IFA 2017 – Absent friends

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Hardware still taking the back seat to software.

• This year’s IFA is more about those that are providing the software that runs the products rather than the products themselves.
• IFA has become Europe’s answer to CES and this year it is bigger and better than ever.
• However, although there is a huge range of new products being launched, almost none of them are running their own software.
• These days almost all of the money in consumer electronics has migrated to the ecosystem which necessitates having one’s own software in order to drive the differentiation required to make a decent margin.
• Of all the products launched at IFA only wearable devices appear to be running their own software with almost everybody else using software from Google, Microsoft, Amazon or Steam.
• Smartphones, smart speakers and portable computing are getting the most attention but not one of these products is able to offer a unique experience.
• This is why all of the focus is on adding gimmicks at the edge of the core proposition in an attempt to drive differentiation.
• Sony’s 3D capture function using the camera leads the field but there are plenty of others.
• The problem with these gimmicks is that at the end of the day the users tend not to put any real value on them with their requirements remaining focused on Google and Apple for Digital Life and Microsoft for Digital Work.
• Amazon Alexa is also to be found on many devices particularly smartphones and home speakers.
• This puts Google, Microsoft and Amazon in the driving seat when it comes to defining the functionality that these devices will be able to offer as well as the point at which all the data will be collected.
• In effect, almost all the value being derived from the huge usage of digital devices is accruing to the ecosystems not the hardware makers.
• Consequently, as these hardware makers continue to slash each other’s throats to win a slice of market share, it is the big ecosystems that will benefit as the hardware that runs their experiences will be continually falling in price.
• This leaves the hardware makers as little more than commodity box shifters likely to earn 2-4% EBIT margin in the best instance.
• The one exception is Samsung because in smartphones it currently outsells its nearest rival by more than 2 to 1.
• This gives it a scale advantage enabling it to earn 12-14% on the commodity products that it sells.
• This is exactly the strategy that it employs to great effect in its semiconductor division where it dominates both the markets for commodity DRAM and flash memory.
• Unfortunately, for everyone else the outlook remains pretty bleak despite the fact that the smartphone market is showing some signs of life once again.
• Samsung and Apple are the only hardware makers I would consider but the valuation argument for both of these is no longer there following their excellent performance in 2017.
• This leaves me preferring the ecosystems of Tencent, Baidu and Microsoft.

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