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Tech Roundup: AMZN Advertising, GOOGL’s Schmidt Steps Down, AAPL Sued

Zacks

Amazon’s AMZN advertising push, Alphabet’s GOOGL Schmidt stepping down and a number of lawsuits against Apple AAPL for deliberately slowing down older iPhones made headlines as 2017 drew to a close. Here are the details-

Amazon Digital Advertising in 2018

CNBC interviews with half a dozen ad buyers and technology partners revealed that Amazon has been honing its skills to make a splash in the advertising business this year. The company already generates about $1.8 billion from advertising according to eMarketer, which has garnered it around 2% market share. This is of course well behind market leaders Google and Facebook FB, which together account for the majority of digital advertising revenue.

Amazon has over the years expanded its product range, including digital advertising entertainment options and is increasingly becoming the go-to place for product search. Over the years, a number of surveys and research reports have mentioned that most people start their product searches on Amazon.


This position has strengthened because of its review system that helps people do their product research on the platform. Therefore it is a very good place to advertise. Since Amazon also sells the products, it can speed up conversions for advertisers, thus improving their return on investment.

So Amazon has been testing advertising tools across its platform and also outside it (a partnership with mobile advertising company Kargo for example helps it place TV and mobile ads sequentially). Video advertising is also in the cards, especially if it also goes ahead with the plan to launch a freemium video streaming service.

Advertisers are no doubt thrilled with the idea of a strong third contender, especially if it’s Amazon, as this could bring down prices. Of course data sharing will be a sore point because Amazon is unlikely to be more willing to part with a key business secret than Google or anybody else for that matter. Still, some media reports say that Amazon is willing to share more data (it generates a treasure trove from all the transactions it processes).

The Interactive Advertising Bureau estimates that the digital advertising market exceeded $209 billion in 2017 and expects it to grow another 13% this year. So Amazon has every reason to disrupt it the way it has every other business it targeted.

Eric Schmidt Steps Down

Eric Schmidt is stepping down from his role as executive chairman of Alphabet but will continue as technical advisor (likely related to Sidewalk Labs, deep learning efforts, and healthcare spin-offs, Verily and Calico) and a member of its board. He first joined the company in 2001 as something of an adult member in the Larry Page-Sergey Brin team that founded Google.

Schmidt has taken the company from an exciting startup to a tech behemoth of colossal size and has played a particularly important role in Washington. He has also been Google’s public face for long. While no one mentioned a reason for the change, it was described as a necessary transition in his role as decided by himself, Page, Brin and Pichai together.

So Google is without a chaperone now and the new breed of managers, of which Pichai and Porat are the main, will take the company forward from here. Schmidt announced the decision in a tweet: “Day-to-day adult supervision no longer needed!” — referring to a comment that Brin made when he was first hired.

Apple Slows Down Aging iPhones

More than 8 lawsuits have been filed in in U.S. District Courts in California, New York and Illinois seeking class action status to represent users of old iPhones. Another case has also been filed in Israel.

The main issue, gleaned from the lawsuits is that Apple deliberately used software updates to slow down older model (iPhone 5, 6 and some 7) phones with underperforming batteries. Apple also didn’t inform users that the issue was with the batteries, instead encouraging them to upgrade their devices to newer, more expensive models.

Apple’s apology was wanting. While it said that it “would never do anything to intentionally shorten the life of any Apple product, or degrade the user experience to drive customer upgrades,” all it offered was a one-off $50 discount on replacement batteries for iPhone 6 or later. While it promised to update its operating system to give users "more visibility into the health of their iPhone's battery," it didn’t say it would stop the practice of slowing down the phones. Instead it said that the action was necessary to protect the components of older phones and prevent unexpected shutdowns.

So Apple hasn’t extended warranties on its devices to two years like Samsung or Google, nor has it said that if such things happen in the future, it will again discount the batteries.

One place where Apple could have been taken to task is France, where another case has been filed against the company. Since 2015, French law specifically makes planned obsolescence, i.e. deliberately reducing the useful life of products, a crime. But since the French law relates to products manufactured in France and most of the iPhone is manufactured elsewhere, Apple has enough room to wiggle out.

Ticker

Price Change Last Week

Price Change Last 6 Months

AAPL

-3.3%

+17.9%

FB

-0.4%

+18.9%

GOOGL

-1.5%

+14.5%

MSFT

+0.0%

+25.5%

INTC

-1.1%

+37.9%

CSCO

-0.6%

+22.2%

AMZN

+0.1%

+22.6%

Other Stories-

Corporate

iPhone X Demand Concerns: Following a Bloomberg report quoting Taiwanese newspaper Economic Daily about Apple planning to cut its second quarter (calendar first quarter) iPhone sales forecast from 50 million units to 30 million units, there were a number of bearish reports on weaker-than-expected demand for the iPhone X. But other analysts pointed out that Apple typically issued higher estimates when launching products to keep the pressure on its suppliers.

