No Second Chances

Baruch has been reading Asymco, a fascinating techie site he was put onto by Jean-Louis Gassé at Monday Note, and those interested in tech investing should really have a look at it. You can now see the site popping up on more generalist econo-investing sites like AR. Anyway, introductions over; there was something Asymco’s proprietor Horace Dedieu wrote earlier this month that made Baruch sit up and think.  “The post-PC era,” he wrote, ” will be a multi-platform era,

The thesis that one dominant platform wins the mobile “war” is naive.  . . Developers already understand this. Platform vendors know this. It’s time to unlearn the lessons of the PC era.

Evidence for this? Microsoft Windows Mobile platform apps are growing at a percentage growth rate that is faster than WM users grow, who collectively make up so little of the pie of smartphone users that the slice representing them would be mostly invisible. It’s not getting any better. WM activation rates are 1/28 of that of Android smartphones. The platform is continuing to lose share with subscribers yet, strangely, still seems to be gaining relative share in apps.

What appears responsible for this is the previously unheard-of ease of transferring apps from one platform to another, software tools such as Microsoft’s that allow the rapid creation of new apps and their adaptation for different operating systems, and an economic system that is set up to make writing software for mobile applications a “cottage industry” with a thousand points of light, rather than an industrial enterprise with 2 or 3 dominant players. The marginal cost of creating apps and sharing them between platforms seems to be very low indeed.  So why not make or adapt apps for Windows Mobile? You never know, it might come back. Mango, the new version which will be Nokia v.2’s adopted OS, might be the Apple or Android killer Microsoft hopes it will be.

If the ability to run the largest number of apps determines success then, far from being a returns to scale market like the one for PCs, the implication is that the market for smartphone platforms will be fluid, with nothing written in stone. There will be room for their relative shares to ebb and flow, variously dominating, fading and coming back repurposed for the new new thing in mobile computing: on this reading, it will be something like the game console market today, where 3 viable platforms survive.

What this means in its most practical sense is that there is hope for the platforms falling behind now, such as HP’s WebOS, RIM, and for OEMs like Nokia, for whom Mango is the only game in town. The implications for stocks are major. The option value in RIMM and Nokia would be much much higher than current share prices imply. This would make a lot of people who are short these stocks very unhappy.*

Comfortingly for them, however, there are equally compelling arguments that mobile computing will end up more like the PC industry than anything else. Firstly I suspect that, contra Horace, the profusion of WM apps has more to do with the sponsorship of Microsoft and its deep pockets than a sudden developer interest in championing losing platforms.  Secondly, its not just developers who decide who wins; operators remain in the mix. Their atavistc promotions and subsidy policies can also determine which platform sells. Don’t forget, moreover, that O/Ses are free! Android makes it so you can’t underprice zero to gain market share for your new platform. That helps to freeze things in place and mitigate against fluidity.

But most of all, the apps game remains secondary to the real goal of platform competition. The aim of the game, the whole schlemiel, remains to sell hardware, not software. Apple’s app store revenue is negligible in comparison to their hardware revenues, and will be for some time to come, at least until Apple finds a way to persuade people to buy higher ASP apps. Frequent purchase of 90c apps won’t move the needle against a $600-$900 hardware sale, even if everyone buys Angry Birds (and they probably already have). Until the dynamics of the mobile computing market stop being hardware heavy,  platforms are still vulnerable to hardware death spirals of the sort we’re seeing in RIMM and Nokia right now, where scale returns and operational leverage go into reverse

Don’t think either that just because is easier to write apps for a platform it is going to make it break out. The fact is that if all apps were available on all platforms rather than freeing up competition it would be likely to freeze the status quo in hardware into place. What killer app can Microsoft’s Mango offer me that I can’t get on my iPhone? What could possibly make me change my Android phone? A more functional OS? Better hardware at a cheaper price? Possibly. More likely that in the absence of anything significantly better than what I have currently I won’t change at all. Ecosystems are grabbing territory now that it will be hard to dislodge them from.

The dream of a fluid ecosystem for mobile computing is nice, especially for software developers tired of being the bitches of the hardware dudes. But it looks far off still. Mobile looks subject to the same laws that have governed tech markets throughout  history. That law is: no second chances. Value investing in consumer or enterprise tech very very rarely works. This is the key message for those who read Baruch’s last post and have fired their retail brokers and dumped their index funds, and who may be tempted to go off any buy RIMM at a 5x PE (don’t let me stop you, but do let me help you think before you do it)**. The graveyard of history is littered with those names that didn’t come back. For those that did, such as IBM, and indeed Apple, we forget just how low the low point was, and how wrenching it was to do the right thing so as to eventually re-emerge.

* you may think that this group of people includes Baruch. You may think that if you wish. But I couldn’t possibly comment.

** as I have said before, if you take anything you read on a blog written by an anonymous author as actionable investment advice, you may not be too bright. I can do nothing for you.

7 responses to “No Second Chances

  1. Pingback: FT Alphaville » Further reading

  2. The whole shlemiel? Doesn’t work. Maybe shebang…

  3. Pingback: Wednesday links: no second chances | Abnormal Returns

  4. “The implications for stocks are major.” Major? Baruch, you’ve been living in the US too long.

    Great post, though.

  5. Just stopping in to say ‘howdy’ and introduce myself. Probably going to hang around here.

  6. Pingback: Lesenswertes – Rückspiegel KW 28 | valueandopportunity