Making Markets EP10: Earnings Abound, Regulation Frenzy, Apple Fights Back Against Epic
Tech Earnings Wave Should Prove Interesting as Shortage Roars On
Over the next 2 weeks we will have a barrage of earnings that starts off with the likes of IBM and Intel and continues on with Apple, Facebook, Google, Amazon, AMD, Qualcomm, and more.
- IBM Spin off of Kyndryl.
- Intel will be the litmus test for many of the IT OEMs, Device Makers, and Cloud Providers as we will get a peek at the Chip Production levels.
- AMD’s numbers will be important to watch in this space too. Market Share could be swayed too if supply problems impacted Intel or AMD adversely as OEMs sought to fill backlogs.
- Apple heeded a few warnings that it is in fact having some supply issues, which could mean softer numbers after an array of great quarters.
- Qualcomm will be one to watch in the mobile devices space. 5G handset numbers continue to grow, and Qualcomm is one of the leading suppliers in this space. I expect demand for 5G devices to remain high, and the company has done a good job of managing supply challenges but another data point will come from their quarterly results and handset shipment data.
Speaking of the Shortage, the Holidays Are Here
What to expect from the holiday months:
The chip crunch will have an impact across a large swath of businesses this holiday season. Some of the efforts like opening the LA ports 24 hours will certainly help get more goods on store shelves.
Best Buy is taking advantage of this to create an exclusive shopper program at around $200 a year to get access to harder to get technology devices. It’s a clever way to charge more and create customer loyalty rather than what automakers are doing which is just charging over list.
But the issues for retailers aren’t just semiconductors. We’ve already talked about the timeline there. We have petrochemicals in short supply impacting plastics to paints. We have energy crunches in major manufacturing hubs like China that have caused factories to be temporarily shut down. The ports are overcrowded, but understaffed. We are diverting containers to more expensive air freight, which inflates prices and can’t move nearly the same volume of good. And then at the end of the line, there are a lack of over the road and last mile truck drivers to get the goods we do have on shelves. It’s a real dilemma.
Regulation in Focus, Again
The battle between consumer good, competition, and control of media and platforms rages on.
Apple Fights Back Against Epic as it asks for a stay to stop the ruling forcing it to allow developers to accept in-app payments not on the iOS Platform
Facebook Rebecca Haugen Whistleblower and the building pressure on Facebook is showing that there is a something that Republicans and Democrats can agree upon…Regulating Facebook.
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Daniel Newman: It’s that time again. Big tech earnings are coming and are certainly set to dominate headlines, but the regulators are out again as Facebook’s whistleblower brought Democrats and Republicans together and Apple’s epic battle rages on, as Apple says, we don’t think the decision was fair. We’ll hit on the supply chain. We’ll talk about all this and more on this week’s edition of Making Markets.
Announcer: This is the Making Markets podcast brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies bridging the gap between strategy, markets, innovation and the companies featured on the show. The Making Markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, principal analyst and founding partner of future and research, Daniel Newman.
Daniel Newman: Hey everybody. Welcome back to another edition, episode 10 of Making Markets. Hope you caught last week show. Had Rowan Trollope CEO of Five9 Joined me to talk about the fallout from the Zoom and Five9 deal collapsing after going so far, but seemed really positive. I think the prospects for both companies is going to be really good. Of course it’s always great to have Rowan on the show. We don’t look back too much here on Making Markets. We tend to focus our time and energy to look ahead. This week is a perfect example of that. Over the next two weeks, we are going to have a barrage of tech earnings. It’s going to start off with IBM and Intel next week. Then it’s going to roll on with names like Apple, Facebook, Google, Amazon, Qualcomm, and more all reporting before the end of October or within the first couple of days in the month. Of course Microsoft. How did I forget Microsoft?
As the big tech earning season tends to go, IBM goes first. IBM is going to be a really interesting one to watch this quarter because we’re expecting very soon for IBM’s spinoff of Kyndryl, its managed infrastructure business to be completed. This means somewhere around a hundred thousand employees, a significant chunk of revenue, whole bunch of costs of the company all concurrently moving on, but it also was a big part of IBM’s refocus towards analytics, cloud, hybrid cloud most specifically, some of its big bad scenarios like Quantum and getting out of parts of the business that have historically been somewhat of a boat anchor in terms of the company’s growth. Kyndryl and its new leadership team will have the chance to focus on its business, focus on its growth, and IBM will be able to really turn its attention.
