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Tech Roundup: FB Messenger Ads, MSFT Broadband, HP PC Lead, Net Neutrality

The top news stories from last week are Facebook’s FB Messenger Ads entering beta, Microsoft’s MSFT offering broadband in rural America, HP HPQ regaining the top spot in PCs and tech companies getting together on net neutrality.

Facebook Messenger Ads Beta

After testing Messenger ads in Thailand and Australia, Facebook is now taking the experience to a broader audience and a larger number of advertisers. So more users are beginning to see ads on the Messenger Home Tab. Clicking on them takes the user either to a Messenger conversation or a web page, whatever the advertiser chooses. Facebook won’t be snooping on conversations to help it target ads, which is good in terms of privacy but may not be as contextually relevant for users as they open the app purposefully, either to send or receive messages.

Facebook has said that it now has 1.2 billion users on Messenger, so it makes sense to hunt up ways to monetize the user base. The initial idea of getting businesses and other organizations to create bots to converse with users resulted in the creation of 100,000 bots that take care of day to day concerns. With the ads also giving advertisers the option of pulling users to these bots or otherwise educating customers, Facebook is well on its way to building a communications platform for one-on-one interactions between businesses and users.

Microsoft to Offer Rural Broadband

Microsoft is looking to advance rural connectivity in the U.S. by using TV white spaces, or the unlicensed buffer channels that broadcasters avoid so signals from different channels don’t interrupt each other. Since Microsoft is planning on acquiring the spectrum for free, broadcasters aren’t too thrilled about the idea. Microsoft is banking on regulatory support to free up at least three channels nationwide without which its technology partners may not be willing to invest.

The company will initially put in $10 billion plus any profit it makes directly from the venture to get high speed Internet to around 2 million people in rural areas by 2022. The government may be expected to agree to the plan, first, because there are still 23 million people without consistent connectivity in rural U.S. and second, because Microsoft has already tested the technology in Africa and India.

Improved connectivity is a positive for all technology companies that offer services via the Internet and Microsoft is no different given its cloud first strategy. So there will of course be indirect benefits for the company.

Facebook, Google, Netflix Want Net Neutrality

It’s telecoms versus Internet companies again as Ajit Pai, the Trump-appointed new chairman of the Federal Communications Commission (FCC) has expressed his willingness to reverse some of the net neutrality rules (subjecting ISPs to utility-style regulations under Title II of the Communications Act of 1934) implemented by the Obama administration in 2015.

Last week, a large number of tech companies along with a few hundred smaller websites joined together in a protest to stop the FCC. Americans have sent over eight million comments to the FCC that Ajit Pai and company will have to consider before coming to a decision.

At the heart of the problem is the cost of maintaining and upgrading the network that some companies like Netflix NFLX, Amazon AMZN, Twitter, Facebook, Google’s YouTube, etc. use much more than others. Telecoms would like them to share the cost of network innovation since they are the biggest users. But if such fast lanes are created for these players, it can penalize the smaller guys that aren’t in a position to pay. Moreover, customers’ experience of the Internet could be weighted in favor of those paying more.

Telecoms have now expanded their argument, bringing in autonomous cars, remote surgery and a growing variety of other highly latency-sensitive applications, saying that an outright ban on differential rates would mean an inability to charge these companies thus preventing them from supporting these technologies altogether.

Moreover, the problem of paid fast lanes, being anti-competitive could probably be taken care of under existing law. Telecoms have also suggested that the regulating authority could be the Federal Trade Commission (FTC) instead of the FCC, which could quickly punish the wrong doers if required. But Internet companies fear that the FTC is not as experienced in these matters.  

HP Regains PC Market Throne

HP maintained its position as the leading PC vendor for the second straight quarter, according to recent numbers from IDC. HP was also the vendor with the maximum growth (6.2%), which along with Dell (third largest), which grew shipments 3.7% and Apple (fifth), which grew 1.7%, offset the decline seen by other top vendors. These included number two Lenovo, which dropped 5.7% and ASUS, which dropped 8.6%. Others were down 12.2%, resulting in a total decline for the market of 3.3%.

