The adblocking revolution is months away (with iOS 9) – with trouble for advertisers, publishers and Google

The thing about print adverts was that they stayed where they were. Photo by Bethan on Flickr.

TL:DR: when Apple’s iOS 9 comes out in September, there’s going to be a dramatic uptake of ad blockers on iOS – and it’s going to have far-reaching effects not just on websites and advertisers, but potentially also on the balance in mobile platforms and even on Google’s revenues.

Now, the longer version.

Remember newspapers?

In the old days, adverts appeared in print, on the radio and on the TV. Most ad-supported news organisations that have shifted to the internet began in print.

Ads in print were straightforward. Advertisers bought space, and editors could turn them down, or sometimes decide not to run them if a story broke that would bring about an awkward juxtaposition of, say, the advert for a shoe store on page 3 and the big breaking story now being placed on page 3 about people having feet crushed by a runaway steamroller. (The ad would get moved to another page.) Print ads were hard for advertisers to track, though they could use codes and so on that would clue them in to where someone had seen one if they responded directly.

Then came the internet, and the promise of measuring which adverts people had seen, and which they had clicked, followed swiftly by the realisation that you’d be able to follow what adverts people had seen between different sites by use of tracking cookies and scripts.

Now we have the situation where news websites are plentiful (some just rewriting, sometimes by machine, sometimes not) and adverts even more so: the attempt by The Verge’s Nilay Patel to pin the blame on mobile browsers’ lack of capability has been effectively shot down by Les Orchard, who pointed out the colossal amount of data that a simple page requires.

That’s where we’re at: websites are getting overloaded with ads, beacons, trackers and scripts that are all scrambling over each other in their attempt to squeeze the last bit of information about us from every page.

But nobody asked us, the readers, along the way whether that was OK. And now, people are deciding that it’s not OK.

Block that ad!

The uptake of AdBlock and its commercial sibling Adblock Plus has been gradual, but has now reached more than 150m users, and it’s accelerating. People are getting pissed off with the huge data loads pages impose without their consent, and the idea that they’re being tracked without their consent. In this post-Snowden age, the latter particularly bugs people. Fine, I came to your site; record the fact. But you’re watching me wherever I go online? That’s not acceptable.

People are also pissed off about what can happen when they view an advert online. In all the years I’ve viewed print adverts, I’ve never had one that:
• filled the page I was trying to read and insisted I either wait or click on a particular point on the page to read the article I came for;
• moved up from off the page to insert itself in front of the article I was reading and ask me to sign up for a mailing list;
• started automatically playing a video advert while I was reading some text;
• infected my computer with malware inserted in the ad;
• ran a Javascript script that pretended I need to pay a ransom, or otherwise blocked any interaction unless I pressed a button saying “OK”;
• turned me away from the page I was reading to a completely different one demanding I download an unrelated app.

You may well have other examples. (I’ve not had the malware/Javascript experience online, but other people certainly have.)

Apple: bite me

Into this comes Apple, which guards the user experience on the iOS platform, its biggest moneymaker, very jealously. Apple’s executives and staff aren’t blind to the things that are going on; they use their phones, and they get the same experiences. User experience is what Apple puts above pretty much everything else, and they’ve decided that they don’t like the experience available through the ad-supported web, and so they’re going to do something about it. Hence content blockers for Safari (and all web views) on iOS 9, which wasn’t announced onstage at WWDC but was one of those “Whoa!” moments on browsing through the Settings in the first iOS 9 beta. (Do read the link in the previous sentence, which explains what iOS 9 content blockers are, and are not.) Hence also Apple News, which is basically “all those sites but with the crap taken out”.

The ad intrusion situation on mobile is arguably worse than on desktop, since people are more sensitive about the amount of data they download on mobile, and their phones are less powerful so that complex layouts take longer.

You can get some adblockers for Android (though reviews for the main one are mixed), though you can’t get AdBlock Plus. You can get Ghostery (which shows you what you’re being tracked by) for Android. But there’s nothing like either presently for iOS.

That’s going to change, and I think the advent of iOS 9 and content blocking extensions will touch off a firestorm.

Update: just to clarify: content blocking extensions aren’t built in to iOS 9; only the capability to use them. But people are already working on them. You’ll have to download them and install them, rather like third-party keyboards.

Here’s a video of one presently being developed by Chris Aljoidi:


These blocking extensions will be paid for (at least initially), but the effect of people tweeting and updating Facebook about how much they enjoy the ad-free web will be hard to ignore. As Carl Howe observes, “Like it or not, once Apple supports ad-blocking in its browsers, it will become the default for people who don’t want tracking.” That also plays into Apple’s other general message, about how it doesn’t track what you do when you’re using its products.

Once this begins happening on mobile, it’s going to sweep back on to the desktop. “How do I do this on my PC?” will become quite a common question. People will load up with adblockers. That’s when websites will begin to face a real problem.

The moral conundrum

Of course, at this point we should step back and ask “why were the adverts there in the first place?” Oh yes, because they help pay for the content. In some – well, many, almost all – cases, they pay for all of the content. As Rene Ritchie of iMore explains, these days sites have to rely on getting ad inventory from all over to fill space; multiple networks vie to fill the space with the most apposite ad for the lowest price (to the advertiser) that the publisher will accept.

It’s worth considering what Ritchie wrote at length:

While we sell premium ads directly to advertisers, that only fills a small subset of the required “inventory” to support the network. Some 85% of ads we served last month were “programmatic”—provided by ad exchanges like Google Adx and Appnexus. Those exchanges are pretty much black boxes. We get a tag, we insert it, and ads appear.

Each ad gets its own iframe, so load is asynchronous and, if one fails, it doesn’t kill the entire site. Unfortunately, that also means each one fires its own trackers, even if those trackers are identical across ads. It’s terribly inefficient.

We’ve tried to find or figure out a way to streamline them, but haven’t been able to. They’re built into the foundations of all the major networks, ad and social, ostensibly to provide more “relevant” content.

When we do get good ads, as soon as they finish their allotted impressions, they go away, and the ad spot gets back-filled with “remnants” which get progressively worse and worse the more we refresh the site.

We also have no ability to screen ad exchange ads ahead of time; we get what they give us. We can and have set policies, for example, to disallow autoplay video or audio ads. But we get them anyway, even from Google. Whether advertisers make mistakes or try to sneak around the restrictions and don’t get caught, we can’t tell. It happens, though, all the time.

So ads are out of control even for sites. That’s so removed from the world of print, where an editor could veto or move an ad, that it’s boggling.

It’s this lack of control – the mad desire and demand by advertisers to get everything, indifferent to the effect of the user experience on the reader – that is driving people to adblockers. It’s a variant of the tragedy of the commons.

People don’t like it; here’s what a recent survey for Reuters shows. (What it doesn’t show is how many of those who don’t block ads know of the capability for doing it.)

Attitudes to advertising and use of adblocking

Not very legible; adblocking is the lower bars. People aren’t happy.

But wait, what about the moral dimension? The fact that if you block the ads, the sites lose their income?

I’ve previously written that the two sides on this are far apart; that adblocking is the new speeding: those who do it can justify why to themselves, while those who think it’s wrong are stern in their disapproval.

Entertainingly, when I noted on Twitter how many trackers I’d blocked using Ghostery (as part of an experiment using Ghostery, AdBlock, Javascript Blocker and uBlock to see how it changed my browsing experience), I was at once the object of finger-wagging and the accusation of the destruction of journalism:

Have I any responsibility to them? Well, not really. Certainly as a standard reader, here’s what happened: I accepted an invitation to read an article, but I don’t think that we quite got things straight at the top of the page over the extent to which I’d be tracked, and how multiple ad networks would profile me, and suck up my data allowance, and interfere with the reading experience. Don’t I get any say in the last two, at least?

Hence my response:

(You can view the entire conversation if you’re logged in to Twitter.)

Print evolved. Now it’s the web advertisers’ turn

This is the part of the debate that so interests (and, frankly, entertains) me. Print-based organisations were told they needed to evolve, and stop being such dinosaurs, because the web was where it was at: advertising was moving, and if they didn’t move too, they’d just die.

Now we’re all online, but somehow we’re meant to accept that web advertising is how it is, and never question or deviate from it? Nuh-uh. Why should web advertisers be immune from evolutionary or revolutionary change in user habits? What’s sauce for the print goose is sauce for the online gander. I don’t recall the people who scolded me for using tracking detectors previously saying that everyone had to stick with print adverts because they made more money (which those ads still do).

