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It's Coming: Tech Industry to Slow Down

Read between the lines of the leading tech companies' earnings and you'll find grim takeaways for any business in the industry.
Zynga CEO Mark Pincus recently laid off 150 employees as the company reported third-quarter losses.
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Every industry has bellwethers. Tech has many, depending on which part of the business you're looking at. But for entrepreneurs looking for inspiration and where things are going, you'd be hard pressed to come up with a set of companies more indicative of the immediate economic future than some of the ones that announced earnings recently: Apple, Netflix, Amazon, Facebook, and Zynga.

On the surface, some of the companies did well and others, not so. But all had their issues. Taken together, they paint a picture of a big caution sign.

Facebook

First up it's the king of social networks and hyper-valuation. After months of concerns over whether Facebook could make mobile pay off, underscored by the major price drop in its stock right after the IPO, the Street rejoiced when the company's numbers for Q3 came out.

Facebook happily--and probably with some relief--announced a revenue jump, more than a billion monthly average users, and, more importantly, that 14% of its money came from mobile. Even with a bottom line loss, the stock price took its biggest gain since its debut on May 18.

The relief might not last when people dig into the numbers a bit more. Yes, Facebook is growing, but it now has almost half of the total number of Internet users coming to its site or smartphone apps. Growth can't keep coming from adding bodies because eventually it will begin to saturate the market.

For growth to continue, the company has to make more money per user than it does now. In 2011, that annual total was $5.11. In the third quarter of 2011, the figure was $1.19. This last quarter, it jumped... to $1.25 per user. If the whole year were like that, 2012 would fall short of 2011. The takeaway: Boosting customer value over time is getting tough.

Netflix

Once a Wall Street darling, Netflix has fallen into the pits. The markets beat on the stock after the company's earnings announcement. Even though video streaming revenue was up and total quarterly revenue rose by 10% to $905.1 million, profits dropped by 88% year over year because costs of obtaining video continued to soar. Content owners have a greater sense of how they have the upper hand in pricing negotiations.

Netflix did add streaming customers and now has a fifth more than the same time last year. But the company warned that subscriber growth is slowing and it reduced previous estimates on how many customers it would add.

Takeaway: Content is king, if you own it. Ecosystems are great for a platform for users, but as the number of options for video, music, reading, and programs grows, being a content licenser means you increasingly have competition that content owners can use to squeeze you.

Zynga

The maker of some of the more popular games on Facebook has seen one problem after another as games aren't ready on time and users seem to tire of the ones they already have. After announcing a 7 cents a share loss and bookings--Zynga's measure of sales of virtual goods to customers--down 11% year over year, the stock shot up.

The reason for renewed investor confidence might have been that Zynga also announced the layoff of 150 employees and a stock buyback of $200 million. The theory is that the moves indicate confidence on the board's part that things will improve in the future. And Zynga did just announce a deal to offer real-money gaming in the U.K.

Over time, though, Zynga offers another takeaway: Fads are a tough business. Don't assume that technology somehow banishes the ease with which customers can walk away.

Amazon

Amazon had a strong miss when it came to analyst expectations. In fact, the company had its first quarterly loss in years. Out of a $274 million loss on $13.81 billion in revenue, $169 million was because of its Living Social investment. And, while not a major portion of the loss, the company's Kindle tablets are sold at "near break-even" prices in hopes of making money in the long run off content.

CEO Jeff Bezos has never been afraid of running short-term losses if it means building up the company in the long term, and long term is how he thinks, whether further expanding into new areas of commerce or additional lines of consumer devices. The takeaway: Expansive strategic plans often need expansive financial resources and patience.

Apple

Apple was perhaps the biggest surprise during a week of tech earnings. Of course it made money--$36 billion in revenue and $8.2 billion in profit. But the latter was less than analysts expected, which is unusual, as Apple is usually conservative with its guidance.

Moreover, unit sales weren't what one might expect, as iPhone purchases grew substantially year over year, but not quarter over quarter. The growth was only 3%, and that was after the millions of units of iPhone 5 were factored in. The number of iPads sold actually dropped by 18% between sequential quarters. Apple announced a full-size iPad refresh less than a year after the last one as well as the new iPad Mini.

When you're at the top of your game, it's still dangerous to take anything for granted. The takeaway: Anyone can be dogged by competition if Apple can, because clearly companies selling Android smartphones and tablets are chipping away at customers. After all, it hasn't been so long that a Samsung can run ads making people who buy Apple-designed products look like nerdish posers.

Last updated: Oct 26, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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