Notebook 03.06.12: RIMM, Product Cycles and Content

I am off to OFC/NFOEC tomorrow and as Andrew Schmitt of Infonetics tweeted (@aschmitt) earlier, I am looking forward to the “Drink every time someone uses the word “bandwidth” and “explosion” in the same sentence. #OFCNFOEC drinking game.”  This is post is a collection of things I am thinking about, therefore I am writing them down in my notebook to validate or dismiss.

RIMM: With the news last week of more layoffs within the WebOS group at HPQ, it shows the missed opportunity that RIMM had with PALM.  If RIMM had acquired PALM instead of QNX, they would have had a legit, complete OS to put across their devices.  The mobile device market would have four OS contenders – not three.  Unfortunately, HPQ acquired PALM and has pretty much killed WebOS.  I am not saying that acquiring PALM would have saved RIMM, but they would have had a chance.   I have spent a fair amount of time posting about RIMM; I read the other day that RIMM was up that day on take over rumors.  I still wonder why would someone want to own the RIMM business?  Seems crazy to me and as for the new CEO, I agree with him the only way out is hard work and hope they made some correct decisions.

Service Providers: I read an interesting sell side note from Deutsche Bank today in which the analyst (Brian Modoff) wrote that he had spoken to several US carriers who were disappointed in one of their large infrastructure suppliers because this company was not designing products how they wanted the products designed.  Well…that pretty much sums up my post here and here from the last few weeks.  Nothing kills creativity faster in the organization than becoming the outsourced engineering arm of your customer.  I want to solve my customers challenges, I just want to do it on terms that are best for my business – not their business.

Content: I have posted three times on content.  For some reason, I glanced at a TV today in a hotel lobby that was tuned to CNBC.  There was some bizarre conversation about Apple and mobile devices and Dow 13k and it triggered a thought.  One of the trends I have been tracking is what I call DIY content.  That was the point I was making about Verizon not buying NFLX, but hiring the team from NFLX.  My view is that it is increasingly easier for content owners to distribute their content and this will increasingly pressure content distributors and content aggregators.  The middle ground between the consumer and the content creator will NOT be a good place to be unless you can own the distribution ecosystem (i.e. devices) like AAPL.

Off to LA tomorrow for OFC and looking forward to meeting PollyAnna and hearing about the how the internet is about to break under the weight of all those videos.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **

RIMM at the Bottom

I have not found much to write about over the past week and I do not own a lot of equities in the PA at the moment, but I do own some RIMM at $17.50.  I am not a stranger when comes to writing about RIMM.  You can find my prior RIMM posts here, which can be summarized into three points: (i) the handset market sucks; (ii) RIMM is a product cycle disaster and (iii) the activists who want to break up the company lack any basic understanding of company’s technology.

I was looking at the RIMM chart today trying to figure out when to sell it.  I bought last week on Thursday just before the close because James Faucette of PacificCrest does not get positive on RIMM that often and his mid-day call made sense to me which was that RIMM was too cheap and trading at book value.  After the close Leon Cooperman’s Omega Advisors revealed they had purchased 1.43M shares of RIMM.  I am not certain if Cooperman called the bottom, but maybe he put a short term floor under the stock.  I was going to post daily and weekly charts on RIMM, but that is waste of time because the charts are beyond technical indicators.  About all I can get from the charts is that the 600MA is $36 on the weekly and the 20MA/50MA on the daily is $20.10/22.69.

Earnings estimates have a big spread $2.67-7.11 for the next fiscal with the mean at $4.77.  I think this number needs to come down to $3.50-4 and the average target price is $27.72 and this seems about correct to me.  I think the stock is fairly valued in the $24-27 range.  Here is what I do not believe in:

– RIMM is not a PE-Buyout target

– RIMM is not a M&A target (NOK/MSFT and MMI/GOOG deals killed that option)

– RIMM is not a breakup candidate (technology not separable)

– RIMM is not going to trade higher on some sort of IP monetization dream

If the leadership team wants to fix the company and get their currency higher they need to fix the product cycles, control expenses and stem share loss.  Note to the leadership team if the QNX device launch date is correct in this article, I sense a lack of urgency in the company.  2H 2012 is a long way off.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. ** 

October 2011 Earnings 1.1: RIMM, RVBD, ERIC, ATT, CSCO

A few reactions to reports from yesterday, this morning and other news:

RIMM: I got an email last night asking me if I was following the activists who are posturing for changes at RIMM and one of their proposals was to break up the company into three companies: devices, networks and patents?  I have no idea how or why you would want to separate networks from devices, this is not NOK or ERIC with large independent business units.  RIMM’s devices are directly tied to their NOC operations.  I do not think that separation is even possible.  It is beyond me why people with a poor understanding of the company’s technical operations are promoted by various media outlets when all they are doing is talking their book.