Furthermore, any argument that tries to put a moral dam in front of a technological river is doomed. Napster; Bittorrent; now adblocking.

Which quickly leads to…

If any significant number of users shift to using adblockers, web advertisers are going to have to move quickly to deal with that new reality. Web publishers too.

(Though I have to say I have very little sympathy for a lot of web “publishers”. Back in the early days of the web, the Guardian ran a brilliant ad which asked “Ever wondered how every day there’s just enough news to fit in the newspaper?” It was advertising the Guardian website, and the fact there was more there than you’d find in the paper.

Now? There are a gazillion websites – but tons of them are simple copies, monetised by adverts from Google or whoever, which leach from the originating sites by copying their content. We’ve now established the limits of how much news is generated each day: it’s more than fits in newspapers, but less than fits on all the websites currently dedicated to “news”. If adblocking puts some of the copiers on the skids, I won’t weep. That’s not journalism; it’s a sort of horrible stenography, even worse than some of the stenography that does pass for journalism at some bigger sites. Good journalism, and worthwhile sites, will survive. Or good journalists will.)

What form will the evolution take? Well, look at sites like Buzzfeed, and their use of native content. If the site generates the ad, it’s suddenly a lot harder to block. We’re back, in a way, in the land of print, where the printing of the editorial and the ads happened in the same place.

Ecosystem fights

Beyond all this, there’s a longer-term potential effect. I don’t think Apple was gleefully thinking of ways to nobble Google when it decided to introduce content blocking, but this could have quite an effect.

Consider: iOS 9 arrives, and lots of happy iOS users say how delighted they are to be blocking those annoying ads. (Don’t underestimate how quickly iOS 9 will be taken up: it’s going to be available for devices going back to the iPhone 4S and iPad 2 and will use less storage than iOS 8. Even iOS 8 was on half of iOS devices within two months of release.) Meanwhile Android users won’t be able to follow suit (to anything like the same extent). At least one of two things will happen:
• some Android users begin considering switching to iPhones
• Google comes under pressure to allow adblockers on the Play Store to prevent Android switching.

Neither of these is good for Google. The loss of Android users is probably more tolerable in the short term. Adblocking could pose an existential risk to Google (which is why it pays Adblock Plus’s makers to not block Google ads).

It’s unlikely that adblocking could ever reach a pitch where it really offers a grave threat to Google. But as more and more people from developing countries come online, paying for every kilobyte of data, they might want adblocking too. India in particular is a generally tech-savvy country where data prices are high; and it has embraced Android enthusiastically. Consider for a moment how that could play out.

Relevantly, Global Web Index has a survey of adblocking use which found that 27% of users aged 16-64 globally in its 33-country survey had used an adblocker, and 15% had blocked tracking.

Adblocking by region

Adblocking by region. Source: GlobalWebIndex.

Statista also had detail about European use:

Adblocking by country in the EU

Adblocking has relatively low use – but what happens when it arrives on mobile?

Consider: hardly any of that is mobile yet. Mobile is the biggest platform. Adblocking is coming to a key mobile platform in September.

Things could get ugly quite suddenly.

Update: there’s a discussion of this post on Hacker News. You don’t need root to read it.

Like this? Other analysis I’ve done you might like:
How Gresham’s Law explains why sites are turning off comments
The death of “Others”: how the PC market’s implosion is squeezing smaller players
Android (and Apple, and BlackBerry, and Microsoft Mobile) handset profitability – the Q1 scorecard (updated)
BlackBerry might have no BB7 users left by February 2016 – and that’s a big, bad problem


The deaths of “Others”: how the PC market’s implosion is squeezing smaller players

PC market 1998 to 2015: rise and decline

IDC data shows how the PC business has grown – and shrunk. “Others” (grey) are selling fewer and fewer.

Back in April 2011, when the results for the first quarter of PC shipments for the year came in, I wrote a story beginning:

“The PC market is showing signs of having passed its peak. Weak demand by consumers for PCs, coupled with a switch to tablets such as Apple’s iPad, meant that worldwide PC shipments fell compared with the same period in 2010, according to two leading research groups.”

Perhaps predictably, this observation of what the numbers were saying riled some of the PC diehard commenters (generally sysadmins with time on their hands who obsessively trawl comment threads looking for places in which to be superior). “I’m looking forward to seeing the looks on Mac users’ faces when Apple – as they display every intention of eventually doing – pull out of the PC market altogether,” said one.

My own observation was that the principal downturn had come in the mature markets of the US and Europe, and that the forthcoming problem was that the rise of smartphones (especially cheap Android) would mean that in Asia/Pacific and Latin America “lots of those people who a few years ago would have been a prime target for a PC might now not need it.”

And so it turned out. The market actually hit its biggest-ever figure in the third quarter of 2011, with 96m PCs shipped. But since the third quarter of 2012, if you exclude Apple figures, the Windows PC market has shrunk for 12 straight quarters. Now it’s 31% down on that peak, and nobody’s quite ready to call the bottom. It’s going to be under 300m this year – the smallest since 2009, in the midst of the financial crash – and that’s even with the launch of Windows 10. (For those saying “aha, but it’s falling because people are making their own PCs using motherboards” – nope. The motherboard industry is trending down just as quickly as the general PC industry.)

What gets people buying computers? Seems that Apple has the answer – launch new products and promote the hell out of them. (In the second quarter it refreshed the MacBook Air, MacBook Pro and introduced the “MacBook”.) It’s working a lot better for them than for the Windows PC market.

Apple v Windows

For the past 12 quarters, Windows PCs shipment figures have shrunk – while Apple generally grows faster

Apple has stayed fairly consistent, shipping between 4m and 5m personal computers per quarter – apart from the first half of 2013, when it couldn’t supply enough new iMacs to meet demand.

The demand for Macs means that Apple is now the fourth-largest PC company for shipments, behind only Lenovo, Dell and HP, and ahead of Asus and Acer, on IDC’s measurement. (IDC doesn’t include Chromebooks and 2-in-1s.) It’s quite a turn of events, but one where it has grown faster than the Windows PC market for quite a long time.

Windows v Apple, long-term

Long-term trends for Windows PC v Apple growth show Apple ahead for almost all of the past 11 years

Dying in a ditch without a saviour

The deeper question is: what happens to the PC market? It’s become a replacement business, but one in which replacement cycles are also lengthening. There’s barely any innovation – Lenovo’s efforts with the Yoga 2-in-1 seems to be the only thing happening, and that’s a minority sport. Gartner and IDC don’t give clear figures, but there doesn’t seem to be a big move to the new form factors. Thing is, it’s usually new form factors that drive revivals in the market.

So far, though? No. Canalys reckons that in Q1 “hybrid and convertible” shipments (that’s the 2-in-1s, and includes the Surface) totalled 3m, and that was a doubling year-on-year. There’s likely money to be made, but not many buyers handing over the moolah. And Chromebooks? A mighty 1.3m in Q1, also according to Canalys, which reckoned 90% went to the US and Europe. I don’t hold out much hope for a gigantic leap in Q2, though education buyers (the principal ones) will likely bump those Chromebook numbers up in Q3.

Brutal reality: revenue down, profit down

I track the big PC companies’ results, where you can generally find both revenues and operating profits for their PC divisions, though not usually PCs shipped (I take the latter from IDC). Apple is different – it gives you shipments and revenues, but no calculation of operating profit (because it doesn’t split out its figures that way).

And over the past 10 years, there are two trends that stand out: per-PC revenues have been falling along with per-PC profits for Windows makers, while Apple has seen similar pressures but sits miles ahead of the rest.

Average revenues per PC for big 6

“Big six” per-PC revenues, based on financial reports and IDC data.

In fact Apple has such high per-PC revenues that it’s actually now the third-biggest PC maker by revenue – excluding Dell, because we don’t know what Dell’s revenues are, because it is privately owned. Acer and Asus, by contrast, are on a path downwards; it’s notable that for the past couple of quarters they haven’t figured on IDC’s numbers for US shipments, meaning they had fewer than a million sales there. (And in timely fashion, Asus just chopped its notebook shipment forecast for the year to 20m units, down from 22.8m it was aiming for, and below 2014’s 20.3m.)

