AT&T sued for massaging DirecTV figures

If there is a headache in the shape of activist investor Elliott Management already, AT&T executives will be reaching for the aspirin once again as investors sue over suspect figures.

Filed in the US District Court for Southern New York, Melvin Gross is the man leading a coalition of investors to sue AT&T, suggesting the management team misled investors over the performance of its DirecTV video products. The massaged figures might be viewed as an attempt to save face (as well as jobs), though the lawsuit also suggests executives were attempting to justify the incredibly expensive acquisition of Time Warner through nefarious means.

“Moreover, several of the Executive Defendants had strong personal interests in promoting the success of DirecTV Now in order to persuade the market of the logic behind the Time Warner Acquisition,” the filing states.

“The failure of DirecTV Now, prior to the closing of the Acquisition, could have jeopardized the transaction, a result that would have been disastrous for the Defendants.”

Through a combination of fake email addresses and additional charges for customers without consent, practises which were allegedly encouraged by managers, AT&T is effectively accused of fraud. Investors are also suggesting the executive team presented misleading numbers down the omission of promotional numbers. 500,000 net adds disappeared once a three month for $10 deal disappeared, though this risk was apparently not appropriately communicated.

By hyping the performance of DirecTV Now, investors might be encouraged to double-down on momentum in the content unit, funding another monstrous acquisition. However, as the lawsuit states, investors might not be buoyed to spend $108.7 billion (including debt) should the 2014, $67.1 billion DirecTV purchase be viewed as a failure.

This is somewhat of a conspiracy theory, though the DirecTV Now numbers were not anywhere near as attractive during the financial earnings call once AT&T was committed to the Time Warner transaction. As you can see from the table below, the timing is a bit suspicious:

Period Net adds (loss in brackets)
Q2 2019 (168,000)
Q1 2019 (83,000)
Q4 2018 (267,000)
Q3 2018 49,000
Q2 2018 342,000
Q1 2018 312,000
Q4 2017 368,000
Q3 2017 296,000

The Time Warner acquisition was first announced in October 2016 and closed in June 2018. In the financial earnings call following the closure of the transaction (Q3 2018), the DirecTV gains started to crumble away.

With the aggressive expansion and success the AT&T executive team was suggesting up-to Q2 2018, investors will of course have been enthusiastic about adding to the momentum. On the other side, you can see why some are reasonably irked by the reality of the situation. It does appear the fact many of these gains were either irresponsibly attributed or unlikely to be anything more than short-term gain.

Although DirecTV is the focal point of the lawsuit, the Time Warner acquisition is the central cog which the saga flows around.

The content strategy from AT&T is relatively simple. The DirecTV acquisition offered a mobile-friendly content delivery model, and the Time Warner purchase offered a horde of content allowing the telco to compound gains. Both, theoretically, work independently, but the combination is more attractive if you have a bank account big enough to fund the expansion.

However, as the lawsuit suggests, investors might be a bit sheepish in giving the greenlight to a $108 billion acquisition if the ROI from the $67 billion purchase are not living up to the original promise. The AT&T theory and business model is theoretically sound, though if the lawsuit is successful, heads may roll due to the route the management team took to get to the finish line.

The content bet from AT&T is already looking suspect, and this lawsuit will not help the situation.

Alongside this filing, the management team is also under attack from Elliott Management, the vulture fund which specialises in restructuring businesses, promoting a shift towards a utilitised business model and realising short/mid-term gains through increased dividends and share price increases.

The activist investor has taken a $3.2 billion stake in AT&T and has recently sent a letter to shareholders attacking the AT&T strategy and competency of the management team. The content business has come under-fire, with Elliott Management pushing for divestments and a more stringent focus on traditional connectivity products. It’s a strategy which could force the telco down the utilitisation path, something which is unlikely to benefit the business in the long-term.

The emergence of this lawsuit certainly aids the Elliott Management case, however we think the timing is more coincidental. Some might suggest the vulture fund is behind the lawsuit, but we think it is more a case of pleasant timing.

For the AT&T management team, this is a potential disaster. Not only do these executives have an aggressive activist investor calling for their heads, they have now been named in the lawsuit, with the complainants suggesting they encouraged under-handed tactics to directly mislead the market. This is turning into a very uncomfortable month for the AT&T management team.

IBC 2019: Linear TV isn’t dead just yet

This might sound like a very bold and short-sighted statement, but thanks to the development of IP-based standards, traditional broadcasters might just be able to survive in the digital economy.

This is of course not a statement which suggests business is as usual, there are major restructures and realignments which need to occur to future-proof the business, but linear TV and traditional broadcasters can survive in the cut-throat world of tomorrow.

The change which is being forced onto the world is HbbTV and ATSC 3.0, two new standards for the traditional broadcasters to get behind which offer the opportunity to create the experiences consumers desire and the business model which advertisers demand.

