Credit Writedowns

In the wake of the NSA spying scandal, I have been moving my data away from large US vendors and increasing my computer security. Both of these issues needed to be addressed but the NSA spying scandal has made them relevant for me – and I suspect many others. This will negatively impact earnings growth, particularly at Google and Facebook, particularly for international and business revenue.

One of the striking aspects of the Senate Permanent Subcommittee on Investigations hearing on Apple’s aggressive tax-avoidance strategies is the way the Senators bent over backwards to declare Apple love even as they poked and prodded at the tech giant’s various, um, devices. Being an icon of US tech prowess, even if the halo is slipping, will do that.

Gartner’s latest market share results are in and they show Google’s Android operating system gaining significant market share in Q1 2013 to nearly 75%. That is a jump of almost 20% in just one year.

Today’s daily commentary is going to be on technology. Over the past few years, I have been writing here at Credit Writedowns that we are in the midst of a massive platform shift in technology toward a mobile-centric world. As Michael Whalen put it in2010, the future of technology is streaming content to any deviice, anywhere and at any time. This platform shift to mobile is built on the back of cheap and high-powered mobile bandwidth, something that was not ubiquitous just a few years ago. It makes video streaming, cloud storage and all manner of Internet-centric business models possible and it is what is driving the move to a mobile world.

Amazon, Apple, and Samsung, three of the biggest names in the technology space, have reported this week. In all three cases, there were gaps in the earnings reports and the earnings outlooks. For me, however, Samsung’s report was the best and Apple’s was the worst. And this is meaningful for investors in US markets.

What I am seeing is a second great wave of consolidation in the industry. And by that I mean that every large company is getting into the traditional space of every other large company. Let’s go down a sample list of some of the changes that are afoot.

I have been meaning to write a blurb about Amazon ever since I saw a great article on the benefits of Amazon’s low-price strategy a month or so ago. But a recent article in the Wall Street Journal about huge price cuts on Amazon’s top-of-the-line tablet has finally galvanized me into action. Here are my thoughts.

In the mobile world, everyone seems to be in a frenzy over Samsung’s next Galaxy smartphone. Apparently, Samsung is the new Apple, where product launches are media events par excellence, marketed to build anticipation. However, while everyone is focused on the Samsung – Apple duel, the launch is verification for me that the relentless Android product cycle will be difficult for Apple to overcome.

Morgan Stanley had a very good note out earlier today reporting that Apple needs to issue an iPhone mini to capture share in China. This is what I have been advising as the market share margin trade-off is favourable for Apple’s bottom line. Morgan Stanley estimates that a cheaper emerging market-oriented iPhone for the Chinese market would cut Apple’s margins down to 49% from 51% while the new handset would boost the pre-tax bottom line by $2.4 billion and triple Apple’s market share in China.

Many of the largest technology companies are making so much money that they are rapidly accumulating cash on their balance sheets. While on could argue that this cash should be stripped off the balance sheet for valuation purposes, I would argue that the cash is worth less than face value because having excess cash on the balance sheet is an invitation to wealth-destroying acquisitions. The excess cash should be returned to shareholders as quickly as possible in the form of dividends or share buybacks to prevent such an outcome.

While the well-respected Internet blog TechCrunch focused on the Apple/Samsung story in analysing the data from Gartner’s latest survey on the mobile market, the real news was elsewhere. The BBC got it right in trumpeting that “mobile phone sales fell in 2012″. This is a big deal and it will put inexorable downward pressure on margins.

Last year, I started off the newsletter with a list of ten surprises for 2012 which I reviewed last month. I apologize for not having a similar list of ten surprises for 2013 yet. I think it is a good exercise to go through to hone one’s thinking about the economic and investing landscape. Here is a preliminary list of top ten candidates for the list and links to the posts in which I tell you why.