The big event last week was Alphabet’s (GOOGL - Free Report) product launch event, which was accompanied by fresh news about Facebook’s (FB - Free Report) problems with Russian ads, the EU going after member countries for tax overdues, and more. Here are the top stories:
Google Introduces Pixel 2
Google’s Pixel 2 wasn’t a big surprise because most of the details were leaked earlier. To recap, it comes in two sizes, with aluminum bodies and Google follows Apple in a move to remove the headphone jack. The base model is priced at $649 for starters, while the high-end version starts at $849. The phones reportedly start selling on Oct. 19.
The new Pixel Bud earphones won’t launch until November. At $149, they aren’t cheap. But they do include a feature that allows real time translation in up to 40 languages, which sets them apart from Apple’s Airpods. Plus they have three kinds of buttons that allow you to turn the volume up or down, switch songs and activate Google Assistant.
There’s also a $249 camera called Clips, which facilitates object detection and automatic recording. The soundless videos last only a few seconds.
Next up is a brand new Pixelbook laptop with a keyboard that folds all the way back to turn the 12.3-inch touchscreen into a tablet. It will feature Google Assistant and support Snap’s Snapchat. The device will be in stores on Oct 31.
Google also announced a couple of new smart home speakers. The first, called Google Home Mini, is a $49 device pitted against Amazon’s Echo Dot. It will be available on Oct. 19. The second is called Home Max, perhaps because it offers decibels more suitable for parties. The device comes for $399 and should ship by year end.
Google is bringing AI to its product range through Assistant. The company is new to the hardware space so has inconsequential market share, but with strengthening prospects in the classroom and at enterprises, a hardware push at this time makes sense on multiple levels. Google also needs to feed the effort if it is to compete effectively with Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) in this area.
Facebook’s Russia Chapter
Facebook has faced some flak after the company announced that there were around 3,000 politically divisive ads on its social media platform by Russian agencies with the apparent purpose of meddling in U.S. elections. Around 46% of these ads were seen before the elections with the balance having been seen thereafter.
The thing concerning law makers and others is that around 10 million people have already seen the ads. Facebook is taking steps to try and prevent a recurrence by Russians or others, but it clearly won’t be an easy task given that there are 5 million advertisers on the platform. There’s also the problem of distinguishing between free speech and a malafide intention to influence crowds.
At any rate, the company said that it would hire a thousand more people to review ads and ensure they meet its terms. It also stated that its ad review system was being changed with increased focus on not just the content of an ad, but also the context in which it was bought and the intended audience. There will also be an attempt to gather bonafide documentation to clearly identify advertisers.
For good measure, Facebook also intends to remove videos showing murder, suicide and other violent acts. It isn’t clear yet if these actions will amount to censorship of the platform by violent groups, thus curbing free speech.
Meanwhile, the company, along with other technology players has been called to testify before congressional panels investigating the issue on Nov 1. CEO Mark Zuckerberg and COO Sheryl Sandberg may not attend, however, as it coincides with the day the company is set to report earnings and also because senators are likely to want someone who could most capably describe the technical aspects of what happened, Bloomberg reports.
EU Tax Issue Weighs on Technology Companies
Technology companies have for years been avoiding tax payments on their European businesses by making use of complicated tax avoidance procedures. Accordingly, they form a subsidiary in a country where tax is exempt or very low. They then transfer some patents to this subsidiary.
European headquarters are built in places like Ireland and Luxembourg, which typically attract foreign investors by offering tax incentives. So the companies first lower their taxes by arranging their incidence in a low-tax zone, then transfer the income to the subsidiary set up in a zero-tax country. They don’t repatriate the cash into the U.S. so they don’t have to pay taxes there either.
The EU, under its current chief Margrethe Vestager, has been going after member countries one at a time to ensure that taxes are not collected in a way that prevents free competition between the member countries. So it has been initiating and fighting cases in not just Ireland and Luxembourg (though these are the main wrong doers), but also Belgium and the Netherlands.
Recently, Amazon (AMZN - Free Report) , which has since changed its ways to also book sales in Britain, Germany, Spain and Italy, has been asked to pay Luxembourg $295 million in back taxes. It has also taken Ireland to the European Court of Justice for failing to recover up to 13 billion euros of tax due from Apple for the past year. Ireland has said that the action was regrettable. It has taken the stand that while making Apple pay the amount was unjustified, it had taken all necessary follow-up action with both Apple and the EU.