HbbTV, Hybrid Broadcast Broadband TV, and ATSC 3.0 are both standards which aim to take the broadcasting industry into the digital world. Although these standards are not necessarily harmonised, the IP approach effectively forces manufacturers and broadcasters into an era of on-demand content, interactive experiences and hyper-targeted advertising.

Over the last few years, many in the TMT world have been quick to write the obituaries for linear programming, but this is not an area which should be written off so abruptly. There is still a niche for the idea of linear TV, and if executed competently, there will be an audience of Generation Z sitting on the sofa next to the Baby Boomers.

Oliver Botti of the Fincons Group, pointed to two areas where linear TV currently, and will continue to, thrive. Firstly, live sports, and secondly, reality TV programming such as Celebrity Big Brother. With both of these standards, new content, experiences and advertising business models can be enabled to ensure continued relevance.

For sports, additional content can be offered to the consumer alongside the action to offer the viewer more control of their experience. This is something which is becoming increasingly common in the OTT world, though it is yet to genuinely penetrate traditional broadcasting in any meaningful way. The second example Botti highlighted is a very interesting one.

The concept of Celebrity Big Brother is not new to most. Dozens of cameras in a closed environment, following around the lives of prima donnas where at least one will probably make some sort of racist gaff at some point. However, with the new standards, Botti highlighted users can choose which camera is live on their own TV, creating a personalised content experience.

It does sound very creepy, but this is the sort of thing which is likely to appeal to some audiences…

Both of these examples are live content. For some, this experience can not be replicated in an on-demand environment, driving the continued relevance for linear TV. It is a niche, but one which will drive the relevance of traditional broadcasters and the relevance of linear programming for years to come.

Vincent Grivet, Chairman of the HbbTV Association, also highlighted the standards also allow for personalised advertising. This is just as, or perhaps more, important to the survival of traditional broadcasters as without the advertising dollars these businesses will not survive. Advertisers know what they want nowadays mainly because Silicon Valley can offer it. If hyper-targeted advertising is not an option, advertisers will not part with their valuable budgets.

What is worth noting, is that both of these standards rely on the TV manufacturers creating products which allow for success to continue. This is where an issue might arise; currently there is no global harmonisation.

HbbTV has been adopted in Europe, while ATSC 3.0 has been championed in the US and South Korea. China is doing what China does and going down its own separate path, creating a notable amount of fragmentation. This might be a challenge.

Richard Friedel, Executive VP of Technology & Broadcast Strategy of 21st Century Fox, told us that as an engineer he would like to see more harmonisation, but as a pragmatist, he doesn’t see it happening any time soon. All the standards are IP-based, therefore there will be a natural alignment as the industry evolves over the next couple of years, but this does not necessarily mean genuine harmonisation.

This presents a complication for the industry, but let’s not forget that this is a positive step in the right direction. Linear TV might not be attracting the headlines, but if you listen to the right people, it is certainly not dead.

Quibi: a short-form streaming service to keep an eye-on

A passing reference at IBC 2019 was the first we had heard of Quibi, but it certainly looks like an interesting proposition which could add further disruption to the content world.

Imagine a cross-over between Netflix and Snapchat and you’ll have something close to Quibi. Although there isn’t a huge amount of information out there about the business, it looks to be a mobile-based, short-form video subscription service designed for millennials. Content will be designed for mobile-format, and only viewable through the app.

This might sound like a bit of a fad but looking at the content it already has lined-up, the first-step towards success has been made.

Firstly, you have a yet to be named thriller starring Oscar winner Christoph Waltz alongside Liam Hemsworth, where a terminally-ill man is hunted by contestants, as he attempts to provide long-term for his wife. Secondly, you have a Stephen King horror series which can only be watched at night. Another title is “Action Scene” which stars Kevin Hart.

These are only a few of the titles which Quibi has floated through the press. Despite there not being a huge publicity push for the service, Hollywood stars seem to be convinced by the concept.

Although it was only a passing comment on-stage at IBC 2019, All3Media CEO Jane Turton and UK MD of Production for BBC Studios Lisa Opie also suggested they had both been commissioned for content on the platform. Turton also said her parent company Liberty Global was an investor in the business.

Interesting enough, the Quibi business seems to have attracted interest from some of the worlds’ most recognisable technology businesses without making a significant splash in the publicity pond. Walt Disney Company, 21st Century Fox, NBCUniversal, Sony Pictures Entertainment, WarnerMedia, and the Alibaba Group complete the list.

Once again, we are relying on third-party sources, but it does seem to be priced reasonably fairly. For $5 a month, or $8 for an ad-free service, the platform might well gain some traction should the content live-up to the expectation.

Another interesting aspect of this business is the leadership team. Jeffrey Katzenberg, a vastly experienced executive in the firm industry with tenures at Paramount and DreamWorks, has been brought on-board to work alongside CEO Meg Whitman. If Whitman sounds like a familiar name, she was previously CEO of Hewlett Packard, leading the business through the restructuring period which created HP Inc and Hewlett Packard Enterprise.