Both HP and Dell grew across regions, but Lenovo saw weakness in North America. Chromebooks did very well in North America. Asia was impacted by sales tax reform in India and delays in implementation of a public sector electronics tender in one of its southern states; high inventory and soft demand in China; conditions in Japan improved and the move from desktop to notebooks continued.

Gartner, which excludes Chromebooks and iPads while including Surface in its calculations, had a slightly more pessimistic view on the market. While also agreeing with HP’s leading position (for the first time in years), the research firm estimates it grew just 3.3%. Lenovo was in second position with a decline of 8.4%, Dell third with an increase of 1.4%, Apple down 0.4%, ASUS down 10.3% and Acer down 12.5%. Total shipments dropped 4.3%. "Higher PC prices due to the impact of component shortages for DRAM, solid state drives (SSDs) and LCD panels had a pronounced negative impact on PC demand," according to principal analyst Mikako Kitagawa.

Not all vendors passed on the cost increase to customers. Business PCs that are purchased under contract therefore resulted in weaker profits, while consumer sales were hit because of greater demand elasticity and the consumer’s ability to wait for a more favorable pricing environment.

 

Ticker

Price Change Last Week

Price Change Last 6 Months

AAPL

+3.37%

+25.19%

FB

+5.62%

+28.07%

GOOGL

+3.83%

+18.10%

MSFT

+4.78%

+16.19%

INTC

+2.35%

-5.26%

CSCO

+1.68%

+4.11%

AMZN

+2.35%

+25.71%

 

Other stories

Corporate

Apple Data Centers in Denmark, China: In order to improve iCloud services and comply with new Chinese law that requires that cloud services be operated by Chinese companies, Apple AAPL is building a data center in the southern province of Guizhou with data management firm Guizhou-Cloud Big Data Industry Co Ltd (GCBD).

Part of a planned $1 billion investment into the province, Apple’s data center will also focus on renewable energy for operations. Chinese authorities say that the law was made to deal with the increased threat of cyber-attacks and terrorism, but some are concerned that its vagaries put proprietary data of American companies at risk. Apple says that “Apple has strong data privacy and security protections in place and no backdoors will be created into any of our systems.”

Meanwhile, the company has decided to put in $921 million to build a second data center in Denmark, which is being favored because of its reliable network and abundant supply of both wind and biomass (Apple operates all its data centers with renewable energy). The data center will take care of Apple's online services (iTunes Store, App Store, iMessage, Maps and Siri for customers all over Europe).

Jefferies Negative on Intel: Jeffries analyst Mark Lipacis issued a sell rating on Intel INTC shares and took down his price target to $29, citing a “tectonic shift” in computing that will see Intel quickly losing its dominant position in processing technology. Intel’s lead came from making the most of Moore’s law (cramming more transistors into a single chip to make it a more powerful computer). But this strategy obviously has limitations.

Moreover, with the advent of big data, artificial intelligence, neural networks and IoT, there is greater value in building chips capable of parallel processing such as the graphics chips that NVIDIA has focused on. So as we can see already, Intel is struggling with decelerating growth in its data center business while NVIDIA is growing triple digits.

Jeffries thinks Intel was late to jump on the bandwagon, giving competitors like NVIDIA, Xilinx and AMD the chance to grow share in this emerging market. Intel is not sitting back, of course, but its leadership position will be hard to win back here.

Suntrust, Needham Upgrade NVIDIA: Other than the positive mention from Jeffries, NVIDIA also saw an upgrade last week. SunTrust Robinson Humphrey analyst William Stein expressed optimism about its earnings and revenue growth potential, particularly with reference to the artificial intelligence segment. He also said that growth opportunities in the datacenter, gaming and automotive end markets were under appreciated and praised the company’s innovative spirit: "Nvidia has a strong culture of innovation and desire to drive general purpose graphics processing unit (GP-GPU) computing adoption," meaning beyond gaming.

