Sony: The Cable Replacement

pstv

SNE is rolling out its web TV service, Vue, across the US with a starting price of $30.

Broader availability, attractive pricing, robust content and rising hardware sales are all supportive of Vue’s long-term growth outlook.

Remain bullish on SNE.

Sony (NYSE:SNE) just made cord-cutting easier. PlayStation Vue, SNE’s web TV product, is now available across the US starting for as little as $30/month. Vue is a cable replacement in that it delivers numerous TV channels and on-demand content, and also allows the viewers to record shows on DVR and watch multiple TVs around the house in one account.

Given the current weakness with the basic cable subs trend that we witnessed last quarter, lower pricing, broader availability and strong PS4 sales momentum could potentially accelerate the cord cutting trend in the US.

Equally important, the recent FCC ruling on cable set-top box is a positive for SNE in that it could drive broader adoption of third-party set-tops. Given that the video game console is evolving to become a comprehensive media home entertainment device, I see SNE as one of the beneficiaries. I remain bullish on SNE.

When SNE introduced PS Vue a year ago, it was difficult to see why anyone would sign up for the product given its unattractive pricing and lack of content differentiation. However, the addition of Disney (NYSE:DIS) products was a game changer in that Vue now can offer live linear content from all of its Big Four networks, effectively addressing PS Vue’s earlier weakness in content offering. Despite the decline in viewership, ESPN remains the largest sports network in the US and continues to have the capability of attracting viewers given its live sports programming.

The nationwide rollout puts Vue in direct competition against other web-TV products such as DISH’s (NASDAQ:DISH) Sling TV, which cost $20/month ($25/month with sports add-on). Although Sling TV is cheaper and has broader device penetration (i.e. Roku, Fire TV, Chromecast, iPhones and iPads,Android phones and tablets, Android TV devices, Xbox One, and PC and Mac computers), Vue surpasses Sling TV in terms of content offering with ABC and Disney channels, which is why I am bullish on Vue’s growth outlook and on SNE.

On a final note, web TV services such as the Vue will no doubt result in higher data consumption among its subs. As these services get consumed over wireless, the higher data demand actually favors smaller wireless carriers such as T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) that have more spectrum than the incumbent AT&T and Verizon. Higher spectrum and lower spectrum cost advantage allow TMUS and S to be the preferred carriers to consume these media channels over mobile.

In conclusion, SNE is better positioned to capitalize on the cable unbundling trend that is shaping up in North America. When comparing against Sling TV, PS Vue is looking more like a competitive web TV package. Additionally, the rising popularity of the PlayStation 4 could drive meaningful penetration of PS Vue in the US, allowing SNE to take TV subs from the cable companies. That said, I remain bullish on SNE and cautious on traditional cable companies such as Time Warner (NYSE:TWC) and Comcast (NASDAQ:CMCSA). SNE remains one of my top picks amongst the Japanese tech stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Article originally posted on Seeking Alpha

XBOX ONE PRICE DROPS TO $299 FOR SPRING SALE

gunner

Starting this Sunday, March 20, Microsoft has announced that Xbox One will drop to $299 – and $50 will be knocked off of all official Xbox One bundles – for a “limited time”.

Announced on the Major Nelson blog, the sale is the cheapest official price Xbox One has held and, for now, the price cut has no stated end date.

The price cut coincides with the Xbox Spring Sale – beginning on March 22 – which will discount over 150 items in the Xbox Store, including PC titles. It might well be worth checking out IGN’s top 25 Xbox One games to scope out some potential purchases.

Yesterday, Microsoft revealed two new special edition Xbox One controllers, Dusk Shadow and Copper Shadow.

Miitomo Makes Storming Debut on iOS in Japan

miitomoMiitomo, as many reading this will know well, launched on 17th March in Japan. Nintendo and DeNA’s social app is certainly under pressure to deliver big download numbers, while shareholders will be watching closely to see what kind of revenue it and future apps will generate. A lot of that will be assessed in the medium to long term, but initial results are certainly promising. At launch Miitomo has become the number one social download on iOS in Japan – beating the mighty LINE – and the second most-downloaded free app – those trends have been the same on 17th and 18th March, as reflected in App Annie stats. The only app beating Miitomo in the overall free chart in Japan is the new Puzzle & Dragons entry from GungHo, which is hardly surprising considering the fact that the brand is a phenomenon in Japan.The reaction to the app and these early results is undoubtedly positive in Japan. Bloomberg quotes Atul Goyal, an analyst at Jefferies Group LLC, as saying the following.

