India smartphone sales on the up

Most of the world might be experiencing dip with smartphone shipments, but with India playing catch-up in the digital economy, device sales are continuing to rise.

According to new estimates from IDC, Q2 registered the second-highest ever number of smartphone shipments in India. 36.9 million smartphones were shipped in the quarter, 9.9% year-on-year and 14.8% quarter-on-quarter growth, while a total of 69.3 million mobile phones were shipped to India.

This is a country which is under-going its own digital revolution, admittedly a few years after some of the Westernised markets, though it does present opportunities for bewildered and down-beaten smartphone manufacturers.

“Despite the efforts towards multi-channel retailing by almost all vendors, the online channel continued its growth momentum fuelled by multiple new launches, attractive offers and affordability schemes like EMIs/cashbacks,” said analyst Upasana Joshi.

“This resulted in YoY growth of 12.4% for the online channel with an overall share of 36.8% in 2Q19.”

Globally, smartphone shipments are on the decline. Estimates suggest shipments are at the lowest levels since 2014, which can be attributed to a number of different factors. A lack of innovation might be putting people off purchasing new devices, with new flagships offering little more than incremental upgrades. The price of these new devices might also have the same impact, though it is providing a surge for the second-hand market.

Another factor to consider is the up-coming 5G revolution. Telcos are building the hype around 5G, and if consumers buy into the euphoria, why would they consider purchasing a 4G device when more affordable 5G-compatible devices might just be around the corner. The last thing the consumer wants is buyer’s remorse.

These are not necessarily factors which are that influential in India however.

Although it has been considered a growth market for decades, the reality never really fulfilled the promise in telco and technology. Sluggish telcos were happy to sit back and quietly collect profits as aging networks and a pre-historic approach to business slid India down the global digital rankings. And then Jio entered the fray.

Taking a data-centric approach to telecommunications, Jio forced a digital revolution onto the Indian society and dragged the traditional telcos into the 21st century. The result is better and more inclusive networks, consumers using more data and digital applications, leading to increased sales of smartphones.

As IDC points out, 2G and 3G device shipments are gradually declining, while 4G smartphones are on the up. The average cost of devices is also increasing, the $400-$600 segment is the second-fastest growing segment, though the premium segment ($500+) is also starting to gather momentum. 72% of purchases are below the $200 threshold, though $200-300 is the fastest growing area.

This is market which still has a lot of growth potential, not only because of smartphone penetration, but also the ability to upgrade customers to more premium handsets. Let’s not forget, this is a country with a population of 1.339 billion; there will be plenty of opportunities to make money as long as Jio continues to drag the industry forward.

But who are making the most of this digital boom:

IDC India smartphone shipments

These are the smartphone manufacturers who are embracing the mid-tier smartphone segment. Numerous other, more established players, are scaling back in this market, choosing to more dutifully embrace the high-tier. This is an interesting decision.

Firstly, it not necessarily a bad strategy. A significant refreshment cycle for premium smartphones is on the horizon as 5G gets a better grip around the world. There are billions of users who will want to upgrade over the next couple of years; this is big business for those who make a name for themselves in the premium 5G market.

However, there might also be the negative consequence of brand loyalty. India is upgrading to 4G now, prioritising the purchase of mid-tier devices. This is where numerous Western markets were 4-5 years ago. Some might not want to engage mid-tier purchases, bigger profits are elsewhere, but they will miss out on forming a loyalty relationship with this monstrously large market.

India is surging forward into the digital economy, and there are many brands who are embracing the market through this transition. The likes of Xiaomi, OnePlus, Oppo and Realme are using this momentum to challenge the status quo. There might well be a horde of new device manufacturers to consider in a few years.

5G is big business but only if we hurry up

A report from Barclays Corporate Banking suggests 5G could add £15.7 billion to the UK economy by 2025 but only if network deployment is done faster.

While progress is being made, the Barclays team forecast the current rate of deployment would add £13 billion to UK businesses, though any hurdles could drop this figure to £8.3 billion. By 2030, the size of the UK economy could be increased by between 0.88% and 1.54% compared to a situation where no national 5G network. The middle-ground, development continuing at today’s pace, is an increase of 1.09%

For a country which is courting with controversy and potential regulatory hurdles, this does not necessarily paint the brightest of pictures. But of course, this is entirely dependent on whether UK businesses actually know what 5G is and what can be achieved with the upgraded infrastructure.

“The rollout of 5G offers a huge opportunity for the UK,” said Sean Duffy, Head of TMT at Barclays. “We’re seeing massive potential for business growth, which ultimately delivers a positive knock-on effect for the whole economy.