While Whitman’s tenure at HP was not exactly the most successful, her background in the technology industry married to Katzenberg’s experience in the content world dovetails quite well. It’s technology pragmatism alongside content creativity; both barrels will have to be firing if the Quibi business is going to be a success.

This is the other side of the business which the team is yet to discuss; technology. Digital natives are not very tolerable of poor service, so Quibi will have to be on-form if it is going to be a long-term success. Creating a new, disruptive service is difficult, just look at YouTube’s experience last year.

As Paolo Pescatore of PP Foresight pointed out to us, streaming the Champions League Final on YouTube was not the greatest of successes. It was an interesting move, setting the scene for potentially a new field for YouTube, but the team did not necessarily nail the experience.

“YouTube had decoding issues dealing with the huge demand from the live streaming event. There were no problems with the stream to the BT Sport app,” said Pescatore.

“Key to the success of Quibi will be distribution as it has a strong growing slate of content. It should strong consider forging tie ups with telcos who are crying out for great content to drive connections and usage on fibre broadband and 5G networks.”

We like the idea. It is a novel-concept which could potentially form a completely new kind of content delivery model. The audience is likely to be curious as well.

If the last few years have shown us anything, it’s that the millennials and generation Z are open to new ideas. And they are willing to pay for it. $5 a month is a price point which many will tolerate as an experiment.

Assuming the content lives up to the blockbuster names it is attracting, the technology fulfils the experience which digital natives demand, and the marketing team is clever enough to cut through the noise in a very crowded space, this could well be a success.

Quibi isn’t exactly shouting about itself at the moment, but it is an idea which we really like the look of.

Silicon Valley drops the ball on censorship once more

Yet another set of ill-considered censorship decisions by Silicon Valley has illustrated once more the impossible position they are in.

Google has announced it will now ‘elevate original reporting in search’. On one level this is totally laudable. Modern journalism has been severely corrupted by the wholesale shift in advertising spend from print to journalism and thus put in the hands of the digital advertising platforms, of which the biggest is Google itself.

The move to digital has squeezed media margins, with advertisers looking for demonstrable ROI where once the circulation and brand of a publication was sufficient reassurance of ad money well spent. As a result the total number of journalists employed has dropped dramatically which, in combination with the explosion of digital publications, has meant each remaining hack has to produce much more content than previously.

Digital ad spend also directly rewards direct traffic in a way print never did, which means media are incentivised to publish a high volume of ‘click bait’ journalism, which is typically of a low standard and designed more to provoke than inform. Of all the companies in the world Google is easily the most directly culpable for this trend and now it’s belatedly trying to correct it.

“While we typically show the latest and most comprehensive version of a story in news results, we’ve made changes to our products globally to highlight articles that we identify as significant original reporting,” said Richard Gringras, head of Google News. “Such articles may stay in a highly visible position longer.”

There’s a lot to like about this. Prominence in Google news equals more clicks, which equals more revenue. If follows, therefore, that any tweaks to the algorithm that promote proper reporting (which is much more expensive than opinion or re-reporting) are a step in the right direction. But Gringras himself acknowledged the complexity of the situation this puts Google in, in his next paragraph.

“There is no absolute definition of original reporting, nor is there an absolute standard for establishing how original a given article is,” said Gringras. “It can mean different things to different newsrooms and publishers at different times, so our efforts will constantly evolve as we work to understand the life cycle of a story.”

In other words Google decides what news is worthy of delivering to the public. Even if we assume those decisions will always be made in good faith and that the associated algorithms will somehow be furnished, in real time, with the most exhaustive context, this is still a lot power to be put in the hands of one commercial entity.

On top of that Gringras himself was the head of digital publisher Salon before moving to Google in 2011. Salon is widely recognised to be significantly biased in favour of perspectives and issues considered to be left wing and you have to assume its long time boss is also that way inclined. How can we be sure his own political positions don’t influence the decision-making of his team? US President Donald Trump will doubtless be asking that very question before long.

What media spend hasn’t shifted to Google has been mostly hoovered up by fellow Silicon Valley giant Facebook. As a social media platform it faces an even greater censorship challenge than Google (if you just focus on the search bit, not YouTube) and has been even less consistent and coherent in its approach, leaving it open to extensive accusations of bias.

Facebook’s latest attempt to clarify its censorship policies offers little clarity or reassurance to its users. Here are the new criteria, as copied from the official announcement.

  • Authenticity: We want to make sure the content people are seeing on Facebook is authentic. We believe that authenticity creates a better environment for sharing, and that’s why we don’t want people using Facebook to misrepresent who they are or what they’re doing.
  • Safety: We are committed to making Facebook a safe place. Expression that threatens people has the potential to intimidate, exclude or silence others and isn’t allowed on Facebook.
  • Privacy: We are committed to protecting personal privacy and information. Privacy gives people the freedom to be themselves, and to choose how and when to share on Facebook and to connect more easily.
  • Dignity: We believe that all people are equal in dignity and rights. We expect that people will respect the dignity of others and not harass or degrade others. 

