Apple’s AAPL Shazam acquisition, its $390 million advance to Finisar FNSR and Western Digital WDC making peace with Toshiba were the top news from last week. Here are the details-
Apple Buys Shazam
Apple has acquired popular music discovery app Shazam for an estimated $400 million. Shazam identifies music playing near the device within a few seconds and directs users to places like Apple’s App Store or Google’s Play Store where they can listen to the whole track later. But despite the billion+ times the app has been downloaded, the company hasn’t been able to monetize its service well, which is probably why it is going this cheap (it has raised a total of $143.5 million in funding rounds, the latest of which, back in 2015, valued the company at $1.2 billion).
In 2016, it generated around $54 million in revenue to net a pre-tax loss of $5.3 million. Apple may be expected to integrate the software into Apple Music (or Siri) or in HomePod, its new, high-end smart speaker boasting superior sound quality that will launch in 2018. It’s unlikely that the service will be available to Android users as well, as it is now.
Apple Offers $390 Million to Finisar
Finisar has obtained a $390 million funding from Cupertino-based Apple that it will use to re-open a long-shuttered, 700,000-sqare-foot manufacturing plant in Sherman, Texas. The plant will be used to manufacture vertical-cavity surface-emitting lasers (VCSELs), a special kind of semiconductor found in sensors enabling 3D mapping of the external environment. It therefore has very wide-ranging application in things like augmented reality (AR) and self-driving cars. It also enables Apple’s Face ID technology that’s part of its iPhone X.
Finisar has said that Apple’s contribution (which comes from a billion dollar fund it set aside for U.S. manufacturing support) is not in the nature of a debt or equity investment, but instead “represents anticipated future business between the companies over a period of time.”
VCSEL products are currently in short supply, with the main providers being Finisar, Lumentum and Oclaro where Oclaro is the smallest and Lumentum the leader. But Finisar has been gearing up to increase production manifold. It’s unclear at this stage whether Apple’s agreement with Finisar involves the purchase of its entire production, which would preclude the company from supplying to Android manufacturers like Samsung, etc. thus giving Apple a competitive edge.
But Apple no doubt secured the deal at very favorable rates as it usually does with its component suppliers. So it looks like a good deal for Apple and an average one for Finisar because Apple supply agreements usually mean good volumes at very low profit margins.
Toshiba, WDC Are Friends Again
Toshiba and Western Digital have agreed to settle all disputes between them, which means Western Digital’s withdrawal of all its legal proceedings against Toshiba and allowing the sale of Toshiba’s memory chip business to K.K. Pangea, a special purpose acquisition company formed and controlled by a consortium led by Bain and including Apple and WDC competitors Seagate and Hynix.
At the same time, they “agreed on mutual protections for their assets and confidential information in connection with the sale of Toshiba Memory, and on collaborating to ensure the future success of Toshiba Memory as a public company following an eventual IPO.” WDC CEO Steve Milligan expressed satisfaction that “our interests in the JV were sufficiently protected and we had the right kind of protections and the right kind of access."
They also agreed to extend their JV partnerships including Flash Alliance that now runs to December 31, 2029 and Flash Forward to December 31, 2027. Flash Partners was previously extended to December 31, 2029.
Additionally, neither party will move ahead with the Yokkaichi fab (Fab 6) without the other, i.e. both will invest in the next-generation of 3D flash memory BiCS FLASH™ and Western Digital will receive chip supply. They will also collaborate on the upcoming wafer fabrication facility in Iwate Japan, for which a new agreement will be drawn up “in due course.”
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Other Stories-
Corporate
Chinese Phone Makers Coming to the U.S.: Bloomberg reports that China’s biggest smartphone vendors Huawei and Xiaomi have their eyes on the U.S. market. While Huawei already sells its Mate 9 through Amazon AMZN and other ecommerce channels, it will be much easier to increase sales with stores, carrier partnerships and commercials, so the thinking goes.
Xiaomi is looking for a more gradual launch, first building its stores to sell fitness trackers, thermostats and vacuum cleaners while it works on phone details with carriers AT&T, Verizon and Sprint. That could take up to two years, according to Xiaomi executive Wang Xiang. Since wireless carriers are showing less inclination for subsidizing phones, this seems like the right time for Chinese players to make an entry, since they can sell devices much cheaper.
Google AI Lab in China: Alphabet’s GOOGL Google is setting up an artificial intelligence (AI) research team in Beijing, China to make the most of the growing talent in the region. The company hasn’t made much progress doing business in China but chairman Eric Schmidt has said it "never left" China. The Beijing-based team will work with AI colleagues in Google offices across the world, including New York, Toronto, London and Zurich.
It’s true that competition for AI talent is on the rise since most modern systems will soon be using some form of the technology. So it might be a good idea to grab whatever’s possible. Dr. Fei-Fei Li, Chief Scientist at Google Cloud will be the heading effort and will be joined by Jia Li, who formerly headed research at Snap.
