Unpacking the Week’s News: Friday, January 27, 2017

Facebook Hiring Hugo Barra Might Say More about China than VR – by Carolina Milanesi

This week, Hugo Barra who was VP of International at Xiaomi, left the Chinese company to join Facebook as Head of VR. In Mark Zuckerberg’s own words “to lead all of Facebook virtual reality efforts, including our Oculus team.”

While at Xiaomi, Barra launched Xiaomi Global which brought Xiaomi’s smartphones into India, Indonesia, Singapore, Malaysia and other markets. Before joining Xiaomi, Barra was the VP of Android at Google. In his own Facebook post, Barra said the last few years have taken a huge toll on his life and had started affecting his health. Whatever the reasons for Barra to move back to Silicon Valley, his appointment at Facebook might have more implications than what the job title states.

Barra’s background in engineering and his experience with platforms fits Facebook’s VR expansion plans very well, as does having a strong public figure who will be able to be the face of VR for Facebook. Yet, I wonder if it is what Barra has learned in the past few years at Xiaomi that is the biggest skill he will bring to the company.

VR in China is big. Among online consumers, 48% expressed an interest in using VR. This compares to 29% among US online consumers. Consumers have been exposed more to VR in China than in the West. Similarly to internet cafes, China rolled out many “experience spots” and VR cafes. This allowed for higher performance experiences to consumers who would not be able to afford their own high-end set up a device such as the HTC Vive requires. HTC itself announced its plan to open over 10,000 out-of-the-home VR experiences. These cafes (there are a few thousand now available in the larger cities) charge around $8 for 30 minutes of VR gaming. Predictions for the VR market in China reached numbers as high as $10 billion by 2020. Homegrown VR headset vendors have been flourishing with e-commerce brands like Alibaba and Taobao saying they are selling close to half a million VR headsets a month.

Xiaomi is not new to VR. Most recently, the Chinese brand launched the Mi VR, a Daydream-like headset selling for $29. The company also launched the MIUI VR which offers apps and panoramic content for the headset. The Mi VR follows the Mi VR Play which was launched in the summer.

Barra would have certainly had ample opportunity to be exposed to both internal developments at Xiaomi as well as market dynamics which could provide extremely useful to Facebook. A Facebook still desperate to re-enter the Chinese market. So much so as to be said to be even contemplating censorship tools to apply to its site. VR could offer a different and possibly easier entry into the Chinese market, especially if Facebook partnered with a local brand like Xiaomi where Barra remains an advisor.

So, while there is no doubt Barra is a good asset for Facebook when it comes to VR across the board, I cannot help but think he could be particularly valuable in helping Facebook take a slice of the VR opportunity in China as well as using VR as a Trojan Horse to re-enter the market.

Alphabet Announces First Earnings since the Pixel Launch – By Jan Dawson

Alphabet announced its earnings for Q4 2016 on Thursday afternoon, the first since Google launched the Pixel, Home, WiFi, and Daydream hardware it announced in the fall. Overall, the results were decent, with strong year on year growth and fairly consistent margins but there were some one-off items executives were vague about on the call. Alphabet technically missed earnings consensus, which sent the stock down a bit after hours.

When it comes to the hardware launches, Alphabet said very little – only one question was asked on the earnings call and the response was a complete non-answer from Sundar Pichai. But Google reports hardware sales in its Other segment along with Play app and content revenue and enterprise cloud revenue, so it’s worth examining those numbers a bit for signs of how the Pixel and other hardware sold. That segment grew approximately $1.3 billion, or 62%, year on year, and was 13% of total Google revenues in the quarter.

The Other segment has been growing by $500-700m year on year recently, so there’s an additional $600-800m in revenue this time around. That suggests there might have been around 700k Pixel sales on top of a variety of other hardware sales, with Home likely the other strong seller. That’s not bad for Pixel’s first quarter, especially given the limited US distribution and supply constraints which have kept the phone in short supply, especially in larger storage configurations. It’s a blip on the radar of the rest of the industry but it’s a decent start Google can build on over time.

In the rest of the business, search advertising continues to grow strongly, though almost entirely thanks to growth in “clicks” (including views of video ads) on Google’s own sites, while the price per click continues to fall along with traffic to third party sites. YouTube is a major driver of that growth and was a major focus for management and something of an obsession among the analysts on the call. There’s healthy growth here but it’s masking shrinkage in the underlying business driven by the shift from desktop to mobile.

Then there are the Other Bets – all the bits of Alphabet that aren’t Google. Those continue to generate relatively little revenue (under 1% of the total) and lose truckloads of money (the operating margin for Q4 and 2016 as a whole were both over 400% in the red). But there is progress here – revenue grew meaningfully and the losses are slowly but steadily coming down as they have ever since Ruth Porat came on as CFO and instilled some financial discipline. The news Singaporean investor Temasek Holdings had bought into the Verily business within the Other Bets today is another sign Alphabet is finding creative ways to spread the risk and reduce its financial commitment to some of these businesses.

