Social media and tech giant earnings show power of new business models
Evolving business models have made it hard to tell what business some tech giants are in, exactly. No wonder shareholders are waiting eagerly for this season’s earnings reports.
By Vikram Rangala
Wednesday, July 20, 2016
When Mark Zuckerberg announced Facebook’s IPO back in May, 2012, his open letter to investors said, “Simply put: we don’t build services to make money; we make money to build better services.” That ethos has spread and made it hard to tell what business some tech giants are in, exactly. No wonder shareholders are waiting eagerly for this season’s earnings reports.
In the months leading up to its second quarter earnings report on July 27, Facebook has, by all accounts, both made money and built services. Analysts expect its earnings per share to be around $0.81, an increase of about 56% from a year ago. This follows three quarters of steady growth including a big 1Q16 in which advertising revenue jumped 57% to $5.2 billion.
Advertising has been the big driver of Facebook’s revenue growth, not just because their users number more than the population of China, but because the data those users provide allows advertisers to target them with unprecedented precision. Facebook may not have set out to be a marketplace, but it has adapted its sharing platform into a powerful one.
Adaptation has been the key to Microsoft’s resurgence, too. The third-largest company (behind Apple and Alphabet) posted its fourth consecutive profitable quarter after last month’s highly-touted $26 billion purchase of LinkedIn. Those puzzled about why the maker of boxed software like Windows and Office would want the social network should look more closely at the shift in focus since Satya Nadella became CEO.
Microsoft doubled—again—the revenue from its cloud service Azure, proving its viability against established competitors like Amazon Web Services. Its search engine Bing, long more of a punch line than a competitor to Google, now has one-fifth of the search market. If you add the Bing-powered AOL and Yahoo, Microsoft now handles one-third of Internet searches.
How did that happen? It’s quite simple, really. The growth of Bing came as AOL, which is now owned by Verizon, switched from Google to Bing as AOL’s default search engine. Meanwhile Mozilla, whose Firefox browser is a competitor to Google’s Chrome and Microsoft’s now-defunct Internet Explorer and new Edge browsers, chose Yahoo, which is powered by Microsoft’s Bing, as the default search engine for its browser, which competes against both Microsoft’s browser and the browser of Microsoft’s aforementioned competitor, Google. Got all that? There’s more.
Yahoo (powered by Microsoft) may also replace Google as the default search engine for Apple’s dominant Safari mobile browser. In Monday’s earning’s call, Yahoo CEO Marissa Mayer unexpectedly listed Apple as a search partner, even though it isn’t, leading some to speculate that Apple is switching to Microsoft…I mean Yahoo. Yahoo also has started using Facebook Audience Network for advertising on Tumblr, which Yahoo bought in hopes of making Tumblr compete with Facebook. If all of this cross-pollination is confusing, it’s certainly not new. When Google threatened to overtake Yahoo as the dominant search engine back in 2000, Yahoo licensed Google to power its own search, bringing the competition under its umbrella.
Suffice it to say tech companies are adapting all over each other and their products (cloud, search, social networking, news) and revenue sources (advertising, more advertising) may not be in the same categories. Two of them, Google and Apple, are even getting into the automobile business. It’s getting hard to say what some firms' core business is any more.
Which brings us back to Yahoo, or if you prefer, the private equity firm that owns a major stake in Alibaba while running a search engine, Tumblr, Flickr, and a news network on the side. Yahoo reported a 19 percent drop in revenue in the last quarter, as the company entertains bids for the firm’s core Internet assets. Yahoo CEO Marissa Mayer talked about the company’s progress in her earnings call, but analysts are mainly discussing Yahoo’s value as a property for sale, not an investment.
Twitter is another struggling tech giant, but unlike Yahoo, people know what Twitter does. While the company hit an all-time low in early May, it has fought back with advertising innovations and partnerships with sports leagues. With a major presidential candidate conducting much of his campaign on Twitter, the stock may go up even if its earnings report on July 26 shows little actual revenue. The stock is up over 25% since the May low.
Most analysts expect Facebook and Alphabet to report strong revenues, while Twitter’s won’t really matter. Apple and Yahoo are expected to disappoint. Unusually, few analysts seem unsure about any of these companies.
The oddest thing these tech companies have in common is that they are all trying to become news publishers. Amazon’s Jeff Bezos owns The Washington Post, which recently got a boost by being banned by Donald Trump. The recent tragic shooting of a motorist by a police officer in Minnesota showed the power of Facebook Live as a one-tap broadcasting platform anyone can use. Twitter’s role in the news business is now well established, as is Yahoo’s.
The irony is that these ad-funded Internet companies are going into the news business at the same time traditional news companies are struggling for ad revenue and and a successful transition from print to online. Chicago Tribune Media’s name change to the ridiculous “tronc” is the latest example.
The tech sector is a mix of business models. Some companies still sell things, like iPhones, in exchange for money. Others, like Microsoft, are moving into the Internet of Things. Google, Yahoo, Twitter, and Facebook make most of their money from advertising, while Amazon and Netflix sell products mostly made by others—and both now make TV shows. The Facebook model of making money in order to build services seems to have infected everyone in this respect: the services you offer, and what people pay you for, no longer need to be the same thing.
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