Apple and Samsung both had a mixed second quarter

While Apple registered modest growth, with the strong performance of Services compensating the declining iPhone sales, Samsung’s revenue and profit continued to plummet, thanks to weakness in the semiconductor market.

Apple’s Q2 2019 results (its financial Q3 2019) were respectable, if not exciting. The total sales went up by 1% to $53.8 billion from $53.3 billion a year ago, therefore making it the company’s record June quarter in terms of revenue. Gross margin slightly declined from 38.3% to 37.6%, and the operating margin dropped from 23.7% to 21.5%.

The iPhone contributed almost $26 billion, a decline of 12% from $29.5 billion the same quarter in 2018. This represented the first quarter when the iPhone accounts less than half of the total revenues since 2012. Notably, the iPhone is the only product category that reported year-on-year decline this quarter, with growth reported in Mac (+10.7%), iPad (+8.4%), Wearables, Home and Accessorie (+48%), and Services (12.6%). The $11.5 billion revenue generated by Services now accounts for 21.3% of the company’s total income.

“These results are promising across all our geographic segments, and we’re confident about what’s ahead,” said Tim Cook, the CEO. “The balance of calendar 2019 will be an exciting period, with major launches on all of our platforms, new services and several new products.”

If by “promising” Cook meant decelerated decline, he was right. Apple’s revenues continued to drop in Europe (-1.8%) and Greater China (-4.1%), the second and third largest markets after the Americas, albeit at a slower pace. Greater China would have registered a growth on constant currency, Cook insisted.

When it comes to the “balance of calendar 2019”, Apple gave a guidance showing mild improvement in Q3 (its financial Q4). The midpoint guidance points to a 16% growth in revenue, largely similar gross margin (38%), similar operating expenses, implying an improved operating margin of about 24%.

While the iPhone’s shrinking contribution may be expected, the strong performance of Services was encouraging. The company claimed it now had 480 million subscriptions across all its service portfolio, and both Apple Pay and the ad income from App Store search delivered triple-digit growth. The 3rd-party subscription revenue generated by the App Store went up by 40%. The Service growth momentum is likely to be further strengthened by the launch of the video streaming service Apple TV+ and the subscription gaming service Apple Arcade in the next quarter. The Services strength helped lift Apple’s share price by 4.2% pre-market.

Apple 2019_Q2A

Apple 2019_Q2B

A few hours later Samsung Electronics announced its less impressive though not surprising Q2 numbers. The company continued to see its profit plummeting by more than half, a trend we have seen in the preceding quarters, and largely in line with the profit warning the company published earlier this month. The total revenues declined by 4% to KRW 56.13 trillion ($47 billion) with the operating profit coming in at KRW6.6 trillion ($5.6 billion), down from KRW14.87 trillion ($13 billion) a year ago, indicating an operating margin of 11.8%, down from 25.4%. The net profit of KRW 5.18 trillion ($4.4 billion) represented a 53% decline from Q2 2018.

Not everything is bleak. IT & Mobile Communications division, Samsung’s largest revenue generator and which includes Samsung’s mobile handset business, reported a 7.8% sales growth although the operating margin declined by 41.5%. The revenue growth was largely driven by the strong sales of the Galaxy A series geared towards the young users. This has helped Samsung gain market share in a contracting smartphone market. On the other hand, the flagship Galaxy S10 series have met “weak sales momentum”, the company conceded. Recently Samsung announced that it has fixed the problem with the Galaxy S10 Fold and is now ready to launch it in “select markets”.

Continued to be worrying is the Display and Semiconductor business division, the biggest profit generator for Samsung. Despite that the display panel business turned profitable after making loss in Q1, weakness in the memory chip segment drove the operating profit down by 71%, on the basis of a revenue decline of 27%, indicating strong price pressure. This has led to the data centre customers to continue to adjust the inventory levels, Samsung claimed.

Another uncertain, though Samsung did not explicitly discuss, is the on-going trade dispute with Japan, which has resulted in trade embargo on the export of selected high-end equipment from a few Japanese companies. This could potentially impact Samsung’s plan to deliver the more advanced semiconductors in the second half of this year. Samsung insisted that it did “see 2H demand recovery” though.

At the time of writing Samsung’s share price was down by 2.6%.