This should remove any doubts about the Nintendo brand’s relevancy in the smartphone age. More than just a messaging tool, Miitomo can be a platform for distributing Nintendo content, and probably third-party content at a later stage.

Nintendo spokesman Yasuhiro Minagawa only provided a short statement.

We had a good start and have received very positive feedback. Miitomo will continue to evolve.

It’s undoubtedly a strong start for Nintendo and Miitomo, though the proof of its success will come over the next few weeks, ultimately; nevertheless a positive launch and early momentum (along with prominent store placement) is a notable boost.

We’ll keep an eye on how its chart placings progress in Japan and keep you posted. Do you think Miitomo will have a similarly impressive launch in the West?

[via appannie.com, bloomberg.com, nintendolife]

Report: Sony is prepping a 4K-capable “PlayStation 4.5” with an improved processor

Citing talks with “developers who have spoken with Sony,” gaming site Kotaku reports Sony (NYSE:SNE) plans to launch a revamped PS4 able to handle 4K gaming and “enhance the games” supported by the PlayStation VR headset(shipping in October).

The console, dubbed the “PS4.5” by developers, is said to feature an improved GPU to enable 4K support, as well as more processing power. No word on its launch date or pricing, or whether Sony will continue selling the current the current PS4 after an improved model launches.

The report may have given a lift to PS4 CPU/GPU supplier AMD, which closed up 4.6% on above-average volume. A more powerful processor would almost certainly bring with it a higher price tag. AMD rallied yesterday after Bloomberg reported Intel is in talks to license AMD’s graphics patents.

Separately, Sony will begin taking pre-orders on Tuesday for a $499 PlayStation VR bundle featuring the headset, a PlayStation camera, two PlayStation Move controllers, and a collection of five mini-games. A “core” VR bundle lacking the controllers, camera, and games will cost $399.

Article originally posted on Seeking Alpha

Microsoft: What’s Up With Xbox?

Summary

Microsoft wants to end the console war for good – and might actually be able to succeed.

The individual pieces are in place, but MSFT has struggled to execute similar strategies in the past.

Xbox could slingshot ahead in the PC gaming space if the strategy works.

Introduction

Phil Spencer, head of Xbox for Microsoft (NASDAQ:MSFT), recently announcedthe shift to “Universal Windows Applications” and a world of Xboxes with “upgradeable” hardware. This would eliminate the need for console generations and convert Xbox into the same hardware utilization model enjoyed by PC gamers.

This is a huge shift in strategies and represents a unique opportunity for Microsoft to gain an advantage over Sony (NYSE:SNE). In actuality, this ends the console war (which is already over in favor of the PS4) and shifts the competitive landscape. Microsoft would be more at odds with Valve Software’sSteam platform, Blizzard (NASDAQ:ATVI) Software and League of Legends than the Sony PlayStation. If successful, this strategy could leave Sony behind, depending on how PlayStation adjusts to the new market dynamics.

In this article, I attempt to explain the nuance of this strategy as well as the pros and cons and what it means to Xbox in the future.

Source: Ars Technica

Consoles Versus PC Gaming

The typical (and longstanding) debate of which is superior – PC versus Console – goes something like this:

Consoles offer a “closed system” that is an inexpensive (compared to PC gaming) and reliable way to get into video games. Software is specifically designed to work on the console hardware, games (generally) run pretty well, and there is little to no major troubleshooting or technical fidgeting to get things working.

Additionally, the console offers about 5-7 years of life where you do not need to worry about upgrading the hardware. Developers generally design their games around whatever hardware limitations might exist. Generally, the console hardware is outdated at time of release compared to PC, and by the end of the console generation, the hardware is easily 3-4 iterations behind what is available to the average consumer in the PC market.

