I have a confession to make: I love the companies that I own. While that may cause me to hold a stock for a bit longer than I should when the valuation gets too frothy, I accept it as one detriment of getting enamored by the story of a company’s evolution over time. I like listening to all the conference calls and analyst events, and anxiously await the launch of new products like a kid on Christmas.
Recently, this anticipation has been for Microsoft (MSFT) and Nokia (NOK)'s Lumia 900, which will be released in the U.S. on April 8. As anybody who has been following the press around this launch knows, the views on the potential success of this product line have been polarized (as expected), with some continuing to shout of impending doom for these old tech giants while others proclaim that they have turned a corner. While I think it’s clear that no one knows how this will play out, I think we can narrow our focus down to a couple key areas that will potentially determine the success of the Lumia 900; the particular areas that I would like to briefly discuss are product cost, marketing, app store development and product differentiation.
Cost – The Lumia 900 will cost $99.99 at AT&T (subsidized price with two-year contract), which is half the price of the HTC Titan II (running Android; will also be released in early April) and the latest iPhone (16GB). I’ve thought about this for a long time, and still haven’t come to a conclusion (maybe readers can share their opinions): How important is upfront cost to the average smartphone consumer? With many plans running at a price at or even above the cost of the Lumia 900, I’ve wondered whether or not this is even a concern for many consumers; ironically, the shortening of the product life cycle that has been perpetrated (in large part) by Apple’s annual launches and upgrades could cause upfront phone pricing to be a more pertinent factor than it would be with a three to four-year device life…
Marketing – This is where the phone can get off the ground in a big way; Nokia has made it clear that the budget for this launch is multiples in size of what is generally spent on marketing a new product, and AT&T has made their commitment clear as well: Jeff Bradley, senior vice president of devices, noted last week that this is “a notch above anything we’ve ever done,” specifically noting that this includes the original iPhone launch.
App Store Development – This has caught a good amount of press and is fundamentally important to the success of the ecosystem; if the app offerings are not comparable to that of the competition, then Microsoft and Nokia might as well pack it in (at this point, Microsoft has roughly 70,000 apps in its app store, compared to 400,000 for Android and 600,000 for Apple).
Yet, many authors seem to simply stop at that statement; the reality is that this offering will need to be developed in tandem with growing demand for the products, which is current being undertaken. As of writing, Microsoft has taken a step to fuel this growth by committing to finance the development of Windows Phone versions of well-known apps in order to build up their offering. The head of business development at Foursquare (mobile social network) had this to say about the program:
"We have very limited resources, and we have to put them toward the platforms with the biggest bang for our buck… but we are a social network and it is incredibly important for us to be available on every platform."
By my estimation, this is all comes back to financial commitment; the app store is a key part of the ecosystem, and must be invested in as an integral part of the product offering.
Product Differentiation – When I say this, I’m not talking about the specs of the device; while that’s important to a specific group of consumers, your average buyer doesn’t know anything about the processor or the phone's capacity. My personal opinion is that for many people, this means simplicity of use, to the extent that it makes their life easier (think Siri); but as the smartphone continues to become a device that simply houses apps (which are roughly identical across all ecosystems), differentiation comes in two ways – the use/look of the operating system, and the ease/connectivity of those applications to other devices.
For the use/look of the OS, Windows has clearly stepped away from the iOS/Android layout; whether or not this will attract users is beyond me. More importantly (in my opinion) is the ease and connectivity of applications, particularly Xbox Live and Office. As devices continue to become different mediums for accessing content (like power point presentations, word documents, gaming, etc.), the key becomes interoperability; my hope would be that Microsoft has seen the writing on the wall for some time now and has a clear strategy for bridging the divide between smartphones, traditional PCs, and ultra books/tablets (I mean beyond the Windows 8 OS; I'm talking Office & XBL).
With all that having been said, I know that in the vast majority of instances like these, what I read about and eventually conclude is just a small piece of the equation, or little more than noise; in the case of Microsoft, I never was interested in the company because of what I thought they might potentially do in the mobile arena, and I don’t believe (at least in the near future, which explains why I rarely invest in this industry) that a failure to quickly grab share will impact the company in a material way.
When reading the comments on many financial articles, you often find polarized statements suggesting that a product or business development will either cause a company to fail or cause their stock to double in the next 12 months; but in reality, the impact is rarely as important as the initial reaction might suggest. Peter Lynch talked about this in “One Up on Wall Street”:
“The first thing to find out is: What effect will the success of a product have on the company’s bottom line? Back in February of 1988, I recall, investors got very enthused about Retin-A, a skin cream made by Johnson & Johnson… So what happens? Johnson & Johnson stocks jumps $8 per share in two days (January 21-22, 1988), which adds $1.4 billion in extra market value to the company. In all this hoopla the buyers must have forgot to notice that the previous year’s sales of Retin-A brought in only $30 million a year to Johnson & Johnson, and the company still faced further FDA review on the new claims.”
Microsoft is a $265 billion company, and generated more than $23 billion in net income last year; despite the polarized opinions about the Lumia 900 and its potential success or impending failure, there is one thing that’s clear: This launch will not make or break MSFT. It gets people to read articles and sells newspapers – but it’s not true. At some point in the coming months, a news article will break that either marks the early success or struggles of the Lumia 900 in the fight to grab share from the iPhone and Android devices; just remember that the reaction that follows on the street is little more than noise to the intelligent investor.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.