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Earning season for Q4 2011 is up and tech companies are showing results.  The story of Apple and Ericsson could not be more different.  Apple stunned investors by releasing a surprising revenue growth of 73%, well above analyst expectations.  Quarterly sales rose to $20bn and margins doubled to $17 bn, achieving a record 97% increase in profits.  The road is still long for Apple to raise profitability and continue its market expansion despite harsh global economic conditions and surging competition.  Ericsson also surprised analysts this week, but by releasing earning half of what were estimated.  Sales in the network division were almost 10 percent lower and profits contracted by 66%.  Ericsson tells us that operators are putting a chilly face to network suppliers, despite the need for network upgrading towards LTE.  Operators are cautions about investing despite surging demand by users of more and more mobile broadband.

What all this tell us about the sector?  A quick read is that telecom operators are reducing costs because they do not see the business case for the recurrent additional investments of a sector that needs cyclical upgrades.  This could be due to the grim economic outlook for 2012, as it is happening in many other sectors.  However, I think the reason for halting investment and reducing costs goes beyond that.  That operators are uncertain about the business case of adding new capacity and upgrading their networks says a lot about their problem of monetizing demand for their services regardless of the economic situation.  The fact that Apple continues making money and sees no market end for its products (particularly iPads and iPhones) shows where the money is going to.  The sector has been reshaping since July 2008 when Apple’s iPhone disrupted the market’s value chain by introducing the applications model.  Operators have been slow to react and now time is running out. 

The clout of the market is going to handset-ecosystem providers, who have stolen the gateway for content (the real driver of demand), and operators are considering whether the rapid move towards the utility model allows them to maintain the continuous network investments and upgrades so particular of this sector.  Some operators, such as Telefonica, are reshaping their structure hoping to find a formula that allows them to reap some of the high-margin portion of the market while there is still time.  No operator restructuring aimed at capturing the over-the-top market has worked so far and this will certainly be a challenge for the traditionally rigid structure of operators.  However, showing the sharp turn of Ericsson’s results, it seems that most operators are resigning to live with lower margins; thus, with lower and slower investments in their networks.  If this is not a temporal issue (waiting for the economic tempest to calm down), how can we sustain the investment cycle we have been enjoying in the sector to continuously upgrade and augment bandwidth for the ever-hungrier services and applications (an industry that has generated substantial wealth and employment)? 

This is the question policymakers should be asking themselves this week as Apple and Ericsson tell us plainly just how it is out there.