Total PC revenues for the big 6

Figures to 1Q 2015: despite fewer shipments, Apple’s revenues outdo Acer and Asus

The picture gets even worse if you look at total profits. We have to assume an operating profit for Apple; I use 18.9% because that’s the historical figure, extracted from pre-iPod days. On that measure, Apple makes the largest profit from PCs by a mile.

Per-PC operating profit for the big 6

Apple is miles ahead of the rest, based on an estimated 18.9% historical operating margin

Total profits in the PC industry for the 'big 6'

Data to 1Q 2015: on a historical figure, Apple is miles ahead, while Asus and Acer struggle to break even

The figure for Apple is twice that of any of the others. The graph for Acer isn’t a mistake – its operating profit is all over the shop, and has been negative quite a lot. (Remember this is operating profit – what’s left after paying for the product components, assembly, shipping, associated R+D, sales and marketing.)

The deaths of Others

But if profits are squeezed for the “big five” (or six, now Apple’s in the club), what’s it like for the smaller players such as Toshiba, Samsung, LG? Logically, worse, because just as in the smartphone market they don’t get the economies of scale that let them compete.

The problem is, there just isn’t room for them. Having been above 50% of the whole market back in 2005, they’ve tumbled down until now they’re trending below 30%.

"Other" PC makers are a smaller segment of the market

From 50% before, “others” are now less than 30% of a smaller market. The red line is the four-quarter moving average.

Since the market began shrinking, shipments by “Others” – those Windows PC makers outside the top five (HP, Lenovo, Dell, Asus, Acer) – have really fallen off.

As the PC market has shrunk, the “Others” category has shrunk faster.

Windows market growth v "Others"

The Windows PC market is shrinking – but “Others” is shrinking faster

The deaths of "Others": fewer shipments

Shipments outside the “big 6” have roughly halved from the market peak

“Others” (the remainders outside the top six if you include Apple) has dropped from just under 36m to less than 18m in less than four years. That’s a real crunch.

That means fewer sales, less revenue and less profit (if any) for those bit players – which includes Samsung, LG and a few others. Sony gave up PCs as a bad idea a while back. Samsung pulled out of the European market in late 2014.

Samsung, in particular, doesn’t have anything to gain from making PCs: it can’t make the chips in its foundries (they’re Intel not ARM) and it’s not generally offering touchscreens, so it doesn’t get the “flywheel effects” that it relies on for smartphones, where it makes the parts as well as the finished object.

If I were to bet, I’d expect Samsung to exit the PC market in a year or two. There just isn’t much in it there; you can see from the part of its “IM” division revenues that aren’t smartphones that it’s dwindling.

Ride to the end

There isn’t any good news for the PC industry, and I don’t expect Windows 10 to bring about dramatic changes. (Nor do IDC and Gartner.) There’s always a PC sales lull ahead of a Windows launch, but there’s still not great driving reason for the average consumer to buy a new PC because of Windows 10; remember how Windows 8 didn’t help that downward plunge.

And for businesses, if they’re on Windows 7 then they probably won’t see any reason to shift to Windows 10. And they probably binged on upgrades moving up from XP last year.

So get used to the new normal: PC sales will be increasingly concentrated among the top five or six, for whom R&D is pretty much an afterthought, and Apple is coining it – and pushing with the R&D – just as it is in phones.

How long before Apple’s share is 10%, up from its current 7.8% (which has more than quadrupled from its sub-2% low in the end of 2004)? On current trends (falling PC sales/rising Apple sales), it might be a year or two, but it seems shockingly in reach.

And those “Others”? With less and less market to shoot for, I’d expect some to quietly exit. Sony can’t have been the only one losing money.

BlackBerry might have no BB7 users left by February 2016 – and that’s a big, bad problem

John Chen, BlackBerry’s chief executive, is a smart guy – but he’s got really big problems ahead. Photo by jdlasica on Flickr.

They really will let any old nonsense onto Seeking Alpha. On Wednesday there was a piece suggesting that “BlackBerry had a decent quarter; turnaround an extremely high probability“.

Yeah, and pigs will fly.

BlackBerry has a real problem, and it only becomes evident when you dig into the numbers. It’s this: BB7 users, who make up about 22m of its 33m subscribers, are deserting the platform at the rate of about 5m per quarter, while it’s only adding about 1m BB10 subscribers in the same period.

If this pattern continues, then by the end of this fiscal year – that is, February 2016 – there will be next to zero BB7 users, and only slightly more than 15m BB10 users. That will represent probably the bottoming out in subscribers, but will also mean that two key sources of revenue for BlackBerry – service revenues and handset sales – will effectively stop.

And in the just-gone quarter, those two categories made up 78% of its revenues – and the profit on the services, which only applies to BB7 users, amounted to about $211m.

Here’s the problem: once the BB7 users are gone, so are pretty much all the service revenues. And look how soon that could happen:

BlackBerry 7 users leaving; BB10 joining slower

BB7 users are departing the platform five times faster than they’re being replaced by BB10 users

With 15m handsets in use, and BB users replacing theirs roughly every three years (as I found previously), that means 5m handset sales per year, which is about where the company is now – and it currently makes horrendous operating losses on handsets. There just isn’t the scale.

Without the service revenue, and because the handsets are horrible money pits, BlackBerry is left with just its software revenues for profit. And oh dear, those aren’t pretty.

Let’s get stuck in

Here are some extra facts dug out of BlackBerry’s Q1 2016 10-Q, the quarterly detailed report:

• 33m subscribers (I estimated 34m; so it has fallen 4m from the previous quarter, an acceleration in decline)

• 81% of the 1.1m phones sold were BB10 (so 0.89m BB10, 0.2m BB7). Recall that BB7 was effectively dead with the launch of BB10 – back in January of 2013. Yet they’re still getting cleared out of the system.

• a total of 1.3m phones were sold through to end customers. That means that over the past eight quarters BlackBerry has “sold” (recognised revenue on) 15m phones, and sell-through has been 23.3m – that’s 55% more. Clearly, there was a gigantic amount of channel stuffing going on previously. And of those 15m phones (or 23.3m, take your pick) only 9.7m were BB10 models.

We know how many subscribers there were when BB10 was introduced, and we know how many there are now; we also know how many BB10 handsets have shipped. That means we know the split between BB7 subscribers and BB10 subscribers.

Rise and fall of BlackBerry subscribers

On the basis that every BB10 handset goes to a new user… it’s still not great.

In short, there are still twice as many BB7 users (22m or so) as BB10 users (10.8m). In the just-gone quarter, a total of 4.9m BB7 users left, and 0.89m “joined” BB10. Some of those “joining” will have been ex-BB7 users, of course, but the direction of travel is clear; if that 5:1 pattern continues, then when the last BB7 user exits, BB10 will only have 15.2m users.

And the graph above shows that if it’s a straight line, that will be February next year.

• that much-vaunted jump in software revenues (from $54m to $137m year-on-year, and from $67m to $137m sequentially – a rise of $70m) was actually due to a mysterious patent deal, one with Cisco and another with an unnamed company.

Some thought the rise heralded BlackBerry rising from the ashes as a profitable software business; the stock popped on the early results. But as was clarified in the earnings call and the documents, compared to the year before, software revenues rose by over 20% (Chen suggested “22-23-24%”); as the documents then make clear, software revenues alone actually fell compared to the previous sequential quarter.

As the year-ago software revenue was $54m, and the previous quarter software revenue was $67m, and 67/54 = 1.24, it’s evident that software revenues grew less than 24%. This $67m is the underlying quarterly software revenue figure you can rely on; multiply that by four, and you get pure software revenues for the fiscal year of about $270m.

That’s a long way short of the $500m (which excludes any BBM revenues, which I don’t see happening in a hurry) that Chen is aiming for this year. Of course, if he can sell off – I mean license – lots of patents, then he could be on course for that target; the extra $70m from licensing helps. Multiply that by four (one big deal per quarter!) and you get $280m, so if the licensing people can keep hitting home runs, and everything goes fine, he might hit that $500m target, just.

But there’s no indication that the licensing revenues will keep coming; this might have been a $70m one-off. Or (as is also hinted) the company might just sell some patents, and count those in its “licensing” revenue.

But even that is a downscaling from expectations of a $600m annual software revenue, and the analysts all zeroed in on the sleight of hand in the earnings call. The stock selloff that has followed is clearly their reaction to what weren’t such good numbers after all.