While privacy seems relatively easy to determine and thus police, authenticity, safety and dignity are very subjective, ill-defined concepts. Facebook could arbitrarily determine almost anything to be inauthentic or undignified, so all this announcement really does is assert Facebook’s right to unilaterally censor its platform.

The Facebook announcement comes the day after reports of it censoring a piece of content published on it that challenged the claims made in another piece concerning abortion. This isn’t the place to examine the relative merits of the positions stated, but since abortion is one of the most polarising issues out there, and that balancing the rights of the mother and infant is a uniquely challenging ethical dilemma, for Facebook to apparently pick a side in this case has inevitably led to accusations of bias.

Lastly even crowdfunding service Kickstarter is under pressure to censor projects on its platform. A comic titled ‘Always Punch Nazis’ was taken down after claims that it violated Kickstarter’s community guidelines. Slate reports that many Kickstarter employees objected to this decision, which resulted in it being reversed but also claims of recriminations against some prominent protesters. This in turn has led to moves to unionize among Kickstart staff.

Once more we see that it’s impossible for a digital platform to issue watertight ‘community guidelines’ and that arbitrary censorship decisions will always be vulnerable to accusations of bias. The comic claimed to be satirical, which should offer at least some protection, but it still falls on someone to assess that claim.

Prior to the internet there were very few opportunities for regular punters to be published, let alone to a global audience. Social media especially has revolutionised the public dissemination of information and opinion, while concentrating the policing of it in the hands of a few democratically unaccountable companies. They will continue to try to perfect their censorship policies and they will continue to fail.

Huawei wants to sell its 5G tech to rivals – report

The latest bid by Chinese kit vendor Huawei to adapt to US sanctions could involve licensing its 5G technology to whoever is willing to pay.

The remarkable claim was made by CEO Ren Zhengfei (pictured) in a recent interview with The Economist. “For a one-time fee, a transaction would give the buyer perpetual access to Huawei’s existing 5G patents, licences, code, technical blueprints and production know-how,” declared the piece. It also noted that the acquirer would be free to muck about with the source code, thus removing the risk of there being nefarious, sneaky bits of spyware or whatever hidden in there.

A technology company’s intellectual property is its crown jewels and under normal circumstances offering it up to competitors would be the very last thing it would do. But these are exceptional times for Huawei and it’s having to consider ever more novel ways of adapting to a time in which many countries around the world are blocking its presence in their 5G networks.

The stated aim for this move is apparently to create a viable non-Chinese competitor to Huawei in order to take the geopolitical heat off it. Ericsson and Nokia would be entitled to take exception to the inference there, but at the same time would surely be tempted to get hold of some of that choice IP.

On further reflection this doesn’t really add up. Ericsson, Nokia and to a lesser extent ZTE and Samsung all have competitive networking offerings, so this feels more like a dig at them than a genuine attempt to move things forward. It also feels like a bit of a public relations gimmick, so Ren can say he’s trying everything to resolve the current situation and the US needs to meet him half way.

This move could also be a further attempt to reassure the US that there are no security concerns with its software by putting it in the hands of competitors that have every incentive to uncover any cyber-naughtiness there may be therein. But how can anyone be sure that the IP Huawei licenses to third parties is identical to that contained within its own kit?

Ren deserves credit for continuing to engage with the western media and for at least appearing to try to come up with solutions to the current impasse. As we saw in the matter of the confiscated Huawei gear, the US isn’t always acting in good faith in this case, but it seems unlikely that this latest initiative will do much to ease its concerns about Huawei’s presence in the 5G networks of itself and its allies.

New California law says Uber drivers are employees, Uber says they’re contractors

A new law looks set to be passed in California that could set a much wider precedent regarding the employment status of participants in the gig economy.

One of the most disruptive trends brought about by the mobile internet is the gig economy, in which people are able to get casual, piecemeal work simply by registering through a mobile app with a company that matches people who need a service with people willing to supply it. In many ways it has revolutionised the labour market, but there is also considerable disquiet about the lack of employment rights afforded to these ad hoc workers.

A new law in California seems designed to address this disquiet. It’s called Assembly Bill 5, or AB5 for short, and it recently overcame its main legislative hurdle to becoming law. AB5 seeks to reclassify a lot of gig economy workers from contractors to employees. Contractors get hardly any employment rights, such as sick pay, while employees are legally entitled to a bunch of them.

As with most labour relations issues there are two sides to this, each with their own merits. On one hand it does seem unfair for gig economy workers, such as Uber drivers, to get no employment rights despite often working full-time at the job in question. On the other hand they are free to do other work at the same time, a key feature of contracting.