Snap May File for IPO Late Next Week – by Ben Bajarin
ReCode broke the story late Friday that Snap may file for their IPO as early as next week. I know myself, and many others will be extremely interested to dig through the file for nuggets of insight. As I wrote this week on Snapchat (what timing huh!), we have sufficient data from ourselves and third parties to suggest Snap’s user growth has slowed, and in some cases, many who got caught up in the hype did not stick with it. In the coming weeks I’ll share data we have on Facebook and Instagram, which I believe provides sufficient evidence that Instagram, and in some cases Facebooks, total copying of Snapchats features has succeeded in its goal, which was not to steal away Snapchat customers but to fend off their customers from leaving to join Snapchat.

It is wise of the bankers to focus on ARPU, and in some cases reveal Snap’s hardware strategy, since HW revenues if margins are good, can be attractive and sustainable. Snap, Inc is in no way a hardware company, and the street hates hardware companies, so it is wise not to position Snap, Inc as such. So long as the services narrative remains strong, and they have solid metrics on their potential for advertising growth, I think the narrative will be sound. The big concern is Snapchat has already peaked and adding users will be a key metric the street looks for regardless of how they pitch the IPO.

This will be a very interesting one to watch play out.

Facebook Adds Support For FIDO Security Keys – By Bob O’Donnell

In an effort to increase online security, Facebook announced yesterday they will be enabling the use of hardware security keys that support the FIDO digital identity/authentication standard for logins to the service. Specifically, Facebook is adding support for simple USB-stick like devices that support the U2F (Universal Second Factor) standard, which is a mechanism for adding a very secure second-factor authentication for the highly recommended (though little understood) practice of multi-factor authentication.

Essentially, the effort is an attempt to discourage the use of easily breakable, hackable and “phish-able” password-based log-ins and move towards other more secure and more “automatic” type of log-ins. The FIDO consortium is an industry group that includes over 250 companies, including Microsoft, Intel, Visa, Bank of America, Google, Intel, ARM, Qualcomm, Samsung, Lenovo and many others, focused on authentication and security standards that can leverage biometrics, hardware security keys and other methods for digitally proving you are who you say you are — the fundamental principle of authentication.

Unfortunately, few people know about the group’s work—despite its high-profile members—but efforts like this Facebook announcement can help drive that awareness. The ultimate goal of the group is to eliminate passwords and to move to more secure methods of logging into online services, making digital transactions and more. The problem is security and authentication are complex topics few people seem interested in. But the effort is making progress.

With this specific announcement, Facebook is incorporating support for these hardware keys (which must be purchased for around $20) through a limited set of browsers and devices—you can’t yet, for example, use it with a mobile phone-based Facebook app—so the real world impact will be tiny. However, it is an important first step towards greater awareness and usage of more secure methods of authentication. These same hardware keys can be used for DropBox, Google, Salesforce and a few other online services, so hopefully, we’ll start to see more active usage of these types of capabilities moving forward.

Published by

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.

7 thoughts on “Unpacking the Week’s News: Friday, January 27, 2017”

  1. Whether or not 700K of Pixel phone sales is bad or “not bad” is quite subjective, and I think it would be great to have a reference point. Obviously iPhone or Samsung sales are way too high to make a meaningful comparison, but maybe we could use previous Nexus phone sales as a yardstick.

    The Nexus 4, which had many people excited in 2012 Q4, was reported to have sold 400K in 3 months


    If I remember correctly, the Nexus 4 was sold mainly through the Google Store and not heavily promoted by major carriers. Furthermore, the Pixel advertising and promotions far exceeded what was done with the Nexus program. Given this, I am inclined to think that 700K Pixel phones is pretty underwhelming. Pixel should have sold many times more than the Nexus 4 if Google was really serious or capable.

    Of course there is the supply constraint issue, which was also the case with the Nexus 4. Going back two decades, I recall supply constraints were a huge issue with Apple before Steve Jobs came back and hired Tim Cook, so I tend to think that supply issues at a mere 700K units per quarter is not a simple mis-forecast but rather a reflection of deeper problems with the product or the supply chain.

    Using the Nexus 4 as a yardstick, I would hardly consider 700K Pixel phones as encouraging or “not bad”. It suggests to me that Google has a huge amount of work ahead of it, if it wants to make the Pixel into a major smartphone brand that can seriously contribute to their finances.

  2. Assuming that “what Barra has learned in the past few years at Xiaomi that is the biggest skill he will bring to the company” is true, it does suggest that the winner in VR will not be a US-based company, but a China-based one. The company that Barra is now joining is supposed to be at the cutting-edge of VR, or at least people in Silicon Valley seem to think so.

    Chinese companies like Baidu and Tencent initially copied Internet companies in the US and brought them to China. Are we suggesting that the tables are turning?

    Of course, one could make the argument that this has already happened with messaging apps.

        1. You know, I think you are a really smart guy. I admire your thinking and agree with you more often than not, usually because you put such thorough thought in your posts. So when you say things like this I don’t know if you really aren’t paying attention or you’re just trolling me. I think we’ve even had this discussion before, but I think it is because of the low value you place on cultural and societal data you don’t see the relevance.

          This is about cultural methodology. The US furniture industry started down the path as China started building for the US furniture industry, along the way learning the fundamentals and efficiency in systems to out build any US made furniture. they were willing to lose huge amounts of money doing so so they could learn. Then they moved to copying the furniture industry products and designs. Then they moved on to innovate on their own, becoming leaders in the furniture industry, top to bottom. Sound familiar? In tech?


Leave a Reply

Your email address will not be published. Required fields are marked *