I had the chance this week to share the stage with IBM’s CEO Arvind Krishna. It was great to hear from him, seemed very confident and positive about the long-term prospects, partner ecosystem. It was a channel event and he seemed to be very focused on building out that ecosystem. I think the overall prospects are good for IBM, looking at the company, making a pivot from these kind of plus or minus 2%, 3% to really get into that high single digit growth. I see areas like Red Hat and Ansible, which is the automation platform within Red Hat… I see IBM satellites and it’s control plane for hybrid cloud being really important to that. Also watching really closely to see how the company continues to build systems like it’s Z system mainframe, which everyone’s like, mainframe? But this is actually a really important business, really important technology to so many financial institutions.
Of course the open source running on Linux one is going to be important as blockchain technologies become more important. IBM may be a company that’s a little older, but it’s definitely important and one to watch. Talking a little bit extra about it because it is the first, it is going to be a bit of a litmus for how earning season is going to go. At the same time, because of this spinoff, it’s going to be a little different because people are looking further down the road, past this particular earnings, in my opinion, as they’re going to want to see how IBM’s growth is impacted when Kyndryl and that spinoff is complete.
The other big one that’s going to come up next week is going to be Intel. Intel is going to be massive. It’s going to have so many indicators because of course it’s tied to many of the PC makers. When we get numbers in the near future from the likes of HP, of course we saw Lenovo had a pretty good quarter. Next time, we hear from Dell, but Microsoft’s PC business. Intel is powering so many of those PC companies, but it’s also big on the OEM side, on the infrastructure side, on the cloud side. Whether that’s cloud-scale, whether that’s the Facebooks of the world, whether that’s Microsoft and Azure, AWS, Intel plays a part in all those businesses as well. The other reason that the Intel number’s going to be so big is everybody’s got an eye on the overall chip production and Intel being among the largest of the world. Of course, manufacturers it’s chips, unlike many of the fabulous chip makers. Intel’s numbers are going to be a very strong indicator of what we can expect ahead in terms of any progress we might be making towards closing the gap on the chip shortage.
Having had the chance to listen to a number of CEOs the past few weeks, including AMD’s Lisa Su, Marvell Technology’s Matt Murphy, and then of course hearing from IBM, which does have a chip component of its business, does develop leading edge technologies here in the US but doesn’t manufacture chips any longer for other companies. Arvind even indicated it’s going to go beyond late 2022 and it’s going to go into 23 and 24. That’s going to be primarily tied to the fact that demand is not going to quell anytime soon. If demand does not slow down, we cannot build these fabs any faster. All these supply challenges are going to continue to mount. It’s going to continue to put pressure. The companies that are going to be more successful, it’s going to really be tied to their ability to manage the supply chain effectively.
Michael Dell came out with a great quote this last week. He was sharing how Dell was able to raise shipments in the last quarter, over 25% while the entire industry for PCs, according to IDC was actually down. That’s all attributed towards operations and supply chain. That’s something that Michael and the team at Dell have been extraordinarily good at. It’s going to create a lot of value down the line if we can’t get this chip shortage in order. Now hearing from all the other PC makers, seeing if these numbers all come true is going to be something to watch very closely. Now, alongside Intel, you’re also going to see about a week later, AMD is going to come out with its numbers. With AMD being fabulous, there’s going to be a really interesting testament to how the leading edge and the production in Taiwan is going mostly working with TSM. Everybody is aware that leading edge numbers have been good. AMD has had extraordinary results over the past few quarters.
What AMD has been doing to grow has been partially, especially in PCs, but a little bit in the server space too, it’s been taking market share from Intel. We’re going to look closely to see if that continued cause that’s part of where growth comes from. Overall we’ve heard chip makers, we’ve heard OEMs, we’ve heard PC makers, all kind of saying the same thing. Backlogs are big, demand is higher than supply, if more supply was available, they would be able to fill more, grow more, revenue, top line. All of that’s being impacted. I expect it to continue to be impacted for a while. Even Apple this past week, heeded a few warnings and Apple will report, but it basically indicated with its I-phones it is having some supply issues with its iPhone 13.
That slowing down could have a really, really adverse reaction to its overall revenue numbers. I-phone is so important to Apple’s bottom line. Paying attention to Apple, how it performs, are they in fact being impacted as severely as some are thinking by this chip shortage? After so many great quarters of growth and income and revenue tied directly to that iPhone product, people are going to probably be a little bit shocked to see if that number slows down. Now, Apple may be pulling a head fake. It’s not totally uncommon, but this’ll be a great test of Tim Cook’s overall supply chain leadership and if he really does have the abilities to predict the future better than his competitors.
