Category Archives: MBA

HTC and the Android dilemma

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In June I wrote a post about the dilemma Android smartphone manufacturers face. I said:

What the incumbents that went into bed with Google did not realize is that Google does not care about their profits. They only care about getting as many Android phones into as many consumer hands as possible. While the manufacturers earn their money by selling phones, Google earns it from the use of the very same phones. And as suddenly all manufacturers are selling phones with the same software on it – the only remaining differentiator is price. And so with more and more manufacturers joining the fray the average selling prices of Android phones fell off a cliff. And that is precisely what Google wanted – competition on price. This allows consumers to get Android phones almost for free and again increases Android’s platform share compared to iOS. More users on Google’s platform – more revenue for Google. That puts a lot of pressure on the ASPs and profit margins of the manufacturers – hey that is competition.

I think we are beginning to see this effect on the results and forecasts of some of those smartphone manufacturers. Today HTC announced a cut to its forecast for the fourth quarter revenue estimates by 25%. I repeat – by 25%! That is a lot I think. I took a quick look at the numbers of HTC and built two charts. The first one is HTCs quarterly revenue and Gross Profit.

What you can see in the chart is the divergence of Sales from Gross Profit which means that while over time HTC is selling more phones it is doing so at the cost of lower profit per phone. I did not dive too deep into this but I think the reason for the lower profit per phone is a simple economics one. To sell more phones in a market where HTCs product is not that well differentiated and the supply of Android phones is exploding you can really only compete on price. With that in mind I present the second chart – HTCs gross margin evolution.

I know that this is just a rehash of the previous chart but it illustrates how basic economics work. When the market for any product becomes highly competitive and has little differentiated competitors the pressure on the markets profitability increases. This was my prediction from June and why I said that Nokia has better chances with Microsofts Windows Phone 7. Rest assured if WP7 would spread the same way Android did the same would occur with the manufacturers of WP7 phones. For now though great WP7 phones are scarce and there is a window of opportunity for manufacturers to get a piece of the early profitable pie.

A similar problem that results from this is sales. While you can keep your sales growing by lowering prices you will not be able to win a price race to the bottom. Eventually your prices will be low and your sales we still fall because of over supply. That is what I think we are seeing in HTCs sales forecast cut. Not only did Apple release the iPhone 4S but more direct competitors like Samsung, LG and Motorola are releasing more and more new phones putting pressure on everyones sales numbers.

In conclusion one can see why Apple keeps its software tight and tries to do its own thing. While they may loose market share to the onslaught of millions of Android phones their margins seem to be protected. They simply have a better answer to the question why you should buy an iPhone over an Android phone than price – It is simply different.

Note1: I will try to do a similar post on Apple’s margins just to show the difference.
Note2: For HTC’s 2011 Q4 Revenue I used their forecast of about 104 million and the margin of the previous quarter. 

Sustainability

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Fred Wilson over at http://www.avc.com wrote an interesting post on sustainability. It made me think a lot about my experiences, the MBA and how to build companies and cultures that are sustainable. It also connected with a number of things I read online recently. I am reposting my comment here as a post.

Seeing your post Fred – it kind of clicked for me and connected 2 other articles that I read in the past week. I read Nassim Talebs article in The New York Times about the solution to the issues of our financial system and today’s HBR post by Ron Johnson about retail. I put forward the following simple thesis – a sustainable business is a business that puts focus on the value delivered to the customer while an unsustainable one is focused on the value extracted from the customer.

Case in point – Ron Johnson mentions that retail should be built around helping the customer make sound purchasing decisions. The purpose of retail is connecting the customer with the right product. If this is achieved the customer will come back to be connected again. Anyone can carry items like Macs (as demonstrated by other retailers) but few can help the customer buy the right one.

The other connection my head made when thinking about this is Talebs cancel the bonuses article. At first I was wondering how else would you motivate high performing people without bonuses but then it hit me. The current compensation structures at leading investment banks and hedge funds do not motivate the bankers to help their customers make fair valued transactions. They motivate to make big transactions. What if you actually think this product is not really good for the specific customer? What if your customer shouldn’t acquire the company you are investigating? If you still opt for the sale or transaction significant value to the customer is lost but you get your bonus. We need to find a value for the customer based compensation system.

 

What do you guys think?

 

Graduated!

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About 14 month ago I wrote a post that resurrected this blog called Heading to business school soon. The idea was to try and document the life me and the Cosmic Girl chose here in Belgium. I wrote:

“it’s not about “jump starting my career” or “taking my career to another level” it’s about doing something I am really passionate about and changing to a really international environment.”

Well it’s over. Last Friday I graduated and got my MBA degree after 11-12 months of work. I was reflecting a little bit on my expectations and this sentence in the initial post seemed stand out. I love learning and new ideas and Vlerick has proven to be a place with plenty of both. While we could debate the merits of one course or the other the fundamental question is – did I get new insights and understanding from the experience? Do I now have a broader business context? Yes and yes. But even this pales in comparison to the most important part of an international education program – the people. I met some of the most interesting people and it was a privilege to work with (most) of them on papers, projects and extra curricular initiatives. And the parties.

If I can I will post some of the papers I wrote on the blog just to get some feedback. Actually – a number of posts you may have read were parts of my papers – especially some of the posts about the mobile computing industries like the Nokia post (part of my highest graded paper on Strategy).

Now I am on the look out for an interesting opportunity in North-West Europe – ideally in Belgium or the UK. I am not 100% sure what that opportunity should be but I already have some ideas. If you are doing something interesting feel free to contact me.

Economy

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I have been tweeting a little bit about the economy.

I am by no means an expert economist but I do understand a lot of things and the MBA helps too. What I see today is not irrational markets or weakness because of confidence. What I see are artificially inflated economies propped up by stimulus and bad decisions made by our leaders. I see a system that is naturally trying to fix itself by deflating to reality.

There are 2 ways out of this situation. Either leaders of the world will grow a pair and make the tough decisions that won’t get them elected again but will fix the mess that is our financial system or we will continue on this path of propping up economies by stimulus, bailouts and ignorance towards oblivion. Not to sound theatric but at some point normal people will realize that the dollar bill in their hand is not worth the paper it is printed on and will flee to safe places like gold or silver and the financial system will collapse. We were close to it because the most important currency in the world is the dollar and it was near collapse due to the debt ceiling stalemate. But this situation will not be unique – the confidence in the US treasuries is falling and once it’s gone the dollar and the financial system are gone.

So please leaders, don’t think about yourself, consider the future and start making realistic decisions on how to change the course of this ship. The western world needs to start living within its means and we need to start producing value that someone wants.

*Disclaimer: It is friday, I am in the office having a friday evening beer with the colleagues and am offended by some of the statements politicians are making. Do they really think we are stupid? Also again I am not an expert.

Moving to London for a few weeks

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The last part of the Vlerick MBA is the Giving Something Back Project. This is a module designed to get nearly baked MBA’s to do some good stuff for a good cause. I will be doing my project in London for a very interesting NGO that supports local projects. The Cosmic Girl is coming with me of course to have some fun and study in London. While there I hope to get to know the place a bit and meet interesting people an hey, if a nice opportunity shows up at any point – even better.

I am still working on those China posts so patience please.