• the sequential rise in US revenues (from $147m to $216m, or $69m) was mostly caused by the licensing deal. (This actually emerged in the earnings call.) According to BlackBerry’s execs, US revenues excepting the licence did grow, slightly; which means we can peg one licensing deal at just under $69m. That leaves the other licensing deal at somewhere around $1m – because the total extra from licensing was about $70m.

Future imperfect

Soooo… you’ve got a handset platform (BB7) that people are abandoning at a remarkable rate, while they aren’t joining the new platform with any great alacrity. If things continue as now, by February 2016 there will be 15m BlackBerry users, and zero service revenue, and lossmaking handset revenue.

The saving grace is that the software is very profitable – about 84% gross margin. (This is in the annual 10K report published in March.)

So how does this look? If we have software revenues of about $125m, that generates $105m of gross profit (ie before expenses like R+D and keeping the lights on).

Now set against that the costs of the hardware business: it made a gross profit (by my calculations using the software profitability) of $13m on 1.1m sales. So everything’s rosy, right?

Unfortunately not – as Chen admitted, getting handsets to operating profitability (where you account for sales/general/administration and R+D) is much harder. By my calculation, allocating those costs in line with hardware revenues, the handset side hasn’t been operationally profitable since November 2011. I don’t think the handsets will ever come back to operating profit. Still, gross profit, eh?

Let’s see how the sums go. For the latest quarter, R+D was $139m, and SGA was $174m.

If those costs stay the same, your mostly-software-and-a-few-handsets company has gross profit of $118m, and immediate costs of $313m – that’s a loss of $195m, before any other costs arising (such as amortisation or inventory writedown or debenture revaluation). And make no mistake, there will be other costs arising.


If BlackBerry holds on to its hardware business, it’s going to run into the sand. It’s also losing its old BB7 userbase extremely fast. John Chen doesn’t have much time to start generating revenue from licences and software. I’d expect to see some sort of crisis point in a couple of quarters. But then, BlackBerry is always in crisis. And nobody much seems to care, either.

BlackBerry results: my forecast: 1.3m phones, $20m operating loss

Ahead of BlackBerry’s results on Tuesday, here’s my forecast, for what it’s worth.

I’m taking the analyst consensus revenue estimate of $690m as my basis. That’s down 30% on the same time last year. If it’s much bigger or smaller than that, then everything else goes off, but it seems reasonable.

I estimate the following:
operating loss: $20m (excluding adjustments for the value of the $1bn debentures)
phones shipped: 1.3m (I don’t see any improvement from last year, when it did 1.6m, including 1.04m BB10 handsets; this time it’s going to be all BB10)
handset revenue: $353m
device ASP (average selling price): $271.54
subscriber accounts: 34m (down 3m from the previous quarter)
per-account service revenue: $7.56 (or $8.50 per BB7 device in use)
services revenue: $257m (based on those accounts)
software and other revenue: $70m and $10m
per-handset operating profit: -$97 (loss of $97)

The operating profit follows directly from the fact that software and services profit is 84% of revenue. I’ve used figures that follow logically from what BlackBerry is doing.

Conclusions (ahead of the numbers; we’ll see how it goes when they’re out):

– handsets still aren’t cutting it. (The Kantar numbers show no significant change.)
– software revenues are still small – nowhere near a $600m per year company
– thank god for the services revenue, but that’s going away too.

Now let’s see the actual numbers..

Windows Phone: Microsoft’s really good reason to keep it going isn’t about phones

Important equations. Photo by the waving cat on Flickr.

The abrupt departure of Stephen Elop as leader of the hardware devices business at Microsoft, which will instead be united under Terry Myerson, creates a big, obvious question: is Microsoft about to kill the Lumia smartphone business that it bought from Nokia for $9bn?

Let’s go through the arguments for and against.

Kill it because: the Windows Phone business loses money hand over fist – no phone maker, including Nokia, has ever managed to make it profitable. My analysis of its financials suggests that in Q1 it was losing around $40 per handset even if you assumed that featurephones made zero profit. Even assuming a loss per featurephone, the calendar Q1 (fiscal Q3) figures still showed a $29 per handset loss, even with generous assumptions about marketing and ignoring goodwill writeoffs.

And Microsoft has warned that it’s going to take a whacking loss pretty soon on the phones division. The logical time to do that is at the end of the fiscal year – which is two weeks from now. Elop’s leaving just means the mess is already cleaned up when Satya Nadella goes on the analyst call.

Other handset makers simply won’t touch Windows Phone; they know they can’t make money from it. Huawei’s consumer marketing chief famously said last September that it wasn’t worth doing.

In addition, the number of Windows Phone users worldwide is really small in the context of the whole business. Out of more than 2 billion connected smartphone users, around 80m use Windows Phone – and the majority of those are using low-end versions.

Why do they primarily use low-end phones? Because they’re not worried about apps, and that’s fine, because Windows Phone hasn’t managed to attract app developers to any great extent – it’s very much a distant third (or even fourth) for development.

So Windows Phone has no momentum, is a money pit, and nobody’s interested in it – not the users or developers.

Now we come to the reasons to keep it.

Keep it because: Microsoft has to have a play in mobile because mobile is the biggest computing platform on the planet, bar none. Mobile is essential; if you aren’t in that, you simply aren’t in the game. True, Microsoft is writing software for rival platforms (sometimes before it does for Windows Phone itself) but to get any idea of the challenges and advances of what’s happening in the mobile world, you have to be a player yourself. Being exposed to the harsh vicissitudes of the market, and its demands, shows you what it is that people want and need much more immediately than if you’re trying to figure it out at second hand by observing Apple’s or Google’s manoeuvres with their operating systems.

Not only that, but mobile is an intermediate stepping stone between the desktop and the coming internet of things – which you could call sub-mobile. IoT depends on components that have become pervasive through their use in smartphones (GPS, accelerometers, camera sensors, fingerprint sensors, barometers…) and understanding how their capabilities interact, and fuse, and how their price points vary, is essential to seeing what the world is going to look like in five years’ time.

That’s what I see as a subtext in the announcement about the reorganisation of the “devices” side:

Executive Vice President Terry Myerson will lead a newly formed team, Windows and Devices Group (WDG), focused on enabling more personal computing experiences powered by the Windows ecosystem. This new team combines the engineering efforts of the current Operating Systems Group and Microsoft Devices Group.

“More personal computing experiences”? That’s “more personal” as in “closer to the person”, I think, rather than “more things that are PC”. (Update: to clarify, for those it isn’t clear to, I take that to mean things like Hololens – which relies heavily on accelerometers and real-time tracking and lens technology – and wearables. You don’t get much closer to the person than screens a few centimetres from your face and something that’s actually next to your skin.)

So what now?

Even to a Windows Phone sceptic like me (even though I really liked its interface when I first encountered it), it’s obvious that the second argument is by far the stronger one. It would be different if Microsoft couldn’t bear the cost of losses on Windows Phone (if it were, say, HTC), but the fact is that it can. It can bear those losses pretty much endlessly.

Logically, therefore, this is going to happen:
• Microsoft is going to announce a whacking loss on the phones business, which will be merged into the Devices business, at the end of this quarter
• the Lumia business will continue to tick over, functioning essentially as an R+D department for future IoT devices – note how Microsoft killed the proposed Nokia smartwatch in favour of its own Band
• Windows Phone will continue to sell poorly, and lose money, but it won’t matter. For Microsoft, mobile is now a lost battle; it’s moving on to the next thing. Are you ready for the platform battle of the internet of things?

HTC’s prospects begin to look like a death spiral

HTC's stock has plummeted in the past few days after a profit warning.

HTC’s stock has plummeted in the past few days after a profit warning.

On Friday, HTC released a gold edition of its flagship M9 smartphone. Oh, hubris: the timing couldn’t have been worse. Not only did it emerge that the product promo photos had been taken with an iPhone, but within hours the company also issued a formal warning that its financial performance in the current quarter (running from April to June) would be substantially worse than it had expected. Revenues in May were terrible – down by 48% from the year before, which itself had been nothing to sing about.

Now it says that Q2 revenues won’t be the forecast TW$46-51bn (about $1.7bn), but more like TW$33-36bn (about $1.1bn) and that rather than a small profit it will make a net loss – between TW$9.70 and $9.94 per share, which is about TW$8.2bn (US$250m).

