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Financials Reports

Week in review: Smartphone’s heyday is over, but Apple’s is not

To read many of this week’s headlines, you’d have thought the world as we know it had ended. Yes, Apple did report its first quarterly decline in revenue and profit for 13 years, the clearest indication yet that the smartphone’s heyday is over.

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But over 51m iPhones and $50.6bn in revenues for one quarter is hardly doomsday, especially when set against the measly 2.3m Lumia smartphones which Microsoft sold in the same period – and Apple has its famous $233bn cash mountain to see it through many a rainy day.

However, the results brought concerns about Apple, and the wider smartphone sector, into sharp focus. Microsoft’s handset business is a disaster, but it was never central to the company’s activities – the only mystery is why cloud-driven CEO Satya Nadella doesn’t put it out of its misery. In fact, Microsoft’s results highlighted its strong growth in cloud services, and the fact that all the mobile players – like the computer makers in the 1990s – now need to transform themselves into services companies, if they want to avoid scrabbling for share in a commoditized price war.

So Facebook was the star of the mobile industry’s round of quarterly results, having found a magic formula to drive advertising and other revenues via mobile devices, especially video. The highlights for Microsoft and Apple (with its sharp growth in revenue from services like Apple Music and App Store) were all related to content and cloud.

The era of the smartphone has indeed ended, but despite the European Commission’s action against Google, that will not signify a major change in the dominant companies. Indeed, some faded brands may see a revival. Nokia, with its long history of reinvention, bought a smart healthcare company, Withings, in the same week that its formerly mighty handset business was crumbling to pieces at Microsoft. This could signal a return to devices for the Finnish firm – but devices for new uses, not old – and to its adage of the 1990s, that in the early years of a market, a company needs to offer both networks and endpoints, because they drive each other.

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On the infrastructure side, too, the week highlighted a time of deep change. Operators are consolidating to improve their economies of scale and offer quad play services, but that is putting pressure on their key suppliers in turn. With Huawei in the ascendant, Ericsson announced its first major reorganization since 2010, but it was a conservative one – a new leadership team with no new blood from outside the company; a split of the business units between products and services, IT and networks, which seemed geared to internal efficiency and transparent reporting rather than a new strategy for growth. Ericsson, of course, made a bold move last year with its Cisco alliance – having since been overtaken by Huawei in its core carrier networks business, it needs to demonstrate the results of that pact more rapidly.

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Other established mobile players are clinging to ships that have sailed, notably Orange, which is setting great store by turning its new stake in Groupama Banque into a fully fledged mobile banking business – when the only real chances for MNOs to outwit web players in financial services lie in emerging markets.

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The chequered history of mobile operators in payments and banking should be a lesson for other adventures in ‘digital transformation’, especially in the Internet of Things. MNOs need to find a way to add value to the digital activities of a host of vertical players, from banks to car makers to manufacturers, if they – not the over-the-top providers – are to drive the Industrial IoT. Yet the exciting news in the past week in this area has focused on alliances between IT and vertical giants (Oracle and GE, Rolls Royce and Microsoft), with MNOs hardly to be seen.

Some operators are recognizing that enterprise, vertical and IoT power is likely to rely on good old networks, not on trying to beat OTT players or enterprise service providers at their own game – lining the bitpipe with gold rather than dismantling it. This is the real commercial objective of the deep architectural transformations that the larger MNOs are contemplating, from virtualization to Mobile Edge Computing (MEC) to 5G itself.

Once again, they are focused on creating a network which inherently delivers value to a range of services, and enables brand new ones, in a way which is impossible for companies without their kind of spectrum and technology. There is a need for such ultra-efficient, ultra-secure networks – the danger, as Google’s and Facebook’s network experiments indicate, is that the MNOs will not be the firms to build them.

But the pieces are starting to come together. ETSI published its latest set of MEC specifications last week; the FCC is well into its consultation on spectrum options above 24 GHz; Verizon and AT&T are stepping up plans for 5G trials; Huawei and Vodafone established a major lab for cellular IoT applications. The interesting question will be how Apple succeeds in inserting itself into this process of defining the next mobile generation.

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