Samsung will do what Samsung always does

Back in my June post, "Things to consider if you are an OLED investor", I mentioned

Samsung can disrupt competitors' launch and ramp-up schedule with intentional tightening of panel supply (that happened to Huawei's Ascend P1 back in early 2012). Samsung can also limit the supply highest quality OLED display to its own phones.

Apparently, the same thing is happening again this year and likely next year. Oppo announced two days that it will introduce a new version of its very popular R9 model, the R9km, which will use LCD from JDI instead of OLED display from Samsung due to supply shortage. Other specs and the price will stay the same. (see report here)

Separately, it is rumored that Huawei Mate 9 is also impacted by the supply shortage of OLED displays (source).

Again, those two incidents show how powerful Samsung is over its smartphone competitors since it dominates the OLED display supply. Before 2018, when alternative OLED supplies come online, Chinese OEMs will not be able to fully commit to OLED display.

Broken System

Fred Wilson has a very illuminating blog post recently:

http://avc.com/2016/08/trapped-in-a-system/

The post said the following:

Many people in the US (and around the world) are employed by (and trapped in) a system that no longer works very well. And although they realize the system is broken, they fight to support it because it underpins their economic security.

This is in many ways true for sell-side equity research. It's a broken system and yet I am fighting everyday to "support it because it underpins my economic security"

Things to consider if you are an OLED investor

OLED is the ticker for Universal Display Corp. It is also short for organic light emitting diode. I will refer to the company as UDC from hereon.

UDC stock is a good investment recently, returning 22.45% (1 year), 20% (ytd), and 27% (3 month). Most of the price increase was driven series of news reports about new capacity for OLED display. In simplistic terms, UDC supplies certain raw materials (highly protected by patents) to OLED display makers. Also in simplistic terms, it is kind of similar to liquid crystal. The idea is that more OLED display capacity investment, which leads to more production and application of OLED display, which lead to more sales of UDC's materials. Also there is rumor floating around that iPhone will use OLED in 2017/2018, which obviously adds substantial unit shipment assumption to global OLED display demand.

So far, unlike equipment makers that benefit the first from capacity investments (look at AMAT and COHR), UDC has not yet benefited from such aggressive capacity investment - the potential demand has not yet showed up in its results. The stock is trading at 40x forward PE, a multiple that reflects investors' expectation for high growth. The bull case, again, is that mobile devices (including Apple's iPhone) will use OLED display to replace the incumbent technology, LCD. Being the largest smartphone maker and only OLED smartphone display maker (3rd party research firm IHS said Samsung has over 97% in 1Q16 of the smartphone OLED market), Samsung has already been using OLED display for all of its flagship smartphone models and more and more mid and low range phones.

Despite capacity investments for OLED display among non-Samsung panel makers, Samsung will remain the dominant supplier in the next three years. This is what I see as the biggest risk to the bull argument. Are non-Samsung OEMs, those smartphone makers that are supposed to contribute to the much wider adoption of OLED display, are hesitant to use OLED given supplier risk. And Samsung as a smartphone maker has right incentive to leverage its monopoly on OLED display to differentiate its phones from its competitors'. Samsung can disrupt competitors' launch and ramp-up schedule with intentional tightening of panel supply (that happened to Huawei's Ascend P1 back in early 2012). Samsung can also limit the supply highest quality OLED display to its own phones.

A recent "incident" perfectly illustrates the second scenario, that Samsung is supply interior quality OLED display to its customers:

OnePlus is a hot, albeit small, Chinese smartphone OEM. There are plenty of rumors as well as business bureau registration document that show OnePlus is in fact an affiliate of Oppo, but that is a topic for another time. In short, OnePlus makes high spec, low price phones that enjoy a very strong following among the more sophisticated Android users globally. Its first flagship, OnePlus 1, was a sensational success, shipping in millions (very impressive for a "start-up"). Its second flagship OnePlus 2 was not as successful. And this month, OnePlus 3 (OP3) was released, and it comes with an OLED display.

