Web-scale cloud platforms, leveraging massive consumer applications, have dramatic cost and performance advantages over private data centers, stemming from their scale, scope, superior design, and world-class computer science skills. These advantages, which already allow the top cloud operators to deliver 50-75% lower costs to customers vs. the all-in costs of in-house solutions, are growing wider with time and are rapidly separating AMZN, GOOG and MSFT from smaller would-be rivals. As we have often noted, these dynamics are troubling for traditional data center technology vendors, and are likely to be deflationary for IT budgets in general. Low cost, high performance cloud hosting also greatly lowers the barriers to entry for SaaS application developers – opening the door to innovation and competition in enterprise applications, pressuring SaaS pioneers with older architectures, and posing an existential threat to traditional application vendors. Success in SaaS will come from innovation, execution, and scale economies rather than customer lock-in, and product life-cycles will be shorter than in the last 30 years of the software market.
- Netflix and Comcast’s multiyear peering deal comes as a surprise, amidst reports that broadband distributers have been hampering streaming performance.
- Comcast’s proposed merger with TWC likely gave it an impetus to be on its best behavior under regulatory scrutiny, skewing deal terms in favor of NFLX
- Peering agreements fall outside of previous agreements on net neutrality, but this deal sets a precedent and will clearly impact future regulatory policy.
- We don’t expect this deal to have a major impact on NFLX’s bottom line, but expect NFLX will use the terms for negotiations with other providers
Over the weekend, Netflix and Comcast surprised investors announcing a peering agreement whereby NFLX will pay for unimpeded connections to Comcast broadband subscribers. Over the past several quarters, NFLX streaming customers have been frustrated as Comcast, Verizon and other ISPs have refused to expand the bandwidth of connections between the popular content provider and their distribution networks. As a result, average streaming speeds for NFLX users have declined more than 25% at Comcast and more than 15% at Verizon since February 2013, according to the company. Given the burgeoning popularity of the service – NFLX draws 31.6% of all downstream Internet activity in North America according to Sandvine – the deteriorating performance due to the peering conflict is a significant risk to the company. Comcast’s newly signed agreement settles the problem on its network, and eventually on Time Warner Cable, assuming that the announced merger is allowed to proceed. This deal expands the net neutrality limitations that Comcast agreed to in its 2011 consent decree, and will likely be a precedent for further deals with other streaming providers and between streamers and other ISPs. Given Comcast’s obvious interest in courting approval for its TWC merger with an FCC skeptical of the deal’s possible impact on broadband competition, the terms are likely favorable to Netflix.
- At $19B in cash, stock and future stock grants, FB is paying more than 10% of its enterprise value for WhatsApp, its 450M monthly active users and 55 employees.
- Strategically, WhatsApp is a great fit, with extremely strong penetration and engagement in markets where FB is relatively weak, like India and Latin America and a clear monetization path
- The strategy of separate focused mobile apps is spot on – WhatsApp for messaging, Instagram for photos, Paper for news dissemination – controlling footprint and usage on others’ platforms.
- This is a VERY bold move, but WhatsApp will deliver real long-term growth and FB may have enough short term business momentum to cover for the almost certain and substantial dilution.
Wow! Mark Zuckerberg is not playing it safe. WhatsApp has been on fire, going from 0 to 450M users in less than 5 years, now serving more messages than all of the Earth’s wireless carrier SMS systems combined. The service is particularly strong in emerging markets – According to The Information, 55% of Indians, 63% of Brazilians, 72% of South Africans and 76% of Mexicans surveyed by Jana Research reported WhatsApp as their most used messaging application, while Facebook didn’t top 6% in any of those markets. No mystery that Facebook would be interested in buying the company, but after seeing Twitter’s big move out of its IPO and having had Snapchat turn down a rumored $3B offer, the real question was whether it was too late to get WhatsApp at a price that Zuckerberg was willing to pay.