“While the Government and network providers are already working hard to introduce 5G in the UK, we found that businesses do not yet have enough clarity about how they will benefit in the long-run. What’s more, nearly four in ten business leaders still aren’t entirely sure what 5G is.”

The education issue is perhaps pinned to the telco industry itself. Not only have the telcos been slow to engage potential customers and develop specific usecases, the industry spent years plugging the main benefit of 5G as ‘bigger, faster, meaner’. Both of these points have led to the issue being raised by Barclays.

On the speed side of things, the industry has moved away from plugging faster networks as the primary benefit of 5G. The networks will of course be faster, but the latency and throughout benefits are seemingly becoming much more important. Perhaps this is also a realisation that selling 5G on speed alone will not recoup the vast financial outlay.

In terms of engaging specific industries to develop tailored usecases, this is also being corrected, though European telcos and customers are years behind counterparts in Asia. Whether this has any fundamental impact on digital economies moving forward remains to be seen, as there is still time to catch up while the deployment of 5G continues.

During Mobile World Congress Shanghai two years ago, this point was painfully obvious. At conferences in Europe, telcos were still bickering about the point of 5G, while in Shanghai, almost every operator had vertical specific usecases emblazoned across their stands. The difference is approaches was quite staggering.

That said, progress has been made. According to the Barclays research, 58% of businesses are already benefitting from fast communications technology like 4G and ultrafast broadband, quoting the gains being (1) operating across disparate locations (59%), (2) communicating with customers (49%), and (3) connecting multiple machines and devices (48%). At least the majority are already experiencing the benefits of improved connectivity and should, theoretically, be primed for 5G.

Worryingly however, the research also suggests that while awareness might be high, only 9% are allocating ‘significant’ funds to prepare themselves for the 5G era.

Another very upsetting sign for the UK is uncertainty. This might create obstacles to slow the deployment of the networks and ultimately the economic benefits to the UK. And what is creating this uncertainty; Brexit and Huawei.

Brexit is a tiresome topic, but the current political landscape is not encouraging any form of certainty. This will impact enterprise customers appetite to invest. And in terms of Huawei, the Government’s oversight board has not called for a ban, though it certainly hasn’t completely ruled it out either. Such is the importance of Huawei as a supplier to UK communications networks this uncertainty will make telcos nervous.

The UK is promising the world it will be a leader in the digital economy of tomorrow, but it is proving to be the architect of its own downfall. The Government, telcos and customers are all contributing to this gloomy scene. It’s all very British.

UK growth is slowing, but so is Europe’s

The numbers for 2018 GDP growth are in and, while they’re not great, they’re a lot better than some doom-mongers have expected.

UK annual GDP growth slowed to 1.4% in 2018, the lowest since 2012. Having said that growth was below 2% for the previous two years and historically we seem to have paid the price for few recessions by having smaller peaks too. This ONS chart shows around 2.5% is the long-term historical norm so we’re below par but not by a lot.

Further context can be provided by looking at the rest of Europe. A recently published European Commission report says German GDP grew by 1.5% last year, with the French managing exactly the same. In both cases, however, this was down from 2.2% last year and the UK is actually forecast to slightly out-perform Germany this year, with growth of 1.3%. The whole of the EU27 is only forecast to grow by 1.5% this year.

“GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining,” said Rob Kent-Smith, Head of GDP at the ONS. “However, services continued to grow with the health sector, management consultants and IT all doing well.

“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy. The UK’s trade deficit widened slightly in the last three months of the year, while business investment again declined, now for the fourth quarter in a row.”

The EC report defaulted to tried and tested ‘uncertainty’ to explain the slowdown. The main thing flagged up was the current aggro between the US and China, but also “…social tensions and fiscal policy uncertainty in some Member States,” which seems to be a reference to France and Italy, respectively. The uncertainty around Brexit was briefly mentioned at the end of the commentary.

That hasn’t stopped opponents of Brexit jumping on these figures as the next piece of news to support their apocalyptic narrative, with loads of supposed experts jumping on the bandwagon and claiming special insight into the minds of the country’s business people. Many such experts also predicted a recession in the event of a leave vote that never materialised, so we should probably take their latest blurts with a pinch of salt.

 

Cybersecurity investments on the up but not sustainable – study

Research from Strategic Cyber Ventures points to an increased appetite for cyber security investments, but the euphoria sweeping the segment forward is not sustainable.

On numerous occasions we have commented security is the ugly duckling of the technology world. It is critical to ensure the industry, and digital society on the whole, functions appropriately, though more often than not it is ignored. There will be numerous reasons for this, perhaps because security is a thankless and often impossible task, but the data suggests 2018 might have been a watershed year.