RVBD: The numbers look fine.  I was thinking about a theory on RVBD that if there is a slowing trend of spending in enterprises, that RVBD should do better in that environment as they provide a lower cost solution that extends the life of the current network and enables enterprises to put off upgrades which is what is really needed to solve network performance issues.  In time, I think RVBD’s WAN acceleration will go the way of the distributed CDN, but this is probably a few years out.

ERIC: Wow…those margins suck, but I would say that mid-30s is going to be the new normal over the LT and some companies will need to adjust to that trend.

ATT: The CAPEX number is out and it is $5,220B for Q3.  Waves of relief emails are pouring into my inbox.  I have been bearish on ATT CAPEX, as noted in prior posts, and I still think something is amiss based on APKT, PWAV and JNPR commentary.  I would say that I modeled ATT CAPEX to be a little ahead of this number and if ATT still plans to spend to $20B in CAPEX, then the Q4 number should come in around $5,300-5,340B.  In all, that still tells me that multiples are going to be finishing their correction, contraction process.  The CFO will probably make a statement on CAPEX later this morning on their call.  I have updated the charts I posted in July and added a simple chart of ATT CAPEX back to 2002.  The wireless revenue miss is going to cause all sorts of questions to be asked.  Does this mean they have made enough investment in wireless or not enough?  I will wait to make a final call on ATT CAPEX until I hear from CSCO in November and CIEN in December.

CSCO: Acquired private company in which they had previously made an investment.  This is just further evidence of a content deep networking trend and that CDNs can easily be built by service providers.  I covered all this is prior posts.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. ** 

It is Cheap for a Reason

Here is a thesis I never understand when promoted.  The Bloomberg piece is here saying that RIMM should be acquired because it is cheap so Microsoft should buy the company.  RIMM is cheap for reason and it is getting cheaper and that is not a reason to buy the company.  Just because it is cheap, does not make it a buy.  How many people go to the car dealer and say “I would like to buy your cheapest car that needs a lot of work, has legacy problems like a few accidents.  I would like to do this because the car is cheap and maybe a lot of people rode in it over the years and I think the brand is iconic so I plan to wave at the other aging models on the rode too.”  Why would MSFT or any other company want to take on the RIMM problems just because they are cheap?  As if the problems are less surmountable now that you can buy the problems for less than you could a few weeks ago?  Some foolish person will buy the stock because (1) it is cheap and (2) hope that some other company would pay a premium to acquire some cheap problems.  That thesis makes little sense to me.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. Just hover over the Gravatar image and click for email. **

Mobile Device Market Just Sucks

On Friday I was partially correct on NOK.  This morning NOK lowered their Q2 forecast citing a number of factors.  The stock is (11.5%) in the pre-market.  I said neutral on Friday; apparently it has lower to go.  In the press release NOK is citing a number a factors including a mix shift to lower priced smartphones and pricing actions in the market by competitors as well as itself.  I just struggle to see why anyone wants to bullish on the mobile device market unless you are AAPL, GOOG, HTC and QCOM.  Competition is brutal and I think tablets will have a more significant impact that people think.

To compliment the NOK train wreck this morning, the Rodman & Renshaw analyst Ashok Kumar dropped coverage of RIMM citing a number of factors, but basically saying that product cycles are negative and the company is falling behind the product cycle marathon and is generally un-interesting.

Here is what we know about the mobile device market: NOK and RIMM have both preannounced negative in Q2.  AAPL will release the iPhone 5 sometime this year.  HTC has one of the best engineering teams in the business.  Software is generally homogenized around Android and Widows Mobile.  Device prices trend lower.  If you cannot differentiate like AAPL, how is this a good market?