- CMCSA is SERIOUSLY understating the approval challenges for its TWC deal –DOJ and FCC are philosophically opposed, Hollywood and Silicon Valley can offset its political clout
- Combined, CMCSA/TWC passes 60% of US households, and has 37%+ of broadband and 32% of video subs. Divesting subs to get under 30% share of video isn’t enough of a concession
- Net neutrality will become the BIG deal hold up – FCC could require common carriage regulation, open the door to real open web TV competition on cable pipes
- Meanwhile, the deal announcement throws a major monkey wrench into AAPL’s rumored plans to offer TWC access via AppleTV – all industry over-the-top TV plans now go on hold
Comcast definitely has swagger. In the wake of John Malone’s ill-fated $130/share bid for Time Warner Cable, Brian Roberts swoops in with a friendly $158 offer, just a tick below the $160 number TWC had floated as a fair price for its sloppily managed cable TV dominion in slapping down the Malone/Charter Cable bid. Anticipating the inevitable regulatory scrutiny, Comcast immediately offered to peel off roughly 3 million subs to get under the 30% share Maginot line previously established by the FCC as unacceptable concentration in the cable industry, and published a powerpoint document outlining its argument as to why a combination of the country’s number one and number two cable providers would be a boon to consumers and to competition in general.
GOOG dominates the booming digital ad market – we expect Search, YouTube, local, AdSense, and other initiatives to keep the company in front, even with the shift to mobile, social and video, and in the face of able challenges from Facebook and Twitter. However, it is GOOG’s dominion over modern computer science that scaffolds this ad sales machine and that creates wholly new opportunities – in fields as diverse as robots, medical research, augmented reality, commercial hosting and the internet of things. The company has the world’s biggest, cheapest, and most powerful computing platform, and combining that extraordinary infrastructure with its world leading data management, algorithm development and deep learning software expertise puts it in prime position to attack the nearly limitless number of traditional businesses ripe for disruption from the cloud. In this context, GOOG’s seemingly out-of-focus moon-shot investments and acquisitions make perfect sense, even if they may be monetized by subscriptions, service charges, equipment sales, retail commissions, or transaction fees rather than ads. Ultimately, GOOG may be addressing a larger and more lucrative opportunity set than any other TMT player, with assets and skills that will make it difficult to beat as the cloud era plays out.
- The good news: TWTR blew out 4Q sales and EPS on HUGE ad sales – sales/month/user up 50% QoQ and 72% YoY – turning an unexpected profit and raising guidance well above consensus
- The bad news: Investors are disappointed with user growth – MAUs up just 9% QoQ to 241M, far short of expectations for 250M, with engagement off 10% QoQ to boot.
- Slow user growth and weak engagement is a product of VERY poor marketing of the service to consumers, a condition that could be countered easily with effective management action
- Meanwhile, TWTR has been very successful in positioning with advertisers, accelerating sales growth in the quarter, and poised to deliver serious upside to expected 2014 sales and EPS.
Market sentiment seems to have made Twitter’s 4Q13 results into a referendum on the size of the service’s potential user base. Twitter management seems not to have gotten the memo. 241M individuals reached the monthly active user (MAU) threshold in the quarter, up 9% QoQ and 30% YoY, but far short of well publicized analyst expectations for 250M. User engagement, as measured by the number of timeline visits per MAU in the quarter, was a bigger embarrassment, off 10% QoQ. Going back, the MAU and engagement statistics have been bouncing around with periodic fits and starts, and 4Q could either be the start of a trend or an anomaly, but the erratic performance hardly inspires confidence. Investors, who sold the stock off hard after hours, are concerned that a tree is falling in the forest without nearly enough MAUs on hand to hear it.
- GOOG satisfied investors with a top-line beat, despite its MOT-driven EPS miss. AMZN tripped on both sales and earnings, evidence of a weak environment and delivery partner problems
- GOOG ex MOT was strong – sales up 22% YoY, paid clicks up 13% QoQ, and cost per click down 2% vs. 3Q; The earnings miss was ALL on Motorola, which will be gone soon to Lenovo
- AMZN’s revenue miss, on 20% sales growth, is evidence of a fairly soft Holiday retail market, while troubles with delivery partners may have hurt on both the top and bottom line
- GOOG should ride a strong digital ad shift all year, unencumbered by MOT. AMZN’s soft 1Q guidance raises investor fears, but the long-term growth and profit opportunity is still intact
The two 1,000 pound gorillas of the Internet reported within minutes of each other Thursday night. Google hit the tape first with what, at first, seemed a mixed report that initially sent shares down in after hours, a trajectory that reversed itself once investors realized that the only bad news was in the Motorola Mobility business that had been sold to Lenovo for $2.9B this very morning. In contrast, Amazon disappointed all around – the stock started down and kept going, as squeamish holders sold out, wondering if Jeff Bezos deserved this much benefit of the doubt. Ultimately, I think the disparate results of the two can be tied to the relative fortunes of their core revenue drivers. The digital advertising market is on fire, while on-line shopping proved that it is not immune to the broader retail weakness.
