Tag Archive: apple

  1. Are Big Tech’s Q2 results too good?

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    Across the world, national economies are in deep recession, businesses are folding and unemployment has soared. The coronavirus pandemic has wreaked havoc for so many, yet there is a subset of the global economy which demonstrates extraordinary resilience.  

    The tech giants release their Q2 2020 results

    On Thursday last week, amid much anticipation, the Big Tech big four released their second-quarter results. They would have been impressive in the pre-Covid world, but in the current context they were nothing short of astonishing. Facebook reported an 11% growth in revenue year on year, to $18.7 billion, and its profit doubled to $5.18 billion; its number of monthly active users (MAU) rose 12% to 2.7 billion. Amazon posted a record profit of $5.2billion, with sales rising 40% to $88.9 billion, while Apple’s profit rose 12% to $11.25 billion, and its revenue by 10% to $59.69 billion, thanks partly to a 1% increase in iPhone sales. Alphabet, Google’s parent company, reported a profit of $7 billion, which was down on the year, but still above the share price expected by Wall Street ($10.13 a share vs $8.21).  

    A great quarter for Facebook

    Despite the negative publicity that Facebook suffered following the #StopHateForProfit campaign and subsequent boycott of the platform by some of the world’s largest advertisers, the second quarter of 2020 was a great one for the social media giant, from a financial perspective. Revenue growth slowed, but it was still far greater than what analysts on Wall Street predicted. The financial success and growth in both monthly and daily active users signal that people and businesses used Facebook to stay in touch with loved ones and customers in the spring, when much of the world was in lockdown because of the pandemic. Facebook states that 180 million businesses use their tools, and it has 9 million active advertisers; this well-established longtail of smaller advertisers goes a long way to explaining why the July boycott wasn’t financially damaging to the platform, although it was very challenging from a PR perspective. Facebook is strengthening its relationship with its small business advertisers with the launch of two new initiatives, Facebook Shops and in-messenger commerce. 

    Strong performances from Apple, Amazon and Alphabet

    The other three components of the Big Four also enjoyed remarkable success in Q2. While Alphabet’s ad revenue was down, many analysts believe that this was largely because it came from a much larger base than Facebook’s, for example. YouTube’s ad revenue increased by 5.8% to $3.8 billion, which was much slower than its Q1 performance but still impressive given the context, namely many advertisers halting their ad spend. 

    Amazon, possibly unsurprisingly with so many people stuck at home, had a strong second quarterwith a record profit of $5.2 billion and growth of more than 40% in its division that is largely comprised of its ad sales business. The retail giant brought in revenue of more than $7 billion more than expected, despite initially being caught off guard by a sudden spike in demand during the pandemic, as more people chose to shop from the safety of their homes. It says it is currently expanding its fulfilment centres as it prepares for the peak holiday shopping season at the end of the year. 

    Despite store closures and operations disrupted by the pandemic, Apple’s revenue was the highest the company has ever reported in its second quarter, up 11% year on year. This rise is due largely to a 1% increase in iPhone sales, helped by the launch of the lower-cost iPhone SE. 

    Results that good don’t look good

    The tech giants and investors will undoubtedly be pleased with their performance in the second quarter, particularly given the economic context, but there is a fly in the ointment. Results this great, when so much of the world is in a downward spiral, are difficult to justify, and do nothing to quell suspicions that the Big Four are far too powerful, with too large a monopoly on the marketplace. Just the day before the Q2 results were released, the CEOs of Apple, Facebook, Alphabet and Amazon appeared before the US Congress’ antitrust hearing, as a culmination of 13 months of investigation by lawmakers into the market power of Big Tech. The key criticism against the four companies is that they have engaged in anti-competitive behaviour, using their power to choke the ability of their smaller rivals to compete with them. The investigation will produce a report after the hearing, which will be released towards the end of the year and will form the basis of new laws to regulate Silicon Valley 

    Each of the CEOs – Tim Cook, Mark Zuckerberg, Sundar Pichai and Jeff Bezos – tried to downplay the scale of their market leadership to Congress on July 29th. But their efforts were undermined by their huge earnings released just the next day, which not only underscore how reliant people became on Big Tech during the pandemic, but also symbolise how powerful these companies are and their ability to see off smaller competitors.  