HTC has been skating along on operating margins of less than 1% for the past three quarters; cumulative net profits for that period is TW$1.47bn, or US$47m (yes, forty-seven million).

This latest news though feels like a headlong plunge into the abyss.

The forecast suggests that HTC’s June revenues will be as low as they’ve ever been since 2009 – perhaps worse.

HTC revenues through 2015 by month

Forecast for June is as low as 2009 – before the Android explosion.

The stock market certainly seems to think so, marking HTC’s shares down 9% for two successive days – the maximum drop allowed before “circuit-breakers” come in.

Caught in the value trap

HTC’s story is a cautionary tale about life in the value trap – when you don’t make the core software, and so have to rely on hardware differentiation and software add-ons. It has reduced the PC business to one where the five biggest Windows PC OEMs have 60% of the market, and pretty much all the profits; it’s doing much the same to the Android smartphone market, except the profits there are accruing to just one company (Samsung).

HTC’s problem is that its hardware advantage ran into the sand once Samsung really got serious about dominating the smartphone space, and now – rather like Samsung – it’s being eaten from below by Chinese rivals that do the job just as well, and at the high end is being outcompeted by LG (which has upped its game enormously in the past two years) and to a lesser extent by Sony (which offers features such as waterproofing and SD cards). Let’s also not mention those terrible adverts with the no-doubt-expensive Robert Downey Jr.

In its profit warning, HTC said:

“The change for revenue outlook is due to slower demand for high-end Android devices, and weaker than forecast sales in China, while gross margin is revised primarily on product mix change and lowered scale. At the same time, increased competition has raised operating costs for product promotion; HTC is enacting measures to further improve operating efficiency.”

In brief: the M9 (this year’s flagship) isn’t selling; Chinese buyers are buying other phones (or fewer phones altogether); it’s harder to get noticed with so many rivals; HTC’s going to cut some jobs and spending in an attempt to save itself.

HTC has been a sub-scale player for some time now – remember the calamitous delay to the HTC One in March 2013? – and to some extent the only interesting question is whether any of its attempts to escape the downward spiral can succeed. On the plus side, it’s well-capitalised, so it’s unlikely to abruptly go bust. Its key problem is how quickly it can ramp up other businesses such as its Vive VR headset and Re camera, and how much revenue they’ll generate, while it tries to rely on making smartphones that too few people want to buy.

Losing traction

You can actually trace the point where the wheels came off by looking at HTC’s accounts, and specifically the inventory levels. “Inventory” is a mixture of goods waiting to be made into handsets in factories, work-in-progress, and finished devices.

Now compare HTC’s revenues with its inventory level. You can see that it remains largely under control through to the end of 2012 – although it’s beginning to rise as the iPhone 5 and Galaxy S3 began pushing it out of the market, meaning it was harder to sell handsets. (The lines are on slightly different scales: by the end of 2012, inventory was about 40% of revenue.)

HTC revenues and inventory, by quarter

Revenues kept ahead of inventories, at least to the end of 2012…

But in 2013, it hit that problem sourcing camera sensors for the HTC One M8 (the original – thanks Matjaz Ropret). And it shows up in inventory: all those goods sitting in factories and warehouses waiting to be shipped. Inventory spiked to 89% of revenue for the quarter. Revenues have tracked down, and inventories have stayed relatively high (above 35% of revenue, and sometimes 76%) ever since. High inventories are bad because they’re goods that you’ve paid for, but can’t sell; they’re a drag on business, and what’s worse is that as they age they drop in value. Tim Cook described inventory as “like milk – it goes off after a few days”. (Apple’s inventory is consistently below five days of hardware sales.) HTC had 45 days’ worth of inventory at the end of Q1; watch out for the figure at the end of June, because it will tell us how the M9 has sold to carriers, if not end users.

HTC inventory v revenues

Suddenly at the end of 2012, things go out of control…

Basically, the inventory story breaks into two parts – green marks the OK stage, and red the point where it’s gone bad:

HTC inventory v revenues

The red period, from the end of 2012 on, shows inventories growing way above associated revenues

(This, by the way, is why it matters to look at company accounts. You can find stories if you read them closely enough. That’s where I found BlackBerry’s PlayBooks piling up in 2011.)

The company’s caught in a bind. It doesn’t make enough profit to invest in really top-level R+D that might let it break through into new spaces. Here’s its R+D spending by quarter, in US dollars:

HTC R+D, by quarter

With spending at about $100m per quarter, HTC can’t break out of its position as a mid-tier smartphone maker.

It’s pretty hard to spot where it is spending money on the HTC Re camera, or the HTC Vive VR headset. The latter seems like a smart move (whereas the camera is a complete commodity product whose minimal margins will get eaten by rivals, just like in the phone market). HTC’s in there comparatively early, and has a deal with Valve. I wouldn’t rely on that being the saviour of the business, though.

In search of a USP

So how does HTC get out of this? A better way to ask the question is: what’s HTC’s unique selling point (USP)? What does it bring to the smartphone and device party that nobody else does? Apple has its brand and vertical integration; Samsung has scale and vertical integration (it makes the chips and displays for its own phones); LG has vertical integration; Sony has its brand and terrific photo sensors, though I don’t think that’s necessarily sufficient for the survival of its smartphone business, it is at least a USP.

HTC doesn’t have a geographical advantage (it’s not in China, it’s in Taiwan); it doesn’t have a vertical integration advantage. It isn’t developing the software, though its Sense overlay for Android is nice. There’s no point making Windows Phone handsets, because they don’t sell except at the low end, and there’s no profit there.

Contrast BlackBerry and HTC: both are now pulling in roughly the same revenue per quarter (sub-$2bn). BlackBerry sells far fewer handsets than HTC – only 1.6m in the December-February quarter, and by my estimates perhaps 1.3m in the March-May period, while HTC shipped around 5m handsets in Q1.

BlackBerry’s advantage, though, is that it has a cushion of customers, particularly in enterprise, who are willing to pay subscription fees. If handsets were all BlackBerry had, it would have gone bust long ago.

HTC doesn’t have that cushion. So what does the future look like? At one time in 2012/3, Amazon was interested in buying it – but Cher Wang, its chair (and now CEO, having pushed Peter Chou over to the “future products” side) turned Jeff Bezos down. That looks like a bad decision. Short of a miracle, it doesn’t look like anything’s going to pull HTC out of the mire.

How long can you wait for Android M to be on 50% of devices? Would June 2017 be OK?

Google is announcing all sorts of wonders for Android M (Macadamia Nut fruitcake, or whatever it is) at Google I/O.

At the moment, Lollipop (Android 5.x) is on 9.7% of devices – 9.0% for 5.0 and 0.7% for 5.1, according to Google’s developer dashboard.

So when you get the announcement of “permissions for apps” (or indeed anything that is M-only), you have to ask: how long will it be before that is actually widespread? And by “widespread”, let’s define it as “on 50% of devices”. That 50% is useful because 50% of the billion of so Google Android devices in use is roughly comparable with the total number of Apple’s iOS devices in use. The thing is, the overwhelming number of active iOS devices get updated to the latest version within three months of the release of a new version; since iOS 6 in 2012 it’s taken just one month for the number running it to pass 50%. (At the time of writing, in May 2015, the current figure is 82% of devices on iOS 8, 16% on iOS 7, and 2% on something earlier. Revisiting it in March 2016 to add grammatical edits, the figure is 79% on iOS 9, which was released in September 2015.)

Apple iOS versions in use

Rapid adoption is a key element of Apple’s iOS due to its direct update mechanism.

How do we figure this out? We let history be our guide. I’ve been collating the data about versions on the Android developer dashboard for a while, so we can look back to the past. In each case I’ve taken the beginning point as when a version first showed up on the dashboard, not when it was “released”.

Android versions in use

The release of a new version of Android doesn’t necessarily mean it reaches a large proportion of users quickly.

If we take it that “modern” Android starts with version 4 onwards – given that 2.3 (Gingerbread) was super-old, while 3.0 (Honeycomb) was tablet-only, we get this data:

Android 4.0: 16 months for it, or a later version, to be on 50% of devices according to the dashboard (January 2012 to April 2013).

Android 4.1: 13 months (October 2012 to November 2013).

Android 4.2: 22 months (December 2012 to September 2014 – the date of Lollipop’s release, officially).

