Unpacked for Friday, July 29, 2016

Huawei’s Growth Continues but Challenging Apple will not be Possible without US – by Carolina Milanesi

On Tuesday, Huawei Consumer Business Group announced its 2016 half year financial results, reporting an increase in revenue of 41% year-on-year. Smartphones shipments stood at 60.6 million units, an increase of 25% over the same period in 2015. Richard Yu, the business unit CEO, cited Europe, North Africa, Central Asia and Latin America as the key growth driver. In their press release, other than quoting GfK’s market share numbers, Huawei pointed to sales of the Mate 8 and P9 as evidence they are making inroads in the high-end market:

“Sales volume of the Mate 8 increased by 65% when compared with sales of the Mate 7 during the same period in 2015. Furthermore, 4.5 million P9 and P9 Plus devices have also been sold, of which the number of devices sold internationally increased by 120% when compared with sales of the P8 during the same period in 2015.”

This is certainly a good set of results but Huawei’s ambitions to challenge Apple and Samsung as the number one smartphone vendor in the world remains not an easy task despite these results.

Huawei is facing more and more competition in its home market that challenges its current leadership position. The shift in focus towards the high-end of the market might cap Huawei’s potential going forward as the lower-end market is much larger and, right now, being captured by local brands that will look to upgrade their users over time. Honor is Huawei’s lower cost option in China but the online distribution will limit how much they can penetrate the less urban areas in China where there is still a lot of untapped potential. Basically, Huawei will be facing similar problems Samsung and Apple are already facing. When looking at intention to buy, only 10% of consumers are considering Huawei vs 12% for Samsung and 16% for Apple. The combination of the Chinese players is the real threat as 5% of consumers are considering Xiaomi and 7% are considering Oppo, Vivo or Coolpal.

As the growth opportunity in China decreases, Huawei needs to make sure to make significant inroads in the US, the only other single market that will give them enough volume to really make the climb to the top possible. Huawei only has a 2% installed base in the US and intention to purchase of only 3%. It is clear Huawei has a lot more work to do in the US. The online channel in the US is growing which is good news for Huawei’s Honor brand. The bad news, however, is consumers who are preferring the online channel are much more price conscious and less brand conscious. This mean that, while Huawei brand strength is not enough in the high-end, in the low-end having a leg up over more unknown brands does not actually help either.

The Yahoo-Verizon Deal – by Bob O’Donnell

After months and months of speculation and doubtless hours and hours of negotiations, Verizon announced at the beginning of the week they were purchasing the core internet content assets of Yahoo for $4.8 billion. Yahoo’s investments in Alibaba and Yahoo Japan are not part of the deal and will be spun off into a yet-to-be-named new entity.

The deal closes a major chapter in internet history as Yahoo served as a key gateway to the web for 21 years and to billions of users. Even the Yahoo brand is likely to take on a diminished role. While Verizon will likely keep using it for certain content properties, it will be just one of several Verizon will need to rationalize over time.

For Yahoo, the deal is likely about as good as they could get but certainly a far cry from valuations it’s held in the recent past. Despite four years of efforts to turn it around by CEO Marissa Mayer, the company ultimately was never able to overcome its lack of focus. Numerous efforts at creating new types of content and services never gave the company the boosts it needed and it slowly lost share in both search and web-based advertising.

For Verizon, the purchase is clearly part of an effort to build up a growing portfolio of web-based content. The traditional carrier business continues to be challenged by lower prices per data bit, the ongoing decline of voice services, and the low-growth, utility-like nature of the business. Recognizing these challenges a while back, Verizon has been acquiring content (such as AOL, the Huffington Post and others) in order to create a potentially high-growth, advertising driven business. With Yahoo, they get an established name and, most importantly, a billion active users.

As has become clear with major web-based content properties, the only way to really succeed is with scale and Yahoo gives Verizon more of the scale it desperately wants. Having said that, there are many remaining questions about how the two companies’ cultures will blend (or not), whether or not key employees will want to stay and, as mentioned earlier, how all the various content properties will be organized.

History has shown us these megadeals often don’t work out very well and, to be honest, the cards seemed to be somewhat stacked against this one as well. However, if Verizon can address these issues, they may be able to break the mold. If not, it really could be the end of Yahoo as we know it.