Samsung 2019_2Q

 

DoJ launches anti-competition investigation into leading online platforms

The US Department of Justice announced on Tuesday it is investigating if leading online platforms have undertaken anti-competition, anti-innovation, and other consumer harming practices.

Though the DoJ does not name the companies it will focus the investigation on, when it specifies “concerns that consumers, businesses, and entrepreneurs have expressed about search, social media, and some retail services online”, it would be fair to assume the targets are Google, Facebook, Twitter, Amazon, and when it comes to digital content distribution, Apple.

“Without the discipline of meaningful market-based competition, digital platforms may act in ways that are not responsive to consumer demands,” said Makan Delrahim, the Assistant Attorney General of the Department’s Antitrust Division. “The Department’s antitrust review will explore these important issues.”

The DoJ is seeking “information from the public, including industry participants who have direct insight into competition in online”. If found guilty, and this may including offences other than anti-competition, according to The Wall Street Journal sources, “the Department will proceed appropriately to seek redress.”

This is the latest of a series of actions taken by the US legislature and administrative authorities to rein in the power of the online platforms. In March the House Antitrust Subcommittee launched a probe into online market competition.

“The growth of monopoly power across our economy is one of the most pressing economic and political challenges we face today. Market power in digital markets presents a whole new set of dangers,” House Representative David N. Cicilline, Chairman of the Antitrust Subcommittee said at the time.

More recently companies including Google, Facebook, Amazon have been subjected to House Judiciary Committee enquiry into their practices related to market competition, amid reports that these companies have gained shares in their key markets. Facebook is on the eve of a settlement with the Federal Trade Commission that could run as high as $5 billion following the investigation of its privacy breach.

The most common measure used by the leading online companies to fend off competition is to buy the competition out. The most high-profile cases include Facebook’s acquisition of WhatsApp and Instagram, Google’s acquisition of Waze, Amazon’s acquisition of Twitch, and Apple’s acquisition of Shazam. In some cases, for example the acrimony between Spotify and Apple, some restrictive policy changes may be applied to limit the growth of a competition, especially if the competition relies on the platform. Tim Cook, CEO of Apple, however denied the company is a monopoly in a CBS interview in June, claiming Apple is not in a dominant position in any market.

The power wielded by the online platforms has not escaped the attention of the politicians, especially the presidential candidates. President Trump has repeatedly lambasted the alleged bias against conservatives by the social media giants, while Elizabeth Warren, one of the front-runner Democrat candidates, famously called for the breakup of the big internet companies. However the applicability of such proposed breakups is debatable. The most high-profile attempt to break up a company in recent history was the one targeted at Microsoft, the decision rescinded on appeal. Even if a breakup does happen, its long-term effectively may also be questioned. The last memorable breakup of a monopoly in the last 40 years was the geographical split of AT&T’s regional operations into seven Baby Bells. Four of them were later acquired by the current AT&T.

Vodafone Germany tries to placate regulators via wholesale cable deal with Telefónica

Telefónica Deutschland will be able to sell services that run on the combined Vodafone and Unitymedia cable network in Germany, as a remedy measure taken by Vodafone to satisfy EU’s competition concern over its proposed acquisition of Liberty Global.

The two companies announced that they have entered into a definite “cable wholesale agreement” in Germany, whereby Telefónica Deutschland will offer its customers broadband services that use both the Vodafone fixed network and that of Unitymedia. The combined networks cover 23.7 million households and represent a significant upgrade to whatever Telefónica Deutschland customers are currently getting.

“The cable agreement will enable us to connect millions of additional households in Germany with high-speed internet in the future,” said Markus Haas, CEO of Telefónica Deutschland. “By adding fast cable connections, we now have access to an extensive infrastructure portfolio and can offer to even more O2 customers attractive broadband products – including internet-based TV with O2 TV – for better value for money.”

Vodafone’s plan to acquire Liberty Global in Germany (where it trades under the brand Unitymedia), the Czech Republic, Hungary, and Romania, has run into difficulty at the European Union, which raised competition concerns at the end of last year. The Commission was particularly worried that the combined business would deprive the consumers in Germany of access to high speed internet access, and the OTT services carried over it. Vodafone expressed its confidence that it would be able to satisfy the Commission’s demand. Opening its fixed internet access to its competitor is clearly one of the remedies. Also included in the remedy package Vodafone submitted to the Commission was its commitment to ensure sufficient capacity is available for OTT TV distribution.