Once supply and demand reached closer to parity these estimates were typically lowered. Moreover, investors shouldn’t be concerned about estimate reductions when even those lowered expectations are higher than the street. Also, since Apple’s valuation is reasonable compared to other leading technology companies, there’s little reason to start selling the shares on this account.

iPhone Price Rise in India: Apple has been in talks with the Indian government about tax and other concessions to start assembling phones in India, but the government doesn’t appear to have budged. On the other hand, on Dec 15, it raised the customs duty on imported electronic goods like TVs, phones etc from 10% to 15%.

As a result, Apple, which only assembles the iPhone SE in India, raised the prices of all its other phones by an average 3.5%. So its 256 GB iPhone X model now costs 105,720 rupees ($1,646.61), while the 256 GB iPhone 8 costs 79,420 rupees. The X is up 3.6% and the 8 up 3.1%. All this at a time when its top sales executive in India Sanjay Kaul is leaving the company to be replaced by Michel Coulomb, who recently served as the managing director for Apple in South Asia. Kaul’s inability to negotiate deals with the Narendra Modi government may have had something to do with the change.

Apple/Amazon Going to Saudi Arabia: Technology companies Amazon and Apple are in discussions with the crown Prince Mohammed bin Salman to invest in Saudi Arabia. Amazon has approached the region through AWS, which already has an operations center in neighboring Bahrain.

Apple is in talks with SAGIA, Saudi Arabia's foreign investment authority, according to Reuters. There remain significant regulatory hurdles as the legal structure isn’t conducive to attracting foreign investment, but Prince Mohammed has made a lot of progress in that regard as he tries to reduce the country’s dependence on oil. Being something of a technophile himself, he has also joined with Softbank to create a $45 billion technology fund.

Analyst Positive on AMD: Macquarie Group analyst Srini Pajjuri has now turned positive on Advanced Micro Devices AMD saying that the company is in a better position to charge higher prices for its GPUs and also that it could win back market share with its new line of server chips. He also raised his target price from $10 to $11.

However he isn’t betting on its improved competitive position versus Intel INTC: “Additional gains will depend on the company’s future roadmap and execution, and we believe it’s too soon to give the company the benefit of the doubt given Intel’s strong product portfolio and entrenched position.”

Google Stores in India: Google’s pop up stores in malls like High Street Phoenix in Mumbai and Select Citywalk, Promenade Mall of India in Delhi-NCR have done well. So well in fact that the company is now thinking of setting up “experience centers” across the country, as three people familiar with the matter have told the Indian English daily The Economic Times.

The goal is to better showcase its Pixel product line, which is up against very stiff competition from a host of other players including Samsung (which has stores in every nook and corner) and China’s Xiaomi, Vivo and Oppo. Google will also benefit from direct interactions with customers, which could help it close sales faster.

Trump Wants Postal Service to Hike Rates: Trump has tweeted that he wants the Postal Service, which delivers around 62% of Amazon’s total packages, to hike rates for the items it delivers. Last November, the rates were hiked by around 2%. With rising pension and health care costs, the Postal Service is struggling.

Since it has been losing money for 11 straight years, there is reason to be concerned. But Amazon is likely not the reason because its results show that online package deliveries is a business with better-than-expected results.

Amazon’s ‘Digital Day’ Sales Event: As if holiday sales aren’t big enough, Amazon has started a new tradition called Digital Day that was held in 2017 on Friday, December 29. As the name indicates, the focus is on digital sales with more than 5,000 deals covering eight categories including movies, TV shows, mobile games, apps, eBooks, and more. Digital Day was a huge success last year when it launched for the first time enabling it to generate record-breaking sales across digital apps, games and comics.

First Alibaba Data Center in India: Alibaba’s BABA first data center in India (33rd globally) will be operational this month. In addition to standard cloud computing services including storage and big data, it will be offering customers elastic computing, database, content delivery, networking, analytics, containers, middleware and security.

The company has doubled its revenue every quarter this year and although most of this growth is coming out of China, it has ambitious plans to service customers all over the world, which is why it has data centers in Hong Kong, Singapore, Japan, Australia, the Middle East, Europe and the U.S. Management expects it won’t be long before it gets into direct competition with market leaders Amazon AWS, Microsoft Azure and Google Cloud.

Legal/Regulatory

Germany Finds Facebook Guilty: The German Federal Cartel Office has said that its 20-month review of Facebook practices found that the company had abused its dominant position. Facebook disagrees that it is the dominant social network in Germany and said that the characterization was inaccurate.

