Tidbits in the News: Smartphone Market Red Alert, Xiaomi’s New Business Model, Nintendo’s Earnings Surprise

So the past week has been dominated by the North-South Korean summit, and the ongoing turmoils inside the White House. And yet, I refuse to even touch those issues, and instead decide to talk about all this other news that was lost in transition.

Smartphone Market Red Alert

I’ve always been a smartphone guy. Ever since the dawn of the iPhone, no matter how much I wanted to deny it all, I fell in love. I fell in love with the very concept of the smartphone, and everything it promised. I knew, when I first heard news of the iPhone, that everyone in the world would end up holding one.

Turns out, that day is arriving sooner than later.

In Samsung’s latest earnings report, it mentioned that it had a negative outlook on the smartphone market as a whole, implying that it no longer saw the industry as its main driver for growth. This comes soon after reports of Chinese smartphone shipments reaching its lowest levels since 2013.

This implies a few things. First, there’s the Chinese market. The recent reports concerning the smartphone industry of China implies that there’s slowing demand overall for new smartphones. There’s 2 implications here. First, the smartphone penetration rate in the country has reached a plateau. This means that everyone who wants one now has one. This would be people in large cities, such as Shanghai and Beijing. Second, the upgrade cycle for smartphones in the country is now longer than before. We should have had a steady market if people were upgrading at a  consistent rate, but, instead, we’re seeing a negative growth rate. This implies that not only is new demand slowing down, but recurring demand as well.

The second large implication is that this isn’t an isolated case in China. In fact, it’s a case worldwide, and it’s a big enough problem that Samsung took note. It also implies that rising demand from emerging markets, like South East Asia, and Africa, aren’t enough to offset demand cliffs in established markets.

All in all, it’s looking like we’ve reached peak smartphones. So where’s all the demand going then?

Samsung sees its future in memory chips sales. In fact, it seems like, as more things become digitized, connected to the cloud, and powered by AI, parts like LCDs, DRAM memory, and CPU/GPUs are only going to become more in demand. Consumers will no longer be driving the market directly, but they will still be seeing increased exposure to these technologies.

It’s a shame, really. I would have thought that there was still more in the industry to warrant further innovation in the space. For now, it seems that smartphones have hit a ceiling. Maybe it’s time for a new hero device to come along and stimulate our collective curiosity, or maybe (and this is much more daunting) we’ve hit a technological ceiling, beyond which the business case simply does not exist. Maybe consumer tech isn’t supposed to get better than this, and maybe the next great step for mankind is in other pursuits.

Xiaomi’s New Business Model

Xiaomi is preparing to go public. And, in light of this, it’s pulling all the strings possible to stay in the public lime light. This latest one, however, is rather interesting. It’s unprecedented, as far as I’m concerned, and it’s questionable just how the logistics for this would work.

If Xiaomi makes too much money post IPO, it’ll find a way to give it back to its customers.

Now there’s 2 things to talk about before talking about how the company will compensate is customers. First, it’s the question of too much money. What do they mean? In a corporate tweet, they claim that, going forward, they’ll cap their earnings at 5%. As stated in the linked article, it’s doubtful Xiaomi will ever surpass this benchmark ever. The hardware business has been known to be a cut throat market, especially smartphone hardware. In fact, in a recent report, it’s been reported that 87% of all the profits in the industry goes straight to Apple.

Second, there’s the question of investor dividends. Bear in mind, the company said it’ll compensate customers for any profits over 5%. The, what about the investors? In conventional corporate structures, investors are, by way of their investments, entitled to the profits, current and future. Does Xiaomi have the rights to take extra profits and, instead of paying their investors as dividends, compensate customers and end users?

There may be an argument to be made here. See, many companies, even post IPO, don’t pay their investors in any way, shape, or form. The profits, instead, are “reinvested” back into the enterprise, used as capital to fund improvements across the business. And, there is a business case to be made, especially for a company like Xiaomi, in promoting consumer confidence by way of compensation. Xiaomi is not interested in profits — not yet. They’re more  interested in top line growth, and increasing market share. They believe that in doing this, they’re creating an ecosystem for the consumer, a la Amazon and Apple. In this regard, this business move makes perfect sense, and it’s something investors should be open to for at least a while.

Trouble is, how would they go about doing this? The general consensus is that the rebates will come in the form of Xiaomi credits, that could be used to purchase Xiaomi products and services. This would further entrench consumers into the Xiaomi ecosystem, which would allow them to generate further revenues in the future.

But will consumers bite? Are Xiaomi credits enough to incentivize consumer behavior? I have a hunch that it might not be. I have a hunch that it may just prove to be another accounting trick to shave off profits, lower effective taxes, while maintaining corporate cash flows. And I feel like customers should be able to see straight past that. Except, Apple has done this before, and it serves as an example on just how powerful the ecosystem mentality is in driving consumer purchasing behavior.

Nintendo’s Earnings Surprise

Nintendo just reported something that’s worth recording in the books — a 505% YoY increase in operating income. What’s even more surprising is that this increase can be attributed to a single product — the Nintendo Switch.

Now, full disclosure here: I own a Nintendo Switch, so I contributed my 2 cents towards Nintendo’s profits here. So I understand, fully, the reason for the Switch’s success. But the fact that it was able to drive the company’s bottom line growth so much is more mystery than science.

Was there really that much demand for a Nintendo console post Wii U? Probably not. The Wii U, by all accounts, did irreparable damage to the company, both PR wise, and business wise. It was a huge factor behind Nintendo’s move into mobile gaming, and a major failure in every metric. There were many calls, by experts and consumers alike, for Nintendo to leave the hardware business altogether, and focus on software, like its rival Sega did earlier this millennium.

But it seems that people were willing to give Nintendo one more chance. Or, at least, they were willing to give Nintendo’s handheld division one last chance. Because that’s how many are seeing the Nintendo Switch — as an extension of the company’s Game Boy business, more so than a successor to its Wii line. It’s the reason for calls for the company to bring its 3DS exclusive franchises over to the platform, and the increasing number of mobile indie IP migrating to the device.

This may be a compromise from Nintendo, consolidating its product portfolios, thereby consolidating demand. And it seems to have worked.

It then begs the question, is there still more steam left in this engine? Nintendo is forecasting 20M Switch sales over the next fiscal year, a 33% increase YoY. When considering that the Wii sold a bit over 100M units as of 2016. That’s around 10M units sales a year. Of course, the sales figures aren’t linear for any given product, but based on the sentiment, it feels Nintendo is expecting the Switch to outperform the Wii in terms of sales. Which may be warranted, based on the increased third party support the platform has had, but take it with a grain of salt: all the support currently given to the platform has been year old software being ported to the hardware, at lowered specs.

That’s not to discount the company, nor its hardware. In fact, it’s actually a testament to Nintendo’s brilliance in its product strategy — don’t compete directly with Sony and Microsoft. Offer them an alternative. Offer them something that can augment their gaming experience — not just a substitute good.

Will the switch end up outselling the Wii? Possibly. There’s no doubt that the Switch will go on to outsell the Xbox One and the PS4 by the end of its life cycle. That’s for certain. Those two  compete rather directly with the PC, whereas Nintendo’s offering feels more like a bridge device. But, there are very real concerns that keep me from being 100% certain. Is the offering compelling enough in a world where the border between device  categories are becoming ever more vague? Does it offer compelling enough of an experience to warrant an extra console for many? Is it worth the asking price?


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