Android 4.3: 18 months (October 2013 to March 2015)

Android 4.4: 19 months (forecast). Launched in December 2013, at the start of May 2015 it was at 49.5% for 4.4 and successors. It’s a safe bet that in June 2015 the total for Android 4.4 and successors will pass 50%. (Update: this was exactly right: the figure for May 2015 showed 49.5% on 4.4 or later; for June 2015, it was 51.6%, including 5.x; Android 4.4 itself peaked at 41.4% in April 2015.)

Android 5.x: 18 months (forecast). Presently, it’s 9.7% after 4 months, and its uptake pattern is more like 4.3 than 4.4. My forecast for its 50% point: July 2016.

On that basis, I’d say it’s a pretty safe bet that if Android M is released in December 2015 (which is likely) that it will take until June 2017 before it’s on 50% of Android devices according to Google’s measurements. Of course, that will vary regionally – there are still 6% of devices running 2.3 or earlier, which translates into about 60 million devices still in use. Some will get more rapid takeup, some will get less.

To put it into perspective (thanks Mark Blank-Settle on Twitter):
• presently, Apple’s offering iOS 8. It will show off iOS 9 in June.
• by the time Android M is released on devices later this, iOS 9 will already be on 60%+ of iOS devices
• by the time Android M – shown off in early 2015 – is on 50% of devices, Apple will have shown off iOS 10.

So if you’re depending on something such as, oh, the permissions model or Android Pay being introduced in Android M reaching the majority of your users any time soon, might be best to hold your breath. The revolution looks more like an evolution.

Why Sony might pull out of smartphones: it’s trying to raise prices in a falling market

A message for Sony? Photo by LendingMemo on Flickr.

After my look at the first-quarter performance of various high-end handset vendors – Samsung, Sony, LG, HTC, Apple – plus Microsoft and BlackBerry, it’s time to focus more tightly. First up: Sony, which I think is most likely to pull out of the smartphone business among those presently in it.

Why not LG, HTC, Microsoft or BlackBerry? (Samsung we can be sure will stick with smartphones. Apple, ditto.)

• LG is a rarity: a company that has pulled itself out of the lossmaking mire to come back to success. In part this is because it’s a conglomerate, so it can afford to pile money into its handset division, because (like Samsung) when the handset division does well, it pulls the rest along.

• HTC somehow stutters along. It’s a minor player now, but doesn’t look imperilled as it did last year, when it was posting losses as though it enjoyed it. With cash in the bank, it looks safe for now (though we’ll have to see how the M9 and associated handsets sell).

• Microsoft can bear the losses from handsets pretty much endlessly, and they’re useful for other research.

• BlackBerry has horrendous problems with handset profitability, but handsets are essential to its existence while it doesn’t have a completely solid business in mobile device management; they also lend it a USP, so it’s likely to stick with them even though they don’t make money. Then again, let’s check back when it announces its next set of results in June.

Last man standing

Sony is the one I think is most likely to pull out of this market. It’s in the middle of a huge struggle with its identity, where the only divisions that are performing up to snuff are its image sensor manufacturing and games, while music and films tick over. The mobile side? Not so much.

Here’s how it has been doing – plus its stated ambitions for the coming financial year, outlined in red.

Sony's smartphone aims for 2016

What Sony wants from its smartphones: sell fewer at higher prices, smaller losses.

Sony is aiming to get the average selling price (ASP) of its phones to rise, according to its forecast for next year:

Sony's forecast for smartphone revenues and profits. Well, loss.

Sony’s forecast for smartphone revenues and profits. Well, loss.

Sony presentation: smartphone sales/profit

Extract from Sony’s financial review of 2014 and forecast to March 2015

Specifically, it says it’s going to sell fewer handsets but keep revenue about the same. The figures imply raising handset ASPs from around the $300 mark to over $400.

I don’t think that will work. None of Samsung, LG or HTC has an ASP over $400; for all, the figure has been generally trending down for some time. Apple has a high ASP – over $600 – but it claim all sorts of unique selling points (notably, its brand). Sony is competing with other high-end Android phone makers where it hasn’t been able to stand out.

Also, compare Sony’s ASPs and profitability with LG’s:

Comparing Sony and LG smartphone ASP and profit

Sony’s profit wobbles all over the place – but its ambitions for ASP look wild

They’re both on the same scales: ASP on the left axis, profit per handset on the right. (I ignored Sony’s intangibles writedown for the latest quarter.) LG sells on average for less, but does a lot better from it. Sony swings around wildly – a manifestation of its internal problems. Note also how both firms are seeing falling ASPs (ignoring Sony’s forecast).

The problem for Android handset makers is that the ASP is being driven down relentlessly: entrants such as Xiaomi and big players like Huawei are prepared to set low price expectations, which then make it hard for pricier offerings.

But but but! you say. Sony has a world-famous brand, and it has differentiation from Samsung and LG: its phones are waterproof, you can add SD cards (well, that differentiates them from the top-end Samsung flagship now, at least), and.. hmm.

Not so easy to think of features that really distinguish Sony phones from the others jostling for the top end, is it? Which means that in its aim to push up ASPs while selling fewer phones in turns means concentrating even more on the top-end market. There it is going to bump right into LG, Samsung, HTC and Apple, of which at least two have more powerful brands in this field. While 30m isn’t an ambitious target, the price is.

Not that Sony’s admitting that; it has “financial targets” for the fiscal year to March 2018, where it wants the mobile business to have revenues of between ¥1,000 and 1,250bn ($8.32bn and $10.40bn) with operating income margins of 3% and 5%, which translates to between $416m (lowest revenue, lowest profit) and $520m (highest).

Goals are nice, but Sony’s brand isn’t strong enough in smartphones: I think its strategy may take it in the same direction as PCs, where it fought at the high end (competing, notably, with Apple), making devices that were well-regarded critically but which didn’t sell in sufficient volume to make the business worthwhile. It then threw in the towel as losses grew.

The smartphone business is similar: once you lose scale (as has happened to HTC), it’s really hard to regain it. Sony is aiming to sell half as many phones as LG did in 2014, and only 50% more than HTC did. The incremental sales of camera sensors and phone screens will be nice, but it doesn’t have its own CPU or memory foundry as Samsung does; those factors all help drive Samsung’s profitability. I suspect this will be more like PCs than LG’s smartphone business.

How soon? That rather depends on the smartphone market, and how tolerant Sony’s management are if the strategy doesn’t go according to plan. Give it a few quarters. Then we’ll see if Sony really has the guts for this.

But it also raises a key question. What is the differentiating feature to boost sales for an Android handset today? Waterproofing? SD cards? Removable battery? Great camera? Or is it just price? Sony will have to hope it’s not that.

Android (and Apple, and BlackBerry, and Microsoft Mobile) handset profitability – the Q1 scorecard (updated)

Quality. Profitable. Photo by Thomas Hawk on Flickr.

At the end of January, I drew together the figures from the fourth quarter of 2014 to look at how profitable making smartphones was for companies including Apple, Samsung, HTC, LG, and Sony. The approximate answer was: not very, unless you were Samsung or Apple.

Another quarter gone: time again to see if anyone is faring any better. As a bonus I’m also throwing in Microsoft Mobile and BlackBerry.

Proceed with caution

A few words first on procedure. I look at the companies’ financial statements and information about the smartphone shipments, revenues and operating margin of their handset divisions. In some cases they don’t give this explicitly, or they give some but not all of the numbers, which have to be estimated or wrangled by triangulating with analysts’ data. (I tend to use IDC and/or CounterPoint, who I’ve found to be reliable.)

Some people have wondered why I use operating margin rather than gross profit to calculate these numbers. There’s an important difference. “Gross profit” is what you have left over after subtracting the cost of the goods in the product, and the cost of making it, and the cost of getting it to the customer. It’s a number that flatters a business because it doesn’t take into account all the other costs involved in running that business – such as paying sales, general and administrative [SG&A] staff, marketing, R+D (which comes out of your current cash, and is an investment in the future of the business), and all the other things you think of as “keeping the lights on”. If selling your products doesn’t cover all those costs, then you don’t actually have a viable business.

The Motorola finesse

This was why it used to bug me when Motorola Mobility’s people would say that it “made money on each handset it sold” selling its low-priced devices while owned by Google. Sure – it made money on gross margin. It wasn’t a lie, but it was economical with the truth, a comment made perhaps in the knowledge that most journalists wouldn’t ask “you mean on gross margin or operating margin?”