On the PC side, hardware costs are typically higher, but the user is offered a range of flexible options and a very “open” hardware ecosystem that can be upgraded over time. Games may or may not work on particular hardware depending on how outdated it is, but if you want the highest definition experience, you can upgrade into whatever works with your current configuration. Also, games are not tied to your specific machine, and if you upgrade to something better, you can take your library with you easily and play all of your old content.

Console games tend to be more expensive than their PC equivalents, and more physical copies are sold on the console versus the PC, which is dominated by various digital content delivery services. Steam and other digital distribution platforms occasionally run crazy sales where incredible deals can be found at prices consoles rarely ever see. Also, the library of games that a PC has access to is far larger than any console library. PC games can also include higher complexity that utilize the mouse and keyboard interface (PC gamers have been known to call console users “peasants” from time to time).

In years past, console exclusive software releases have played a major part in driving the sales of one machine over another, but in the current generation, the majority of games are released multi-platform (with the major exclusion of any Nintendo (OTCPK:NTDOY) or Sony first-party releases).

For more information on the typical PC versus console generational gap, please refer to the graphic below or this ExtremeTech article. As you can clearly see in the graphic, the PC performance graph takes a “linear” approach. The console is more of a “stair step” by generation. Essentially, Microsoft is positioning itself to convert Xbox from the console line to the PC line.

Breaking Down The Strategy – Key Concepts

The “immortal Xbox” strategy is clearly an attempt to convert the Xbox console into a “PC gaming” machine, but the early indications are the universal Windows application/Xbox ecosystem would be the only available content to play. It is unclear whether MSFT would eventually open the Xbox ecosystem to the Steam library or other non-Microsoft stores, but it is highly unlikely as it would seriously damage Microsoft’s ability to sell software through its own content distribution service.

In theory, Microsoft’s strategy makes perfect sense as the console/PC gap has been shrinking little by little every generation up to the present day where the Xbox One and PS4 are basically PCs in everything but name and operating system (even less so on the Xbox One which runs Windows).

The concept of upgradeable consoles is not new (and it has always failed in prior attempts) if you remember the days of the 16-bit era when Sega had the 32x and the 64-bit era when Nintendo released the 64DD for the N64. Those consoles were far different than the current generation which offers digital downloads and far superior scalability of software. If Microsoft handles this correctly, each game could have an “upgrade/downgrade” graphics option depending on what level of Xbox it detected, similar to the graphics option settings found in nearly every PC release. This would be far simpler for developers to build around.

Currently, Xbox One is far behind the PS4 in the console race. This strategy shift could put Microsoft back on equal footing and “one up” Sony sling-shotting Xbox ahead after an upgrade cycle or two (while the PS4 continues to chug on the original release hardware).

Sony will have a challenging time matching MSFT’s strategy as it does not have the giant Windows OS installed base. One option Sony could have would be a “PS4/2” with full backwards compatibility and compatibility with the Steam Linux marketplace. At some point in the future, all the consoles could be technically streamlined “Steam boxes” that may have console-specific exclusives as an incentive to purchase a particular brand.

Potential Pitfalls

There are some potential pitfalls to Microsoft’s strategy. One issue will be the PC gaming user base is heavily invested into the Steam store as well as other specific individual platforms, such as League of Legends or Blizzard’s various franchises. Valve has a huge share of PC game digital distribution, and owns a big chunk of the market share (around 15%). These users will have a hard time abandoning their content libraries and “open” PC hardware to shift to a “Windows store” if the Xbox hardware restricts access. Previous attempts by Microsoft to entice PC gamers into its content distribution platforms have not gone well (Games for Windows was an abomination), and the current Windows store also has major issues if it wants to compete.

If Microsoft thinks gamers will flock to the Windows store and it does not release a Steam-competitive content marketplace, the effort will most certainly flop. Also, the console user base prefers the console experience for a reason – it is reliable and inexpensive compared to alternative options. Adding the complexity of some games not working or suffering from inferior performance without the right “upgrades” will further fracture the user base and turn off the average console user. As I mentioned previously, the console upgrade concept was attempted previously by Sega, Nintendo, and Atari, and it did not go very well. Perhaps, Microsoft can overcome the marketing and technical failures of previous generations, but it should definitely be careful.