Lastly there’s the fact that the primary differentiator for gig economy services over legacy ones is price. It’s precisely because the internet company facilitating this labour exchange doesn’t have the overheads of a traditional company, which includes things like employee benefits, that the service is so much cheaper.

Even with these advantages Uber is losing a billion bucks a quarter, so it’s highly debatable whether or not it would even be a viable business if it was forced to reclassify its drivers as employees. As you would expect it has been lobbying extensively against this law and doesn’t intend to give up just because it’s on the verge of losing that specific fight.

In his recent update on the AB5 situation Uber Chief Legal Office Tony West, challenged the reclassification of Uber drivers, noting they’re free to work for competitors too and asserting that ‘drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.’

This kind of law-making seems like an existential threat to the gig economy which, while arguably exploitative towards its employees (sorry, contractors), also offers flexible work to people who might not otherwise be able to earn at all and presents consumers with great value for money. If the precedent set by California spreads, the digital economy could be set for its biggest shake-up to date.

Apple finally gets the memo on sacrificing margin for market share

By making its entry-level new phone cheaper than last year’s one and only charging a fiver for its new video service, Apple is further compromising its premium image.

The roman numerals experiment is over, which means no more X in the iPhone nomenclature. Now we have the entry-level iPhone 11, the iPhone 11 Pro that has additional wide-angle and telephoto cameras on top of the regular one, and the iPhone 11 Pro Max, which is the same as the Pro but bigger. The most significant change, however, is the pricing of the 11, which is $50 less than the XR was last year at $699, which is also $100 less than the Google Pixel 3. The price of the other two phone remains the same.

On top of that the pricing of the new Apple TV+ SVOD service, which will launch on 1 November, has been announced at $5 per month, a lot cheaper than the standard Netflix package that costs $13 per month. The latter is a sensible acknowledgement that Apple TV+, which will only have original content, won’t have a fraction of the amount of stuff you can get from Netflix, while the phone pricing must surely be in response to increasing competitive pressure from the sub-premium market.

“With the tight integration between hardware, software and services, the advancements in iPhone 11 bring an unparalleled user experience at an affordable price to even more customers,” said Apple marketing boss Phil Schiller. “Apple TV+ is an unprecedented global video service with an all-original slate,” said Jamie Erlicht, Apple’s head of Worldwide Video. “We look forward to giving audiences everywhere the opportunity to enjoy these compelling stories within a rich, personalised experience on all the screens they love.”

The pricing angle has caught the attention of the commentariat. Bloomberg notes that not only is the iPhone 11 price cut significant, but the XR has had $150 knocked off it. “We view this as an admission that Apple stretched too far with the price points at last year’s launch,” Chris Caso, an Analyst at Raymond James & Associates, is quoted as saying in the Bloomberg piece.

On top of the aggressive price point for Apple TV+, anyone who buys a new iPhone, iPad, Apple TV, Mac or iPod gets a year’s subscription for free, which is not just a great way for Apple to seed TV+ into its existing customer base, but provide a strong incentive for new sales too, so this is a smart move. Having said that it’s further evidence of Apple’s sudden willingness to sacrifice margin at the altar of market share.

We spoke to Ed Barton of analyst firm Ovum to get his take on the TV+ move. “The price point and a free year of access for new Apple device buyers are aggressive moves which will help drive early growth and usage,” said Barton. “But it’s still, by volume of content, a very limited video service with no catalogue content wholly reliant on new, untested intellectual properties.

“The strength of the Apple hardware and services ecosystem means that it practically can’t fail and a lot depends on how effectively and frequently Apple drops new shows to maintain viewers’ interest levels. Apple’s $6 billion production investment and its ability to surface and promote Apple Video content to a global audience of hundreds of millions throughout its tightly integrated hardware and software ecosystem give the service huge potential.”

On top of the phone and telly stuff Apple also unveiled the latest versions of its Watch and iPad in a mega-launch that it would previously have scattered throughout the year. Just as with the phones the new devices are largely spec upgrades, but we were reminded what a relative bargain the iPad is at just $329 (Apple is still charging $130 for a modem, for some reason, and it’s hard to see why anyone would pay that when they can just tether).

One other announcement was Apple Arcade, a gaming subscription service that Apple has been banging on about for a while. Just like TV+ it costs a fiver a month (although there’s no free subscription offer) and offers a smallish selection of exclusive games. People are less impressed with the games service though.

“It’s difficult to get excited about the games subscription, it does include some exclusive, new titles which didn’t appear particularly noteworthy from a gaming perspective,” said Barton. “Most of the games included didn’t sell well on a standalone basis so it’s difficult to see who this will appeal to. Perhaps there is a casual gamer segment which appreciates the simplicity of a subscription for a heavily curated selection of mobile games, but I won’t hold my breath.”