- FB and QCOM answered critics with strong 4Q earnings. FB showed outstanding execution in a frothy digital ad market and QCOM showed a low-end mix shift won’t scuttle profitability.
- Mobile, social and video drove big on-line ad spending growth. FB increased ad density, and added high-priced video, while growing users/engagement. Sales accelerated to 63% growth.
- QCOM revenues were a tad below consensus, but its strong margins and guidance were a relief after poor smartphone #s from Samsung and AAPL, damping concerns of commoditization.
- Separately, GOOG announced the sale of Motorola’s device operations to Lenovo for $2.91B, resolving conflicts in the Android ecosystem and returning focus to its core businesses.
I got to say, it was a good day. Facebook spanked the sandbagging analyst community with a stirring quarterly beat. Qualcomm didn’t thrash the sales consensus like Facebook, but delivered serious bottom line upside in response to doubters that expected margins to crater with the ongoing mix shift toward lower priced smartphone chipsets. Finally, Google rid itself of its Motorola albatross in a sale to Lenovo, which gives that company a red-carpet entrée into western handset markets while removing Google from the awkward position of competing for market share with its own licensees.
Quick Thoughts: Apple – A Frightening Glimpse of the Future
- While AAPL delivered an EPS beat and in line revenues, poor iPhone unit volumes, weakness outside of Japan/China, and cautious March guidance fuel serious questions of long term growth
- AAPL’s high price strategy delivered margins, but it is trapped in an almost saturated segment. Despite 2 new iPhones, share is down YoY in almost every major economy but Japan.
- China Mobile began selling iPhones this month, but tepid guidance squashes hopes of a 2QFY14 windfall, and raises the possibility of an even worse 2H as the new iPhones and iPads age.
- 1QFY14 casts a pall over expectations of future growth – China/Japan slows, high end device demand plateaus, competition intensifies, Mac succumbs to PC weakness. What then?
At first blush, Apple’s 1QFY14 looked like a beat – sales of $57.6B topped the $57.5B consensus, while EPS of $14.50 cruised past the published $14.09 expectations. However, given talk ahead of the report, it is likely that investors were expecting even more. Furthermore, a few paragraphs further into the press release, the 51M iPhones sold stood out like a warning beacon, a 10% miss against expectations of more than 55M units in a quarter where the company released two brand new smartphone models, launched them to more countries on a faster schedule than it ever had, and added NTT DoCoMo and its 63M iPhone crazed subscribers to the list of carriers for the first time. Add in guidance for mid-point March quarter revenues almost 6% below the current consensus, and the after-hours rout was on – at the end of the conference call, shares were down more than 8%.
- AAPL’s Monday report should easily top consensus of $14.09 EPS and $57.5B revenues on Japan fueled iPhone sales, but may just meet the rising whisper numbers.
- Expect a big top-line beat out of FB – strong market shift to social/mobile ads drove 59% growth in 3Q. Consensus is low balling with forecasts of 46% growth in 4Q – up just 16% QoQ
- QCOM EPS estimates have fallen 9% since Oct., with a sharp sales deceleration QOQ built in. Global smartphone market looks a bit soft, but QCOM will beat on share gains.
- Online ad sales should also lift GOOG above the $12.21 EPS/$16.76B sales consensus, with MOT less of a drag than usual. Estimates look even easier for 2014.
- AMZN earnings are a wild card – analyst EPS forecasts vary btw $0.01 and $1.86 around the $0.66 mean. Expect sales better than the $26B consensus and another free pass on profits.
I usually stay out of the quarterly earnings game. Each of the top TMT names has dozens of analysts keeping detailed financial models, issuing forecasts, and either taking victory laps or offering excuses as the releases roll in every three months. Still, with 5 of the 7 companies that I see as the most important players for the future of TMT reporting over the next 4 days, I thought I might offer my thoughts.