Upside Potential/What Does This Mean For MSFT?

The PC gaming market is estimated to be worth around $27b. If Microsoft successfully implements its strategy, it will give it a huge advantage in the next console cycle as the company will be removing Xbox from a head-to-head battle with the next-gen PlayStation. Bridging the console-PC gaming divide would be a major win if it was accomplished, especially if a best of both worlds result gave us flexible and open-ended hardware with the reliability and ease of use of the typical console. Microsoft may figure out the “Steam box” before Valve does.

MSFT could finally be leveraging its native advantage of Windows OS installed base over Sony, but we should be skeptical until further details of the strategy are revealed. The fusion of the PC gaming market and console market will give access to significantly more potential users and a strategic edge to Microsoft that would not be easily duplicated by any of its competition. Also, Xbox upgrades could give Microsoft a future advantage in the VR space if it provides an easier or lower barrier to entry for average users.

Currently, details are sparse, but the future success of Xbox hinges on Microsoft’s ability to execute. Be on the lookout for more news with special consideration for the content delivery restrictions and “hardware upgrade” specifics before placing a bet on the future of Xbox.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Article originally posted on Seeking Alpha

Like Microsoft with the Xbox One, Sony working on upgraded PS4, report says

Microsoft made headlines earlier this month when Xbox head Phil Spencer hinted that the hardware giant was considering ways of upgrading the Xbox One, much like the way smartphones and PCs see iterative updates. If Microsoft decides to release updated versions of the Xbox One on a regular basis, it would certainly signal the end of traditional console cycles.

After this announcement was made, the question of how Sony would respond inevitably arose. If Microsoft began to release updated versions of the Xbox One with more powerful hardware, would Sony sit idly by and let the PlayStation 4 ride the current generation out with comparatively outdated hardware?According to a report from Kotaku‘s Patrick Klepek, who spoke with a number of unnamed developers, it seems that Sony is in fact planning on upgrading the PS4. The “PS4.5,” as it is unofficially being called, is said to have a more powerful GPU to support 4K resolution for games and to add more processing power to enhance titles that support the PlayStation VR. Overall, having a stronger GPU would allow for all games on PS4 to have added graphical effects and upgrades.

Klepek wasn’t the only member of Kotaku who received information about the “PS4.5.” Both Stephen Totilo and Jason Schreier verified these plans, according to their own sources. Klepek says that the device is still “exploratory” and may not be released this year.

One interesting bit from the post was highlighted by Jason Schreier on Twitter. It reads: “As we were chasing down this story, coincidentally, Kotaku UK EIC Keza MacDonald overheard some developers casually talking about the machine while on line at GDC.” These developers also spoke about 4K resolution and PlayStation VR.

If any of this is true, the same questions that came up when Microsoft announced upgrading the Xbox One arise here. How exactly will the PS4 be upgraded? If folks have to buy an entirely new system, can they trade in their current console for it? Will the current PS4 be unable to play games which were created for the upgraded system? It’s still too early to speculate on what Sony’s exact plans could be, specially since we don’t know how accurate this report is.

As always, take this with a grain of salt until we get official confirmation from Sony. However, given what Microsoft is planning with Xbox One, it wouldn’t be at all surprising if Sony does something similar with the PS4.

A Deeper Look At Nintendo’s Earnings

Summary

The recent earnings report indicates the company is healthy & profitable but running out of time.

Nintendo profits are declining and growth has stalled while we wait for mobile and NX.

Investment in Nintendo today is an entirely speculative bet on the NX and the mobile strategy.

Summary of Earnings

Nintendo(OTCPK:NTDOY) has just released its earnings from APR-DEC 2015 (FY3/2016). The overall report shows that the company is healthy, with significant cash reserves (about $4.6b at today’s exchange rate) and very little debt. Net sales YoY are mostly flat, gross profit margin is trending up (but net profits are down), and the company continues to rely on a very small portfolio of first party games to generate the majority of their revenues. Also, the amiibo toys have sold unbelievably well with 20.5m figures sold and 21.5 card-type units moved.