Samsung’s Profits Boosted by Smartphones Sales – by Carolina Milanesi

Samsung’s second-quarter operating profit jumped 18% to 8.1 trillion Korean won ($7.17bn; £5.46bn), in line with the company’s guidance issued in July. Operating profit at its mobile division soared 27% year-on-year to 4.3tn won. That is mainly driven by strong sales of its Galaxy S7 and Galaxy S7 Edge smartphone models.

As I’ve mentioned before, Samsung is where Apple was with the iPhone 6 upgrade cycle. The Samsung Galaxy S6 did not excite consumers and many passed the upgrade opportunity by until the 7 came along. With a much greater upgrade cycle this year, Samsung will struggle to replicate the cycle in 2017. From a revenue perspective, Samsung might be able to deliver a stand-alone VR solution in 2017 at a more affordable price than Oculus and HTC Vive and supplement any slow down in smartphones.

In smartphones specifically, Samsung could experiment with bendable displays but it would be a risk that might not pay off in sales as, when we look at history, mass market consumers have proven to be quite conservative when it comes to design – think of the Nokia 7600 or the 3650, the Bang and Olufsen Serene, or the Samsung Serenata and how they all flopped.

Samsung should also incentivize more annual upgrade options as those will help create a more predictable cycle.

As far as the rest of 2016, despite Samsung pointing at the upcoming Note launch, I expect a repeat performance of previous years where sales will not actually make a difference to the bottom line. With most phones now having a larger screen and the Edge 7 having many of the features once exclusive to the Note, it will be hard for the Note update to really stand out and pen input is still not a major driver for consumers.

Apple Sells its Billionth iPhone – by Carolina Milanesi

On Wed, Tim Cook announced, “Last week we passed another major milestone when we sold the billionth iPhone. We never set out to make the most, but we’ve always set out to make the best products that make a difference. Thank you to everyone at Apple for helping change the world every day.”

Looking back, Nokia is the only vendor to have devices that got anywhere near this milestone. Apple did not just do it with one model as many will rush to point out. Nokia’s 1100 and 1110 sold around half a billion units. Price points were of course very different — the 1100 cost around $100. In fact, Nokia’s billionth phone was an 1100 back in 2005. Aside from price, doing worldwide winners like the 1100 was much more difficult than it is today in a world of software-defined devices. Back then to ship in different countries, you had to have different physical keypads and the cellular standards were more fragmented than they are today. Different times.

Apple’s achievement, despite what critics say, is a considerable one when one accounts for the average selling price of the different iPhone models which ranged from $400 to $800. This is what the installed base looked like at the end of the second quarter of 2016:

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Source: GWI, July 2016

As you can see, the current mix of the installed base offers ample opportunity for the future iPhone 7 to encourage upgrades from current iPhone 6 users. The iPhone SE’s target is more those iPhone 4 and 4s users out there. From an ecosystem perspective, the latter is as important to Apple than the former. Making sure users have access to Apple Pay, Touch ID, Live Photos, etc., ensures their level of engagement and satisfaction remains as high as it can be. So, while ASP might be impacted for now by the success of the iPhone SE, in the long run, Apple will benefit from it.

As I mentioned in my earnings analysis however, Apple needs to start looking at its installed base more deeply as it is much more segmented than it used to be. The iPod might be the only product that had comparable breadth in user base characteristics but, due to the price difference, parallels will only go so far in helping with predicting or understanding iPhone upgrade behavior.

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Carolina Milanesi

Carolina is a Principal Analyst at Creative Strategies, Inc, a market intelligence and strategy consulting firm based in Silicon Valley and recognized as one of the premier sources of quantitative and qualitative research and insights in tech. At Creative Strategies, Carolina focuses on consumer tech across the board. From hardware to services, she analyzes today to help predict and shape tomorrow. In her prior role as Chief of Research at Kantar Worldpanel ComTech, she drove thought leadership research by marrying her deep understanding of global market dynamics with the wealth of data coming from ComTech’s longitudinal studies on smartphones and tablets. Prior to her ComTech role, Carolina spent 14 years at Gartner, most recently as their Consumer Devices Research VP and Agenda Manager. In this role, she led the forecast and market share teams on smartphones, tablets, and PCs. She spent most of her time advising clients from VC firms, to technology providers, to traditional enterprise clients. Carolina is often quoted as an industry expert and commentator in publications such as The Financial Times, Bloomberg, The New York Times and The Wall Street Journal. She regularly appears on BBC, Bloomberg TV, Fox, NBC News and other networks. Her Twitter account was recently listed in the “101 accounts to follow to make Twitter more interesting” by Wired Italy.

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