Since smartphone innovation has been stagnant for the best part of a decade, Apple decided to seek revenue and margin growth from flogging services to its installed base. Apple TV+ is a major step further in that direction, but the decision to be more aggressive on pricing is also a sensible strategy when it comes to expanding that installed base and thus the addressable market for its services.

Smartphone market finally expected to grow again in 2020

After years of misery, decline and shrinking profits, IDC is estimating the smartphone market might actually grow in 2020 thanks to 5G.

The 4G era produced a boom in technology adoption few would have predicted, though the years which followed were slightly less profitable. Since 2017, worldwide shipments of smartphones have been in decline, though it does seem the 5G buzz is living up to its reputation in at least one area.

Shipments are forecast to decline slightly over the remainder of 2019, however IDC is estimating year-on-year growth of 1.6% in 2020.

“The anticipation of 5G, beginning with smartphones, has been building for quite some time but the challenges within the smartphone market over the past three years have magnified that anticipation,” said Ryan Reith of IDC.

“To be clear, we don’t think 5G will be the savior in smartphones, but we do see it as a critical evolution in mobile technology. We expect the 5G ramp on smartphones to be more subtle than what we saw with 4G, but that is primarily because we are in a much different market today.”

The growth numbers are not as revolutionary as a decade ago, but they are certainly more palatable than another year of contraction.

2019 is proving to be another tough year for the smartphone manufacturers, IDC expects a year-on-year decline of 2.2% for the 12 months, though there are some glimmers of hope. Not only are 4G networks scaling in some developing markets opening-up a new window of opportunity for 4G handset sales, but the up-coming 5G euphoria creates an entirely new refreshment cycle in the developed markets.

This is something smartphone manufacturers and telcos have been looking forward to for years.

In the developed markets, as soon as smartphone penetration exceeded 100% of a country’s population, there was always going to be a struggle. Incremental improvements in terms of storage capacity, camera performance or software features, carried momentum for a period, but the decline of smartphone shipments was perhaps largely down to a lack of innovation.

Consumers are being asked to pay more for new devices, but without the attraction of innovation it becomes difficult to tolerate these purchases every year. A new camera is fine, but if it is only marginally better than the one you already have, does that justify the expenditure? Clearly it doesn’t as 2019 becomes the third-year straight for shipment declines.

This is what 5G offers manufacturers and telcos; something genuinely different to talk to consumers about and rationalise the process of purchasing a new device. It does something previous generations of devices do not.

Of course, despite the coverage limitations of 5G networks, the advertising campaigns are already in full swing, but who will be the winners and losers?

Samsung was one of the first leading brands out of the gate, and alongside Xiaomi, it could benefit significantly from the woes of Huawei. 12 months ago, we were contemplating if Huawei could overhaul Samsung and take the global market share lead, though a lot has changed during that period.

Huawei looks in a very suspect position currently. Its supply chain currently looks in a precarious position, and while this will not threaten the existence of the brand, it might lead some to question the quality of the end-product. US suppliers can be replaced, but can Huawei seek alternatives which can fulfil the same order quantities reliably, and will the components perform as well as those offered by incumbent suppliers?

One of the most interesting developments here concerns Google, its mobile applications and its Android operating system. Last week, both Google and Huawei confirmed the new Mate 30 will be shipped without the Google applications. There might be a workaround, though should the trade conflict between China and the US continue, Huawei will be forced to use its own Harmony OS.

This presents problems on two fronts. Firstly, will Android fan boys trust the unknown of a new operating system. And secondly, how much reputational damage has been done to Chinese brands by the White House; will consumers trust a Chinese brand without the middle man of a US operating system?

These are the unknowns, but the early signs do not look promising for Huawei. Research from Canalys suggests Huawei smartphone shipments in Western Europe during the most recent quarter has declined by 16% after President Trump dragged the brand through the mud, though there is an upshot for both Xiaomi and Samsung, who increased shipments 48% and 20% respectively.

Another brand which might suffer at the beginning of the 5G era is Apple.

“A lack of 5G support in the new iPhone won’t surprise anyone, though it will still disappoint operators looking for 5G devices to help them drive traffic to new 5G networks,” said Peter Jarich, Head of GSMA Intelligence.

“At the same time, new features that are expected – improved camera functionality, improved processor, upgrade to Wi-Fi 6 – may all seem incremental rather than revolutionary, particularly if the product line and form factor line-ups remain relatively constant.”

Apple has a very loyal customer base, while the closed-ecosystem has forced loyalty upon others. However, Apple will be testing the limits of loyalty. 5G will be plastered on every wall, each advert and on the lips of every consumer before too long. Apple will have to be confident it can convince customers to delay the purchase of a 5G device until it is ready to launch its own, otherwise it could risk losing those customers to the Android ecosystem permanently.

Looking at the IDC forecasts, iPhone shipments are expected to decline 14.8% year-on-year, due to market maturity and a lack of 5G-compatible device. When the firm does deliver its 5G device in 2020, it will have to prove it is better than rivals to justify the delay in delivery, otherwise the precious brand could be damaged.