The reviews of OP3 is universally positive (theVerge, TechRadar, CNET, Engadget) across tech websites, with the exception of one website, AnandTech, which is known for its more in-depth and sophisticated approach to gadgets reviews. And AnandTech has some criticism of OP3's display that are largely based on 1) poorer resolution due to pentile pixel arrangement, and 2) inaccurate color. AnandTech summarized the display performance as follows:

Regardless of what path led to the OnePlus 3's current display, the end result is that the poor display calibration ruins the phone for me, because the screen is just unpleasant to look at. If display accuracy doesn’t matter at all to you it may be possible to overlook it, but for anyone who cares even the slightest bit the issues with the OnePlus 3’s display will be too severe to live with.

If everything stops here, it would have been just a forgettable story about how a young Chinese smartphone start-up made a poor choice over display for its flagship of the year. But a young co-founder of OnePlus, Carl Pei, did not take the criticism lightly and unleashed a rant on Reddit,

 I'm sick and tired of sentiment like this. It may not seem so, but for a product company -- it's insulting.

It started with the OnePlus One, people trying to find explanations and faults that could have led to its reasonable price. People were complaining about screen variance (visible and common for LCDs, search for "iPhone yellow blue screen" images), vibration motor, and cheaper NAND, etc. Looking for any explanation, and quick to jump on bandwagons and to conclusions.
With our relationships in the supply chain, we know the BOM (bill of materials) of all other flagships. Out of all the devices that the OnePlus 3 gets compared to, it is one of, if not the most expensive to make. Do you think the price delta between a 2K AMOLED and a 1080p AMOLED is huge? It's a product decision, and spec by spec is not how to judge a product. The OnePlus 3 uses latest generation AMOLED made to our specifications by Samsung. The vast majority of our users, and reviewers love Optic AMOLED. It is NOT tuned to sRGB, and was never meant to be. sRGB tuning is a niche requirement and is not the right choice for the vast majority of smartphone users. Why do you think it's hidden under developer settings on the 6P? For those who need it, we've taken note, and have added it to the next OTA.

Two things jumped out at me from Carl's rant: 1) he calls "sRGB tuning a niche requirement and is not the right choice for the vast majority of smartphone users" - this is a bizarre mistake, almost all online content are coded to sRGB color space, it is the default choice for all smartphone users - as co-founder of a smartphone company Carl should have known better; 2) he said "OP3 uses latest gen AMOLED made to our spec by Samsung" - there is a clear difference between a much acclaimed display Samsung uses in its flagship S6 and S7 (see third party review here) and the one in OP3. It seems clear to me that given the different, either OnePlus asks Samsung to make a low quality display for OP3 (hence "our specification") or Samsung fucked OP by giving them a lower quality one.

Btw, I have an OnePlus X with AMOLED display, and that display is such an eye sour - overly saturated colors, low brightness levels....but hey, plenty of people find that pleasing.

The whole Reddit thread is fun to read: link; the gist of the thread is that Carl Pei's argument got torn apart of tech-savvy Redditors and more problems with OP3 and OnePlus were exposed. Enjoy!

Full rant here:

 

A Summary of Amazon Echo Articles

After the complete failure that was Amazon Fire phone, the expectation for an Amazon-issued consumer electronics device is very low. Since its announcement in November 2014 (first limited, then wider sales began in June 2015), Amazon Echo is almost 1.5 years old. Given the recent surge of media coverage and positive comment on Amazon Echo, it may worth the while to build a summary of Amazon Echo articles for future reference. Hopefully this will provide value insights into voice-based computer interface, AI, internet of things (IoT), and platform competition (Google vs. Apple vs. Amazon vs. more).

Amazon was unveiled in November 2014, at the time, this Bloomberg article quoted an insightful comment from Forrester, which touches on two issues that will have lasting impact on platform companies: 1) presence in the home and 2) value of Amazon Prime members

“Every major digital platform company from Google to Apple wants to put sensors in your home. Google has thermostats and cameras thanks to its acquisition of Nest and Dropcam, Apple has added HomeKit, a set of developer tools for building apps for the home. But Amazon is the first to put a persistent microphone interface in your home, a listening and learning service that is ready to hear your every command. Sure, it doubles as a connected speaker and some people will end up buying it for that, but the Echo will only achieve its real purpose when you start asking it questions, having it complete tasks for you — especially shopping tasks — just the way Apple hopes its users will interact with Apple Watch.”

