Tech Sector Beneficiaries And Victims of the New Mobile Driven World
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The advent of smartphones and mobile devices has seen the demand for personal computers and laptops wane as demand for smartphones and tablets has boomed in recent years. Users are conducting more business using mobile devices now than ever before. The mobile sector has driven increased revenues in some communications and e-commerce companies and seen traditional chip and PC makers looking for avenues to exploit growth in the mobile market.
Chip makers Intel (NASDAQ: INTC), Sandisk (SNDK) and Micron Technology (MU) have seen business channels change from business to home and personal computers. These companies are now jockeying for position to supply the expanding mobile market in tough economic conditions where high manufacturing costs and oversupply have met decreased expenditures by businesses and consumers. The main challenge in the chip market is providing lower cost chips to power the burgeoning mobile market that provides long battery life to a number of mobile devices.
Microsoft (NASDAQ: MSFT) has experienced a 22% drop in profit in its first quarter of fiscal 2013 due to a decline in PC demand in advance of the release of its new Windows 8 operating system. Intel’s fourth quarter 2012 forecast is weak as a result of the shift from PCs to mobile devices. Intel’s chips are used in less than one percent of the mobile device market.
The top five U.S. telecom companies AT&T (NYSE: T), Verizon (NYSE: VZ), Comcast (CMCSA), Sprint Nextel (NYSE: S) and DirecTV (DTV), have been dealing with declining subscriptions for landlines, highly competitive home phone, cable, and Internet packages as well as trying to make prudent expenditures to enter into the mobile market and remain competitive with peers. The mobile market has and continues to grow at a speed that often sees demand for devices outpace the technology and the wherewithal of telecom companies to make necessary expenditures to serve that demand.
Verizon showed record quarterly profit in the third quarter which was attributed Verizon’s penetration into the mobile market and demand for the iPhone voice and data packages Verizon offers. The dominance of AT&T and Verizon in the mobile market is being challenged with Softbank’s (SFBTF) acquisition of 70% of Sprint Nextel for $20 billion. Softbank has had an exclusive deal to sell Apple’s (AAPL) iPhone in Japan offering discount rates on data packages. This acquisition provides Sprint with the opportunity to pay down some of its high priced debt which was hindering its ability to make acquisitions to remain competitive in the mobile market. Deutsche Telekom (DTE) has announced that is will merge its T-Mobile USA division with MetroPCS (PCS). This will create a bigger competitor to Sprint.
Mr. Masayoshi Son, President of Softbank, is quoted as saying that “Each subscriber should have at least two subscriptions, one for a smartphone, one for a tablet. I would say in the near future three lines, four lines, five lines per capita is possible.” I believe Mr. Son is correct. In the global economic downturn, many subscribers have foregone traditional land lines and cable and moved to tablet or smartphone subscriptions for their communication, commerce and entertainment needs. As macro conditions improve and technology advances to the extent to provide voice, data, content streaming and broadcast to mobile sources, the increase in subscriptions is bound to follow.
Mobile has proven to be disruptive to search engine providers and e-commerce sites, as mobile applications have driven more consumers to make online purchases. Amazon.com (AMZN) and eBay (EBAY) are servicing more consumers through mobile devices. It is reported that over 800,000 people made their first eBay purchases through a mobile device such as Amazon’s Kindle Fire.
Search engine juggernaut, Google’s (GOOG) third quarter results showed that its core online advertising business had declined for the fourth consecutive quarter as a result of decreases in accessing the Internet from PCs. China’s Internet companies are trying to make the transition from servicing home computers to servicing those users who access the Internet through smartphones and tablets. The largest search engine in China, Baidu (BIDU) saw its share price drop last week after a downgrade from Credit Suisse to “underperform.” At the end of the first half of 2012, the number of Chinese users accessing the Internet from mobile phone surpassed those accessing the Internet via personal computer.
In all of this change, companies that conduct business online are looking for ways to translate web sites and portals in a cost efficient manner to service the growing number of consumers who access e-commerce sites through mobile devices. Template Monster provides really attractive and easy to upload templates for mobile social networking and e-commerce sites. It has a large number of designs for mobile device users. It provides templates of light weight design for display on 98% of mobile device platforms. As more businesses opt for a mobile option for e-commerce, Template Monster can provide templates for a number of different businesses and services allowing those companies to take advantage of the boom in online purchasing through mobile devices.
Companies like Template Monster know that businesses need to provide mobile consumers access to goods and services or miss out on potentially huge revenues. Template Monster estimates that mobile Internet users will increase 17.1% in 2012 over 2011 and that there will be 72.8 million mobile shoppers in 2012 and 37.5 million mobile buyers in 2012. The number of smartphone shoppers will reach 68.6 million and smartphone buyers will reach 36.4 million in 2012. Template Monster believes that tablet users will reach 54.8 million in 2012, and 76.4% of these users will be iPad users. 88.1% of U.S. Internet users over the age of 14 will browse or research products online in 2012 and 83.9% of Internet researchers will make at least one purchase online in 2012. Template Monster’s Responsive Magento Theme are fully optimized for mobile users, where reloads are omitted in mobile layouts to make browsing faster and more comfortable for each user.
Of all the companies mentioned here, I think that telecom companies will have the most turbulent year ahead trying to stay on top of mobile demand and appeasing consumer tastes that translate into subscriber growth and retention. I think Mr. Son is correct in assuming that there will be businesses and households who have different subscriptions depending on need. These are growth areas which will eventually consolidate, and the bigger and better capitalized companies such as AT&T and Verizon will prevail after a period of upset.
I think the chip makers are always going to have a difficult time as oversupply and thin margins on manufacturing will favor larger companies. In this sector, looking to companies like Micron Technology that has made advances into the mobile market and Intel that is well capitalized are better places for investors to have exposure in their portfolios to this sector.
Google and Baidu are experiencing a shift in their respective dominations in the search engine markets, and will have to find a way to adjust their business models to the demands of the mobile market. Both of these companies are well capitalized and well established and will most likely bounce back from recent share price drops.
Microsoft gets the nod for being the company that will show the most improvement with the release of Windows 8. Microsoft has staying power. It has been criticized for its lack of innovation in recent years, but it has had the ability to observe and digest the changes in the PC market. It is likely that its relatively low debt position, with $66.64 billion in total cash versus $12.36 billion in total debt, will allow it to be able to either step up its research and development activities to serve growing market sectors, or acquire a company to facilitate growth in the mobile and future hardware, software, content and service markets.
Change is always a challenge. The economic conditions of the past four years have made it difficult for many large companies to respond to different sectors and different demands. All of the companies mentioned here have made adjustments to their business models to adapt for change and to anticipate new areas for growth.
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