pack up and leave Cupertino for Finland or Taiwan.

It will be interesting to see which choice AAPL makes.

 

 

 

will INTC make tablet/smartphone chips for AAPL?: the INTC view

recent analysts’ reports

A few days ago,Forbes published an article highlighting a report by Glen Yeung, an analyst from Citigroup, saying that AAPL will use INTC as the manufacturer for the advanced tablet and smartphone chips that it’s designing in-house.  Thsee chips will use ARMH designs, but INTC’s fabrication know-how.  Later on, speculates Yeung, AAPL could shut down its own design effort (more likely sell it to INTC, in my opinion) and rely 100% on INTC for both design and fabrication.

Similar reports have been circulating for at least a month.  In  typical Wall Street fashion, they follow a spate of other analysts’ output claiming exactly the opposite!!  –that AAPL, which uses INTC to power all its Macs, will ditch INTC entirely in the next year or two, in favor of its own ARMH-based chips.

important?

I think this issue is interesting for three reasons:

–stuff like this is fun to talk about,

–what APPL decides now may be important to the market share it eventually stakes out in the tablet business, and

–contrary to what you may think, what AAPL decides makes no difference to the positive case for INTC stock.

I’m going to write about this last point today.

my take on INTC

1.  What catches most people’s eye about an advanced semiconductor plant, other than it requires highly specialized craft skills to run, is that it costs at least $3 billion to build.  That’s the wrong thing to focus on.  What’s more important is that to operate the plant effectively, you have to be able to sell the $7 billion+ of output it is capable of churning out annually.  If you figure the selling price of each unit at $100, that means 70+ million units a year.

If you don’t have a market that size, you’re not only pouring $3 billion down the drain by trying to make chips yourself, you’re ensuring a constant flow of red ink until you shut the plant down.

In other words, in today’s world it only makes sense for Intel, Samsung and third-party foundries like TSMC to build and  operate cutting-edge semiconductor plants.  ( In 2Q11, AAPL sold 3.8 million Macs and 4.7 million iPads;  that works out to about a 34 million units a year.)

2.  INTC is the best operator of advanced semiconductor plants in the world.  It has maybe a two-year lead over TSMC in process technology.

3.  The yin of mobile computing–the small size, low power market that INTC has missed up until now–has created a yang of demand for high power corporate servers and cloud computing that plays to INTC’s traditional strengths.

The fast growth of emerging economies over the past decade has created a large market of first-time computer buyers.  Unlike buyers in the US or the EU, who want tablets and smartphones, these customers want the high power laptops INTC has traditionally excelled at.

These businesses combined make up the majority of INTC’s profits today and are growing very rapidly.

4.  INTC’s stock has been such a poor performer recently that it’s now trading at about 9x earnings and yielding a tad below 4%.  If its consumer business in the developed economies were to completely vaporize today (including, of course, its Mac business with AAPL), I think the stock would still be trading at under 15x earnings and yielding more than Treasury bonds–but would be showing growth of 20%+.

5.  INTC had a management change a few years ago.  The new guys have been working very hard on delivering the small size, low power use chips that smartphones and tablets require.  So far, what they’ve done hasn’t been good enough.  But they’re making fast progress.  And who knows?

I think INTC now has a much better management than investors are giving the stock credit for.  But the real point is that at 9x and a 3.9% yield, the stock looks to me to have factored the worst possible outcome for the company’s business–and then some. So downside seems limited to me (remember, I own the stock), and hte upside oculd be large if INTC’s chips in 2012 onward perform as advertised.  Sure, having AAPL use INTC as a foundry would be a plus, but–yes or no–it doesn’t alter the fundamental positive case for the stock by much.

 

post-earthquake supply disruptions from Japan

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It has only been a little more than a week since the devastating earthquake/tsunamis in Japan.  However, a lot more information about possible supply disruptions is available now.  As an investor, the main conclusions I see, based on what we know to date, are:

1.  Many of the disaster-affected plants that are sole sources for key components supply the auto industry.  A number of auto manufacturers have already announced that they may soon have to shut down either individual production lines or entire factories for lack of parts.  Although I’ve owned auto stocks from time to time, this is not an industry I’m particularly interested in or familiar with.  But one of the main reasons I’m not a fan is that the industry is characterized by chronic (and huge) overcapacity.  So far it doesn’t appear that there’s any one component in potential shortage that’s used in virtually every car in the world.  So the effect of plant closings will be market share shifts, not a shortage of cars or trucks.

2.  It’s possible that electric power will have to be rationed, at least in the Sendai area, for many months.  The Japanese government tendency is always to prefer industry over the consumer.  Public outrage over currency speculators who bid up the yen in the aftermath of the earthquake–they’re being described as criminals who exploit human tragedy, the moral equivalent of gangs that loot stores during a fire in the city–suggests there won’t be any popular opposition to this.  The practical questions for factories where the problem is power (not that the earthquake destroyed the machinery) will be how quickly power lines can be repaired and what the limitations of the Japanese power grid are in delivering electricity from other areas of the country. (I’m assuming that, as the latest reports are suggesting, the Fukushima reactor crisis is finally coming under control.)

