As you all know, I like to read the earnings reports to spot critical trends, both with the companies themselves and for the markets they play in. Microsoft and Google both reported earnings yesterday, and both gave the markets an upside surprise. So what does that mean?
Media coverage of Microsoft has missed the point. Though Microsoft posted its first-ever loss, the problem was because of the writedown of its ill-fated ad company aQuantive and not from sales, and the company’s financial performance ex the exceptional items was better than expected, which is why it’s stock was up. Microsoft seems to be benefitting from the business space more than the consumer space; PC sales were up to the former group and down in the latter. This is almost certainly due to a shift of consumer demand toward the tablet, something that’s not yet happened (and may not, at least in comparable numbers) for business.
This trend isn’t wholly bad or good for Microsoft. I think it validates the thesis that Microsoft sees its tablet and even phone opportunity as coming more from the business side, not so much because businesses will demand Microsoft stuff but because their inertia is higher and their demands a bit different. Microsoft thus has more time and a slightly different target of opportunity to take aim at.
What will mature things on the business side is a mature conception of the cloud. Right now less than a fifth of enterprises are cloud-literate to a full extent, and before we can hope for a rational market we need literacy levels of a third or more, which we’re not likely to get until late 2013 at best. But that means Microsoft has a year for Windows 8 to impact things, for better or worse, and likely just a bit less for Office 2013 and Surface. It’s not going to be easy, and we can’t really read how Microsoft plans to proceed beyond what I’ve already said in prior blogs, but at least they have a shot. The death of the PC and of Microsoft are greatly exaggerated.
The same can be said for Google. The fact that they are “behind” in social networking generated a lot of hype that Facebook would swab the deck with them, performance-wise. We’ve not heard from Facebook in the current quarter but the Street clearly doesn’t believe that it’s going to be swabbing many decks, and Google’s numbers were impressive. Google is making display ads work, it’s making YouTube ads work, and it’s still making money aggressively on search ads even with per-click rates down.
The reason is that search is the thing most readily connected with buying. Yes, some people do pure research on products or other stuff, but if you set aside geeks like me who entertain themselves by knowing things, the search engine market base is probably for the most part looking for stuff to do or to buy. What better place to advertise? Yes, it’s a market that’s going to hit the wall eventually. Yes, SEO practices are making it harder to get good stuff from search. But it’s not Facebook that will steal prospective buyers away, it’s Amazon. If you can’t find good research by searching, you go to Amazon and just read reviews on products.
Motorola, which did OK, is probably Google’s hedge against change. Mobility is where the future lies simply because mobile broadband can be—and is being—integrated into our lives in different ways. The future of advertising, the future of broadband services, and even the future of the cloud (business and consumer) are tied up in mobility. Google is going to take some flak for Motorola, as it did for YouTube, but it will probably make a go of the venture down the line, which is what’s making it a powerful player in the space.
Verizon also released its numbers, and they show that mobile is king already. Financial analysts have summed up the earnings by saying “Mobile’s up, wireline’s down” and if you exclude FiOS that’s true. Some look at the profit line for Verizon and think it shows the company is gouging the consumer, but the fact is that their return on infrastructure even in the mobile space is below that of Google (measuring return on capital overall). It’s also getting lower, and that’s why operators are so hot on managing network costs and expanding their service profile via the cloud.
I think Verizon (and to a slightly lesser extent, AT&T) have a fairly realistic vision of how the cloud comes about and helps them make more money. They see a new developer/partner ecosystem built on top of a bunch of as-a-service URLs exposed from underlying network and platform capabilities, and used to create new offerings at the retail level. This process is interesting because it will create the largest carrier IT investment in history, and one that is entirely outside the traditional OSS/BSS stuff. IMS isn’t part of OSS/BSS, and IMS is a voice service layer. IPTV logic similarly is kept separate where it’s deployed; it’s under Operations and not under the CIO. The cloud will likewise be separate, and for the OSS/BSS types the question now is whether they can sustain relevance, not whether they can take over. Inertial thinking kept them from commanding the evolution and it could push them out of the game now. Google, my friends, doesn’t have an OSS/BSS.