This is a transition period for Nintendo as they milk their existing software and hardware and prepare for the transition to Mobile and the NX platform. Nintendo’s net income will likely continue on a downward tend until the mobile/NX strategy is implemented.

(click to enlarge) – SOURCE

Hardware and Software Numbers

Hardware and Software sales were decent considering the lack of major holiday releases. Unfortunately, the software library of the Wii U is likely about 95% complete and 2016 will be the last year with any meaningful new releases for the console.

3DS Hardware and Software numbers were:

5.88m and 38.87m respectively.

Wii U Hardware and Software numbers were:

3.06m and 22.62m respectively.

Lifetime numbers for both consoles are in the graphic below.

SOURCE

Wii U

The struggling Wii U got a lift from Splatoon and Super Mario Maker which sold 4.06m and 3.34m units respectively, very impressive numbers considering the installed base of the Wii U is only 12.6m units total (as Comparable to PS4 – 36m, Xbox One, 19m). Unfortunately, the Wii U still struggles from a dearth of software titles available, even if there are several very high quality first party releases.

Mario Maker was only just released in September and Splatoon was released in May. Both Splatoon and Super Mario Maker have room to sell additional units and will likely end up near 4.5-6m total units comparable to Mario Kart or New Super Mario Bros U. Yoshi’s Wooly World was also a solid performer with 1.3m units sold and a likely target of 2-3m units sold in total over the next year.

The lean holiday software lineup is evidence that this is a slow period for Nintendo as they ramp up mobile and NX for 2016 and rely on the 3ds and Wii U to carry them over the bridge.

The only significant upcoming software releases for the Wii U are the Zelda games (a re-release of Twilight Princess in March 2016 and an entirely new Zelda game sometime in 2016 TBD). The Twilight re-release will be a decent seller, but the new “open world” concept Zelda game will be a system mover and should sell in line with some of the consoles other major titles. It is somewhat unfortunately that the new Zelda game is releasing so late in the Wii U’s life, but I believe there is a good chance it will also be available on the NX either natively or through Wii U backwards compatibility.

Other than the Zelda games, the only notable Wii U titles on the horizon are the experimental “project guard” and “project giant robot” which are Miyamoto wild cards. There is a strong possibility that both of these projects will end up either cancelled or in some form or another on the NX.

The Future Outlook

It is clear to me that the Wii U and 3ds are nearly out of runway and that 2016-2017 will be a transition period into the mobile strategy and NX. Nintendo says they will maintain attention on the Wii U but I believe it will be quickly abandoned soon after the NX console comes online. The mobile strategy has significant potential if Nintendo handles it correctly, but as of now no real details have been revealed (other than the initial mobile release sometime in March — “Miitomo” and a “game featuring a major Nintendo character” sometime thereafter)

Nintendo has more than enough cash and recurring revenues/profits to exist as a low-growth, stable company until the NX releases. This earnings report highlights for me the tremendous importance the success of the NX means to the company. Perhaps we will find out more at this years E3 or in an upcoming Nintendo direct. An investment in Nintendo today is basically a speculative bet that the NX will be a success, or at worst a superior console to the Wii U and a replacement for the 3ds. I’m bullish on the prospects of Nintendo as they are still the most innovative video game company on the planet, but if the NX is less than impressive or not received well the next cycle is going to be very difficult for the big N.

Disclosure: I am/we are long NTDOY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Article originally posted on Seeking Alpha

Should Microsoft Corporation Be Concerned With the Worst PC Sales In 8 Years?

Another decline in PC sales in 2015 didn’t come as much of a surprise: It’s been an ongoing theme for the past several years. What is surprising was the rate of decline in the PC market last year, and the ramifications for once PC-dependent tech kings including Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC).

Both Microsoft’s and Intel’s CEOs are well aware of the declining PC market, which explains why both are implementing their own versions of a mobile-first, cloud-first transformation.. But do declining PC sales really matter? And if so, how much?

Pc Sales

Chart courtesy of Statista.