The regulator also frowns upon its practice of monetizing the data of its 2 billion users worldwide. It has also taken exception to Facebook’s practice of collecting third-party data, i.e. data picked up from sites that have a Facebook “like” button that the social network then adds to the data it has already collected on the user. The company does this to build profiles of users for more targeted advertising.

Products/Technology

Huawei Phone Coming Soon: China’s Huawei will launch its flagship Mate 10 in the U.S. next month. The company is partnering with AT&T for the purpose and the two have been working on details over the past year. It will also spend more than $100 million on marketing since the brand remains largely unknown in the U.S. It is, however, well known overseas, with a global market share of 11% and behind only Apple at 13% and Samsung at 22%, according to IDC.

Alphabet Debuts New Internet Access Tech in India: Along with local telecom company AP State FiberNet, Alphabet is using Free Space Optical Communications (FSOC) technology to bring connectivity to rural areas of the Indian state of Andhra Pradesh. The technology uses beams of light to deliver high-speed, high-capacity connectivity over long distances, so it is particularly useful to connect remote areas. The project is aligned with the Indian government’s initiative to connect 12 million households to the Internet by 2019.

AmazonTube Trademark: TechCrunch reports that TV Answer Man has found trademark applications from Amazon called AmazonTube and OpenTube describing a service providing “non-downloadable pre-recorded audio, visual and audiovisual works via wireless networks on a variety of topics of general interest.” This could be inviting litigation from Google, since the name closely resembles its popular YouTube service.

Amazon and Google have been squabbling with each other since Google pulled YouTube from Amazon devices because of violations in its terms of service and later turned it on again briefly. Later, Amazon stopped selling Google video streaming devices. After talks appeared to fall through between the two, Google pulled its YouTube service yet again.

Now there seems to be reason to believe that Google dropping YouTube from Amazon devices may have been less of a squabble and more of a strategic decision as the two move toward building their own walled gardens. The TechCrunch report also says that Amazon has registered the domain names AlexaOpenTube.com, AmazonAlexaTube.com and AmazonOpenTube.com.

Collaborations and M&A

Facebook Licensing Deal with Universal Music: Facebook now has a deal with Universal Music that focuses on copyright infringement. Accordingly, Facebook will no longer require users to take down music from Universal’s catalog for copyright infringement. This should encourage them to share more video.

Facebook is also reportedly in talks with Warner Music Group and Sony Music Group, but deals haven’t materialized yet. Facebook has been doing all it can to become more of a destination for video sharing and watching as it attempts to take share from Google’s YouTube and also pull in some TV ad dollars. Its Watch tab was also created for this purpose.

Some Numbers

Apple Smartphone Profit Share Falls: Counterpoint Research’s Market Monitor program for Q3 2017 shows that smartphone profit growth of 13% in the period was driven by Samsung and Chinese brands rather than Apple. Chinese brands have focused on gradually rolling out more premium devices that are priced just slightly lower than Apple and Samsung.

They have also been streamlining the supply chain, which has helped them generate profits. So for the first time in as long as I can remember, Apple’s smartphone profit share actually shrank from 86% in the year-ago quarter to 60% this quarter. Samsung’s share went from 26% to 3%. Huawei, Oppo and Vivo accounted for 5%, 4% and 3% of smartphone profits, respectively.

Apple Devices See Most Activations: Data from Flurry Analytics shows that Apple was the most popular device during the holidays with 44% of smartphone and tablet activations through the week leading up to Christmas and the end of Chanukkah, same as last year. Samsung’s share went up from 21% to 26%. Huawei took a 5% share with Xiaomi, Motorola, LG and Oppo taking a 3% share each and Vivo the remaining 2%.

Older iPhone models (6 and particularly, 7) did better than newer ones, especially in international markets, likely because they were cheaper. Full-size and small tablet share shrank over the past two years, tablet shares grew from 27% in 2015 to 37% the following year and 53% last year. Medium phone share also shrank from 54% in 2015 to 45% in 2016 to 35% last year.

Amazon Dominates Online Sales: GBH Insights analyst Daniel Ives estimates that Amazon received 45-50% of holiday online retail sales this year, up from 38% during the same period last year despite a strong showing from Walmart, Target and Best Buy. In his words: "While Walmart is emerging as Amazon's biggest sole competitor online, we believe customer overlap remains small today as Prime membership growth and Amazon's stronghold on e-commerce remain hard to penetrate as we expect this trend to continue to play out in the near-term heading into 2018."

Amazon said plenty of things that indicated it sold a ton of Alexa-enabled devices with the heavily discounted Echo Dot at $29.99 being the best seller.

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