Monday Note

With three high-tech earnings announcements to cover, this week’s Note will have more breadth than depth.

We’ll start with Amazon. The company’s Q4 2010 sales grew 36% to $12.95B, vs. $9.5B for the same quarter in 2009. Great! But not so fast–investors trashed the stock because Amazon’s numbers were “below expectations.” Yet despite losing 7% after the earnings announcement, AMZN shares are up 36% over the past year:

Across the past five years that number is…+278%.

More interesting than these Wall Street games are the e-book numbers. Earlier in the year, Amazon said e-book sales surpassed hardcover sales for the first time, 180 e-books for every 100 hardcover versions. Now we have a more important milestone, 115 e-books for 100 paperbacks. A tip of the hat to Jeff Bezos for catalyzing the e-publishing phenomenon. This wouldn’t have happened, or at least not so quickly, without the Kindle. Curiously, Amazon releases a lot of numbers, but no hard data for Kindle sales. “Millions,” we’re told and that’s it.

Which leads us to the iPad and tablets.

With 14.8 million iPads sold in nine months and a forecast of 40 million in 2011, one is tempted to eulogize the Kindle. It’s just not needed anymore, right?

Tempting but premature. Ask Kindle fans: They love the device; it’s simple and inexpensive (starting at $139), the battery lasts forever, the e-ink is pleasing to the eye and can be read in full daylight. The Kindle is a well-executed, single-purpose device and will coexist with multi-use tablets, especially if Amazon lowers the price in order to sell even more e-books (or newspapers and magazines which, so far, haven’t done as well as books).

Speaking of newspapers and magazines, Rupert Murdoch’s iPad special, “The Daily,” will be introduced on February 2nd. We’re told that The Daily isn’t the Wall Street Journal or some kind of subset or subsidiary. It’ll provide “entirely original content” and is rumored to cost 99 cents a week. We can assume loads of ads.

In last week’s Monday Note, Frédéric described the tension between publishers and Apple over subscriptions and customer data. We’ll watch what happens with The Daily. Will Apple sell subscriptions exclusively through the app and iTunes? Will Murdoch let Apple keep customer data to itself? One can imagine Apple sharing customer data if, in exchange, Murdoch lets Apple “run the table” for subscription sales. News Corp’s founder is a hard bargainer and a trend setter. Whatever agreement emerges between Apple and The Daily will impact the rest of the publishing industry.

Next up, Microsoft.

While profit slipped by 4%, revenue grew 5% ($20B for the quarter) and cash is abundant, $41.3B, up $4.4B from the same quarter last year. Good numbers. With its traditional Windows + Office cash cow, MS still looks prosperous. But the company said “tablets were a little bit of a drag” last quarter. We’ll watch how that “drag” manifests itself when the 100+ different tablets we’re promised for this year hit the market.

In the meantime, some observers aren’t impressed. In this ComputerWorld article, Gregg Keizer drills into Windows licensing numbers, untangles accounting gimmickry and concludes they have, in fact, plunged by 30%, thus confirming the “tablet drag” comment from company execs.

This explains why, in one year, Microsoft’s stock as gone nowhere, losing 1.5%:

Across the past five years that number is a similar – .1%. Ten years: – 13%…

Still, with the Xbox and Kinect, Microsoft is doing quite well. See this Business Insider article and chart:

The division report, however, omits a crucial detail: Windows Phone 7 numbers. Microsoft says its OEMs have shipped 2 million handsets but neglects to say how many have actually been sold to subscribers. Further, the company “bought” that business. In addition to a $500M marketing budget, they paid developers to write apps and provided financial incentives (versus charging for licenses) to handset makers. No criticism, here. That’s what Microsoft has to do to catch up with Android, Apple, RIM, and even Nokia.

But how long will they have to spend that sort of money before they make any of it back?

If Microsoft’s on-line services business is any guide, a long time. The division might lose $2B this year, something it’s been doing for the past 5 years. Still, we can be sure Microsoft will hang onto its smartphone business indefinitely.

Why?

They agree with Lenovo’s chairman, Liu Chuanzhi, who, in an interview at the World Economic Forum in Davos, said this:

‘We have an extreme focus on the innovation of LePad and LePhone because these products will dominate the future market. Anyone who loses this battle will be phased out from the history of this industry.’

Microsoft feels it has no choice but try to be a serious player in the exploding smartphone ecosystem.

That ecosystem word leads us to the king of phones: Nokia. They just announced their 2010 Q4 results…and they’re not good. The Devices and Services business is up only 4% (or down 3% at constant currency) in a market that grew by some 73% last year. Digging a bit deeper, while Nokia managed to slightly increase the average price of its feature phones to $59, the ASP for its smartphones fell to $214. (Apple’s comparable number is a stable $620.) This is one of the reasons why the operating profit for Nokia’s Devices fell by 24%.

All of this led Nokia’s new CEO, Stephen Elop, to send signals that things are going to change. And not just spending less, cutting jobs and the like–that’s for “normal” trouble. Nokia needs to deal with systemic trouble, an ecosystem upheaval. More-of-the- same-but-better won’t help Nokia.

In one year, Nokia’s shares lost 22.8%:

Across the past five years that number is – 41%…

Here are some choice morsels from Elop’s Seeking Alpha earnings call transcript:

‘We also continue to learn that we need an attitudinal shift within Nokia.
…
The game has changed from a battle of devices to a war of ecosystems and competitive ecosystems are gaining momentum and share. The emergence of ecosystems represents the broad convergence of the mobility, computing and services industries.’

And the money quote:

‘[W]e must build, capitalize and/or join a competitive ecosystem. The ecosystem approach we select must be comprehensive and cover a wide range of utilities and services that customers expect today and anticipate in the future.’

The full transcript is a bit long, but if you search for these passages you’ll find a courageous, straightforward CEO who doesn’t shy away from calling the problems and their causes as he sees them, politely but without obfuscation.

The “build, capitalize and/or join a competitive ecosystem” line has raised eyebrows. Is Nokia telegraphing a move to Android? Last June I wrote a Nokia Science Fiction piece that made just such a recommendation. Nokia people weren’t pleased: ‘If we do this, we lose control of our destiny!’ To which I replied: It’s already done. OPK and a couple of other execs got the boot and Elop, after just six months, is asking some tough questions.

The other choice is, of course, Microsoft, where Mr. Elop comes from. There, we have two sub-choices.

First, Microsoft “goes Apple”. They decide to make their own smartphones. That’s why they bought Danger and shipped the misbegotten Kin, remember? They’ve built their own MP3 player, the Zune, and a game console, the Xbox. If Microsoft acquired Nokia they’d instantly catapult themselves back at, or close to, the top of the mobile industry.
Easier said than done: Incompatible existing product lines, cultures would get in the way. As for the price, today the market says Nokia is worth $40B, up a little in a down market as  buyers smell an opportunity.

Second, Nokia goes Windows Phone 7…and becomes a Microsoft vassal–I mean licensee. But they’d be (potentially) MS’s largest partner and, as such, able to receive special treatment from the needy platform vendor. The execs know one another, the lord and the liege could become mutual lifesavers. (Or anchors. We’ve seen how these partnerships can degenerate. Ask Carol Bartz at Yahoo!)

We’re promised specifics of Nokia’s plans by February 11th, right before the Mobile World Congress in Barcelona. Stay tuned!

—JLG@mondaynote.com

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