Just the facts
Investors need to harken back to 2011 to find the last year of PC sales growth. The PC market grew 4% in 2011, to more than 365 million units. But since then, four straight years of sales declines-topped off by 2015’s 8% drop-have left the market in tatters.

To put last year’s PC woes into perspective, it was the lowest number of global PC shipments since 2007. Currency headwinds played a part, particularly in emerging markets. However tablets were the primary culprit, and consumers using smartphones as all-in-one personal computing devices also played a role.

Does it really matter?
The drop in PC sales affected Microsoft last quarter, as its More Personal Computing division, home of its Windows OEM sales, reported a 17% drop in revenue.. Windows sales dropped 6% last quarter, and with earnings scheduled for Jan. 28, investors can expect more of the same. One of the few upsides to Microsoft’s last quarter as it relates to PCs is that the drop in Windows revenue of “just” 6% was actually better than the overall desktop market.

The personal-computing business also took a hit from Microsoft’s failing smartphone hardware sales, which saw a precipitous 54% drop in revenue year-over-year. Intel can certainly relate to the impact the lowest PC sales in eight years has had on Microsoft following its own fiscal 2015 Q4 and annual earnings.

Intel CEO Brian Krzanich’s transitional efforts were responsible for overcoming much of Intel’s 8% drop in PC-related revenue. The shift away from desktop sales is exactly why last year’s eight-year low should play little-to-no part in either Microsoft’s or Intel’s fortunes going forward.

What does matter
CEO Satya Nadella’s cloud-first pillar of his two-pronged initiative is paying off handsomely for Microsoft and its shareholders through a boost to its revenue from cloud-based services. Microsoft stock has been under pressure this year, but that has as much to with the recent broad-market sell-off as it does with poor 2015 PC sales.

Better still, Microsoft’s cloud-revenue growth should continue throughout 2016, particularly thanks to Nadella’s decision to focus on Software-as-a-Service (SaaS) delivered via the cloud. SaaS is expected to be one of the fastest-growing areas within the cloud-computing market, and with its industry-leading software product suite, no one is better positioned than Microsoft.

Intel has taken another approach to increasing its presence in the cloud, and it, too, is reporting impressive results. Along with the Internet of Things (IoT) division, Intel’s cloud-specific data-center sales is quickly becoming its most important division to drive growth. For the year, Intel’s data-center unit reported $16 billion in revenue, an 11% improvement compared to 2014, and equal to nearly half its PC-related sales.

Microsoft’s mobile-first strategy is also taking hold. Getting Windows 10 and Windows Phone operating systems into as many devices as possible, regardless of manufacturer, is paying dividends. Last quarter’s 29% in Bing search ad revenue was driven by “Windows 10 usage.”

The bottom line: Microsoft, like Intel, is not tethered to PC sales any longer. And even the worst PC sales results in eight years doesn’t change Microsoft’s status as one of the best growth and income investments in tech.

Something big just happened
I don’t know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was the best performing in the world as reported by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations. Together, they’ve tripled the stock market’s return over the last 13 years. And while timing isn’t everything, the history of Tom and David’s stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom’s newest stock recommendations.

*”Look Who’s on Top Now” appeared in The Wall Street Journal which references Hulbert’s rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

The above article originally appeared on The Motley Fool, written by Tim Brugger.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Intel.

 

The Key To Holding Microsoft Stock

Summary

  • Microsoft’s $1 billion donation, over three years, includes software as well as cloud services.
  • The donation will tie thousands of thought leaders to the company’s software offerings.
  • It’s a good move that highlights just how much excess cloud capacity is out there.

microsoftMicrosoft (NASDAQ:MSFT) made headlines this week by saying it will donate $1 billion in cloud computing services to non-profits.

It’s a good thing to do, but it highlights just how much excess cloud computing capacity exists.

Ever since Amazon.Com (NASDAQ:AMZN) began reselling cloud capacity based on technologies originally pioneered by Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Yahoo (NASDAQ:YHOO), companies offering the new infrastructure have had to invest well ahead of demand. That’s why Amazon dominates the market, alongside Google and Microsoft itself. These companies have internal demands for cloud that help justify the huge capital expense – as much as $1/quarter – the technology demands.

