One of the biggest mistakes that investors make is looking in the rear view mirror when making decisions about what lies ahead; as comments on multiple articles about companies like Wal-Mart (WMT), Intel (INTC), and Microsoft (MSFT) will show, this is the most common argument for passing on these cheap multinational large cap stocks (a decision that I believe will prove to be a grave mistake).
But this bias doesn’t just present itself to retail investors; it is also a common occurrence among analysts, who often extrapolate what has happened in the past when rubbing their crystal ball to forecast market share, sales, and earnings. An example of this can be found in this weekend’s Financial Times, in an article entitled “Apple and Google in Christmas showdown”, which focuses on smartphone sales. In the article, Bernstein analyst Pierre Ferragu is quoted saying the following:
“The iPhone has clearly revolutionized the handset market. On its tail, Android has flourished and we now have a strong conviction that the two ecosystems won’t leave much room for any alternative”.
While I can’t see into the future any more clearly than Mr. Ferragu can, I thought I might share some numbers from a recent Microsoft event, at which Zachary Apter, General Manager of Corporate Strategy, had this to say about the conversion to smartphones in the United States (edited to highlight key points):
“Yes, so the mobile conversation is an interesting one, and let me actually frame that with a couple of pieces of context, because I think it's sort of useful to think about. The first is this sort of notion that we are at a place in industry maturity where you can basically take the installed positions of the incumbents and extrapolate that for the future, and that's where things are going to go. The fluidity of Android, the fact that Android has gone from zero percent share to 50 percent share in basically two years, the speed with which they’ve brought on application developers, and the number of apps now in their marketplace rivaling what Apple has in theirs, suggests that we are still very early in this process. I mean in the U.S. alone I think something on the order of 30 percent of people have smart phones. So, that means that 70 percent of people don't and if you just do the math on that what that means is over the next two years more smart phones will get sold than have prior been sold in the entire history of the smart phone segment.
So, we think that there's a ton of opportunity ahead of us. The other thing of context that I'd use to sort of frame how we think about it, is this notion of share meaning everything. I think it's actually a relatively un-nuanced way to look at it to basically say, when you have high share you attract application developers, and if you have low share your platform is uninteresting.
Developers are smart. They think about things like how much does it cost to build my app on a given platform, beyond the total number of users that I might be able to reach? How well do I monetize on a per-user basis? How much does it cost me to deliver my app on a per-user basis? And they think through this developer value equation and they say, hey, it may actually be more worthwhile for me to develop on a platform that has lower share, because I can make more money, or I can have my needs addressed. If you're an enterprise, you care more about reliability and security, and those sorts of things for your app than you do market share…
And if it was all just about the number of users, then Symbian would have a huge installed base of apps. So, it's a lot more than that. So, looking forward to how we build out our platform, obviously that enterprise installed base of developers really matters. We've seen a ton of innovation on consumer-facing apps, and we think that over the next few years the enterprise is really going to figure out how to use these smart phones, how to turn them into value-added business tools, and the fact that we have legions of developers who are familiar with Microsoft tools, familiar with the Microsoft framework, makes the Windows Phone platform really compelling.
Because things are so early, because we think that it's often the case that application developers go to the platform before share, instead of the other way around, we think the combination of those two things is a very powerful thing.
Then lastly the software is materially differentiated. It's a better user experience in a lot of cases. The look and feel, the design choices that we've made, a lot of people will tell you they like Metro better. I personally prefer Metro to iPhone, to Android. I've tried them all. Metro works better for me. There is some segment of the market we believe that that will be true for…”
It is still early extremely early for Metro, and the same is true for the smart phone segment; as noted in the same Financial Times article, JPMorgan estimates that 657 million smartphones will be sold in 2012, compared to roughly 460 million in 2011 (43% increase year over year).
Whether or not Microsoft’s partnership with Nokia will payoff is still in the air; pronouncing success or failure at this point in time seems to be a bit premature.
But this bias doesn’t just present itself to retail investors; it is also a common occurrence among analysts, who often extrapolate what has happened in the past when rubbing their crystal ball to forecast market share, sales, and earnings. An example of this can be found in this weekend’s Financial Times, in an article entitled “Apple and Google in Christmas showdown”, which focuses on smartphone sales. In the article, Bernstein analyst Pierre Ferragu is quoted saying the following:
“The iPhone has clearly revolutionized the handset market. On its tail, Android has flourished and we now have a strong conviction that the two ecosystems won’t leave much room for any alternative”.
While I can’t see into the future any more clearly than Mr. Ferragu can, I thought I might share some numbers from a recent Microsoft event, at which Zachary Apter, General Manager of Corporate Strategy, had this to say about the conversion to smartphones in the United States (edited to highlight key points):
“Yes, so the mobile conversation is an interesting one, and let me actually frame that with a couple of pieces of context, because I think it's sort of useful to think about. The first is this sort of notion that we are at a place in industry maturity where you can basically take the installed positions of the incumbents and extrapolate that for the future, and that's where things are going to go. The fluidity of Android, the fact that Android has gone from zero percent share to 50 percent share in basically two years, the speed with which they’ve brought on application developers, and the number of apps now in their marketplace rivaling what Apple has in theirs, suggests that we are still very early in this process. I mean in the U.S. alone I think something on the order of 30 percent of people have smart phones. So, that means that 70 percent of people don't and if you just do the math on that what that means is over the next two years more smart phones will get sold than have prior been sold in the entire history of the smart phone segment.
So, we think that there's a ton of opportunity ahead of us. The other thing of context that I'd use to sort of frame how we think about it, is this notion of share meaning everything. I think it's actually a relatively un-nuanced way to look at it to basically say, when you have high share you attract application developers, and if you have low share your platform is uninteresting.
Developers are smart. They think about things like how much does it cost to build my app on a given platform, beyond the total number of users that I might be able to reach? How well do I monetize on a per-user basis? How much does it cost me to deliver my app on a per-user basis? And they think through this developer value equation and they say, hey, it may actually be more worthwhile for me to develop on a platform that has lower share, because I can make more money, or I can have my needs addressed. If you're an enterprise, you care more about reliability and security, and those sorts of things for your app than you do market share…
And if it was all just about the number of users, then Symbian would have a huge installed base of apps. So, it's a lot more than that. So, looking forward to how we build out our platform, obviously that enterprise installed base of developers really matters. We've seen a ton of innovation on consumer-facing apps, and we think that over the next few years the enterprise is really going to figure out how to use these smart phones, how to turn them into value-added business tools, and the fact that we have legions of developers who are familiar with Microsoft tools, familiar with the Microsoft framework, makes the Windows Phone platform really compelling.
Because things are so early, because we think that it's often the case that application developers go to the platform before share, instead of the other way around, we think the combination of those two things is a very powerful thing.
Then lastly the software is materially differentiated. It's a better user experience in a lot of cases. The look and feel, the design choices that we've made, a lot of people will tell you they like Metro better. I personally prefer Metro to iPhone, to Android. I've tried them all. Metro works better for me. There is some segment of the market we believe that that will be true for…”
It is still early extremely early for Metro, and the same is true for the smart phone segment; as noted in the same Financial Times article, JPMorgan estimates that 657 million smartphones will be sold in 2012, compared to roughly 460 million in 2011 (43% increase year over year).
Whether or not Microsoft’s partnership with Nokia will payoff is still in the air; pronouncing success or failure at this point in time seems to be a bit premature.