Not only did 2018 see $5.3 billion in global venture capital funding, 81% more than 2016, M&A activity increased as did private equity investments. On the M&A side of things, Cisco made a bang with a $2.4 billion acquisition of Duo Security, while Blackberry acquired Cylance for $1.4 billion. These are two of the larger deals, though there was increased activity in the segment across the period.

In terms of private equity, Barracuda Networks was acquired for $1.6 billion by Thoma Bravo, Bomgar by Francisco Partners for $739 million, while Blackrock spent $400 million on Cofense. Elsewhere in the more complicated financial world, Skyhigh Networks acquired McAfee with assistance from its financial sponsors Thoma Bravo and TPG Capital.

Cybersecurity one

Overall, the trends for the security segments are heading in the right direction. Perhaps now this is an area which will be taken more seriously by the industry, with adequate investments heading into security department.

That said, Strategic Cyber Ventures has warned the trends from a funding perspective are not exactly the most favourable. The amount of cash being invested is increasing, though it does not appear the rewards are reflecting this. Some of these companies have raised funds through big rounds, but growth has slowed, perhaps due to vendor fatigue or increased competition. The risk here is firms cannot raise additional funds at increased valuations from prior rounds, meaning they will have to lean on existing investors. Eventually these parties will grow tired of keeping them alive for minimal rewards.

The issue here is the need and hype around security. Its critical to secure the expanding perimeter of the digital economy, creating the need for the segment, while executives constantly talk about security being a number one priority of firms, creating the hype. This would seem to be the perfect recipe for investment in security companies and start-ups. However, the segment hasn’t taken off, perhaps due to the preference of customers investing in technologies which will make the company money as opposed to more secure?

This is maybe the most accurate assumption on why the security segment has faltered continuously over the years. Companies have limited spending power with executives choosing to invest in areas which will make the company more profitable, such is the pressure from investors and shareholders. However, consumer attitudes might be changing.

While many would have ignored the security risks of the digital economy in years gone, today’s consumer is more educated. Privacy scandals have demonstrated the power of data forcing the consumer to consider security more critically. This might have an impact on future buying decisions.

According to research by Onbuy.com 60% of US and 44% of UK consumers believe there is a risk to personal safety in the sharing economy, while 58% of all the respondents believed the risks outweigh the benefits in the sharing economy. Such attitudes will force companies to consider their security credentials as there is now a direct link back to the bottom line.

What this means for VC funding and investments from around the ecosystem remains to be seen, though the tides are turning in favour of the security segment. As Strategic Cyber Ventures notes, the current levels of investment are unsustainable, but there certainly are rewards.

Netflix doubles profit but Wall Street not very happy

Netflix has increased its annual revenues by 35% and doubled profits over the course of 2018, but that didn’t prevent a 3.8% share price drop in overnight trading.

Total revenue across the 12-month period stood at $15.7 billion, though growth does seem to be slowing. Year-on-year revenue increases for the final three months were 27.4%, with 21.4% for the first quarter of 2019, though this compares to 40.4%, 40.3% and 34% in Q1, Q2 and Q3 respectively. However, when you consider the size, scale and breadth of Netflix nowadays this should hardly be considered surprising.

“For 20 years, we’ve been trying to please our members and it’s really the same focus year-after-year,” said CEO Reed Hastings during the earnings call.

“We’ve got all these ways to try to figure out, which shows work best, which product features work best, we’re a learning organization and it’s the same virtuous cycle, improve the service for our members. We grow. That gives us more money to invest. So, it’s the same things we’ve always been doing at just greater scale.”

This is perhaps the reason Netflix has succeeded in such a glorious manner where others have succumbed to mediocrity or failure. Investments have been massive to build out the breadth of content, while the team has not been afraid to alter its business or invest in content which others might snub. Bird Box is a classic example of a movie some might dismiss, whereas we find it difficult many competitors would have given the greenlight to the original Stranger Things pitch.

On the content side of things, investments over the last twelve months totalled $7.5 billion and Hastings promises this will increase in 2019. Perhaps we will not see the same growth trajectory, as despite the ambitions of the team, another objective for Netflix pays homage to the investors on Wall Street. Operating margin increased to 10% during 2018, up from 4% a couple of years back, though the team plan on upping this to 13% across 2019.

Content is where Netflix has crowned itself king over the last few years, aggressively pursuing a varied and deep port-folio, though it will be pushing the envelope further with interactive story-telling.

“I would just say there’s been a few false starts on interactive storytelling in the last couple of decades,” said Chief Content Officer, Ted Sarandos. “And I would tell you that this one has got storyteller salivating about the possibilities.

“So we’ve been talking to a lot of folks about it and we’re trying to figure it out too meaning is it novel, does it fit so perfectly in the Black Mirror world that it doesn’t – it isn’t a great indicator for how to do it, but we’ve got a hunch that it works across all kinds of storytelling and some of the greatest storytellers in the world are excited to dig into it.”