The result has been a revolution but, for most, a revolution without profit. Major players, again led by Amazon, have gone through repeated price cuts, with prices starting at free, in order to squeeze out competitors and maintain market share.

The strategy has worked, despite the absolute imperative of cloud to major enterprise players. Hewlett-Packard’s (NYSE:HPQ) decision, before spinning off its Enterprise (NYSE:HPE) unit, to get out of public cloud is just one decision among many. Yahoo’s inability to compete is due to its lack of other revenue with which to subsidize expansion. Other companies, while advertising cloud platforms heavily, have nevertheless kept their investment (and thus their potential market share) down. In order to report a profit Rackspace (NYSE:RAX), which pioneered the modern cloud movement as the original sponsor of OpenStack, cut way back on new capacity investment.

Even today, no one in this market will tell you just how much of its cloud capacity is being occupied by customers at any one time. Load factors are a secret, and while the excuse is they’re constantly changing anyway, they could be estimated if providers wanted to do that.

My guess, based on an unscientific survey, is that it’s in the single digits. Most of the time, less than 10% of cloud capacity is in use. So giving it away costs nearly nothing.

The Microsoft move, first announced by President Brad Smith and CEO Satya Nadella, is to donate capacity over 3 years to a list of 70,000 non-profits, including 900 university researchers, through Microsoft Philanthropies. This will include not just the Azure cloud, but Microsoft’s CRM program and its Microsoft Office suite, meaning a lot of people are going to go out into the world dependent upon, and knowledgeable about, Microsoft’s software offerings.

Microsoft reports earnings next Thursday, and analysts are expecting earnings of 71 cents per share on revenues of $25.22 billion, although there’s a whisper number of 75 cents.

The stock has held up fairly well during the January market frost, down just 8.5%, and despite the fall its price/earnings multiple remains a robust 34. Whether it continues to gain this year depends heavily on whether Nadella can get hardware sales up, like the Surface Pro and Lumia Phone, while continuing to keep traffic moving through Azure with moves like the donation and yet-another recent price cut.

The key to continuing to hold the stock is recognizing that the Microsoft cloud is a successful loss-leader for software and services, a defensive move in a glutted market.

The above article originally appeared on Seeking Alpha, written by Dana Blankenhorn.

Performance Market Crash Just Made Sony An Even Stronger Bull Case

Summary

PS4 will continue to drive Sony earnings.

Virtual reality is a potential strong force for future earnings.

Host of new products coming off the pipeline.

PS Vue set to become very earnings accretive for Sony.

SonyMy article in November outlined what I saw as a moderate bull case for Sony (NYSE:SNE). At that time the share price was US$28.45. At the time of writing now the price is at US$22.21. The 52-week range is between US$20.34 and US$37.95. The price fall is not because of any recent bad news about Sony. Indeed to the contrary, as I outline below, it is because of the general market sell-off. In fact Sony has had good news to announce recently. This makes Sony now a strong bull case.

My November article outlined the progress being made across Sony’s divisions, so I will not repeat that here. Suffice to say that in the six months to 30/9/2015, in revenue terms:

Game segment +17%.

Device segment +22%.

Music segment +15%.

Other divisions have returned to profitability with the exception of the strategically held mobile phone unit and perhaps the audio and TV division. Since then, more good news has filtered in for the company.

PS4.

Both hardware and software for PS4 is driving the Games & Network Services division. PS4 out-sold Xbox One in every month of 2015 except for April and October, including of course the big-selling months of November and December. About 36 million PS4s have now been sold, with approximately 6.4 million during the just gone holiday season. This figure of 6.4 million compares to 4.1 million for the 2014 holiday season. This represents up to a 100% quantitative advantage over Xbox. PlayStation Plus subscriptions increased 60% year-on-year.

New software titles for Sony will continue to boost the division in 2016. These titles include “Street Fighter V,” “Uncharted 4: A Thief’s End” and “Tekken 7.” Sales in the recently opened up China market will also show strong growth in 2016.

