The smartphone industry is the most important technology sector with a size of ~$350 billion and a growth rate of nearly ~30%. All the major technological players want to get a slice of this market which has become hypercompetitive in the last couple of years. The smartphone market has around 100 companies, but Samsung (GM:SSNLF) and Apple (AAPL) dominate with a combined marketshare of nearly ~40% and account for more than 90% of the total profits. Google (GOOG) has also become a major player as its free Android OS is used by ~75% of the smartphones. The company has now thrown its hat in the hardware ring by introducing its first fully designed in-house smartphone - Moto X.
Google-owned (GOOG) Motorola released the smartphone on August 1, which boasts of some unique features. This smartphone will be the first to be fully developed under Google's ownership. The other smartphones were already half developed when Google bought Motorola for $12.5 billion. The big question is whether in an extremely crowded market, Moto X can fundamentally change the dynamics. Analysts have not been too impressed by the Moto X, and some think it will not make a dent into Apple's commanding market share. However, I think that given the right price, Moto X has all the right ingredients to seriously threaten the iPhone as well as S4's hegemony in the global markets. I remain positive on Google's stock, given the spate of new product launches and continued strength in its core search advertisement market.
Motorola has been a Failure (till now)
Google bought Motorola for $12.5 billion to defend itself from the patent attacks by the well-established technology companies like Nokia (NOK), Apple and Microsoft (MSFT). While the technology old guard was not directly attacking Google, they were suing major Android users like HTC and Samsung (OTC:SSNGY) in courts around the world. Even now, Nokia and Apple have not let up on their attacks against major Android companies. Microsoft is rumored to be earning from ~$1 from every Android shipment, while Ericsson (ERIC) has also joined the patent feasting party by targeting Android players (even small fish such as Micromax). Motorola has not been able to reverse its operating system losses as it continues to lose smartphone market share. The company has now become a bit player in the market, with only a 1% market share. The company is undergoing a painful restructuring as Google has fired thousands of Motorola employees and sold off non-core assets. The Motorola segment has been a pain point for Google, showing an operating loss of more than $200 million on ~$1 billion of revenues in the most current quarter.
Is Moto X a Game Changer like iPhone
Google announced that Moto X will be the first smartphone to be designed and assembled in a US factory in Texas. This is being done so that the customers can quickly procure a smartphone which has been custom designed by a buyer. The smartphone will offer a wide variety of colors and textures to choose from. It would take a long time for a factory in Asia to ship such a smartphone to a customer in the USA. So Google has built a factory in Texas which can ship a smartphone in 4 days after receiving an order.
Moto X Pros
- Always on Assistant - I think this is the most important feature of the new smartphone. Companies have been falling over one another to dish out better hardware, but they have been sorely lacking in improving the user experience. The smartphone industry has not witnessed any big changes after the touch screen introduction by Apple. While the iPhone also has a Siri assistant, the new Google Voice assistant seems to be on a different level altogether. Google has made a huge change to the hardware to allow the assistant to listen to the customer the whole time without draining the batteries. The company has built in a separate processor just for processing the natural language commands. This feature, if it works well, could dramatically change what customers expect from their smartphones. It will allow them to perform most functions such as messaging, searching etc. rapidly through voice only.
- Custom Designed Colors - Google has introduced a wide variety of colors (~2000 color combinations and soon smartphones made of wood) which customers can choose from. No other smartphone offers this option currently. At most you can choose from 4-5 colors while Apple restricts you to only 2 colors white and black. The reason for this restriction is the supply chain dynamics which plays havoc with a large number of SKUs. It has the potential to become a big selling point if marketed properly.
- Quick Camera Function - Google has also designed a new feature by which customers can quickly start the camera function in 2 seconds. I think this is a nifty feature, but don't think it is a game changer. It is more gimmicky like Samsung's eye following scrolling function.
Moto X Cons
- Hardware is average - Google has not focused too much on hardware, which I think is a good move. Putting an extra gigabyte of RAM would not have helped too much while raising the cost. The smartphone comes with Qualcomm's (QCOM) Snapdragon 1.7 Ghz dual core processor with 2 GB of RAM. The company has put in a relatively large AMOLED touchscreen of 4.7 inches. The hardware specs are not out of this world, but average when compared to the top of the line HTC One, Samsung S4 and Sony (SNE) Experia Z.
