Google Glass - A failed hi-tech innovation

One of the ambitious projects of Google X research labs is Google Glass along with Self-driving car and Loon. In year 2012 Sergey Brin, unveiled about this ambitious project. He thinks that people using a cell phone while walking has an underlying problem and Google Glass would solve that problem. The premium to solve that problem is just little over $1500 (price of Google Glass) from the consumer pocket. Ever since its announcement, Google has been rushing to bring this Google Glass to mainstream consumers with too much of experiment but very little consumer feedback. Let us see what are the pros and cons of the Google Glass are.

Issues with the concept:

• The idea sounds cool and looked novelty, a science fiction style concept, and a niche product. But the world is not advanced to accept that augmented reality (yet).
• Too much electronics on the head - a microprocessor, 720P video camera, a touch-pad, a battery, LED projector, Wi-Fi, Bluetooth, phone, text, email, speakers, microphone and list goes on. Too much stuff with too little space.
• Failed to attract people who already wear glasses in the first prototype.  My personal experience in one of the tech workshop - I was asked to remove my glasses before wearing Google Glass.
• There is no apparent evidence what exactly Google is trying to do with the Google Glass - is it a gaming device, or a social media platform, or a medical device, or a device which will solve some real world problems, or is it just some cool and geeky device?
• Who are their target audience? Technology geeks or general public? From the prototype, it will be highly impossible to take this device and sell to a person who is not a technical savvy.
• Early reaction was astonishing from technology pundits, but this reaction is nothing new for any tech gadget, people look at only positive stuff, or a “wow” sort of reaction. However, how many people really wear the Google Glass and glue them to their eyes, very little or none. For the first couple of days we spend great amount of time on the newly purchased gadget, and later on we tend to give up and slowly lose the interest. Google Glass certainly will fall into that category.
• How can Google protect and assure the guarantee of the privacy with a computer being on the head, can we trust the technology?
• Just wearing the Google Glass for a trial is a great and cool experience, but is it possible to continuously wear it the entire day and not get labeled as a weird guy in the wrong set of crowd? How far is the social acceptance of this product?
• The issue is not about how much cool factor Google can build into the Google Glass which they can certainly do that but how can they convince the general public to adopt the Glass
• Another observation is how they invited the developers and technical pundits to participate in the prototype phase. Instead of focusing on one or two areas, they wanted to try pretty much everything with the Google Glass.  It was overwhelming, causing too much confusion for not only for the developers but also for the Google Glass engineers as well. The expectations from the engineers are way beyond the reality.
• It would cost $1500 if someone wants to purchase it during the prototype phase. This is a hefty price tag and cannot be justifiable to bring the product into general public.

Some advantages and benefits:

• When Google introduces a new product, they have the capacity and a fat bank balance to do it big
• When Google introduces a new product, they have the capacity and a fat bank balance to do it big.
• No near term threats from the competitors, first mover advantage.
• Brand advantage, Google is already part of our lives, whether it is Search, Gmail, YouTube, Android, or Google Chrome. So obviously, the expectations on the Google Glass is very high.
• Being Google, they have the marketing power.  They can partner with any leading eyewear manufacturers, and dictate the terms and conditions and also can negotiate better share on the profits.
• Google being a technology innovator and genius brain bank, they can leverage their expertise and create an ecosystem around the Google Glass.

Should Google focus on mass market or enterprise market for Google Glass? My take is enterprise market. The world is not ready for this device yet to include it in the main stream market. It falls under the category of augmented reality, self-driving cars, or a journey to mars. It could take couple of decades for main stream to adopt products like this. At the end no matter who you are, if there is no customer, there is no business. “The customer… is the ultimate reason for whatever the organization produces, -Peter Drucker”.