This is not new from Apple. This is a company which doesn’t necessarily want to be the first to market, but it does invest heavily to be the best. It will have to do the same once again.

What is also worth noting, is this is just the beginning of the 5G era. A swing back to growth in 2020 for year-on-year smartphone shipments is encouraging, however the momentum will have to be compounded and the only way to do this is through the development of an ecosystem, applications and broader usecases.

Right now, the telcos and the ecosystem are only really talking about one thing; speed. If you believe the hype, 5G is going to be between ten and a hundred times faster than 4G. This might sound good as an advertising tagline, but a continued focus on speeds will become tiresome. Consumers will realise the excess speed is redundant soon enough, and this is another path which takes the telcos towards commoditisation.

More interesting usecases for 5G will have to emerge, and some of them will be reliant on improvements realised for latency.

Gaming is one area which is becoming increasingly dominated by mobile, and the more comfortable people are using higher volumes of data on the move, the greater this dominance will become. Lower latency will certainly help the case here, as more real-time gaming experiences become palatable.

The connected car is another development where 5G and lower latency could add to the momentum. Right now, the usecases are simplistic, though incremental gains in the connectivity world are improving the prospects for entertainment providers and application developers in the car. And we haven’t even mentioned the dreaded ‘autonomous’ tag this time around.

Of course, when you are talking about an entirely new generation of connectivity, you have to talk about the unknown. Perhaps the most exciting applications are the ones we mere mortals will struggle to imagine today. Uber is a perfect example.

Uber seems like the simplest idea today, but no-one else thought of the idea until Travis Kalanick. This is an application which was only possible because of 4G and the mass adoption of mobile internet, which makes us wonder what is in the pipeline. There will be blue sky thinkers who have an idea, but it can’t be validated or tested until 5G is scaled. This is when 5G devices could genuinely accelerate.

Marginal growth is all well and good for the moment, though the ecosystem will drive the next generation of profits. Having a snazzy new phone is fine for the early adopters and tech enthusiasts, but when the normmies start seeing how much more can be done through a 5G device, interest will scale much faster.

This is an area which is of course very difficult to quantify; what is the awareness of 5G in the consumer segments, and how much do they actually care?

According to research from Ericsson, half of smartphone users in South Korea and Australia, as well as 40% in the US, claim they do not have fast enough mobile broadband connections. Those who live in the big cities around the world will also be familiar with the challenge of network congestion, offering another buy-in for 5G contracts. Respondents to the survey said they would be prepared to pay 20% more on average to realise the benefits of 5G. Those who are more familiar with the concept of 5G, said they would tolerate a 32% increase in prices.

Of course, these projections are largely meaningless unless there is proof of accuracy. That said, in South Korea SK Telecom is claiming to have secured 1 million 5G postpaid subscriptions in the first four months of network operations. This represents 3.5% of the total subscribers at the telco, demonstrating there is an appetite for the new generation of mobile connectivity.

There is clearly an appetite for 5G connectivity, and should the manufacturers be able to produce a product which is tolerable for the consumers, there could be profits sooner rather than later.

“Solid push of 5G smartphones by the mobile operators in China in 2020 will drive economies of scale for the phone makers, and we will see the prices of these devices globally slide down to much more acceptable levels from their current highs,” said VP of Forecasting at CCS Insight, Marina Koytcheva.

“5G will not drive everyone to the shops in a search for a new phone, but for a group of technology enthusiasts- early adopters of all things tech- the new generation of mobile technology will act as a catalyst for replacing their current smartphones.”

This is an awkward challenge which the manufacturers will face; pricing. Smartphones are eye-wateringly expensive nowadays, perhaps a contributor to the shipments decline, and 5G devices are likely to see another premium added onto the tag.

This will at least be the challenge in penetrating the smartphone market in the early days, though Koytcheva is a bit more confident than IDC. CCS Insight are suggesting shipments could increase by 3% year-on-year over the next twelve months. This number will account for 4G devices in increasingly digitised developing markets, though 5G will add impetus in the developed nations.

But the challenge still remains; if 5G smartphones are going to anywhere near replicate the success of 4G predecessors, economy of scale in manufacturing operations will have to be achieved.

We suspect, and many others do also, that 5G devices will not take the world by storm in the same way 4G devices did. The transition from 3G to 4G was much more dramatic in the consumer world than the current transition we are anticipating today. The long-tail of applications and network evolution might be greater, but the up-front glories will not necessarily be the same.

That said, even if it is marginal year-on-year growth for smartphone shipments, that is a lot better than a fourth consecutive year of contraction.

50 US Attorney Generals sign-up to Google antitrust investigation

Usually, when you put 50 lawyers in a room together, it’s a bloodbath, but Google has seemingly done the impossible; united them all behind a single cause.