Interesting article in the WSJ describing how Activision Blizzard is planning to launch a Call of Duty online gaming service.  Not a lot of surprise here, but the implications are interesting as content owners create distribution for their content whether that is games, movies, applications, etc.  Service providers want to impose usage caps and force high volume users into upper service tiers and they will probably partner to create special service classes for content providers.  For example, when you contract for broadband at your home, you will be able to add a monthly surcharge for a policy based connection to Netflix or the COD network or some other content.  Just a random supposition on my part, but I think policy based SLAs will be a way for service providers to improve broadband margins.

 

/wrk

 

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Wondering why my 80 year old dad wants a smartphone and what this means for the mobile device industry

Over the weekend my 80 year old father sent me an email asking for advice regarding upgrading his Samsung feature phone to a smartphone.  Apparently my sister had suggested a Droid and my brother an iPhone and my dad was thinking Blackberry.  I replied to his email asking him why he wanted to upgrade, how he intended to use the device and what is in the new device budget.  My dad is not an early adopter of the latest technology trends, but his is not illiterate either.  Below is a picture of him from the Korea War when America was still using exchange name calling codes in a two letter five digit format.

He replied that he did not know what social networking is, but he would like to talk on the phone, read email and text.  He has never sent a text message.  That forced me to think about what kind of device to recommend.  His current feature phone was designed to be a phone.  When the engineers at Samsung designed the clamshell phone my dad is carrying their first design objective was to build phone for talking.  The phone has a text message function, but with a standard telephone keypad it is really not a texting device if you are over 18.  As a phone for talking, the Samsung device is great.  The battery lasts for days, rarely drops a call and it is small and easy to carry.

When the engineers at Apple designed the iPhone, their first thought was to design a mobile computing platform that leverages the Apple OS.  They then thought to put a voice application on it and call it a phone.  That is much different design path than the Samsung engineers who designed a phone and thought to add some text functions.

I have been carrying a Blackberry device since 2000.  It was not always a phone, but it has always handled email.  That was the magic of the Blackberry.  The engineers at Blackberry said let’s design a mobile email device that uses the cellular network.  Then they made it a phone and after that they decided to make it web device.  It was the step beyond email and phone where Blackberry stumbled.  Today, there is no magic to email on a mobile device.

Nokia made a colossal set of mistakes, but the biggest like Blackberry was losing the innovation war to Apple and buying Symbian.  Symbian was a great operating system for the feature phone era – but it failed in the smartphone era.

Motorola or MMI as they are now called simply stopped innovating.  They fell behind the other device leaders after failing to replace the magic of the Razr and had to recruit a new CEO a few years ago out of QCOM named Sanjay Jha.  I have met Sanjay many times and I give him credit as he realized the market for mobile devices was going to be a product development marathon.  Product cycles will matter.  Miss a product cycle and it becomes hard to catch up.  That is what is happening to RIMM in the present year.  When Sanjay took over he knew he needed an OS that would be a winner and he chose Android.  The whole mobile device market really comes down to three operating systems: Android, Windows Mobile and iOS.

HTC embodies the concept of product development as a marathon.  They are a product development machine with phones on Windows Mobile or Android.  Samsung and Sony-Ericsson are another two developers of smartphones who have seen the light and are now using Android or Windows Mobile.

The business model in the handheld mobile device space is to pick an OS: Android or Windows as iOS is not available for license and webOS (developed by Palm now owned by HPQ) is really a cool OS, but very small amount of market share.  Next you need to develop a nice user interface (UI) to go on top of your OS.  Hire some excellent hardware, packaging engineers, use the latest chips from QCOM, STM, IFX, BRCM, then build a device, find market distribution and off you go.  This is a somewhat long answer by me to the Edlar Murtazin blog post today speculating that MSFT will by NOK’s device business.  If I was NOK and MSFT wanted to buy it, I could not sign the paperwork fast enough.  If I was MSFT, why would I want a mobile device business?  I have a mobile operating system business.  Which is more valuable?  I think the later and we can debate if MSFT is executing well, has leverage, blah, blah, blah.