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Bain Intends to Make Peace with WDC: After winning the bidding war to acquire Toshiba’s memory chip business, U.S. investor Bain Capital has indicated that it will try to settle things with Western Digital (WDC - Free Report) at the earliest. However, the acquisition will close by the March deadline even without the settlement and the investment firm has already reached out for government approval in China and elsewhere.
Western Digital, for its part, continues to say it will challenge the acquisition through arbitration, but some now believe it’s on the back foot given that Toshiba actually owns the operations and technology and now has the right to block WDC out of its new Fab 6, impacting its ability to procure NAND.
WDC appears to have really messed up the negotiations, people familiar with the matter told Bloomberg. So now, it may be in the uncomfortable position of having to share technology with competitors Hynix and Seagate. All of a sudden, its multi-billion dollar SanDisk deal looks wasted.
And Seagate, which appeared to have fallen behind in the NAND race, now looks more favorably positioned to cut a supply deal with Toshiba Memory (Pangea). Bain is looking to cash out in three years by floating shares in Pangea and WDC may get in on them. But that still won’t solve its supply problem.
Canaccord Upgrades Microsoft: Canaccord analysts Richard Davis and David Hynes are optimistic about Microsoft’s gaming prowess and think that the soon-to-be-launched Xbox One X and eSports prospects are enough to warrant a ratings upgrade from Hold to Buy. The analysts believe that Microsoft has the gaming depth to run its own leagues perhaps growing into a Ticketmaster equivalent of eSports.
It’s true that eSports is catching on in a big way, particularly in North America, and Microsoft does have a better chance than many to build its position. But that isn’t the only place it’s likely to gain from: 1) Office Productivity (2) Gaming (3) Marketing, and (4) Azure’s Platform as a Service have been developed under CEO Satya Nadella to generate a period of sustained and accelerating growth, the analysts say.
Apple-Qualcomm Dispute in Light of New EU Rules: Qualcomm (QCOM - Free Report) , which charges licensing rates for its standards essential patents on the "fair, reasonable and non-discriminatory" (FRAND) licensing model, has been in the midst of patent licensing issues for the last few years. It started in Asia (China, South Korea) and has now spread to the U.S. with Apple playing a key role.
The truth is that what was once considered fair and reasonable is now being contested because companies like Apple simply don’t want to pay up. There’s logic in their argument, too. The FRAND is a very low fixed rate that a company charges when its technology becomes part of a standard that all device makers are compelled to use.
But because of the growing number of devices, and the varying value of devices, the fixed rate is actually more lucrative when incorporated in a higher-value device than a lower-value one, such as an iPhone versus a cheap Android. Apple’s argument (and that of other device makers) is that companies like Qualcomm, aren’t contributing to the additional value, so they shouldn’t be allowed to claim a share of it.
However, this argument overlooks Qualcomm’s viewpoint (and those of other such patent holders like Nokia and Ericsson) that this was what made it possible to charge a low rate in the first place. Raising the rate based on individual negotiations would mean more limited adoption of new technologies, which would be bad for consumers.
The issue gets more interesting because the EU is drawing up new rules fixing the reasonable rate for patent holders given the increasing number of new devices that nowadays also includes IoT (Apple’s Watch for instance uses a Qualcomm technology that finally allows it to be untethered from the iPhone). Naturally, device makers like Apple, Samsung, Huawei and others will be opposing the EU’s decision.
Google Moves on Russia: Following a report from the Director of National Intelligence about Russia Today (RT) being one of the publications close to the Russian government and systematically undermining American trust in the democratic system prevalent in the country, Google took some action.
The world’s leading search engine and owner of YouTube, removed RT from its Google Preferred bundle. Advertisers usually pay a premium for ad placements in the Premium section because it comprises what’s most popular on YouTube. In that respect, RT was reportedly the second most popular channel. The company is currently carrying on internal investigations. Note that other state-backed channels like Al-Jazeera and the BBC remain as part of its premium inventory.
TrueDepth is Apple iPhone X Differentiator: Famed Apple analyst Ming-Chi Kuo says that Apple’s Face ID facial identification system, places it up to 2.5 years ahead of its Android peers. Face ID, as the name implies, is a facial recognition system that scans a user’s face in 3D to determine whether the phone should be turned on. It harnesses Apple’s TrueDepth technology sitting inside the camera.