Then the last one that I’m going to be paying a lot of attention to as it applies to the supply chain is going to be Qualcomm. Now that’s in the handset space. We’re going to have to watch them very closely. 5G is set to grow I believe exponentially this year, double the number of 5G handsets that are going to sell. Qualcomm is the leading supplier in this space, especially… It has a wide variety of systems, but at the high end, companies like Samsung are almost exclusively in their highest end flagship devices dependent on Qualcomm. Seeing that 5G demand remain high, but also seeing that they were able to manage their supply chain, also most of their fab is work is done with TSM, that they were able to manage the challenges and continue the strong growth rate that they’ve seen over the past several quarters. All the chip makers, despite the shortages, have had really good performances with little bits of swaying.
Intel has had some stronger data center versus client and then client versus data center, but all of them have been at or above. None of them have really fallen short. When you hear how much the chip shortage is impacting us, it’s interesting because we’re still showing growth year on year. We just can’t meet the demand, which has a lot more to do with the fact that everything runs on semiconductors.
Let’s pivot a little bit here because the supply chain shortage and its impact on the holidays is another really hot topic. While this isn’t all directly tech, it is a lot of tech because around the holidays, consumers are filling stockings and giving gifts that include phones and computers. Of course, companies are oftentimes looking to make big purchases, expenses to try to lower tax burdens and tech can often be a spend. Going into the holidays, I think we really have to expect that the chip crunch is going to have a huge impact along a large swath of businesses.
We’re seeing the ports now opening up for 24 hours, which why did it take us this long to get there, but I’m glad we are. At least these containers, these hundreds of thousands of containers can finally be unloaded and at least those supplies can get to where they’re going. Of course, we’re going to need trains and trucks and people to work, which means we might need to raise wages. That’s another thing that’s going to on.
Best Buy, actually really interestingly decided to put a program together, some type of exclusive shopper program that they’re starting. I guess we could thank Amazon Prime for this idea, but for about $200 a year, it gives you access to be able to get harder to get technology devices. Given that the shortage could rage on for one or two or more years, this could be a really interesting move for Best Buy to create a strong recurring revenue, build more loyalty, get access to its best customers.
I sure as heck like it better than what automakers are doing, which is just saying, these are hard to get, so you’re going to pay way over list price for a depreciating asset. The reality is with the retail space that everyone hears about the chip shortage, but it really isn’t just the chip shortage. We’ve got a multi-year timeline. We’re not going to be able to produce exponentially more chips. Everyone that wants to know how it’s going to get fixed in the short term, demand has to go down. I guess if inflation goes up enough and prices go enough higher, that demand might go down. We have problems with shortages and petrochemicals, meaning plastics and paints are being impacted. We have energy crunches in major manufacturing hubs like China. This is causing factories to be shut down.
Ports are overcrowded and understaffed. You’ve got too much stuff and we can’t get this stuff off of the containers. We can’t get it onto the trucks. We can’t get trucks to the location. It’s hurting us everywhere from the over the road drivers to last mile, which means wages are going to go up. You have wage inflation, you have product inflation and you’d have to really push it up high though, in order to slow down the demand, especially the demand for a lot of these products that are driven by semiconductors. We have a real dilemma. We don’t have a really great fix. We are trying to spend our way out of it. There’s a number of bills in the House, in the infrastructure space that need to pass the House before they will actually go into law, including one that would be around $52 billion to help build more fabs in the US. The fabs and doing more leading edge production here in the US would help, but in itself that is not going to solve the entire problem.
Let’s move on real quick here. Regulation, that’s another thing that came into focus again. I want to start off with just a little side note about regulation and especially regulation in big techs. We’re hearing a lot about antitrust. Antitrust is creating this interesting battle between big tech companies, platforms, abuses of power, privacy and data, and then consumers. The Facebook, Rebecca Haugen, whistleblower instance has put a lot of pressure on Facebook. Of course it’s unifying Republicans and Democrats for the first time. They can agree on something, regulating Facebook. Now how that actually gets regulated… I don’t think they know the answer to that yet, but what they do know is there is a concern for how data is being used, privacy, what is being targeted at consumers, of course, safety and the protection of children, and of course, how much does Facebook know?