He added, “The risk for Amazon is that [the Echo] may end up being too early, setting the table for a party that consumers aren’t ready to join. But there’s no better way to find that out than to try; Amazon’s limited rollout of Echo to its Prime users is exactly the right way to try.”

The latest addition to the Amazon Echo praise comes from Bezos-invested Business Insider, a not so insightful piece, but with interesting details nonetheless. The "Wizard of Oz" testing seems interesting, I wonder how that compares to the way Apple and Google train their voice assistant.

Echo’s resounding success seems to have surprised even people internally. Amazon's Limp said the team realized within minutes of taking pre-orders that it picked way too low a number for initial estimates. One of the early employees said Echo hit a million pre-orders in less than two weeks, a far better pace than the iPhone, which took about 70 days to reach the same milestone.

Limp says the sales numbers aren’t a priority at this point. Rather, he’s more focused on making the product better and smarter. “At Amazon, we believe the next big platform is the voice,” Limp said at a recent press event for Echo. “What we’re trying to do is to build a computer in the cloud that’s completely controlled by your voice.”

CNET review: one of the best connected home products money can currently buy.
Mossberg review is a bit less enthusiastic: Did I make a mistake buying my Echo? I don’t necessarily think so. In our house, it has been pretty nice to have in the kitchen, if only for the on-demand, hands-free newscasts and music.
NYT review compares Amazon Echo to the first iPhone, the next must-have gadget.
The ZDNET reviewer said Amazon Echo is the most-used gadget in the home.
Engadget review is much less impressive with Amazon Echo, mostly because they view it narrowly as a speaker: "Echo is not a bad device; it's just one best suited for people already heavily invested in Amazon's ecosystem, making it ill-suited for anyone just looking for a speaker."
Echo may get comically confused when NPR talks about it over radio.
PCMag reviewer believes that being in the home gives Amazon Echo an advantage over Siri and Google Now because it feels less disembodied.
The other Steve at Apple also recently voiced his excitement for Amazon Echo, calling it "freedom" and "luxury".

IFTTT has an expanding recipe for Amazon Echo.

This Recode article defines Alexa as the invisible platform, which is most in-line with my view on Amazon Echo.

To Amazon’s credit, it recognizes the platform potential of Alexa and is actively encouraging other device makers to use Alexa in their own hardware designs and to create add-on skills. This could allow Amazon to do an end run around the existing ecosystem players, such as Apple, Google and Microsoft, and place it at the forefront of voice-based computing.

Most visions of the future imagine technology that seamlessly blends into our lives, gives us immediate access to all the world’s information and helps make our lives easier. While the Amazon Echo family of devices may not completely fulfill all these requirements, it’s one of the clearest indicators of where personal technology is headed in the years to come.

Thoughts and Summary on Emerging UI and AI

Beginning this year, I am seeing more frequent mention of artificial intelligence (AI)-driven, conversational user interface (UI) in technology media and among my technology-oriented friends. This is no surprise, AI and conversation (either verbal or written) based UI has been around for a while. Siri, Cortana, OK Google are familiar features. Amazon Echo, Magic (app), Slack, WeChat, Facebook's M are more recent, high profile additions to the category. The purpose of this writing exercise is to explore how and why this new trend is flourishing, and whether they will evolve into something significant.

Conversational UI will undermine visual interface design, according to Matty Mariansky:

But, let me say it again. The entire field of visual interface design—everything we know about placing controls, handling mouse and touch interaction, even picking colors—will be affected by the switch to conversational form, or will go away altogether. Store that in your brain’s temp folder for a little while, then take a deep breath. Let’s move on.

Text-based, or messaging interface is still what people use the most to communicate, according to Sarah Guo:

If we take college students as a leading indicator, I’m not alone. In 2014, college students (at least in this interesting study at Baylor) spent ~9 hours a day on their smartphones. Of those 9 hours, almost 30% of that time (2.4 hours) was spent either texting or emailing. Messaging has become the dominant digital experience for many young people.

Sarah Guo also brought a great point on the platform advantage of popular messaging apps:

the popular messaging clients (mostly FB and WeChat, potentially Slack) have been smart enough to develop ecosystems that trade their distribution power and real estate on your phone for third party invented features, behaviors and content that, in turn, increase their platform’s relevance and stickiness.

Text-based interface is praised for its simplicity, according to Jonathan Libov:

In contrast to a GUI that defines rules for each interaction — rules which, frustratingly, change from app to app — text-based, conversational interactions are liberating in their familiarity. There's only really only one way to skin this cat: The text I type is displayed on the right, the text someone else typed is on the left, and there's an input field on bottom for me to compose a message.

Text is powerful, according to greydon 2:

Text is the most socially useful communication technology. It works well in 1:1, 1:N, and M:N modes. It can be indexed and searched efficiently, even by hand. It can be translated. It can be produced and consumed at variable speeds. It is asynchronous. It can be compared, diffed, clustered, corrected, summarized and filtered algorithmically. It permits multiparty editing. It permits branching conversations, lurking, annotation, quoting, reviewing, summarizing, structured responses, exegesis, even fan fic. The breadth, scale and depth of ways people use text is unmatched by anything.

Messaging could change the way we interact with computers, according to Jonathan Libov:

Messaging is the only interface in which the machine communicates with you much the same as the way you communicate with it. If some of the trends outlined in this post pervade, it would mark a qualitative shift in how we interact with computers. Whereas computer interaction to date has largely been about discrete, deliberate events — typing in the command line, clicking on files, clicking on hyperlinks, tapping on icons — a shift to messaging- or conversational-based UI's and implicit hyperlinks would make computer interaction far more fluid and natural.

It is unknown if those "invisible apps" can be powered by pure AI, can be scale up at reasonable cost, or can provide good enough user experience without human intervention.

Siri is supposed to be a "do engine", according to its original founders:

As conceived by its creators, Siri was supposed to be a "do engine," something that would allow people to hold conversations with the Internet. While a search engine used stilted keywords to create lists of links, a do engine could carry a conversation, then decide and act. Had one too many drinks? The ability to coordinate a Google search for a ride home might elude you, but a do engine could translate a muttered, "I'm drunk take me home," into a command to send a car service to your location. The startup's goal was not to build a better search engine, but to pioneer an entirely new paradigm for accessing the Internet, one that would let artificially intelligent agents summon the answers people needed, rather than pull relevant resources for humans to consult on their own. If the search engine defined the second generation of the web, Siri's co-founders were confident the do engine would define the third.

The technological backdrop for Siri was mature in 2007, according to Huffington Post:

Yet if ever there were a right place and a right time for virtual assistants, the fall of 2007 appeared to be it. Faster wireless speeds, better speech recognition, the rise of cloud computing, the debut of Apple’s iPhone and a flood of new web services made virtual helpers seem attainable at last.

Siri can tap into as many sources of information as third party APIs allow, according to Huffington Post:

To pull a list of cafés, Siri would tap into data it had organized from over 40 web services that operated like remote, diffuse lobes of its brain. While previous virtual assistants functioned through deep training in a single specialty, Siri had been built as a cross-industry savant with expertise in anything from books to bagels; it just needed access to the application programming interfaces, or APIs, many web companies offer to third parties.

Early on, the Siri developers saw virtually no limit to the routine transactions the assistant could automate. They envisioned Siri’s architecture allowing for any web service with an API — potentially hundreds of thousands of them — to add its database to the do engine.

Siri almost became a selling point for Android phones, due to Verizon, according to HP:

Verizon thought so, too. In the fall of 2009, several months before Apple approached Siri, Verizon had signed a deal with the startup to make Siri a default app on all Android phones set to launch in the new year. When Apple swooped in to buy Siri, it insisted on making the assistant exclusive to Apple devices, and nixed the Verizon deal. In the process, it narrowly avoided seeing Siri become a selling point for smartphones powered by its biggest rival, Google. (Somewhere in the vaults of the wireless giant, there are unreleased commercials touting Siri as an Android add-on.)

Siri was left an orphan at Apple, which was probably why it seemed to have under-delivered so many years after the acquisition, comparing to what it was capable of when it was an app, according to HP:

But corporate politics have been unkind to Siri, and the endeavor’s prospects may be jeopardized by its loss of many powerful advocates within Apple. Though Saffo, the Stanford professor and futurist, cautions deciphering Apple’s inner workings is like “trying to understand North Korea,” he ventures that Siri has become “an artificially-intelligent orphan” within the company.

Only one of Siri’s three co-founders, Tom Gruber, remains at the company. Kittlaus left three weeks after Apple re-launched Siri in 2011, and Cheyer quit a year later. Apple’s Forstall, who introduced Siri at its first keynote and oversaw the company’s iOS software, was fired last year. Steve Jobs died the day after Siri debuted. And Luc Julia, who replaced Kittlaus as head of Siri, lasted just 10 months at Apple before leaving in 2012.

Who knew Samsung also had a voice assistant like Siri, called "S-Voice", according to HP:

More than half a dozen Siri-like services launched in 2012 alone. Samsung debuted S-Voice, a voice-controlled assistant. Nuance, a provider of speech recognition software, released a “Siri for apps” called Nina. Startups Evi and Maluuba each released virtual assistant apps. IBM is working on adapting its supercomputer Watson into a turbo-charged Siri that can help physicians, farmers, Wall Street traders and high-schoolers. And Google has followed Siri with its own conversational assistant, Google Now.

The slow, and relatively closed-door evolution of Siri might be leaving room for its competitors (platform players) to catch up. For example, Facebook acquired Wit.ai in Jan. 2015. Wit.ai is an open and free natural language processing API. According to Tech Crunch:

The Wit.ai product lets developers add a few lines of its code to instantly build in speech recognition and voice control. Without it, developers would need the expertise, time and resources to build a whole voice-recognition system themselves.

“Facebook has the resources and talent to help us take the next step,” Wit.ai wrote in a blog post about the acquisition. “Facebook’s mission is to connect everyone and build amazing experiences for the over 1.3 billion people on the platform – technology that understands natural language is a big part of that, and we think we can help.”

When a small group of tech people started to praise Amazon Echo, you don't call it a trend yet, but you certain listen to what they have to say, according to M.G. Siegler,

Admittedly, I’m less than a week into using the device. And honestly, I’m still not 100 percent sure how we’ll use the thing day-to-day.¹ But I now believe in the power of Alexa, Echo’s female voice, as a platform.

In fact, I think Echo makes it very clear that Apple (and to a lesser extent, Google) dropped a ball here. This is exactly how Siri should exist in your home. And this is what that orb thing Google made a few years back should have been.

Connecting users with AI on a personal level, or risk creeping them out, this is the question, according to Peter Sweeney:

Personification is a powerful creative device. When we attribute a human form or personality to things that are not human, it can make the product more accessible and easier to understand.

In the realm of intelligent assistants, however, this strategy is risky. Like lipstick on a pig, the risks surface not only in how these machines are represented, but also in how they behave.

Scale Out vs. Scale Up

In the past, when companies built large online operations, they bought enormously expensive and complex machines that ran proprietary software. Now, they buy lots of little machines that they can string together into a larger whole, running all sorts of software that allows these machines to work in concert. “You scale out rather than scale up,” Vahdat says, echoing what has become standard lingo in the world of computing.
https://www.readability.com/articles/mdbltgcw

things to consider if you are SYNA investor

2016 is set out to be a frustrating year. There are so many macro uncertainties - China, oil, interest rates and currencies. I think good investment will be those stocks with simple stories. If one thinks that USD will depreciate, then invest in gold. If one believes a recession is upon us, then invest in utilities and consumer staples. In technology sector, I will look for simple growth stories, because growth is such a precious thing during a recession. 

SYNA used to be a simple growth story on touch interface. Today, it has three distinct segments: touch (PC and mobile), display driver, fingerprint, each with very different drivers and risks. 

Touch is very mature business. SYNA has majority share in notebook touchpad but the market is going to decline in the foreseeable future. 

• Mobile touch is a even tougher. low-end mobile is commodity, rife with low-cost contenders from China and Taiwan who are willing to survive on razor thin margins and have lower operating structure (engineers in Silicon Valley are easily 3x-4x more expensive than in China). 
• High-end mobile touch is not growing when overall smartphone market is expected to grow in low single-digit. SYNA's marquee customer, Samsung, ditched SYNA for STMicro in last year's flagship S6, presumably for a cheaper price. Indeed, why pay more if you can get the same function - there has been almost no innovation in high-end touch. Pressure sensing is one, but Android-based implementation of pressure sensing does not even qualify as a joke. 
• TDDI is one last resort for growth. A more compelling proposition than plain touch or touch+pressure sensing. But initial ramp should be small in 2016, and that small TDDI business is unlikely to move the needle anytime soon.

Speaking of TDDI, it is kind of unfair to call it a growth driver, because TDDI can cannibalize both touch and display driver business. Isn't that the whole point? When you have a TDDI chip, you don't need one touch chip and one display driver chip. The hope is that customers are willing to pay a little more for the integration - supposedly clean design and savings on flex PCB and assembly. Again, when you introduce new design changes, adoption tends to be slower. So, not much hope there. 

Display driver is an Apple-driven business. Sharp is a key customer of SYNA's driver ICs, but given its financial shit show ($3.1B in contingent liability disclosed last minute, seriously?!), there is only headwinds ahead. Also, it will be difficult to present a compelling case for both TDDI and DDIC to new customers in display at the same time. Obviously, TDDI will take higher priority. So, no hope for DDIC market expansion any time soon. 

Everyone knows that fingerprint will explode in 2016. Investors have been expecting SYNA to fly high on the explosion since two years ago. It dominated Samsung, which is not bad, but it lost everyone else to FPC. Based on this years early announcement from China, it is not winning any territory any time soon. The incompetency of Ritu Favre (GM of biometrics) is appalling, no execution. Plus, Egis, Goodix, and maybe 10 more companies will enter competition this year. 

Things to consider as an AMBA investor

Ambarella (AMBA) rose the wave up and down with GoPro. After GoPro reported its 4Q earnings and 1Q16 guidance, AMBA was hitting its rock bottom as well. If one is considering investing in AMBA at today's price, I believe the following issues should be carefully studied before the investor place the order:

• how much downside will GoPro present in the near-term? 
• there has been speculation that GoPro contribute as much as 40% of AMBA revenues in normal times. That % contribution is likely to decline in 1Q and 2Q based on GoPro's weak camera sales and slashed product line (low-end Hero)
• how much growth potential is left at GoPro for 2H16?
• GoPro will announced its camera drone toward mid-2016 and its new flagship around 3Q16. Street consensus for GPRO's 4Q16 have come down significantly, implying low expectations for new flagship camera sales. If the action camera market is on a structure decline then GoPro will be a constant overhang than growth booster.   
• how much slack can camera drone customers pick up to offset the declining GPRO sales?
• estimating camera drone sales is not as hard as figuring out drone chip ASP and margin profiles; this piece of the puzzle should be the easiest
• what supply chain data points can an investor reply on, and to what extent?
• with lowered GPRO contribution, Chicony data points may no longer be viable
• Are QCOM and low-cost contenders like Allwinner presenting real threat?
• one needs to understand where QCOM competes (drone and home security cam? what about auto?), the pros and cons of QCOM solution, and if the markets are large enough to draw serious interest from QCOM. 
• how big can AMBA's auto opportunity be?
• can dash camera sales grow given emerging markets weakness? will ADAS features from VisLab fend off competition from tier-1 chip vendors? where are the overlaps between NVIDIA, QCOM, Intel, and Mobileye?