Motorola Mobility was fabulously unprofitable; its losses, once you included SG&A and R&D, were dramatic. Between the second quarter of 2012 (when Google took it over) and the first quarter of 2014, Motorola’s total revenues were $10.98bn. Its losses, once you took account of those costs, were $1.9bn, or 17 cents for every dollar of sales. Motorola never had a profitable quarter while inside Google. In fact if you take its entire life after being spun off from the larger organisation at the start of 2010 to the start of 2014, over 17 quarters just two showed operating profit, totalling $160m. Total operating losses, including those profits: $2.47bn on revenues of $30.6bn. Now it has been swallowed by Lenovo, which promises to make it profitable. We’ll see.

So don’t let glib answers fool you. There are lots of way to talk about “profit”. Here’s mine. (“ASP” is average selling price, across the company’s whole portfolio of smartphones.)

So how was Q1 for you?

With the numbers now in from all the top-line handset makers (who you’d expect would be the profitable ones), here are the numbers. (An asterisk means the number isn’t absolute, and the reason for each is explained below the table.)

OEM Handset
US$ (approx)
Operating profit US$m Operating
margin %
handsets shipped Implied ASP per phone Implied profit per phone
HTC $1.35bn $0.89m 0.06% 5.0m $270 $0.18
Sony $2.28bn –$461m -20.2% 7.9m $288.70 –$58.40
LG $3.25bn $79.85m 2.46% 15.4m $210.79 $5.18
Samsung $22.53bn $2.47bn* 10.96% 83.3m* $250.88 $29.65
Total for top-end Android $29.41bn $2.09bn 7.1% 111.6m $263.50 $18.73
Lenovo $2.82bn* -$218m -7.7% 18.7m $150.80* -$10.28
Top-end Android inc Lenovo $32.23bn $1.87bn 5.80% 130.3m $247.35 $14.35
Apple $40.28bn $11.27bn (at 28% margin) 28% (est) 61.17m $658.53 $184.20
Microsoft Mobile $1.03bn –$369m -35.8% 8.6m $119.70 –$54.00
BlackBerry $274m –$156.88m -57.2% 1.3m $210.77 –$120.68

HTC: I’ve assumed that all the first-quarter revenue is for HTC phones – which isn’t true, given that it also now offers the HTC Re and made the Nexus 9 tablet sold by Google. (Sales were likely pretty small, since it didn’t show up in IDC’s tablets category where the smallest number was about 1m, and you’d expect that Amazon sold more. I understand Nexus 9 shipments in Q4 were just 70,000; the number would be substantially smaller in Q1.)
The 5m phones number comes from one of the big analysis companies that tracks smartphone shipments. (Not sure I have their permission to say who, but they’re very reliable.)
The operating margin isn’t a mistake – it really is $890,000 after conversion. HTC truly lives on the edge; and has been spending on R+D for its virtual reality headset. The phones are probably more profitable than this suggests; the Nexus 9 and Re probably aren’t, but it’s unlikely they contribute much to revenue.

Sony: Currency converted using the yen rate for the quarter cited in Sony’s results presentation. The huge operating loss is a puzzler: Sony’s explanation in its financials is that besides the dollar’s appreciation hitting costs, it was due to “the recording of intellectual property related reserves in the current quarter”. I don’t know what the IP-related issues are; is Sony gearing up for a court fight with someone? (Microsoft, over Android licensing?)

LG: Currency converted from Korean won using the same conversion rate as Samsung.

Samsung: the company doesn’t give exact figures for its smartphone shipments; it coyly said in its investor call it had shipped 99m mobile phones including featurephones and that smartphones were in the “mid-80s percent”. This is IDC’s number.
Its smartphone revenues calculated on the prevailing won-dollar exchange rate on 31 March, and the basis that those 15.7m featurephones had a shipping price of $15, and that the “about nine million” (quote from the earnings call) tablets had a shipping price of $175.
Samsung gives operating profit for its entire “IM” division, which includes its PC divison. I’m assuming these make zero profit, or not enough to perturb the figures. If any of its PCs, tablets or featurephones makes a profit, that reduces the per-handset smartphone profit.

Lenovo: now owns Motorola, which is dragging down its results, as it does everywhere. Assumptions: the 2.5m tablets it sold went for an ASP of $100 and made zero profit; a higher tablet ASP and profit means the smartphone business did worse. Another assumption: Moto360 smartwatch sales didn’t add materially to revenues, and didn’t lose money. (You can argue about this. It reduces the smartphone revenue, but boosts profitability if the Moto360 sold well at what was probably a loss or breakeven.)

Lenovo is odd in that its smartphone business is now partitioned into two – there’s the Lenovo brand, which sells almost entirely in China (and recently in India, a little), and the Motorola brand, which sells much more widely. The Lenovo brand phones have really low ASPs – historically, around the $100 mark. The Motorola ones have much higher ASPs – about $230 in the most recent quarter. None of it is profitable, though; even before Motorola the mobile business was losing money, and there are various unspecified writeoffs of unspecified amounts in the latest quarter that make the losses even worse. Lenovo says it’s aiming to get Motorola profitable within 4-6 quarters of acquisition. So that’s by the middle of 2016.

Trouble for Lenovo is that it hasn’t made a profit with low ASP phones, and it’s not making one with Motorola’s high ASP ones. Perhaps it hopes the profit will come with scale (or the departure of rivals?).

Top-end Android cumulatively: clearly, Samsung dominates: it has 30 times more profit than its nearest rival (LG) on about 5 times as many phones.

Apple: we have to assume Apple’s iPhone operating profit margin at 28%, because it doesn’t break out divisional profits; all costs are assigned across the company. (You could estimate it by taking iPhone revenues as a percentage of the total, and assigning that percentage of all other costs to it.)

Microsoft Mobile: I previously set out all the calculations used here (which exclude writedowns on intangibles). Specific assumptions: its featurephones have an ASP of $15 and make $5 profit per handset; sales and marketing was $300m per quarter. Mobile is a terrible business for Microsoft, but it has to stick with it.

BlackBerry: these are the figures for its quarter to the end of February. I looked at those in detail, and found that services and software have consistent gross profit margins of about 82%. Subtract that from the gross profit, and you get a total gross profit for handsets of $21.20m. Now we have to subtract operating expenses from that; assuming those are proportional to the revenues from each slice of its business (hardware, software, services) we take away 42%x $424m = $178.08m to get the operating profit for BB’s handsets. It’s negative.
Handsets are an even worse business for BlackBerry than for Microsoft – and BlackBerry can’t bear the losses like Microsoft can. Tick tock.

Questions you’re asking:

1) Where’s Lenovo (including Motorola)?
Hasn’t reported yet; calendar Q1 is the end of its financial year, and it takes an age putting together its results. Might have them some time in, who knows, June. (It seems to have shipped 18.8m phones in the quarter, down year-on-year from the 19.1m Lenovo and Motorola shipped when separate.)

There, it’s now included.

2) What about Xiaomi/Huawei?
Though they’re big players in shipments (15.3m and 17m respectively), Xiaomi doesn’t publish numbers anywhere I can find (pointers welcome), and Huawei doesn’t break out any detail from its mobile division – though a year ago it said it was operating just ahead of break-even.


Sequential quarter comparisons are usually odious, especially if you look from the Christmas quarter to the new year one; shipments fall, revenues fall and stuff gets cheaper as companies try to shift unsold stock and get ready for New Things. Bearing that in mind, looking back at the Q4 figures, we find that:
• HTC’s margins worsened quite a lot; handset ASP stayed fairly steady.
• Sony’s ASP dropped a lot, from $305 to $288.70.
• LG actually improved its operating margin, kept revenues and shipments up, and saw only a slight dip in ASP
• Samsung kept revenues up while increasing shipments – hence a big drop in ASP, from $306 to $250.88 – and improved operating margins and profit
• Apple saw shipments fall (as expected), a slight fall in ASP but per-handset profit remained almost the same. And it’s still taking all the money.

Coming up…

In a followup post, I’ll look at ASP trends for these companies, and what they suggest about the challenges facing these companies – particularly Sony – and also the question of whether Samsung might withdraw from the PC business altogether. (It pulled out of Europe last year.) Stay tuned.

