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Opera targets 100m handsets, but still needs a white knight

Opera Software is a company which, behind the scenes, has had a significant influence on the modern mobile experience. The Norwegian firm had the most functional handset browser for years before Safari, Android and Chrome colonized the smartphone. Some of its innovations – such as compressing data searches on the cloud side to save on device and connection resources; as well as tabbed browsing, user-defined search engines and speed dial – have become standard practice.

One of Nokia’s many strategic errors, when trying to put together a platform to challenge Apple’s, was to acquire fellow slimline browser maker, Novarra, rather than Opera (it finally made Opera Mini the default for its ‘smart featurephones’ in 2014).

Buying Opera would not have been enough to change Nokia’s fortunes in the smartphone world, and ultimately some of the Opera technology might have found its way into the mobile strands of W10 and Edge. But certainly Opera has been increasingly in need of a white knight.

Earlier this month, it cut its forecasts for a second time this year. It now expects 2015 adjusted EBITDA to be between $104m and $108m, down from previous guidance of $108m-$118m, and revenues between $590m and $600m, down from $600m-$618m. In August, it had reduced its revenue guidance from about $650m.

In August, it initiated a strategic review after slashing its annual forecasts, indicating that, despite bold efforts, over the past years, to diversify its business into mobile advertising, content and data tools, it is struggling to play in a game where the web software giants increasingly control the mobile platform.

This is a question of scale not product quality. Opera continues to sign deals with operators and handset makers to preload its Mobile and Mini browsers and its Max data compression software; and it is surrounding those foundations with a raft of services, especially on the advertising side. But the margins available on preloaded software, largely for entry level smartphones, are slim and require huge scale, or a sufficiently large set of premium services to enable the core products to be free and possibly open source.

The browsers may have lost some of their differentiation when Opera finally converted to the WebKit rendering engine and a Chromium code base in 2013 (founder Jon von Tetzchner subsequently left to set up a new browser start-up Vivaldi). However, they still feature on a large number of handsets, even if far fewer staff work on them these days, and new versions of both mobile products were released earlier this month.

More important to the business is the data compression technology which has allowed the Mini browser to work so efficiently on devices with limited processing power or slow connections. Now that compression system is becoming even more valuable, given the shift of the smartphone industry’s growth towards entry level products, and it has been embedded into other offerings such as ad engines and the Opera Max data saving application.

Last week, Opera announced deals with 14 Android handset makers, to embed Opera Max in their devices. Big names such as Samsung and Xiaomi are on the list and will pre-install the software on new devices, which should mean it will be present on 100m Android handsets by 2017, Opera said.

Other partners include Acer, Hisense and Oppo, plus some of the regional brands which are becoming increasingly important in emerging economies, such as Cherry Mobile, Evercoss, Fly, Micromax, Mobiistar, Prestigio, Symphony, Tecno and TWZ.

Opera Max extends the cloud-side compression technology beyond the Opera Mini browser and allows it to run as an app. It already has some strategic partnerships, notably with MediaTek, but it is now poised for greater scale than the 5m downloads it has seen from the Google Play store, because it will become a default option in many devices.

In addition to compressing video and other data by up to 50% and making more efficient use of handset resources, the app allows users to monitor their data usage through its dashboard, issuing alerts and advising on how to change settings to lower fees. This it the feature which means it gets into higher end smartphones – for users eager to monitor their 4G data usage – not just the entry level models colonized by Opera Mini. Opera Max can also block apps which consume data in the background (though not ads, given the important of its mobile ad network to the Opera business model).

“Many users are wary of using mobile data for fear of spending too much or exceeding their data caps. We see OEMs responding to this and stepping up to lower the barrier to mobile internet access by providing a data optimization solution on their devices,” Opera Max head of product Sergey Lossev said.

The compression technology, along with the advertising platform, are likely to be the main attractions for any buyer – and Opera is still in need of a new parent as the web giants extend their reach into every area of the mobile experience, and start to take low end devices – the main growth area now – seriously. When Opera initiated its review, Facebook was reported to be one of the companies interested in acquiring it.

For Facebook, this could still be a good opportunity, bringing established mobile advertising software to support the social media giant’s dominating presence on handsets.

In such a deal – with Facebook or other mobile ad-driven players – Opera’s most famous products, the browsers, would be almost a sideline, unless, in future, they underpinned the often-rumored Facebook operating system (emerging mobile and embedded OSs are increasingly slimline and browser-based, like Google’s Chrome OS).

Opera’s second quarter figures showed just how far its transition to advertising has gone, and also went some way to dispel the idea that the firm is on the market merely because it missed its forecasts. When a company is dealing with multiple sub-sector revenues streams, some growing at varying rates between 45% and up to 83%, the odd miss is inevitable, but overall trends looked solid, if Facebook could get the support to kickstart growth again.

In total, Q215 revenue at Opera was up 45% year-on-year to $146.2m, and at constant currency the jump would have been 55%. Mobile advertising through third party partners brought in quarterly revenue of $92.9m, so makes up 63.5% of the total, and is the part of the business which is growing most quickly. Of course it also has mobile advertising on its own properties, which amounted to another $31.4m, but only some of that is on mobile devices. Other revenue streams include licensing and the Opera TV store.

Interestingly the video part of its mobile advertising business now makes up 58% of the revenues, compared to 9% a year ago, making it the biggest source of growth, and perhaps the main attraction for an acquirer. Of the three main companies which have been suggested as purchasers of Opera over the past three years (Microsoft, Facebook and Yahoo) the last two in particular would benefit from this capability.

We can see here some of the logic (and influence) behind Opera’s 2014 purchase of Ad Colony, which serves HD video in-app advertising. And in August, the company made another purchase, of Bemobi, a Brazilian firm which offers a subscription service for apps. Customers pay a monthly fee and download any app they like, even premium ones, and pay for this service through their mobile carrier bill.

This is particularly appealing in emerging markets, where payment card penetration is often low, and where Opera’s browsers have their largest remaining influence, thanks to many agreements with local operators. Carriers often install and brand their own mobile software for the midrange and low end user bases, especially in developing markets, while among high end consumers, it has been hard for Opera to sustain its share when Apple, Google and others pre-instal their own browsers with their mobile OSs.

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