3.  With one notable exception, the Japanese technology-related firms that have announced earthquake-related shutdowns make commodity products, like DRAM or NAND flash, where alternate sources of supply are available.  Prices may go up a bit but devices will still get made.

The one exception: bismaleimide-triazine  resin (BT), a compound used to glue semiconductor chips to printed circuit boards.  BT is used in all smartphones and tablets.  90% comes from Japan.  The largest producer, Mitsubishi Gas Chemical, which accounts for about half of what the tech industry uses, has shut down production due to earthquake damage.

The other major Japanese source of BT is Hitachi Chemical.  It’s plants are still operating.  But, according to the Financial Times, the BT made by different chemical companies isn’t simply interchangeable.  Output differs enough that at the very least a period of testing is required before you can use BT from another supplier. The Wall Street Journal says this process could take a month for most kinds of circuit boards.  For cellphones, though, because of their small size and the specific amount of heat a given chip may throw off, the entire design may need to be changed in order to accommodate a different flavor of BT.

But the main issue is there’s no way for the rest of the industry to double production overnight–which is what would be needed to keep cellphone production rolling along at the current clip.

Mitsubishi Gas Chemical will likely make an announcement about the extent of damage to its Fukushima BT plant in the next few days.  All we really know now is that production has been halted.

In the meantime, MGC customers are doubtless talking to Taiwanese and Korean suppliers of chemicals that they wouldn’t have given the time of day to a month ago.   And they may be seeing what they can do to get increased allocations from Hitachi Chemical (good luck with that).

The BT story bears close watching.  If MGC production isn’t restored soon, disruptions to the supply chains of phone makers whose products use the MGC output could be severe.  Pain will be felt not only by the phone manufacturers but by all their component suppliers, as well.

INTC will make chips for Achronix in its newest 22nm fabs

INTC and Achronix

Achronix, a small privately-held fabless semiconductor design firm in Silicon Valley, announced on Monday an agreement that it and INTC have been working on for almost a year.  INTC will manufacture Achronix’s 22-nanometer Speedster 22i, which it calls “the world’s most advanced field programmable gate array (FPGA),” using one of the company’s most advanced fabricating plants, slated to open late next year.

INTC didn’t make an announcement, but did post the news on a company blog.

On the surface this looks like a lopsided deal in Achronix’s favor.  The key feature of FPGAs is that their programming can be improved or upgraded even after the chip is in a device.  So they’re great for putting new technology into telecom or networking equipment.  Achronix claims the Speedster 22i will offer 4x performance vs. competing chips and will use 50% less power, but will cost 40% less.  A lot of this will be due to the INTC process technology.

What does INTC get in return?  The company isn’t really saying and there’s no agreement either among analysts or technology bloggers.

my thoughts

I think there’s a good news/bad news aspect to the answer, which is why INTC is mum.

A semiconductor fab in today’s world costs at least $3 billion to build.  It’s capable of producing about $7 billion in yearly output.  Who can afford to build one?  Who needs that much output?   No one–other than INTC, which has a near monopoly in processors for PCs, Samsung, the dominant force in memory chips, and maybe TXN.

To the degree I’ve thought about these facts–and I haven’t done much–I’d assumed that being big enough to continue to have your own fabs, and to relentlessly push for more advanced fab technology, would prove a critical market advantage.  But it hasn’t.  That’s the bad news.

For most semiconductor design firms, fab ownership is out of the question financially.  They turn to third-parties, the so-called “foundries” like TSMC or UMC, to do their manufacturing for them.  For the fabless firms, then, manufacturing is not a competitive advantage.  What separates winners from losers among them is the flexility of products, the ability to do more creative things within the confines of a standard fabrication technology.  As a result, the fabless industry has made a virtue of necessity and learned how to do a lot more with a lot less.  Arguably, the foundries have done the same.

In other words, the rules of the game for semiconductor device makers–and especially for chips in mobile devices–have changed in a way that puts INTC at a disadvantage.  More bad news.

Where’s the good news?  –it’s that INTC understands what’s going on and has decided to try to change the game once again.   Companies like Achronix get manufacturing prowess that will give their chips features the competition may not be able to match.  INTC learns the mindset of the designer of products for the mobile universe.  Together, the two firms may be able to create system-on-a-chip products that make future generations of the Atom processor more attractive to makers of cellphones and tablets.

My guess is that this move isn’t at all about INTC itself becoming a foundry.  It’s more about changing the chip design culture within INTC to the point where it can meld the best of the fabless world in with its own traditional skills.

If I’m right, this is a real sign of management strength.  It might work.  I don’t see anything in the company’s stock price that suggests this possibility is being discounted at all. Let’s see what happens.