    An awareness of perception issues

    Each company was acutely aware of the optics of their Q2 results. Amazon’s press release went out of its way to detail the ways in which it contributes to communities and its employees. Tim Cook said that Apple was conscious that its results contrasted sharply with the fortunes of so many others over the last few months, and that the company doesn’t have a zero-sum approach to prosperity, while Mark Zuckerberg highlighted his belief that Facebook’s products have changed the world for the better and improved people’s lives. Whether these statements will have any bearing on Congress’ conclusions remains to be seen. 

    Is Big Tech on notice?

    It’s very likely that the Big Four’s remarkable Q2 results will feed into Congress’ belief that they are too powerful; indeed, they – along with Microsoft – currently represent more than a fifth of the S&P 500, the first time since the 1980s that the five largest companies have had such a large share of the index. Congress lawmakers will inevitably seek to curtail that power to an extent, as it is in direct contrast with American antitrust laws. It will be fascinating to see what the implications for the Big Four, the tech sector and advertisers will be. 

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  2. Is Netflix ready for the launch of rival platforms?

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    Make or break for Netflix

    A couple of weeks ago, Bank of America Merrill Lynch told clients that Netflix’s Q3 figures, out later today, would be ‘make or break’ for the streaming platform, and would indicate whether it would be able to effectively compete with new rival platforms from the likes of Disney and Apple. It’s been a difficult few months for Netflix – its share value has plummeted by nearly 30% in the last three months, and subscriber levels fell short of the company’s own guidance in Q2. Whether those subscriber levels have recovered will be of particular interest in the Q3 results – and investors will be looking for signals that they can retain that recovery as competitors launch their streaming platforms.

    Who are the competition?

    So what does the competition look like for Netflix? Apple and Disney are launching their streaming services next month: Apple TV+ on 1st November, and Disney Plus on 12th November in the US, Canada and the Netherlands, with other markets in the months afterwards. This makes strategic sense, particularly for Disney, as it can piggyback on the marketing for its big-budget holiday-season films, and Netflix has shown over the last few years that it gets its biggest viewership in the last couple of months of the year. WarnerMedia’s HBO Max and NBCUniversal’s streaming service will be launching in early 2020. So Netflix’s battle to keep its subscribers loyal – and grow its customer base – starts now. Convergence Research Group, which tracks the streaming industry, predicts that its 47% share of the streaming market in 2018 will decrease to 34% by 2022, as reported in an LA Times article.

    Original content will be increasingly important

    This decrease will in part be down to the fact that Netflix will be losing some of its most watched shows to its competitors: ‘Friends’, for example, will go to WarnerMedia’s streaming service in early 2020, while ‘The Office’ will be shown by NBCUniversal from January 2021. With adults spending only around 30% of the time they spend with Netflix watching Netflix Original content, it looks like this could have an effect on Netflix’s subscriber numbers.

    However, Bank of America Merrill Lynch told investors that he believes Netflix will have time to ramp up production of original content while its rivals work on building their subscriber bases. This will means that Netflix will need to continue its huge investment into original content – this year it is estimated to have spent around $16 billion dollars, and Pivotal Research Group estimates that this will have climbed to a giant $35 billion by 2025. This needs to be funded from somewhere and Netflix’s capacity to raise subscription fees – its fallback option to date – will be stymied by increased competition. Netflix could also consider increasing its debt, introducing ads, investing in innovation (such as the ‘Bandersnatch’ episode of ‘Black Mirror’, where viewers could choose what the main character did next), or harnessing the vast wealth of data they have on what people like to watch, and where.

    A core part of the streaming bundle?

    Netflix’s choppy year has made investors a little nervous, which is why so much rests on the figures that it is releasing today. But many think that things will be ok. Mark Mahaney, lead internet analyst at RBC Capital Markets, for example, told CNBC that most people will want to use more than one streaming service, and it’s likely that that will mean Netflix plus another – Netflix will be a core part of the bundle. He believes that Netflix has the scale advantage and better brand name, content, global distribution and partnerships than its competitors, which bodes well for the future. Time will tell!

    What does this mean for advertisers?

    TV is still a crucial medium for advertisers, but with viewers having more and more ad-free options from the new streaming platforms, it will become increasingly difficult to reach their hearts and minds. What’s more, they are likely to be less forgiving of higher ad loads on the ad-funded free-to-view channels. This means that the most effective media channels will likely become more expensive, and the wise ones may well have fewer, higher impact ad spots for which advertisers will pay a premium. Furthermore, the growth of addressable TV will allow for more targeted and therefore more engaging ads, and lower levels of rejection by the consumer.

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