NVIDIA’s edge comes from its CUDA computing platform that was first released in 2006 because it is harder to copy than hardware.  Meanwhile, Needham analyst Rajvindra Gill reiterated a buy rating while raising his price target on the shares from $130 to $200 citing checks with Toyota that indicated aggressive deployment of NVIDIA self-driving technology that may be expected to generate significant revenue for the chipmaker.

Toshiba Chip Unit Sale Update: Last Tuesday, Western Digital matched the highest bid for Toshiba's chip business. This was followed up by an announcement on Wednesday that it had obtained the desired temporary restraining order from a San Francisco court forcing Toshiba to give its workers access to shared databases.

The plea for injunction preventing Toshiba from proceeding with a sale that didn’t have its approval was denied. Toshiba argued that one, an American court didn’t have jurisdiction; two, urgency claims of SanDisk (WDC) are contrived since the sale was unlikely to close before the end of 2018; three, an injunction could irreparably damage the bidding process; and four, WDC has limited rights in the JV that were effectively extending control to all of Toshiba’s business. Toshiba also said that if the court granted an injunction, Toshiba needed a $20 billion bond to cover related harm thus caused.

However, considering the fact that SK Hynix, which had joined the bidding process as part of the government-backed Innovation Fund of Japan and U.S. private equity investors Bain Capital, is now looking for an equity stake in the JV, Toshiba has gone back to talks with other bidders including WDC and a group that includes Taiwan's Foxconn, Apple, Amazon, Softbank and others.

Legal/Regulatory

Google, YouTube Sued: Google’s YouTube has run into some trouble in its haste to remove hate speech and anti-Semitism from its platform. As a result, James Sweet and Chuck Mere, the creators of a YouTube channel called Zombiegoboom that allows players guns, saws, axes and other weapons to slaughter attacking zombies. The creators claim a revenue decline of 90-95% and the loss of a prospective buyer of the business for $60,000. Moreover, YouTube ignored requests for a review of their situation. They are asking for unspecified damages and class action certification so all others impacted similarly can be part of the fight.

Google Challenge to French Tax Bill Successful: The Paris administrative court ruled that Google Ireland Limited was not subject to corporate and value-added taxes for the period 2005-2010. The tax authorities, which had charged Google with $1.3 billion for recording sales through Ireland and thereby avoiding tax payments in France, will likely appeal the case as the Finance Ministry is considering an appeal.

Amazon Gets Food Retail Approval in India: Amazon will be investing $500 million into India’s food retail business, in addition to its prior commitment to $5 billion now that the Indian government has approved its entry into the segment. Food products are currently sold through Amazon Pantry where it has partnerships with Cloudtail and others. Its Amazon Now app also delivers same day groceries through partnerships with Big Bazaar, Star Bazaar and Hypercity in select areas.

New Products/Technology

Facebook Testing Paid Subscriptions: Facebook is attempting to breathe new life into its Instant Articles feature that hasn’t been making a lot of money for publishers given its limitations on ad loads and there being no need to get on the publishers’ websites to read stories. So the company is now introducing a paywall feature that will allow publishers to charge for any story they wish to. The feature will be tested on a small batch of publishers by year-end, and if successful, will roll out more broadly in 2018.

New Server Chips from Intel: Intel announced a new line of server chips called Xeon Scalable that Martin Reynolds of Gartner thinks is an improvement over its previous generation, offering better power efficiency, improvement on artificial intelligence workload and more advanced storage. The chip is expected to help it fight a resurgent AMD, which is expected to eke out a few points of market share on the strength of its recently-launched Epyc line.

On stage, the Intel chips were endorsed by Alphabet, Microsoft and Amazon, which is a big deal because these companies don’t just buy chips for themselves, but also to power their cloud computing infrastructure. But the world’s leading chipmaker still seems to be lagging NVIDIA in training machines for artificial intelligence.

