Earnings Season: What Recent Results Say About Consumer Firms’ Future Prospects

In what is turning out to be one of the most interesting quarterly earnings reporting seasons for some years, Apple, Zynga, Nintendo, Microsoft, and Intel have all “surprised” the market with their “low” numbers — but there are fundamental differences in why these firms have had a tough quarter. (I’m going to use calendar quarters rather than financial quarters to avoid things getting far too complicated).I can think of four main reasons (I’m sure there are more):

  • The tough product transition period, part 1: Apple. Apple had a pretty good Q2 2012 — far better than a year ago — but unfortunately it came on the back of a huge Q1 2012 (largely thanks to iPhone 4S). Citing poor demand in Europe among other factors, Tim Cook also made some interesting comments on the earnings call alluding to anticipation of iPhone 5 reducing demand for current products. Pent-up demand for the new phone seems unprecedented; once this device hits the market, Apple numbers should “improve.” It’s a testament to the financial markets’ belief that Apple can do no wrong that this shock miss of Wall Street’s inflated earnings estimates (albeit more in line with Apple’s own projections) shaved 5% off the share price overnight.
  • The tough product transition period, part 2: Nintendo. Another firm whose current products are looking tired but whose shiny new products aren’t quite ready is Nintendo. The Wii has dropped off console sales charts in the past year, and while the 3DS is doing good business in the portable space, the release of new Wii U consoles is still (probably) several months away. It’s going to be a tough 2012 for Nintendo; crucially, there isn’t that guaranteed pent-up demand for the new console that Apple enjoys with the iPhone 5.
  • Great business but bad investments coming home to roost: Microsoft. In many ways, Microsoft is also in a transition period — Windows 8 OS and accompanying Surface devices won’t arrive until October 26, 2012 — but luckily the rest of its products haven’t run out of steam. In fact, Q2 2012 was a good quarter with rising revenues; it’s just a shame that its on-going fruitless attempts to build a consumer media/advertising strategy led to a $6.2 billion writedown.
  • A changing market causing (hopefully) short-term pain: Intel, AMD, PC OEMs. As expected, a tough global economy and the on-going consumer (and business) infatuation with tablets is hitting traditional PC sales numbers. Ironically, the solution to the tablet challenge may also be causing consumers to delay PC replacements while they wait to see a proper tablet + Windows solution, which won’t happen until the end of October.
  • Wow, we did not expect that! Zynga. Cracks started to appear in Zynga’s “grinding games without the fun game bit” business model some time ago; its valuation at IPO (in November 2011) was based on the continuing stratospheric growth of user numbers (and the accompany microtransaction revenues) seen with early hits like Farmville and Mafia Wars. Unsurprisingly, like every other videogaming market, social games have turned out to be a hits-driven industry, with relatively low barriers to entry and a fickle audience. It also highlights the danger of relying on someone else’s platform (Facebook) over which you have no control. And the strategy of buying a rival “star” product/ firm (Draw Something by OMGPOP) for top dollar just as it became a “dog”(entirely bypassing the “cash-cow” phase) didn’t help . . . see this if that last sentence didn’t mean much to you.

Of course it’s not all doom and gloom: ARM and Samsung have reported excellent results of late — and even Facebook did moderately OK, even if that didn’t stop the markets from punishing its share price for not doing better, probably due to the fact that the firm still hasn’t worked out how to really ramp up revenues.

So, while Q3 is typically a quiet period for consumer firms, Q4 is shaping up to be a litmus test for firms like Apple, Nintendo and Microsoft – new products that will need to succeed (and fast), landing at a time when consumers still seem unwilling to recommence their profligate spending ways.


Sony Buys Gaikai: A Solid Investment In Future Services

This week Sony, or more specifically Sony Computer Entertainment, bought Gaikai — the streaming game service. Rumours of a tie-up had been circulating prior to E3, and Gaikai had made no secret that it was on the market for around $500 million. The $380 million Sony paid is well under that, but even so it must have been a difficult decision given the Sony group’s current performance.

What does the purchase mean for Sony and the wider gaming market?

  • Sony is buying networking and service platform expertise . . .  Sony has struggled long and hard with online services and software: its PlayStation network is now robust but suffered an embarrassing hack attack last year, while its PC and phone software (Media Go, PlayStation certification for phones) seems to lag a generation behind folks like Apple or even Microsoft. Gaikai’s core networking and service delivery expertise can fix many of these issues in a relatively short time (months rather than years).
  • . . . as well as console backward-compatibility. Despite consistently offering by far the best access to and support for older titles of today’s three platforms, Sony has long been the recipient of gamer complaints about the removal of backward-compatibility as it has released new hardware iterations of the PS3. Streaming potentially allows both backward-compatibility for today’s PS3 and, potentially more intriguingly, for the future PS4 — allowing it to run today’s PS3 games without additional hardware.
  • Non-console devices can join the game. While not explicitly stated as an aim for Sony Computer Entertainment, its rich gaming back catalogue, along with Sony’s engineering expertise in PCs, TVs, tablets, and phones, means that PlayStation games could now come to all of these platforms. This would provide a USP (if kept exclusively to Sony hardware) and an additional revenue stream for games with little additional investment.
  • Where does this leave Microsoft? Microsoft is already working with OnLive, the rival (and arguably more well-known) game streaming service. However, the relationship has been rocky at times (see this). Does Sony’s news justify Microsoft engaging more here — or even considering an acquisition? Probably not, if Microsoft (along with investors like HTC) can get ready access to the technology as ‘partners’ – Microsoft is already much more competent at online execution in gaming.
  • Connectivity will need to take the strain. One thing is for sure, users will need solid, fast, low-lag broadband connections (and in-home wiring/wireless) to make any of these streaming services work consistently. Netflix and Hulu sometimes struggle with one-way traffic when streaming video into the home; gaming services need to do this as well as upload user actions and act on them at the server end. Let’s also not forget that consumers surrender some of their control with these services — starkly illustrated by the storms last week that took chunks out of the Amazon cloud. This is slightly inconvenient if you want to post your latest wedding dress photo to Pinterest; it’s disastrous if you are 3 to 4 hours into a streamed gaming session without a local save!