When I first saw the iPad I was a bit skeptical.  I had accurately guessed the price at $499, but I was not certain it was a game changer.  Then I used the iPad.  I now have three in my family and it is an amazing device.  I am still carrying an almost two year old Blackberry 8900 as a phone, because it works well as phone and I really see no need to get a new phone now that I have an iPad.  I am also a T-Mobile customer and have been one since 2002.  I am waiting to see if the merger with ATT goes through, what my options are post closing before making any new device or service provider choice.

Back to my advice to my dad who is a Verizon customer.  I told him to look at the iPhone as well as the Droid Incredible and the Thunderbolt by HTC.  As the weekend wore on I realized I might have given him the wrong advice.  Why does he need a smartphone?  The few times he makes a call, he has the perfect phone today.  If he loses the small Samsung phone no one would care.  It was free.  Get another one.  What my dad really needs is an iPad with 3G.  That is the game changer.  When I came to this conclusion my next thought was what does this mean for the stocks in the mobile space?

Here are a six ten year charts to look at.  I think these charts tell you where the mobile device market is going.  Ten year weekly charts are nice because they diffuse the daily noise effect from rogue bloggers.  The other option is read the thousands of pages of research published annually on the mobile device market.  I just think it comes down to who is making cool devices, who can keep making cool devices and who are the companies that are making parts for the makers of cool devices.  Product cycles matter.  They always matter.  Buy stocks in positive product cycles and short stocks in negative product cycles.  Anymore thought beyond that last sentence is too much thought.  People need to let their over analysis go, it is not that hard to figure out and you do not have to calculate RIMM’s earnings if they sell a few more devices in Chile because the 12-18 demographic likes the BBM.  It is not that hard.  Product cycles always tell the truth:

NOK: Here is the poster child chart for missing a product cycle.  I marked the introduction of the iPhone, but it should also be noted that between 2006 and 2008, NOK spent a lot of time in legal battles with QCOM.  I wonder how much this distracted the management team when AAPL was readying the iPhone.  I think the stock will bounce around the bottom for awhile.  I simply do not understand the people who want to bullish on a company in this much turmoil as if a windows phone in Q3, or Q4 or Q1 is going add $20 to the stock.

RIMM: The recent close below the bottom trend line is not good.  Will this chart go the way of NOK?  Missing product cycles really sucks.

AAPL: This is called a positive product cycle company.

MOT: There is no chart for MOT as it is two companies now and the current data set for MMI and MSI is limited.

QCOM: Over the past 3.5 years, I have met with this company many times.  These were very trying times for the company and the stress showed on the management team.  The chart really does reflect that distraction of the various lawsuits both to investors and management.  Those distractions are now behind the company and the recent breakout is very bullish.

MSFT: Last week’s close was not good for MSFT.  I would be watching it here.  I see many reasons why the company is in a negative product cycle, but I am more inclined to say this is being priced into the stock and it sets up for a buy in the 2H 2011.  Time will tell.

GOOG: No ten year chart here, but a nice series of higher highs and higher lows.  As with MSFT, last week’s close not positive, but I like how the company is setup.

/wrk

** It is all about the network stupid, because it is all about compute. **

RIMM Pre Announcement and Smartphones

January 18, 2011: a cold, rainy, crappy night in NYC.  I am there to meet a hedge fund manager for a job interview, but he wants me to meet with another manager too so it is a dual interview.  During the interview, the second HFM asks me what is my recommendation regarding RIMM.  He is long a lot of RIMM.  My response was to sell the RIMM, but if he wanted to keep it then he should short NOK ahead of their investor day as a hedge.  He gives me a strange look and asks why he should sell the RIMM.  I tell him that RIMM and NOK are in negative product cycles that will not end well.  I have no idea what he did with the positions since he has not responded to any emails since the interview, but I do know what the stocks have done:

RIMM is down 20% since January 18 (yes it has been up and down, but should open up another 900-1200bps down in the morning).

NOK is down 23% since January 18.

If you think I am grandstanding…well…yes I am, but look at my April 15 post on GOOG.  Have a nice night.

Side note…a friend emailed me this during the RIMM conference call “Even the EMs starting to soften.  They [are] citing LATAM.  GFK has been noting EMEA flattening fast; could roll soon.  If the INT growth story is cooked, what is there………?  I maintain US has gone negative net adds.  Permanently.  VZ was the still the largest installed base.  Can’t tell me they stopped sub disclosure numbers for any other reason.”

/wrk