“Our deal with Liberty Global is transformational in many ways. It is a significant step towards a Gigabit society, which will enable consumers & businesses to access the world of content & digital services at high speeds. It also creates a converged national challenger in four important European countries, bringing innovation & greater choice,” said Nick Read, CEO of Vodafone Group. “We are very pleased to announce today our cable wholesale access agreement with Telefonica DE, enabling them to bring faster broadband speeds to their customers and further enhancing infrastructure competition across Germany.”

Vodafone believed the remedial measures it put in place should sufficiently reassure the Commission that competitions will not suffer after its acquisition of Liberty Global. The company now expects the Commission to undertake market testing of the remedy package it submitted, and to give the greenlight to the acquisition deal covering the four countries by July 2019. It plans to complete the transaction by the end of July. The merger between Vodafone’s and Liberty Global’s operation in The Netherlands was approved by the EU in 2016.

A weak France overshadowed Orange’s Q1

The telecom operator Orange reported a flat Q1, with a weak performance in its home market partially compensated by the strength in Africa and the Middle East.

Orange reported a set of stable top line numbers in its first quarter results. On Group level, the total revenue of €10.185 billion was largely flat from a year ago (-0.1%), and the EBITDAaL (earnings before interest, tax, depreciation and amortisation after lease) improved by 0.7% to reach €2.583. Due to the 8% increase in eCAPEX (“economic” CAPEX), the total operating cash flow decline by 10.2% to €951 million.

Orange 2019Q1 Group level numbers.pdf

Commenting on the results, Stéphane Richard, Chairman and CEO of the Orange Group, said that “the Group succeeded in maintaining its high quality commercial performance in spite of a particularly challenging competitive context notably in our two principal countries of France and Spain. Our strategy is paying off since EBITDAal is continuing to grow while revenues remain stable, allo wing us to reaffirm our 2019 objectives”

On geography level, France, its home and biggest market is going through a weak period. Despite registering net gain in the number of customers, the total income dropped by 1.8% to €4.408 billion, the first quarterly decline in two years. The company blamed competition, a one-off promotion of digital reading offer towards the end of the quarter, and “a weaker performance on high-end equipment sales in the 1st quarter of this year”. The move to “Convergence” was positive, but not fast enough to offset the lose in narrowband customers. The competition pressure is still visible. The Sosh package (home broadband + mobile) Orange rolled out to combat Free is gaining weight among its broadband customers, which resulted in a decline of revenues despite the growth in customer base.

Orange’s European markets, including Spain and the rest of Europe, reported modest growth, with strength in Poland (+2.6%) and Belgium & Luxembourg (+3.8%) offset by a weaker Central Europe (-1.9%). The bright spot was Africa and Middle East, which registered a 5.3% growth to reach €1.349 billion revenue, taking the market’s total revenue above Spain and just marginally behind the rest of Europe. The company’s drive to extend its 4G coverage in Africa is paying off, with mobile data service contributing to 2/3 of its mobile growth. Orange Money also saw strong enthusiasm, with the revenue up by 29% and total number of monthly active users totalling 15.5 million.

Both the Q1 results and outlook to the rest of the year spelled mixed messages for the wider telecom market and Orange’s suppliers, but negatives look to outweigh positives. On the consumer market side, the slowdown of high-end smartphone sales and prolonged replacement cycle has once again been demonstrated in the weak numbers in France. On the network market side, Orange predicts more efficiency. This includes both the network sharing deal signed with Vodafone Spain, which is expected to deliver €800 million savings over ten years, and an overall reduction in CAPEX this year.

As the CEO said, “while the level of eCapex for this quarter is higher, it should reduce slightly for 2019 as a whole, as predicted, excluding the effect of the network sharing agreement with Vodafone in Spain announced on 25 April.” This means, to achieve the annual target of reduced CAPEX, the spending will drop much faster in the rest of year. There is no timetable to start 5G auction in France yet, but it will be safe to say that any expectations of 5G spending extravaganza will be misplaced.

On the positive side, Orange has seen its efforts to diversify its business gaining traction, especially in IoT and smart homes. But these areas, fast as the growth may be, only make a small portion of Orange’s total business.

Nick Clegg defends Facebook’s business model from EU’s privacy regulation

Facebook’s head of PR reportedly had a series of meetings with EU and UK officials aiming to safeguard the social network’s business model heavily relying on targeted advertising.

Sir Nick Clegg, the former UK Deputy Prime Minister, now Facebook’s VP for Global Affairs and Communications, met three EU commissioners during the World Economic Forum in Davos and shortly after the event in Brussels, according to a report by the Telegraph. These commissioners’ portfolios include Digital Single Market (Andrus Ansip), Justice, Consumers and Gender Equality (Věra Jourová), and Research, Science and Innovation (Carlos Moedas). Clegg’s mission, according to the Telegraph report, was to present Facebook’s case to defend its ads-based business model in the face of new EU legislation related to consumer privacy.

According to a meeting minutes from the Ansip meeting, seen by the Telegraph, “Nick Clegg stated as main Facebook’s concern the fact that the said rules are considered to call into question the Facebook business model, which should not be ‘outlawed’ (e.g. Facebook would like to measure the effectiveness of its ads, which requires data processing). He stated that the General Data Protection Regulation is more flexible (by providing more grounds for processing).”

In response, Ansip defended the proposed ePrivacy Regulation as a complement to GDPR and it is primarily about protecting the confidentiality of consumers’ communications. In addition, the ePrivacy Regulation will be more up to date and will provide more clarity and certainty, compared with the current ePrivacy Directive, which originated in 2002 and last updated in 2009. Member states could interprete and implement the current Directive more restrictively, Ansip warned.

Facebook’s current security setup makes it possible to access users’ communication and able to target them with advertisements based on the communications. Under the proposed Regulation, platforms like Facebook need to get explicit consent from account holders to access the content of their communications, for either advertisement serving, or effectiveness measuring.

There are two issues with Facebook’s case. The first one is, as Ansip put it, companies like Facebook would still be able to monetise data after obtaining the consent of users. They just need to do it in a way more respectful of users’ privacy, which 92% of EU consumers think important, according to the findings of Eurobarometer, a bi-annual EU wide survey.

Another is Facebook’s own strategy announced by Zuckerberg recently. The new plan will make it impossible for Facebook to read users’ private communications with its end-to-end WhatsApp-like encryption. This means, even if consumers are asked and do grant consent, Facebook in the future will not be able to access the content for targeted advertising. Zuckerberg repeatedly talked about trade-offs in his message. This would be one of them.

On the other hand, last November the EU member states’ telecom ministers agreed to delay the vote on ePrivacy Regulations, which means it will be highly unlikely that the bill will be passed and come into effect before the next European Parliament election in May.

The office of Jeremy Wright, the UK’s Secretary of State for Digital, Culture, Media and Sport, did not release much detail related to the meeting with Clegg, other than claiming “We are at a crucial stage in the formulation of our internet safety strategy and as a result we are engaging with many stakeholders to discuss issues pertinent to the policy. This includes discussions with social media companies such as Facebook. It is in these crucial times that ministers, officials and external parties need space in which to develop their thinking and explore different options in a free and frank manner.”

The Telegraph believed Clegg’s objective was to minimise Facebook’s exposure to risks from the impending government proposals that could “place social media firms under a statutory duty of care, which could see them fined or prosecuted” if they fail to protect users, especially children, from online harms.

It is also highly conceivable that the meeting with the UK officials was related to influence post-Brexit regulatory setup in the country, when it will not longer be governed by EU laws. Facebook may want to have its voice heard before the UK starts to make its own privacy and online regulations.

Half of British millennials are getting sick of the internet – report

A new EY report shows 50% of 25-34-year olds are looking to ‘digital detox’, the highest proportion of all age groups.

The “Decoding the digital home 2019” report, published by EY, the professional service firm, was done based an online survey of 2,500 British households in late 2018. In addition to the high proportion of youth wishing to increase their time away from smartphones and other internet connected devices, more people are spending less time online. The percentage of households spending more than 30 hours online per week has gone down from 34% a year ago to 28%, while those spending less than 10 hours online has slightly increased from 18% to 21%.

There are also other surprises. For example, more consumers are happy with their fibre connections (59%, up from 54% a year ago) but also higher number of young people are ready to ditch the fixed broadband (43%). 42% of 18-24-year olds are happy to pay a premium to get the latest gadgets, but only 18% of the 25-year olds and above, who would have more disposable income, are prepared to do so.

The key message that the telecoms and internet industries should take away from the survey, however, is that consumers want simplicity, proof of trust, and assurance of security.

Both service and content providers are confusing consumers with over-complex packages, causing anxiety among users, including the youth. 46% of households think there are too many different broadband, mobile, and content bundles, so most of them will not add anything new to the packages they already subscribe to. Content providers are trying to maximise the distribution channels they can use, therefore making their content available across different packages, platforms, and apps. However, nearly a quarter of all surveyed households found it hard to track their favourite content. This number rose to close to 40% among the 18-24-year olds, the so-called “digital natives”.

The high-profile cases of comprised private data have instilled more caution to consumers. 72% of respondents said that even when dealing with brands they trust they would be very cautious about disclosing their personal financial information online.

On the other hand, the heated debates over “fake news” have driven more consumers less confident in the “new media”. 44% of households responded that they now only trust the traditional news sources. In a teaser to an upcoming report, EY disclosed that over half of all households only watch the five traditional channels on TV.

But it is not all bad news especially for the mobile industry. In 15% of the households surveyed, smartphones are now the main devices to go online with (up from 11% in 2017), at the expense of laptops (down from 44% to 39%). When it comes to consumer spending, slightly more are willing to pay for ad-free streaming (up from 16% to 18%) and slightly fewer are holding their purse strings as tightly as possible when it comes to spending on communication services (down from 55% to 53%)

“Our latest survey highlights both opportunities and challenges for TMT providers. They will be pleased to see that consumers are willing to pay for premium services, but they will also be concerned that customers are overwhelmed and confused by the variety of bundles available,” said Praveen Shankar, EY’s Head of Technology, Media and Telecommunications for the UK & Ireland. “Looking ahead, it is essential for providers to simplify their propositions and offer easier to understand and clearly communicated product and services.”

ey-decoding-the-digital-home-2019

 

The app economy is going from strength to strength

The latest report published by App Annie showed mobile apps had their best year in 2018, and will get better in 2019.

In the report titled “The State of Mobile in 2019 – The Most Important Trends to Know”, the mobile apps analytics firm App Annie showed the latest data of the mobile apps industry, as well as their projections for the near future.

In short, the apps industry is doing rather well. “Consumers spent $101 billion on apps globally in 2018. This is larger than the global live and recorded music industry, double the size of the global sneaker market, and nearly three times the size of the oral care industry,” said Danielle Levitas, EVP, Global Marketing & Insights, App Annie. “Mobile experiences are so central to how we live, work and play and with consumers spending 3 hours a day on mobile, it’s clear how vital this platform is for all businesses in 2019 and beyond.”

Here is a snapshot of the highlights:

App Annie 2019 Snapshot

A few additional data points also caught our eyes:

  • Consumers on average spent 50% more time in mobile apps in 2018 than they did in 2016. Social and Communications apps made up 50% of total time spent globally in apps in 2018, followed by Video Players and Editors (15%) and Games (10%);
  • In Indonesia, mobile users spent over 4 hours a day in apps — 17% of users’ entire day. In mature markets like the US and Canada, the average user spent nearly 3 hours a day in mobile apps in 2018;
  • On average, consumers in the US, Australia, South Korea, and Japan have over 100 apps on their smartphones;
  • 74% of all consumer spending on mobile apps was on games;
  • YouTube accounted for 9 of every 10 minutes spent in the top 5 video streaming apps in 2018. It was also the number 1 app by time spent in video streaming apps for all markets except China;
  • The global consumer spending on dating apps grew by 190% from 2016 to 2018. Tinder successfully defended its number 1 position.

In terms competition between apps and between companies, three Facebook apps occupied the top three spots on the table of monthly active users. The same trio also took the top spots on the most downloads table, but Facebook Messenger edge Facebook to the top. Netflix netted the highest consumer spend on apps (followed by Tinder), while Sony’s Fate/Grand Order sat at the top of the games enjoying the highest consumer spend. Tencent on the hand, thanks to its strong line-up of apps and games, was the company that consumers spent the most on in 2018.

App Annie 2019 MAU

App Annie 2019 downloads

App Annie 2019 spend

The firm predicted that in 2019, the total consumer spending in app stores will double that of the global box office, to reach $120 billion. When it comes to media consumption, the firm sees in 2019 that 10 minutes of every hour spent consuming media across TV and internet will come from video streaming on mobile. Increased availability of premium content and service will also help.

Two years ago, we started hearing from some quarters of the industry that apps economy was dead. To read the latest data from App Annie, that pronouncement was gravely premature.

US operators belatedly act to protect user location data

AT&T and Verizon announced that they will terminate all remaining commercial agreements that involve sharing customer location data, following a report exposing the country’s mobile carriers’ failure to control data sharing flow.

Jim Greer, a spokesman for AT&T, said in a standard email to media: “Last year, we stopped most location aggregation services while maintaining some that protect our customers, such as roadside assistance and fraud prevention.” Referring to the Motherboard exposé, Greer continued, “In light of recent reports about the misuse of location services, we have decided to eliminate all location aggregation services — even those with clear consumer benefits.”

This is similar to the position T-Mobile’s CEO John Legere adopted when responding to the criticism from the US Senator Ron Wyden (D-Ore.). Verizon also announced that the company will sever four remaining contracts to share location data with roadside assistance services. After this Version will need to get customers’ explicit agreement to share their data with these third-party assistance companies. Sprint, which was also caught out by the Motherboard report, is the only remaining nation-wide carrier that has not announced its plan on the issue.

This is all good news for the American consumers who are concerned with the safety of their private data. On the other hand, mobile operators have hardly been the worst offenders when it comes to compromising the privacy and security of customer data. Earlier, Google was exposed to have continued tracking users’ location even after the feature had been switched off, while Facebook has been mired in endless privacy controversies.

Monetising user data is only a side and most likely insignificant “value-add” business for the mobile operators, because they live on the service fees subscrbers pay. But it is the internet heavyweights’ lifeline. This may sound fatalistic but it should not surprise anyone if the Facebooks and the Googles of the world come up with more innovative measures to finance the “free” services we have benn used to.

Tencent is aiming to do a Spotify with its entertainment and music business

The China based internet company Tencent, listed on the HKSE, is planning to spin off its music and entertainment subsidiary and list it separately on an exchange in the US.

The chairman of Tencent, Ma Huateng, also known as Pony Ma, made the announcement on Sunday 8 July, one day before Xiaomi’s trading started on the HKSE. Despite the initial price was set at the bottom end of the estimated range, Xiaomi’s share price still closed the day 1.2 percent lower than its opening price, having recovered from a heavy loss of close to 6 percent earlier in the day.

In an interesting twist, Xiaomi’s CEO Lei Jun felt the share price was depressed by the on-going trade disputes between the US and China, when he spoke to the CNN. Meanwhile, the company’s President and Co-Founder Lin Bin told CNBC that the trade war is not a major concern “as Xiaomi had not done much business in the U.S.”

Although Xiaomi is a profitable business, its thin margin (capped at 5 percent by its owner on its hardware business, which accounted for roughly 90 percent of the whole business) made investors deem the price too high.

In comparison, the global leader in streaming music, Spotify, launched its IPO in April this year on NYSE. The price rose by 13 percent on its opening day, rising to $149.01 from the initial offering of $132, despite Spotify being a loss-making company. It was traded at $175.70 when the market closed on Friday 6 July.

We can only wait for Tencent to disclose the profit and loss of its Music and Entertainment group in the run-up to the IPO, but the group, which gets all its business from China, has reported healthy growths. Its paid subscriptions, mainly for video and music, grew by 24 percent to 147 million during the first quarter of 2018, and its total video revenues grew by 85 percent year on year.

The limited appetite on the Hong Kong market, especially when the channel to China-based investors, the instrument called CDR, is hard to come by, in contrast to the enthusiasm to invest in the future on the US market, may have helped tilt the decision by the Tencent board to go for the US stock market.