Tech Sector’s Profits Are Fueled by Mobile, Cloud
Posted by hkarner - 2. August 2016
Source: The Wall Street Journal
Facebook, Google surge on mobile revenue; Cloud businesses boost Amazon, Microsoft
The latest batch of tech-industry earnings show how two technology trends—mobile and the cloud—are taking root and delivering big profits for the companies that bet on them.
Facebook Inc. and Google parent Alphabet Inc. last week both reported surges in their quarterly profits, fueled by users spending more time on their smartphones and advertisers spending more money to reach them there.
Meantime, Amazon.com Inc. and Microsoft Corp. beat Wall Street estimates with results that were lifted by the strength of their businesses hosting other companies’ data on their computer servers, also known as the cloud.
“The big are getting bigger,” said Ben Schachter, an analyst at Macquarie Group Ltd. “People are using the internet more and more. They always have it with them because of smartphones, speeds are getting better…and all that information has to come from somewhere, and it comes from the cloud.”
The strength of these technologies is intertwined. Mobile devices are increasingly becoming people’s primary computers, which is driving demand for the cloud. On personal computers, data was often stored on the device itself, but smartphones have less memory—and the consumption of data overall has dramatically increased—requiring more information to be stored on the cloud.
The link is more than a decade old but has accelerated sharply in recent years. The original boom in downloaded songs—frequently from Apple Inc.’s iTunes service to iPods—has been supplanted by an explosion in mobile apps, streaming media services and other mobile offerings that require the cloud.
“We see mobile and cloud infrastructure going hand in hand,” said Ben Stanton, an analyst at research firm Canalys. “Cloud infrastructure is pushing more and more of the capability of the mobile device.” Canalys forecasts that corporate spending on cloud services rose 52% in the second quarter from a year prior, largely driven by mobile demands.
Meanwhile, the picture for hardware companies is mixed.
The yearslong shift to smartphones from personal computers has delivered massive profit for Apple, which introduced the first iPhone nine years ago. But now smartphone sales have plateaued in many countries, and Apple is feeling the squeeze. The world’s most valuable company said last week that iPhone sales declined for the second consecutive quarter after an eight-year run of growth, pushing profit down 27% from a year prior.
Still, some phone makers reported sales growth, including Samsung Electronics Co. and Huawei Technology Co. Chip maker Qualcomm Inc. reported a 22% jump in quarterly profit linked largely to chip sales for Chinese smartphones.
Overall, the mobile era is entering a phase in which the profits are increasingly going to internet and software companies that capitalize on people using their phones more.
Two big winners are Google and Facebook, which are reaping the rewards from the critical mass of mobile users that is attracting advertisers.
Facebook said mobile ads accounted for 84% of its $6.2 billion in advertising revenue in the latest quarter, compared with 11% in 2012. Facebook’s profit nearly tripled from a year prior to a record $2.1 billion.
Mobile growth also drove Google’s 21% jump in quarterly revenue. It said advertisers now are increasingly willing to advertise on phones, partly because their mobile websites have improved, and because tech companies like Google are offering better mobile-ad formats. Google also is drawing advertisers by demonstrating the efficacy of smartphone ads, like tracking users’ locations to see if they visit physical stores after seeing a mobile ad for those stores.
While Apple’s phone sales are shrinking, its smartphone-services revenue rose 19% to nearly $6 billion in the second quarter. That revenue includes app sales, Apple Music subscriptions and Apple Pay fees. Apple CEO Tim Cook said he expects the business to grow so much over the next year that it would be a Fortune 100 company if it were independent.
Revenue at Amazon’s cloud business grew 58% to $2.89 billion in the second quarter, helping fuel Amazon’s record $857 million profit, which nearly doubled the company’s previous high. The cloud business is on track to surpass CEO Jeff Bezo’s $10 billion revenue goal this year.
Microsoft, widely seen as the No. 2 cloud provider after Amazon, is making its cloud business the centerpiece of a transition beyond selling software. The segment that includes its Azure cloud-computing service grew 6.6% to $6.71 billion in the latest quarter, while the segment including Windows software fell 3.7% to $8.9 billion. Azure revenue alone nearly doubled.
Google also is aggressively pitching its cloud services, and recently hired Diane Greene, a well-known Silicon Valley entrepreneur, to run the division. Revenue for the segment that includes Google’s cloud business increased 33% to $2.17 billion in the second quarter, outpacing past quarters’ growth and increases in its advertising business.
Some of the losers in the latest round of earnings highlight how smartphones and the cloud are replacing PCs as Silicon Valley’s major growth driver. Intel Corp., the PC-chip kingpin that failed to get a foothold in smartphones, reported a 51% drop in profit because of restructuring charges linked to a strategy to reduce its dependence on PCs.
Other companies linked to PCs are rapidly shifting to mobile. One example is Logitech International SA, a longtime maker of PC peripherals that has recently been adding a range of devices linked to phones, such as home cameras and wireless headphones.
Logitech reported better-than-expected first-quarter financial results, including a 7% rise in revenue. Logitech CEO Bracken Darrell said in an interview, „Everything we do is mobile.”