Microsoft/Google Don’t Like Qualcomm-Broadcom Match: Microsoft MSFT and Google have reportedly raised objections to a takeover of Qualcomm by Broadcom. They have said that Broadcom has a history of cutting cost rather than investing in innovation that could hurt their own expansion plans. (Microsoft is currently working on ARM-based Windows 10 PCs that could for the first time help it diversify away from the X86 architecture. Any scale back from Qualcomm’s side could impact this strategy.
Most of Google’s Android devices use Qualcomm chips, so it could also be affected by the deal). The other reason is that Broadcom is cozy with prime competitor Apple, which could make matters worse for them. Regulators often collect feedback from the industry to better understand the situation before a deal is approved, so this objection could get in the way. But Qualcomm has reportedly asked companies to shelve public statements to see if Broadcom raises the offer significantly from the current $70-a-share. If that isn’t forthcoming, there could be more press and publicity on the matter.
Seagate Job Cuts: Seagate has announced yet another job cut as it continues to struggle against the onslaught of flash memory technology that continues to eat into the HDD market that it has dominated for years along with Western Digital. But while WDC bought leading flash player SanDisk to mitigate its risk, Seagate focused on HDD customers in the enterprise while cutting costs. That strategy hasn’t gone so well. The current plan is to slash 500 jobs by June 2018 to save some $65 million in annualized operating costs (a fraction of the couple of billion it spends annually).
Legal/Regulatory
Apple Opposes India’s Import Tax on Mobile Parts: India wants to increase domestic manufacturing of smartphone components, which is not an easy task since 90% of the $14 billion market is imported, according to Counterpoint Research. At the end of the day, it doesn’t help to welcome foreign investment in a way that the domestic manufacturing base isn’t strengthened. For this purpose, the government has a phased manufacturing program (PMP) that seeks to increase taxes on a growing number of smartphone components to force domestic production.
Apple has held that such imports are necessary at least at the start if its Indian operations are to do well and compete effectively. So it has asked the government to waive the requirement. The government has stated publicly that it is considering Apple’s demand although the IT department has also said that waiving of the PMP may not be feasible. In any case, people familiar with the matter told Reuters that such special treatment isn’t forthcoming and that Apple is coming round.
Facebook Changes Revenue Booking in EU: Facebook FB has said that its local operations in each of the EU member nations will start booking revenue and profits locally rather than through its EU headquarters at Dublin. The move should please regulators since it will generate revenues for the country in which the business was transacted and settle disputes that have dragged companies like Google and Apple through courtroom after courtroom as they tried to justify the negligible taxes they paid in the EU through complicated tax avoidance structures. In 2016, Facebook started recording UK sales in Britain, which raised its tax bill somewhat. So this seems to be a broader rollout of the changed policy.
Products/Technology
Apple Self Driving Car Efforts: While remaining mum on the progress it has made in bringing its self-driving car technology to market, the company has started opening up about some product details. Recently, Apple researchers talked about a 3D sensing system that could work on the basis of LiDAR technology alone, thus allowing a sleeker design. Now, its AI research director Ruslan Salakhutdinov is opening up again.
At the Neural Information Processing Systems conference in California, he said that the company’s software is now able to spot cars, cyclists and pedestrians on busy streets and estimate their position even when they are partially obscured, navigate in unfamiliar spaces and build detailed 3D maps of cities. He also said that cars are given directions using a technique, internally dubbed SLAM meaning simultaneous localization and mapping.
Click-to-WhatsApp Messaging Buttons: Facebook has been adding click-to-WhatsApp buttons to business pages, so users can directly message companies to contact customer care, fix appointments, know more about products, etc. The feature has been testing for a while now, but last week, the company announced a broader rollout to North and South America, Africa, Australia and most of Asia. Facebook could monetize the feature on the basis of number of clicks.
Facebook Tries Measures to Boost Video Revenue: Facebook is doing more to get people to its Watch tab where users can access videos by professional creators. Facebook has been paying creators for the shows, but it is trying to build an advertising model around it, so payments won’t be necessary in the future. For videos accessed through the Watch tab, the company will now be showing commercials before the video starts. Also, videos need to be at least 3 minutes long if they are to have commercials in-between. This is up from 90 seconds allowed previously.
Instagram Direct Messaging App: Instagram is testing a standalone messaging app called Direct exclusively for sharing private messages, photos and videos with friends. Like Snachat, it opens directly to the camera instead of your list of messages. It also has four filters: one bleeps you at random while blurring your mouth, another creates a live cut-out of your mouth to superimpose it over your actual mouth giving you a loony look, while a third creates an infinite video loop zooming in on your open mouth as multiple versions of your head swirl around you. Instagram is currently testing Direct in Turkey, Uruguay, Chile, Portugal, Italy and Israel and is expected to roll out broadly sometime next year.
