The tea leaves showing up in the bottom of the latest earnings results of companies as diverse as Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), Zynga (NASDAQ:ZNGA) and Facebook (NASDAQ:FB) read: "Beware the connected consumer!"
The mobile interactive users companies are scrambling to attract can rapidly turn their attention to competitors or, worse, take off in completely unexpected directions, causing chaos in financial forecasts, product inventory and future plans. The spontaneous interactivity companies are trying to leverage can easily work against them. Consider:
In anticipation of a better iPhone 5 release this fall, the Apple faithful clearly turned thumbs down on high-end iPhone offerings, according to company statistics. Not just any Apple product will do, although the iPad remains a bestseller.
As a result, sales for iPhones, still the dominant revenue driver, missed analyst projections, although they are up 28% over last year. The miss threw off Apple's gross margins and overall revenues, even though brisk iPad sales rose to 26% of total income. The pronounced shortfall in iPhone sales underscores discriminating consumers' willingness to opt for cheaper phones while waiting for better technology--a dynamic that Apple has been insulated from until now.
Warnings from Apple executives about the adverse impact of weakening economics in Europe, Brazil and Australia heightened investor anxiety about consumer whims. Even Apple must fight to retain users within its walled ecosystem.
Netflix subscribers, irate a year ago over the company's short-lived decision to spin off its DVD operations, have been mollified, but growth remains well below forecast levels. The company reported lighter-than-expected subscriber figures (adding 530,000 versus an anticipated 800,000 domestic subscribers last quarter) and weaker guidance, even though it beat Wall Street earnings estimates.
Overall breakeven profitability for the foreseeable future has analysts like JP Morgan Chase' Doug Anmuth cautious and neutral on the stock. Sacked with exorbitant digital content licensing costs, Netflix faces stiff competition from an exploding array of higher-quality streaming video, including the Verizon (NYSE:VZ) Redbox Instant Joint Venture, Comcast (NASDAQ:CMCSA) and other cable operators, Google's (NASDAQ:GOOG) new YouTube channels, Apple, Amazon (NASDAQ:AMZN) and HBO streaming video services.
Zynga, the virtual gaming darling, came up short of Wall Street expectations with second-quarter revenue of $332 million, and a loss of $22.8 million. A bigger problem is the company slashing its outlook for bookings to just over $1 billion this year (from $1.47 billion, after the fees it pays Facebook). Are the dedicated users who pay for virtual goods on the otherwise free gaming service going away?
Daily revenues generated have declined 10% in the past year, even as the number of overall users has increased. Zynga has cut its full-year earnings per share estimate to $0.04 from $0.09--way off from analysts' initial forecast of $0.27. It's disconcerting enough to have some analysts wondering aloud whether the sale of virtual goods in gaming might not be a viable business after all.
As the second-largest revenues source for Facebook, which takes one-third of its gaming proceeds and began ad trials on the gaming site, Zynga's fate is unrelievedly tied to the social network. The clear message in Zynga's freefall since its storybook IPO (its stock is down more than 30%): it's foolhardy to bank on the fluctuating habits of interactive users.
Facebook barely beat analysts' low expectations, with $1.18 billion in second-quarter revenues, but reported and warned of more ad revenue deceleration. The company is pinning its growth hopes on mobile marketing and transactions. Among the promising prospects: Facebook founding CEO Mark Zuckerberg pointed to $1 million daily run-rate on its new Sponsored Stories news feed ad offerings, which would translate into more than $180 million in new mobile and app ad revenues in a year.
That's still not enough to bring Facebook up to the 15-times revenue multiple it went public with earlier this year. Bottom line: Facebook's revenue growth hinges on advertisers and users buying into the new ad experiences it is integrating into their content and interaction.
Nagging uncertainty about brand advertising's ROI, the ability to measure advertising ROI and to monetize mobile engagement is what keeps Bernstein's Carlos Kirjner and other analysts from swooning over the social network's upside opportunity outside of display ads. Prevailing questions about meaningful contributions from social gaming and streaming video helped push Facebook stock to a new low $23 a share.
All four of the companies should be riding the tide of rampant mobile connectivity and, instead, are facing formidable headwinds created by the control consumers have to shift their behavior.
Keeping up will require more than one-off hits. Even for the biggest and best players in the mobile digital arena, you're only as good as your next product or service.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.