Microsoft - Buy side stock report issued on May 8, 2016

Executive Summary: During 2016 Q1, Microsoft returned $6.5 billion to shareholders in the form of share repurchase and dividends. Businesses everywhere are using the Microsoft Cloud as their digital platform. With the combination of Cloud and Windows 10 adaptation, Microsoft consistently adding value to shareholders. Microsoft has a healthy portfolio of products (Office 365, Windows, Azure and SharePoint to name few) to enhance performances across the company. It has diversified earnings potential across its core business Windows and Office products and accelerated growth in Cloud based services. Microsoft is heavily investing in niche areas such as Cloud and Augmented Reality; these two niche technologies will have substantial growth opportunities for next decade. With recent change in CEO, Microsoft has redefined its strategy and clearly sent a positive signal to shareholders. With sixteen percent growth for the past year alone, Microsoft stands at third largest publicly traded company behind Alphabet and Apple. Valuation:  Microsoft currently trades at multiple of 35 where the industry average is 34, and healthy 5-year dividend payout ratio 2.67% whereas industry average is barely 0.3%. Consistently beating industry and sector in EBITDA with gross operating margin of 30.1% compared with 5.0% of industry margin and 18.5% of sector margin. Under the discounted cash flow (DCF) model Microsoft terminal value is $521 billion. Summary DCF Valuation   DCF Enterprise Value $427,980 23.2x   Less: Net Debt $61,028   Equity Value $489,008   Shares 8,130   DCF Value per Share $60.15 21.5x Forward DCF Equity Sensitivity Analysis WACC Growth 7.0% 9.0% 11.0% 2.0%  $73.44 53.86 43.02 3.0% 87.67 60.15 46.43 4.0% 111.39 68.96 50.82 Moat: During past 13 years Microsoft’s average return on equity was 34.26% that was 72% higher than the industry average. Microsoft's wide economic moat is a combination of the Windows operating system, Office productivity suite, and the Windows Server, database, and cloud businesses. Microsoft has adjusted its strategy as enterprise workloads continue to shift to the cloud, away from the client/server model. Billions of dollars invested in the Azure platform are beginning to pay off, and its more open approach to delivering software in the cloud will prevent the firm from material technology disruption. Recommendation: I have a buy recommendation, with a 1-year price target (2017Q1) of $60.15. The one-year price target implies a 2016 P/E of 23.2x, with impressive 19 percent of increase in share price. Under CEO Satya Nadella’s leadership, Microsoft is reinventing itself into multiple new business platforms. While making Office suits products from desktop based to cloud model, Azure, and Augmented Reality, company value with multiples of 23x is very reasonable for next four to five years.

Amazon Fire Phone - A smart device with wrong timing

The Fire Phone is a smartphone designed and developed by Amazon. It was launched on June 18, 2014.  Loaded with several features such as Dynamic Perspective, Firefly. Amazon claims that it helps users see and interact with the world through a lens. Other two key main features for this phone are eye-catching 3D (well, not sure if 3D is eye catching anymore) and deeply integrated Amazon buying features, where Amazon thinks to capitalize heavily.

The device features a 4.7 –inch HD display, a size ideal for single-handed use. An ambient light sensor and a feature called Dynamic Image contrast to make the screen images looks perfect in various viewing situations. Gorilla Glass 3 is available from front and back with 720p resolution. It comes with front and back cameras, which can capture video in 1080p and Dolby Digital Plus surround speaker’s audio. The Fire Phone is an AT&T exclusive, costing $199.99 with two-year contract or $649.99 off contract price.

What it looks like is Amazon’s main strategy behind this phone is not making the money on selling the phone but selling entire Amazon business through the phone, quite a clever strategy. Amazon is already coming up with marketing plans to reach out many consumers on the day one it goes on sale. One such offer is one-year Amazon Prime service, which is another marketing gimmick; but does anyone need this as many hardcore Amazon customers do already have the prime membership? 

One key missing feature is mainstream customers will not be able to access the Google Play store, a major blow for customers who are very savvy of millions of new apps. Amazon for obvious reasons would like to sell all content through Amazon’s app store and build an echo system. But in reality, Amazon barely has 250,000 apps, which is just a fraction of the apps on iOS and Google Play (1.2 million apps). As a result customers who have substantially invested in either of these echo systems will not be interested in the Fire Phone. Even new customers will be hesitant to buy the phone if it does not run the key apps they are interested in. 

Deep integration of buying needs in the phone is not something the customer is really looking for, buy almost everything on web feature comes along even with iPhone and android phones as well.  They have already developed superior Amazon and other Amazon specific apps.

Looking at these factors and already saturated smart phone market where two dinosaurs iPhone and Samsung being in the leaderboard, most likely the Fire phone will not be a hit. According to early reviews, regardless of the bells and whistles, Amazon is walking down on a difficult path. The Fire Phone is available only through AT&T and many are not happy with AT&T due to weak signal and price is also not competitive. Battery life is average and may last just one full day as long as no Dynamic Perspective and Firefly features are activated.

The big question now is whether the strategic rationale behind the Fire Phone in theory is solid but will it play out in practical? The irony is Amazon likely doesn’t know, and matter of fact we will likely never know, because Amazon usually doesn’t share any of their sales data. If the sales still exist even after a year from now, and especially if it gets a successor, then we will say that Amazon has succeeded. If it gets quietly discontinued, then it has failed. Time will tell us.

Good luck Fire Phone and good luck Amazon.