Kuo estimates that Apple will sell 30 million to 35 million of the devices over the next year.Separately, RBC Capital Markets, surveyed more than 4,000 people interested in buying an iPhone, finding that 28% were looking for the iPhone X, 17% the iPhone 8, 20% iPhone 8 Plus and the rest older iPhones. This is a slightly smaller percentage than last year but still quite high. It’s also encouraging that the demand for the iPhone 8 series appears higher than iPhone X given the production glitches the company is seeing with the new Face ID camera feature.
Some Issues with iPhone 8: A customer each in China, Japan and Taiwan said they received iPhones with the casing cracked open. It’s believed that the problem was caused by a bloated battery although there was no evidence of scorching or an explosion. Apple is looking into the matter but further details aren’t available yet.
On the other hand, since Apple has saved most new features for its X phones, iPhone 8 availability has been much better than its previous iteration. Analyst and venture capitalist Gene Munster says that proprietary checks of 190 different Apple stores across the U.S. show that 61% of iPhone 8 SKUs are in stock compared with 20% last year and 50% the year before.
Microsoft Bids Adieu to Groove Music: Microsoft’s streaming music service, originally called Zune, then renamed to Xbox Music and finally Groove Music is now being shut down. The company is making available software that will allow users to migrate their play lists and bought music over to rival Spotify but will maintain the app as a music player and part of Windows 10. From Dec 31, users will no longer be able to stream, share or buy new music through the app but will receive refunds for amounts left in their subscriptions or a Microsoft Store gift card for 120% the prorated amount.
Amazon Delivery Service: Amazon is increasingly handling greater portions of the goods it sells on its platform. Now, to increase the efficiency of deliveries during the holiday season, the company is bringing Seller Flex, an idea it has used successfully in India for the last two years. Seller Flex basically allows the seller to use own or rented warehouses closer to its area of operations with Amazon overseeing deliveries.
This of course eliminates a major function of FedEx and UPS, which had been taking care of these aspects earlier. It doesn’t however mean that Amazon will not use the couriers for the actual deliveries, just that it will now determine the packaging, best route, etc for these goods. This can potentially increase delivery efficiencies, offer free two-day delivery to more people and reduce load on Amazon’s own warehouses.
On the other hand, logistics is a booming market. The ecommerce side in particular is estimated to grow 15.7% between 2016 and 2020 while the overall market will grow just 6.0%, according to market researcher Armstrong & Associates. So Amazon grabbing a larger share of this business means additional profits for the company.
Collaborations and M&A
Wal-Mart Acquires Parcel: In the escalating ecommerce battle between Amazon and Wal-Mart, the company that is still a distant second is making a large number of acquisitions. The latest one is New York-based last-mile delivery startup Parcel, which distributes meal kits, fresh and frozen grocery and ecommerce items 24/7, the same-day, overnight and in scheduled two-hour windows.
Wal-Mart, which didn’t say how much it paid for the company, will use the service in New York City for general merchandise and fresh and frozen groceries from Walmart and Jet. Walmart needs to work on all aspects of the ecommerce game, as it is reportedly one of the biggest losers from Amazon’s Whole Foods acquisition. Research firm Thasos Group says that 24% of new Whole Foods customers after the acquisition were earlier Walmart loyals.
Alibaba Gets into College Sports: Alibaba has expanded its relationship with Pac-12, a group of 12 leading American colleges, to engage with global counterparts and student athletes in an academic and cultural exchange. Accordingly, Alibaba will now distribute 175 live Pac-12 Networks events annually across China through its linear and digital channels, thus helping them build their brands. The agreement runs through 2024.
Netflix Price Hike: The Netflix price hike is now in progress. For new users, the lowest-tier remains same at $7.99 with the most popular standard tier going from $9.99 to $10.99 and the premium tier going from $11.99 to $13.99. Existing subscribers will be notified from Oct 19 with the change going into effect from their next billing cycles.
Netflix has been building and improving the quality of its offerings, so it is not expected to see a major fallout from this price hike. It has also earmarked another $7 billion for additional content including its originals. RBC analysts (as reported by Business Insider) therefore expect the price hike to fetch additional revenues of $650 million in 2018.
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