- Android 4.2.2 - Moto X comes with an older version of the Android operating system 4.2.2 even though Android 4.3 has been released in the market. Being Google's signature smartphone, I would have expected it to feature all the latest and greatest Google software.
- Launch in restricted geographies only - The smartphone market has become a global one with China being at the No.1 position. However, the smartphone will be launched in North America through carriers. I would have expected a global launch of "no-contract" Moto X smartphones. Even the Nexus 4 smartphones came too late to the Asian markets. However, given the customization of the phones, I don't think Google could have managed a global launch anyway.
What will be important?
Google has indicated a pricing of $199 under a 2 year contract with major US carriers. The past experience with Google's Nexus line shows that Google is very aggressive with pricing. If Google can sell this phone at cost, then it could make a big dent to its competitors. The Nexus 4 is an amazing phone at $299. If Google can price the Moto X at $350-400, then it could seriously erode the margins of its competitors.
How Google will force Apple and Samsung to change
The smartphone leaders have not brought any recent innovation to their products. The changes have been made mostly to the hardware, though Samsung claimed that S4 Galaxy had a number of software changes. Google is forcing the pace on innovation with its launch of the Chromecast TV product and now with Moto X. The new smartphone does not have all the bells and whistles that people were hoping for, such as a crash proof smartphone with a very long battery life. However, in this innovation-less smartphone world, the color design and the "Ok Google Now" changes are significant.
While the iPhone is still managing to ship in good numbers, the interest is clearly waning, as can be seen in the lowered market share. Though Samsung is still the king of the hill in mobile handsets, the company is starting to feel the pressure as S4 shipments disappointed. Google has a software and services centric focus and hardware is mostly an enabler rather than a profit center for the company. These innovations will force Apple and Samsung to up their software and services. Google will be hoping that Moto X can generate some of the buzz that the iPhone generated during its initial launch. While Moto X may or may not be a huge success, the smartphone industry will stand to be forever changed.
Impact on Blackberry and Nokia
Blackberry (BBRY) and Nokia have been trying hard to make a comeback into the smartphone market. While BBRY is currently faltering, Nokia has seen good momentum of its Microsoft (MSFT) powered Lumia smartphones. The Moto X will put additional pressure on these companies as they depend on the mobile market for all of their revenues and profits unlike Google. I think that BBRY will be hurt more as it competes only in the premium end of the smartphone market, while Nokia competes in all segments and its best seller Nokia 520 is positioned at the lower end of the smartphone market.
Blackberry is making too many mistakes in my view, and the Q5 pricing is a total disaster. I am rethinking my long thesis on BBRY, as the management does not seem to have a coherent strategy. The Q5 was launched in Canada though the management had positioned this device for low income emerging markets. Microsoft will also have to execute faster on making changes to the WP 8 Mobile OS, which lags behind the Android and iOS. The new Moto X software features show that Google is constantly increasing the distance.
Google's Stock Price and Valuation
Google's stock price has been staying near its all time highs about $900 as the company has introduced a spate of new products such as the Google Glass, while at the same time delivering great results from its bread and butter search engine. Google's pace of innovation has made it the new Apple in my view and justifies the company's premium valuation with a forward P/E at 17x . The other technology mega caps such as Apple, Samsung and Microsoft are trading at high single digit to low double digit P/Es.
Apple became the most valued company in the world due to innovation, but now seems to be slowing down with the demise of Steve Jobs. Google seems to be taking on the Apple mantle by introducing great new products such as the Chromecast and Google Glass. It is also pressurizing the existing product categories such as tablets and smartphones both through new features as well as pricing. The company is now threatening Apple and Samsung both in smartphones (Moto X) as well as tablets (Nexus 7). I am waiting to see how Apple responds with its own new products during the holiday season. If the company releases only incremental updates to the iPad and iPhone, then it might be time to sell the stock. Blackberry has a shorter window of execution and the Q5 has made me rethink my position on the stock. BBRY's only redeeming feature is its attraction to a potential buyer but that is shrinking by the day.