The share price of GameStop (NYSE:GME) fell sharply after they announced a decline in software sales over the holiday period, but in fact their figures were good for Sony. First they showed that gamers still want to buy consoles rather than just use mobile gaming platforms. Secondly they showed a continued decline for Nintendo, which is good for Sony. Thirdly they showed that software sales for PS4 consoles are booming.

On the back of the PS4, Sony’s PS Vue TV service is off to a bright start. This has been boosted by their getting access to ESPN and ABC channels from Disney (NYSE:DIS). It has been variously reported that they are partnering with Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) for this service. They are up against the “Sling TV” service from DISH Network Corp (NASDAQ:DISH) but have the advantage of the huge installed PS base. Apple (NASDAQ:AAPL) has been much mooted as a competitor in this field but is having problems getting a competitive offering off the ground. The PS Vue TV service looks well placed to thrive on the back of the cord-cutting trend. It is forecast by the company to hit over 1 million users within three years.

Virtual Reality.

One negative on the Sony share price has been investors’ worries about what might be the “next big thing” for the company. December saw the announcement of “PlayStation VR” to be available on a so-far unspecified date this year. One major differential for Sony’s product compared to its rivals is the fact that images can be seen by both the VR wearer and on a screen for those not wearing the head-sets.

2016 is likely to see a head-to-head confrontation in this growing VR market between Sony and Facebook (NASDAQ:FB) which has its Oculus Rift offering. Sony’s product is expected to be priced quite a bit lower than that of Facebook. Unlike Facebook’s product it will be limited to one hardware source, the PS console, but that has advantages as well as disadvantages for Sony. Certainly it’s likely to be seen by the huge number of PS4 players (over 30 million and counting) as a “cool” device.

The total potential for this market was put by tech consultancy Digi-Capital at US$120 billion by 2020. These sort of market potential figures should always be taken with a pinch of salt and that figure seems somewhat over-inflated. However, the potential is undoubtedly there.

Other New Products.

The 2016 CES conference in Las Vegas highlighted some of the new products coming off the Sony pipeline, even if they did have a somewhat retro feel to them. These included:

A high definition handycam camcorder.

PS-HX500, a turntable for vinyl records, one that can digitize records as well as play them.

New line of Walkman music players.

New lines of portable wireless music speakers, wireless headphones, new lighting technology for “Bravia” HDR televisions, LED bulb speakers and new cameras.

Sony has additionally brought out its new range of Xperia Z5 mobile phones. As with previous Xperia models, these have earned excellent reviews. Technologically they are in advance of their competitors. The 4K screen display, the 23MP camera, the microSD card for expanding storage and the waterproof design should all be great sales advantages. However Sony seems stuck in an approximately 2% market share at the top end of a market in which branding and fashion are more important than real features.

The line-up at the CES conference though certainly showed that the spirit of technological innovation at Sony is far from dead. Based around their “seed acceleration program” the company is looking at many new concepts, including drones and electric cars.

Conclusion.

Sony is well-diversified both geographically and in terms of products, as I detailed in my November article. Imaging, movies and insurance should all be very earnings-accretive in the coming years.

Possible macro negative factors which could influence Sony include:

  • Effect of global economic malaise on consumer spending.
  • Direction of Japanese yen against US dollar (27% of sales are in Japan).
  • Progress made on the Japanese economy under “Abenomics.”

The PE ratio of Sony may seem high at 30.42, but this is only because the company has only recently become profitable after its successful restructuring. The P/S (price to sales) ratio is at 0.37 which would tend to indicate a company in a recovery situation. The P/BV (price to book value) ratio is at a favorable 4.37. Sony has historically paid dividends and this is expected to be re-instated fully in 2016.

The only division left which is likely to be revenue negative in 2016 is its phone division, which CEO Kazuo Hirai seems to have decided to keep for strategic reasons. The company has made very bullish forecasts on profitability for the coming years as divisions return to profitability and corporate restructuring charges move into the past.

Depending upon how they feel about the timing of the general market sell-off, investors should jump in to Sony shares as the opportunity arises.

 

The above article originally appeared on Seeking Alpha, written by Nick Cox.