Led by Ken Paxton, the Attorney General representing the State of Texas, the coalition brings all except two State Attorney General’s on board, California and Alabama, as well as the legal minds representing Washington DC and Puerto Rico.

“Now, more than ever, information is power, and the most important source of information in Americans’ day-to-day lives is the internet,” said Paxton. “When most Americans think of the internet, they no doubt think of Google.

“There is nothing wrong with a business becoming the biggest game in town if it does so through free market competition, but we have seen evidence that Google’s business practices may have undermined consumer choice, stifled innovation, violated users’ privacy, and put Google in control of the flow and dissemination of online information. We intend to closely follow the facts we discover in this case and proceed as necessary.”

Paxton has pointed out in the statements that the Government and its agencies does not have an issue with a dominant market player (we don’t believe this however), but it must maintain this dominance by playing within the rules. This is where Paxton believes Google has become non-compliant with US law; it is stifling competition and the choice for consumers.

The difficulty the legal coalition will face in this investigation to start with is the reason behind Google’s market domination; it offers the best search service on the web. Some might disagree, but we believe it is the most effective and accurate internet search engine available. This will be one of the reasons behind the continued dominance, though there are of course others; these other factors will determine whether Google is abusing this position of dominance.

One area which might become of interest to the Attorney Generals is the roll of acquisitions in maintaining this leadership position. Of course, M&A is a perfectly valid means of growing a business, though should such transactions be deemed as a means for Google to kill off any competition which could potentially emerge, this would be a violation of antitrust laws.

This is where the probes will find it very difficult to fight against Google and the other giants of Silicon Valley; can anything be done against potentially anti-competitive acquisitions? In the Google case, some might suggest it shouldn’t have been allowed to acquire both Android and YouTube to supplement its PC search advertising business. This suggestion is of course made with hindsight, though there will be some who will attempt to do something about it.

Elizabeth Warren, the Democrat Senator for Massachusetts and potential opponent for President Trump in the 2020 Elections, has already promised to break-up the tech giants. FTC Chairman Joe Simons is another who has the divestment ambition, though he has stated it would have to be done sooner rather than later, as Big Tech is manoeuvring assets and operations in an attempt to make any divestments almost impossible.

What this investigation does offer is another layer of scrutiny placed on the internet giants. This investigation might well be directed at Google, but any precedent which is set could be applied to the other residents of Silicon Valley.

When you actually stand back and look at the investigations which are on-going, the US Government is creating a swiss cheese model of legal nightmares for the internet giants. The more layers which are applied, the less likely Big Tech can squeeze through the legal loopholes and come out unscathed on the other end. The likes of Google will have the finest legal minds on the payroll, but the legal assaults are coming quickly, and from all angles.

Aside from this investigation, Google has also recently confirmed it is at the centre of a Department of Justice probe and is also facing the House Judiciary Committee’s examination into big tech antitrust. And then it will have to consider the potential implications of other enquiries.

Facebook is being investigated by the FTC for its acquisitions of WhatsApp and Instagram, as is the House Judiciary Committee. New York Attorney General Letitia James is asking whether the social media giant has damaged the consumers lives through its operations. Finally, the House Financial Services Committee as well as the Senate Banking Committee is investigating the Facebook push into cryptocurrency.

At Amazon, the FTC is investigating how the eCommerce giant competes against and aids third-party sellers on its platform, while at Apple, the House Judiciary Committee probe is attempting to understand whether the commission it takes from developers through the App Store is anti-competitive.

Each of these investigations will create precedent which can be applied to others in the Silicon Valley fraternity. It also gives any failed attempts to limit the potential of Big Tech another opportunity. There are plenty of irons in the fire and Silicon Valley will do well to avoid a branding altogether.

With the sheer volume, breadth and depth of investigations scrutinising the business models of the internet giants, it is starting to become impossible to believe the regulatory status quo will be maintained. The sun might be setting on the Wild West Web.

To date, Silicon Valley has enjoyed what should be considered a very light-touch regulatory environment. For us, there are two reasons for this.

Firstly, regulators and legislators simply could not keep up with the progress being made by the technology industry, or perhaps did not foresee the influence these giants might be able to wield. Whether it is a shortage of bodies, skilled workers being snapped up by private industry or simply too many different segments to regulate, the progress of technology leapt ahead of the rules which were supposed to govern it. The internet giants have been profiting greatly off this regulatory and legislative void.

Secondly, you have to wonder whether regulators and legislators actually wanted to put the reigns on the digital economy and the power houses normalising it in the eyes of the consumer. These companies are driving economic growth and creating jobs. The US is at the forefront of an industry which will dominate the world for decades to come; why would the Government want to stifle the industry which is keeping the US economy at the head of the international community.

With both of these explanations, perhaps it has gotten to a point where excess is being realised. The technology industry has become too powerful and it needs to be reigned in. Some might argue that Silicon Valley has more influence than Washington, which will make some in Government feel very uneasy.