New Servers from Cisco: Cisco has updated the server and software that form a part of its Unified Computing System (UCS). The UCS M5 servers (including two new blade servers and three new rack servers) are powered by the new Intel Xeon Scalable processors, which enables them to double the memory capacity while improving performance by up to 86%.

Microsoft’s New AI App: Microsoft has unveiled a new AI-powered app called Seeing AI for iOS. As the name indicates, the app uses the camera along with an AI-powered vision recognition system to look at an object and describe relevant information about it to a visually impaired person.

M&A and Collaborations

Apple Gets Closer to PayPal: The partnership allows Apple iPhone, iPod, Apple TV and Apple Watch users to pay for things like App Store, Apple Music, and iTunes through PayPal. The agreement is a very big deal for Paypal since it opens the door to a huge market, more so since Apple’s customers use their devices a lot to make payments and Apple continues to expand its services creating even more opportunities.

Moreover, if iMessage grows into a platform like Facebook Messenger, there could be even bigger opportunities for integration with Apple services. For Apple, it’s good to have more payment options as it strives to give customers all the options they could possibly need.

Some Numbers

iPhone Shipment Estimate Cut: Bank of America/Merrill Lynch analysts Wamsi Mohan and Stefano Pascale have said that based on their interactions with the supply chain on a recent trip to Asia, they were cutting iPhone shipment estimates for the September quarter by 11 million and December quarter by 6 million. The weakness was attributed to a 3-4 week delay in iPhone 8 shipments related to a supply glitch that Apple and its suppliers are ironing out.

On the other hand, Goldman Sachs analyst Simona Jankowski said that despite the possible supply chain bottlenecks, the larger installed base (now estimated at 700 million, up from 300 million in 2014 when he iPhone 6 launched) was good news, particularly since a recent Goldman survey showed that the same percentage of customers were willing to upgrade as a year ago, despite the higher price of the iPhone 8. So, since supply chain issues are a near term concern, the higher priced phone could still be expected to generate greater profitability for Apple in fiscal 2018.

Apple Losing Video Customers: A WSJ report says that Apple is losing its share of the digital movie renting and selling market. Mostly attributable to the stiff competition from companies like Netflix, Amazon and Comcast, Apple’s estimated share has dropped to 20-35% of the overall market, down from around 50% in 2012. Apple maintains that iTunes movie rental and sales revenues have increased (29% in 2015 and 21% in 2016), but since it hasn’t mentioned market share (nor has any third party for that matter), we have to assume that WSJ’s unnamed sources are good.

Oculus Rift Price Cut: Facebook has announced the second price cut on its Oculus Rift headset and this time it’s down $200 to $400 for the next six weeks, closer in price to the sets Sony and Samsung are providing. VR has not lived up to the hype, mainly because there are a number of issues with the headsets, such as picture quality, discomfort in using a device for too long, price (most still require tethering to a high end PC) and a still low volume of VR content that might keep customers engaged.

But companies are working on all these aspects and Facebook itself is getting ready to launch a cheap $200 device that won’t require tethering in partnership with Xiaomi (Xiaomi will manufacture the headsets that will be sold under the Xiaomi brand in China and Oculus brand everywhere else in the world), Bloomberg reports. The $200 device is coming later this year.

India Is Facebook’s Biggest Market: According to data submitted by Facebook to advertisers, the company now has its largest number of active users in India numbering 241 million, topping U.S. users of 240 million for the first time. India active users were up 27% in the last 6 months, more than double the U.S. active user growth rate of 12%.

More encouraging is the fact that India is relatively under-penetrated at 19% compared to the U.S., which is 73% penetrated and the global average penetration of 42%. Moreover, since just one Indian city (New Delhi) made it to the top 10, Facebook’s user base in the large and populous country seems more distributed.

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