Putting iOS and Android apps on Windows 10 is a white flag to rivals – and a red flag for developers

We just need some firmware in here and everything will be fine. Photo by 4nitsirk on Flickr.

Microsoft announced at its BUILD conference that it will be providing a way for iOS and Android developers to port – sorta kinda – their mobile apps to Windows 10, so they don’t have to rewrite them from scratch in its coding language.

As Peter Bright described it at Ars Technica:

[In “Project Islandwood] Microsoft has developed an Objective C toolchain and middleware layer that provide the operating system APIs that iOS apps expect. A select group of third parties have been using the Islandwood tools already, with King’s Candy Crush Saga for Windows Phone being one of the first apps built this way. King’s developers had to change only a “few percent” of the code in order to fully port it to Windows Phone.

For Android, there is Project Astoria. Rumors of Android apps on Windows have been floating around for some time, and in Windows 10 Microsoft is delivering on those rumors. Astoria will allow Android apps to run in Windows. Specifically, Windows Mobile (and yes, that’s now officially the name for Windows on phones and sub-8 inch tablets) will include an Android runtime layer that’ll let them run existing Android apps (both Java and C++) unmodified.

Bright then followed up on Monday last Friday (thanks Walt) with an analysis which goes much more deeply into the mechanics of how it will be done, but also points to two examples where companies have tried to make up for the lack of apps on their platform by enabling others effectively to run on them: IBM’s OS/2 platform, and BlackBerry’s BB10.

The point about OS/2 is well-remembered, delving back into PC history when Windows was young and IBM was trying to keep control of the burgeoning PC platform. It failed, because IBM couldn’t update OS/2 fast enough to keep compatibility with the fast-expanding Windows 3.x API base; but also, developers didn’t want to get distracted by having to look after more than one platform.

Indeed, when it comes to porting, Bright observes that “neither OS/2 nor BB10 has made a success of this capability”. He could also have added Amazon’s Android fork, and the Nokia X, which used AOSP (Android Open Source Platform) and tried to replace Google services with Microsoft ones.

We surrender to your platform

The trouble with “compatibility mode” is that it’s so evidently a white flag on the part of the company that enables it. In effect, the company is saying: we can’t attract enough developers to write natively for our platform, so we’ll try to piggyback on the more successful one.

But that’s also a giant red warning flag to developers on that platform. By effectively telling them that other platforms are more successful, it calls into question the future of the development tools on the platform, and the user base; it accepts that there are both more users and more developers elsewhere.

I don’t think Islandwood and Astoria will work. Not because they technically won’t work – Microsoft has scads of smart people who can do clever things with code – but because this is a technical solution to a business problem.

Even worse, it’s a technical solution that makes the business problem worse. If you subscribe to the idea of “moats and castles” (that businesses aim to surround themselves with an advantage that rivals can’t cross), then effectively dumping your own developer kit on mobile so that you can lure people from rival platforms strengthens the rivals’ moats – their loyal cohorts of third-party developers. Why would anyone write first for mobile on Windows, given these two projects?

The business problem

Microsoft’s user base for Windows Phone is around 70m-80m worldwide, out of a total smartphone user base of around 2 billion. Superficially this sounds like the late 1990s, when Apple was just about able to eke out an existence by having around 50m-60m out of 1.5bn PCs.

The crucial difference though is that Apple had the high-end users, who were willing to pay a premium for Apple’s qualities (principally in desktop publishing and graphic design, and lots of consumers in the US). Windows Phone occupies the low end. Its users don’t monetise well. That means developers don’t concentrate on them. A little experiment for you: today, when you see an ad for an app, notice how many mention availability on Windows Phone. If you get above zero, you’re lucky (or browsing a Windows site).

The category error

But, say the the Windows diehards, the access to 1.5 billion PCs and, ahem, Windows Phone will prove irresistible to all those developers currently writing for iOS and Android. All those PCs! Who wouldn’t want to be on those?

This is wrong, for two reasons: context and support costs.
1) apps written for mobile do not, in the main, translate to the desktop/laptop. What would Snapchat on the desktop be like? Or Uber? Apps that rely on the camera or geolocation don’t make sense; others can in general be done in the browser (example: Facebook). John Kneeland pointed this out back in February, before we knew about these initiatives. What he wrote remains true:

The most interesting developers and companies today aren’t shrinking down desktop experiences. They are building entirely new experiences that wouldn’t make any sense — or even be possible — on a PC.

2) the cost of “writing” the app is only the start; after that you have support, updates and compatibility. Imagine an iOS developer who has written an app for iOS 8 (presently covering 81% of users) considering this.

If they’re sensible, they’ll look first at monetisation via Android – after all, it’s the far bigger market, which has a premium (= willing to pay) segment that rivals iOS in size. So they do that. And then clean up, perhaps, with the iPad market too.

Now – Windows Phone via compatibility mode or Android tablets? If they write for “Windows Phone compatibility” they’ll have a product that will need special tweaking on a new platform where because of the comparatively low number of users, a few bad reviews could spell doom. Even if they get it right, Apple will introduce iOS 9 in the autumn, which might or might not tweak or twerk the existing APIs, and will surely kill off some of the older ones. How long will it take Microsoft to update to those? One thing’s for sure – iOS new version adoption will run ahead of Microsoft’s ability to update. This means there are now two versions of the app, on slightly different APIs, not entirely compatible.

When iOS 9 comes out, the iOS developers’ attentions will be on bugfixing and customer support there. This means (because people are finite) less time to attend to the Windows Phone customers. Things don’t get fixed there, bad reviews get left, the app sinks down the store, and.. what was the point of writing for this thing again?

As for Android developers – if we assume that they haven’t already done an iOS version, then do you think they’d want to write something for a platform with over 500m mobile devices in use, or one with 1.5bn users… except that for almost all of those 1.5bn, their app will make no sense at all (if they’re even able to load it – for don’t forget that about half of those PCs are in businesses, and probably locked down)?

Again, this isn’t hard to figure out.

A good try, but doomed

Microsoft had to do something, and people who like clever technical solutions are delighted by this clever technical solution to the fact of developer indifference and incompatible software. But it doesn’t change the fundamental truth: Windows Phone (v10 or whatever) is too small to matter in platform terms on mobile.

Microsoft is surely interested in keeping the mobile side going, as much as anything because of all the lessons it teaches you about things like power management, chip integration, sensor management, and a multitude of other things that are important.

History tells us that software compatibility is a losers’ move. Far better to move the fight to a new battleground and win there – as Apple did, first with the iPod and then the iPhone and then the iPad and then (thus far) the Apple Watch. Seems like a working strategy.

Update: some responses on Twitter have been along the lines of “Oh, no, really, developers will love it!”

Why, I ask? “Azure! The developer environment! Access to Xbox! It’ll get people to switch to Windows!”

In order:
• developers don’t need Windows 10 to use Azure. Vesper, which is resolutely iOS-only, uses Azure, for instance.
• if there’s one thing developers likely don’t want to get accustomed to, it’s yet another developer environment if the payback is small. Also, is there any developer who hasn’t heard that Windows (desktop) has a lot of users? The point is that Windows 10 is not magically going to make those desktop users into mobile users, for the reasons discussed above. iOS and Android have 95% of pretty much any market that’s worth squeezing developer money from. If anyone wants to tell me which niches monetise better on Windows Phone than on iOS and/or Android, I’m all ears.

• Xbox access isn’t worth much. There are about as many Xbox users as Windows Phone users (of the order of 70-80m; Xbox One is replacing Xbox 360, and any new buyers are balanced out by those abandoning as they get older). Games are notoriously difficult to write well; developers need to write “close to the metal”. Porting mobile games to the Xbox isn’t a sensible strategy.

• people do switch to Windows Phone from other platforms. However, just as many (if not more) flow back to the other two platforms because they aren’t happy with the app situation. And if this works, then what’s the reason for switching to Windows? So that you can get the apps that you already had on the smartphone platform you were on before? That doesn’t make sense.

I’m happy to be proved wrong, of course – if those who say I’m going to be wrong are willing to put up some solid numbers here (in the comments) that we can refer back to in a year or so, such as forecast Lumia sales, or Lumia installed base, or forecast length in 2016 of the app gap between other platforms and Windows Phone/10.

I’m charlesarthur on Twitter. Say hi or leave a comment.