The team are attempting to figure out what works and what doesn’t for the interactive-story segment, but this is one of the reasons why people are attracted to Netflix. The team are exploring what is capable, brushing the dust away from the niche corners and experimenting with experience. They aren’t afraid of doing something new, and the audience is reacting well the this.

Looking at the numbers, Netflix added 8.8 million paid subscribers over the final three months of 2018, 1.5 million in the US and 7.3 million internationally, taking the total number of net additions to 29 million across the year. This compares to 22 million across 2017, while the team exceeded all forecasts.

However, this is where the problem lies for Netflix; can it continue to succeed when it is not diversifying its revenues?

According to independent telco, tech and media Analyst Paolo Pescatore, the Netflix team need to consider new avenues if they are to continue the exciting growth which we have seen over the last couple of years. New ideas are needed, partnerships with telcos is one but we’ll come back to that in a minute, some of which might be branching out into new segments.

This is perhaps most apparent in the US market, as while there is still potentially room for growth, this is a space which is currently saturated with more offerings lurking on the horizon. Over the next couple of months, Disney and AT&T are going to launching new streaming services, while T-Mobile US have been promising its own version for what seems like years. If Netflix is to continue to grow revenues, it needs to appeal to additional users, while also adding bolt on services to the core platform.

What could these bolt-on services look like remains to be seen, though Pescatore thinks a sensible route for the firm to take would be into gaming and eSports. These are two blossoming segments, as you can see from the Entertainment Retailers Association statistics here, which lend themselves well to the Netflix platform and business model. Another area could be music streaming, though as this market is dominating by Spotify and iTunes, as well one with low margins, it might not be considered an attractive diversification.

The other area which might is proving to be a success for the business are partnerships with telcos.

“It’s sort of been this March from integration on devices and just makes that a point to engage with the service to doing things like billing, on behalf of or we do billing integration,” said Greg Peters, Chief Product Officer.

“And now the latest sort of iteration that we’re working with is, is bundling model, right. And so, we’re early on in that process, but I would say we’re quite excited by the results that we’re seeing.”

This is a relatively small acquisition channel in comparison to others, but it is opening up the brand to new markets in the international space, a key long-term objective, and allowing the team to engage previously unreachable customers. This is an area which we should expect to grow and flourish.

The partnerships side of the business is one which might also add to the revenue streams and depth of content. Pescatore feels this is another area where Netflix can generate more revenue, as the team could potentially offer additional third-party content, hosting on its platform for users to rent or purchase. Referral fees could be an interesting way to raise some cash and Netflix certainly has the relationships with the right people.

Netflix has long been the darling of Wall Street, but it might not be for much longer. The streaming video segment is becoming increasingly congested, while the astronomical growth Netflix has experienced might come to a glass ceiling over the next couple of years. The businesses revenues are reliant on how quickly the customer base grows; such a narrow focus is not healthy. Everyone else is driving towards diversification, and Netflix will need to make sure it considers it sooner rather than later.

Cisco investor fears of ‘melting ice cube’ are wrong – analyst

Despite reading off positive results for the last three months, it seems investors are still worried about how much influence Cisco can have in the digital economy. But investment bank Jefferies think they are all wrong.

While Cisco reported positive results in the last 24 hours, $49.3 billion for the last twelve months (a 3% year-on-year increase), George Notter, MD of the Telecom & Networking Equipment group at Jefferies, notes there are still fears from investors that Cisco will not maintain the influence is swings around today as the world transitions to the digital economy. For Notter, the business is in a solid position and will only get stronger.

“Growing economies, data growth, and the general shift to a Big Data/Analytics-driven world are big (and accelerating) drivers for the company,” said Notter. “Further, investor perceptions about the company as a “melting ice cube” fighting against workload migration, market share pressures, etc. are wrong.”

The strength of the business here is the end-to-end network capabilities, which Notter notes will become increasingly strategic to Enterprise and Service Provider customers. Notter also points to improved product orders, growth for product deferred orders and enhanced backlog. Many of the indicators are heading in the right direction.

While there is of course work to do on the transformation project at Cisco, there is evidence it is working. The team has been seeking ways to boost the recurring revenues column on the spreadsheets, with the latest results demonstrated an increase to 32% of total revenues. Admittedly this is only up from 31%, but an increase none the less.

One area which Jefferies is not as confident is on the financials. Notter and his team believe revenues will be on the up over the next twelve months, hitting $51.1 billion for FY2019, though this estimate is about $600 million below the bottom end of Cisco’s own estimates. Although Jefferies are not as confident as the Cisco management team, at least they agree revenues will be heading in the right direction.