The Week in Review; Third quarter results show that bold thinking pays off
Qualcomm and Alphabet invest heavily in driving the next generation of mobile internet, while Apple and Ericsson lack new ideas
This week has been a mixture of big, bold bets in wireless, and a series of poor quarterly results.
There’s a connection of course. The companies which are taking the risks, and recognizing that the industry has changed forever, are the ones delivering the best hopes for growth.
Qualcomm is putting serious investment into its expansion into the Internet of Things, paying $39bn for auto chip leader NXP. The firm is hoping the car will become the new smartphone, and that it can dominate that area of connectivity as convincingly as it did handsets.
It is certainly adapting to the stagnation of the handset space more creatively than most of its phonemaker customers. Apple’s investors have been waiting for several years to see the ‘magic’ innovation they still believe in, against all the evidence of rehashed tablets, Macs and smartphones – and the damp squibs of smartwatches and TVs. As befits a company which is resting on the laurels of its huge installed base and loyal customers, Apple turned in lacklustre quarterly results and a year-on-year drop in iPhone sales – expected, but still a sign of the times, and a wake-up call that the company is dangerously over-reliant on a single iconic product.
Samsung, of course, was showing signs of adapting to the new smartphone realities, until its genuinely innovative Galaxy Note range suffered a literally explosive setback. In its own quarter, its mobile communications unit saw its profit slump from KRW2.4 trillion a year ago to KRW100bn ($88m). The unit’s revenue fell slightly too, and – more worrying even than the dramatic but temporary Note blip – new quarterly figures from analysts at Strategy Analytics show that all the marketing and R&D efforts of the past year are not stopping the rise of the Chinese handset makers, which are succeeding not just at the low end, but with high end models affordably priced.
Samsung and Apple held on to their top two positions in terms of shipments in the most recent quarter, but both had year-on-year declines in shipments (10% and 5% respectively) in a market which, overall, rose by 6%. They now have 20% and 12% market share, both lower than a year ago. By contrast, Huawei increased its share by 1% to 9%, putting it in third place, closely followed by the current hot Chinese challenger, Oppo, which has eclipsed Xiaomi’s place as most watched smartphone upstart. Its shipments, at 21.6m units, were up 140% to give it 6% share and fourth place, followed by Vivo.
The need for far more radical response to the changing industry is not confined to handset makers. Ericsson and Nokia both turned in quarterly results in which their core network equipment businesses were suffering from a lack of creative thinking. Both companies are targeting growth areas such as cloud and software-defined networking, but progress is too slow and competitors from the IT space are too powerful. If ever a company needed to make a left-field choice of CEO, it was Ericsson. It should have emulated IBM – whose position on the precipice in the early 1990s the Swedish firm now occupies – and hired someone from a wholly different industry to bring fresh thinking. Instead, it has appointed Börje Ekholm, a board member of a decade’s standing, an expert in finance rather than business strategy – and the most controversial thing analysts could find to say about him was that he lives in the US rather than Sweden.
There are creative thinkers in top jobs in the technology business, but they are not running the traditional mobile powerhouses. Instead, they are heading up the companies which are most responsible for turning the industry upside-down in the first place. Google parent Alphabet, under the sometimes maverick leadership of its founders Larry Page and Sergey Brin, is the clearest example, though unlike a host of its would-be emulators, it does have a solid, relatively low risk revenue stream in advertising, to mitigate the unpredictable results of the ‘moon shots’.
The rewards of this skilful balance was a 20% year-on-year leap in third quarter revenues, to $22.5bn, and though digital advertising and related services remained the backbone of the performance, there was also strong growth from video, Google Play content and Google Cloud. And mobile usage of all its services, particularly video, was highlighted in the quarter.
Alphabet CFO Ruth Porat insisted that the solid performance justified the ‘other bets’, despite recent cutbacks on the Google Fiber adventure. “As we reach for moonshots that will have a big impact in the longer term, it’s inevitable there will be course corrections over time, and some efforts will be more successful than others,” she said. And Google chief Sundar Pichai, regarded as the man who has to deliver these strong figures while others may be allowed to play, praised the way that investments in machine learning, containers and cloud technologies would, over time, drive new services and growth into the core businesses.
And Alphabet was keen to say that it was still working on driverless cars, in the week that Apple was reported to have shut down its own project in this area, at least on the hardware side. Deciding that an autonomous car is an expensive step too far out of its comfort zone may well prove a wise decision by Apple, but the contrast between the two giants of the mobile world is still telling. Google is positioning itself to drive and lead whatever the next generation of internet experiences and services may be. Apple, in common with the mobile networks vendors and many others, is failing to come up with any new ideas.