Microsoft’s Bing Enhancements: Microsoft is making Bing smarter as it continues its attempt to challenge Google in the space. To an extent, it has succeeded in getting people to use Bing more by making it a part of the Windows 10 experience. Now, it’s adding artificial intelligence to add more context to search results so they become more meaningful and easier to understand. Some questions don’t have straight answers, so Bing offers different perspectives in a pro-and-con format.
For other questions, such as those related to numbers, it provides context that can give you a better understanding. For the purpose, Bing is also being paired with Reddit, which organizes into user-created areas of interest into groups called subreddits. Reddit AmA, a forum for user-driven question-and-answer interviews is also being woven into Bing.
Amazon Will Now Sell Google Chromecast: Soon after Google pulled YouTube from Amazon devices, the leading online retailer has said that it will start selling Google Chromecast and Apple TV on its online store. Amazon earlier said that it wouldn’t offer TV boxes that didn’t include Amazon Prime Video because it could confuse Amazon customers. All that has changed now it seems. Or maybe it’s just that competition from traditional media is strengthening with Disney’s purchase of 21st Century Fox making a collaborative approach wiser.
Twitter Threads: Twitterati have for long been sending a series of tweets commonly referred to as a “tweet storm” when they had more to say. Now, after doubling the character limit to 280 in most markets, Twitter figures that still more needs to be done. So now it’s enabling a feature that will allow people to write to their hearts’ content by simply tapping on the space below the tweet they just completed. They can go back and edit any of the earlier tweets because the whole series remains in draft until you tap tweet all. Once that’s done, Twitter will post the tweets, pacing them out slightly so they don’t all hit at the same moment. You can also go back to “add another tweet” when (whenever) you want to update a thread.
Pandora Video Ads: Pandora is doing a little bit more for its ad-supported listener base. To date, only subscribers of its music service could enjoy on-demand music. But now, anyone wanting to listen to particular songs, albums, or playlists they want but without paying for an upfront subscription, just need to watch a video ad first. Watching the ad unlocks a Pandora Premium listening session, so they can enjoy all the advantages.
M&A/Collaborations
Amazon-Ningxia Partner in China: Amazon’s AWS has formed a strategic technology collaboration with Ningxia Western Cloud Data Technology Co Ltd (NWCD), which provides services from the AWS China Ningxia Region, in full compliance with Chinese regulations. Recent new regulations in China require foreign firms to store data locally and outsource hardware elements to local partners. That’s probably the reason AWS announced roughly a month ago that it would sell the hardware assets of its Beijing-registered cloud unit for up to 2 billion yuan ($302.06 million) to its partner Beijing Sinnet Technology Co Ltd. The partnership with NWCD followed.
Alibaba to Invest in Indian Grocer: Alibaba is planning to invest $200 million in leading Indian grocer Big Basket. Alibaba is leading the funding round, which seeks to raise $280 million that values the company at $800 million. Following the investment, Alibaba will have a 25% stake in the company subject to approval by the Competition Commission of India. The company currently delivers 18,000 products from over 1,000 brands in more than two dozen Indian cities across the country. Dubai-based Abraaj Group and Sands Capital are existing investors.
NVIDIA-Komatsu: Japan’s Komatsu, one of the world’s leading manufacturers of construction and mining equipment, will be adding NVIDIA artificial intelligence (AI) technology to increase safety and efficiency at construction sites. Komatsu has been rolling out its SMARTCONSTRUCTION program to build connected, smart worksites since 2015. Adding NVIDIA’s Jetson platform, which has been enhanced for industrial and commercial applications, will make these much better.
Some Numbers
Moody’s Likes Apple, Microsoft: Moody’s has issued an outlook for the global diversified technology industry in 2018 according to which it expects Apple and Microsoft to have an outsized impact. It estimates that the two companies collectively account for about half of the operating profit for the 24 companies serving as a proxy for the diversified IT sector. Aggregate revenue for the group will grow 3.5-4.5% in 2018 and 2.5-3.5% excluding Apple and Microsoft.
Similarly, Moody's forecasts operating profit growth of 6-7%, but 5.5%-6.5% when excluding the two companies. Smartphones and software will be strong drivers of growth. The movement to cloud-based systems, particularly the related equipment and software purchases and services will serve as a tailwind in 2018. Software-as-a-Service revenue now more than offset the declines in license revenues.
Netflix Usage Hours: Netflix members around the world watched more than 140 million hours per day or a little more one billion hours per week in 2017. Mexico takes the top spot for having the most members to watch Netflix every-single-day. The average member watched around 60 movies on Netflix this year. The top shows were American Vandal, 3%, 13 Reasons Why, Anne with an E, Riverdale, Ingobernable, Travelers, The Keepers, The OA, The Confession Tapes.
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