In this episode we discuss the merger talks between Virgin and O2 in the UK and we dive in to the recent financial results from Google, Apple, Facebook and Amazon (GAFA). Enjoy.
Virgin x O2
Rumours emerged last week that O2 (Telefonica) and Virgin Media (Liberty Global) were in discussions to merge their UK businesses. These rumours were later confirmed by Telefonica.
Now obviously they are still in very early stages of discussion which will go on for many months and may even lead nowhere. Even if they end in a deal there will be huge regulatory scrutiny. This shouldn’t be too bad though as the companies have very complimentary offerings - O2 being a mobile network operator and Virgin being a fixed broadband operator. These offerings should keep regulators reasonably happy as opposed to previous mergers where two mobile operators merging was categorically rejected by the regulators.
Telefonica, the parent company of O2, have played hot and cold with the company in the UK for sometime now, flicking between trying to sell it off and it being a core part of the Telefonica global strategy. Most recently O2 and Three attempted to merge but with being national mobile operators the regulators took a dim view and blocked the merger over competition fears. For Telefonica selling off their British company would give them a good capital boost, enabling them to focus on growing markets. They currently make very little money in the UK given it’s a highly competitive and stagnant market.
In this merger I think there’s going to be much more than just two UK companies coming together though. Both have significant operations in Latin America and I would be hugely surprised if assets in these countries weren't also a part of the negotiation.
For Virgin in the UK a merger with O2 would give them a huge boost in their competition with Sky to be the number one quad-play operator. That’s TV, Phone, Broadband and Mobile. Currently Virgin and Sky are both virtual mobile operators, piggybacking off other networks. Interestingly Sky actually use O2 while Virgin currently use BT/EE, although they’re planning to switch next year to Vodafone. Obviously if this merger goes ahead then Sky will very likely be moving away from O2.
GAFA: The Results
Google, Apple, Facebook and Amazon (aka GAFA) all released their latest quarterly financial results, and they’re pretty impressive.
Google, well their parent company Alphabet, reported revenue for the quarter of $41 billion giving net profit of almost $11 billion. Advertising revenue, their main source of income, was down slightly on what would be expected but still up by 10% compared to the same quarter last year. Of course at the moment companies are significantly reducing their advertising spend which I think will start to show in Google’s finances in the next quarter and probably for the rest of the year. As an example Expedia usually spends around $5 billion each year but expect this year to reduce that to around $1 billion. Now that’s just one of millions of companies in a similar position.
Apple saw equally as impressive figures with revenue for their Q2 of $58 billion. Service revenues grew to over $13 billion. Services is an area that Apple has been trying desperately to make a success as it seeks to move away from their current iPhone cash cow and towards more recurring revenue streams which they typically get form offering services such as Apple Music, iCloud storage, and Apple TV. The company is far less susceptible currently than others such as Google who rely on advertising. With people staying at home they will be spending more on TV & Music, health & fitness trackers such as the Apple Watch, and home office equipment such as new Macs.
As expected Facebook did pretty well in its latest quarter with revenue up 17% to almost $18 billion, almost all of it coming from advertising. Interestingly for Facebook while advertisers are overall spending less, people are spending much more time on the social network, meaning ad revenues have increased. They did state though that they have seen significant reduction in advertising spend which will no doubt be reflected in following quarters. Monthly users, that’s those that logon at least once per month and is a key metric, was up 10% to 2.6 billion people. Profit for the quarter doubled on last year to $4.9 billion.
Amazon too posted excellent results as consumers increase their use of Amazon to buy products, and businesses quickly adapt to Cloud (AWS) to serve their now largely remote employees. AWS revenue was up 33% on last year. Total revenues were over $75 billion but profit was down by $1 billion to just $2.5 billion. Amazon though has never had high profit margins as it has always sought to reinvest the majority of its cash back in to the business, this highlighted by it’s increased spend on technology and marketing. Almost all of their profit now comes from AWS with the retail business making a loss outside of the US.
Episode 5: Virgin x O2, and GAFA: The Results.