How aware is Facebook of the dangers of Facebook and the impact that it could have on children? Could it do more? Nobody wants to use the parallel of smoking and cigarettes, but there was a time when cigarette makers didn’t really know how bad they were. Then there was a time when cigarette makers figured out this is really bad for you. Then there was a period of time where cigarette makers tried to cover up the fact that it was really bad for you. Then a lot of regulation took place. Now people can say, this is a social media app. This isn’t the same thing. That’s the interesting thing. We really don’t know because there is a physiological response. The only thing you have to do is take the phone away from your child or, heck, take the phone away from yourself for awhile and see how you feel. You start to feel symptoms of withdrawal.
My phone gets more than about three feet away from me, I start to get nervous and I get really uncomfortable. How does that feel for a 15 year old whose entire communication world is attached to that device? Does Facebook need more regulation? That’s not just Facebook. That’s everything. That’s TikTok, that Snap, that’s every single big tech company. Now we’ve got this broader dilemma and that’s this battle between what’s good for consumers, what’s good for competition, what’s good for data and privacy, and then of course controlling media and platforms and what can be shared, what should be shared, how do algorithms work?
There was a new bill put forward this week trying to further regulate any company that has a large platform. It really felt like it was straight after Amazon that basically said you can’t favor your own products. By the way, this isn’t new. They’ve been trying this for a while. This is going through the Senate. As I’ve said before, Facebook has… Sorry. Amazon has all of 1% house product right now. Could that be more? Sure. Amazon also has hundreds of multi-billion dollar competitors in retail. I’ve said it for a long time that I don’t really think Amazon is the first company that needs to be focused on, but I understand the idea of not using the platform to create a disadvantage for others on the platform. At the same time, this is their platform. Companies that decide to use these marketplaces, whether it’s Shopify, whether it’s Amazon, whether it’s other to sell their products and services… Nobody’s stopping them from building their own e-commerce platform. Build your own, use your own, create your own e-commerce, create your own store. There’s plenty of tools and technologies for that.
The reason they use Amazon is because it works, but there’s no dominant market share there at this point. I don’t really believe that’s the focal point, but moreover, I don’t see any way that policymakers and governance is going to actually be able to control algorithms. We all know with neural networks, you really don’t know what happens once we send the query out. It’s a little bit black box. The way an algorithm works, and we all remember the Microsoft bot that went a little crazy… The way an algorithm works is not always entirely clear. I don’t see how lawmakers are going to be able to regulate this even if they make the law. How do they really know how the algorithm works, how it favors, who it favors, what if favors?
Of course, we’re seeing this, back to Facebook, with the way information comes. of course, you’re being targeted with information that’s likely to initiate a certain type of response. That continues on. This is just a big conundrum. Regulation is going to stay in focus. Heck, one more, Apple. Apple is now pushing back because the ruling in the epic case was going to say that Apple can’t force companies to continue to make developers use the iOS platform for payments. They’re supposed to be able to side load, but Apple’s asking for a stay. They don’t think it’s right. Now on Apple side, there’s security and risk concerns. When you have this closed garden, it’s likely a little safer, although we’ve all seen that that can be breached in recent months. When you have the open platform, it does create more risks.
At the same time, Apple continues to jack up its prices for its app store and it doesn’t invest in it. That was probably one of the most telling things that the judge said was they’re not really investing in it. They’re pushing pricing, they’re not investing. Therefore, I think Apple is going to have to make this change. Samsung did, others will. Apple’s instance and what they’re doing with payments is probably the most clear cut regulation that needs to be dealt with. It’s the clearest case of antitrust. Again, in the end, it’s about protecting consumers and driving competition. Most consumers don’t want to be protected from Facebook or Amazon. They want Facebook and Amazon. In fact, breaking it up would only make it worse for those companies. Most want iOS and they want to pay and they will pay in iOS, but give them the option. A small percent of driven to a direct payment link, give the developers a chance or invest more in the platform or charge appropriately.
There’s all kinds of different options. The only one Apple seems to want is the one that just makes Apple money. Again, capitalism is not at fault here, but the laws may need to be updated to make sure that it’s fair for consumers and for competition. With that, we’ve covered a lot of ground, so much here. We’ve got the chip shortage, we’ve got regulation and focus, and we’ve got a wave of earnings. Next few weeks, keep an eye out. Microsoft, IBM, Intel, AMD, Apple, Facebook, Google, Qualcomm, and so many more. We’re going to have some really interesting guests joining us soon. For this week’s edition of Making Markets, I got to say goodbye. Thank you, internet.
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Daniel Newman is the Chief Analyst of Futurum Research and the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio