Some surprising and not so surprising results for the tech industry this past quarter (2Q15) confirm both longer term industry trends and also high volatility for mismatches in expectations and performance.

First, Apple delivered strong growth in revenue and profits again (38% growth in profits to $10.8B), and yet, because it was slightly below expectations, lost $60 Billion in value. While Apple sold a record 47.5 million iPhones and saw Mac sales of 4.8 million units (up 9%), investors were apparently disappointed in both the number of iPhones sold and the lack of clear information on the iWatch. Even though it appears the iWatch is more successful at this point in the sales cycle than the iPad or iPhone, investors were apparently expecting a leadoff home run and sent the stock down 7% on the results.

And the reverse occurred for both Google and Amazon. Google delivered solid growth with 11% increase in revenue to $17.7B with net income of $3.9B which sent shares up 12%. Investors were surprised with the breadth of growth, particularly in mobile, and that managers showed some cost control. Amazon actually delivered some profit, $214M on revenue of $29.33B, and showed continued robust growth of 15%. Investors sent Amazon’s stock up on the profit results, a rarity given Amazon’s typical long term vision focus and  willingness to spend for reach and scale even in areas well beyond its core.

What the quarterly results also reveal is that the tech platform companies (Amazon, Apple, Google) are continuing to be viewed as dominant but investors are uneasy about the long term stability of their platforms and thus have a quick trigger finger if they see any cracks in their future dominance. So, with Apple’s potential over-reliance on the iPhone, when there are fewer shipments than expected, or there is not clear evidence of a new platform extension (e.g. iWatch) then investors react sharply. On the reverse, when Google appears to be overcoming the mobile threat to its core search platform, it is well-rewarded by investors.

What do the quarter’s results say about the tech product companies? Unless they have strong portfolio of winning products, it appears they will continue to struggle to regain form. IBM, AMD, HP and others all posted disappointing results as they grapple with the technology revolutions in each of their industry sectors. AMD saw a 35% loss in revenue, dipping below $1B in quarterly revenue for the first time in years to $942M with a loss of $181M. Of course, the slow to declining PC sales worldwide is the primary cause and only console sales were healthy for AMD. Expect further difficult quarters as AMD adapts to the changing component industry (driven by impacts from the platform companies). HP continues a listless journey, its 2nd quarter reflecting a 7% slide in revenue from $27.3B to $25.5B, a 50% drop in operating margin, and a 10% drop in PC market shipments. While HP will split into two entities in November later this year which has some analysts upbeat, prospects look tough across all product segments with slow or declining growth except possibly enterprise software and 3D printing. IBM had mixed results, with better than expected profit on $20.81B in sales, yet saw continued revenue decline, which left investors nervous, sending the stock down. IBM did see strong growth in cloud services and analytics, but lackluster products and results in other core segments (e.g., hardware) which make up the vast bulk of IBM revenue yielded disappointing revenue and profit showings. IBM recently sold off its low end server business as it views that sector becoming increasingly commoditized. Yet, IBM will continue to find that selling services when you have limited ‘winning’ products is a tough lower margin business. And cloud services are far lower margin business than its traditional hardware business – and one where Amazon and Google are first-comers with volume edges. IBM can certainly leverage its enterprise relationships and experience, but that is far easier to do when you have products that provide real advantage to the customer. Other than analytics (Watson) and some software areas, IBM lacks these winning products, having neglected their product pipeline (instead focusing on services) for many years. While the alliance with Apple provides some possibility of developing modern, vertical industry applications that will be compelling, there is far more IBM must do to get back on track and part of that innovation must be in hardware.

EMC and Oracle are the exceptional large technology product companies that have been able to navigate the turbulent waters of their industry the past few years. Oracle did have weaker results this quarter, primarily due to currency fluctuations but also slowing software sales. Only EMC beat expectations and had new products overcome slowing demand for core areas.  Winning products for EMC like VMware and Pivotal as well as high demand for services and products in its information security division (RSA) and analytics more than overcame issues in the core storage division (which showed some recovery from 1Q). One could argue that with the VMWare franchise and leading engineered systems, EMC has established the strongest cloud platform, thus it has a more assured place with growth and margin in this rapidly changing sector.

The bottom line? Product companies will continue to struggle with revenue growth and margin pressure as technology advances undercut volumes and platform companies offer lower cost alternatives (e.g. public cloud options instead of proprietary server hardware and services, or smartphones instead of PCs) Unless technology product companies stay on the leading edge of innovating (or acquiring) compelling products, generating additional high margin revenues through services or software will be tough sledding. As we have mentioned here before, digitalization and the emergence of platform companies will result in more casualties in product companies – both in the tech space and outside it.

And of course, there is Microsoft. Microsoft is in a unique spot where it still has a strong productivity platform (e.g. Office, Exchange) but a diminishing OS platform. And with only low margin business that are growing rapidly (e.g. cloud), the road back to dominance looks very tough. Further, their forays into other tech sectors have been middling at best and disastrous at worst. The second quarter results included an $8B write down of the Nokia acquisition, which was made two years ago. The ‘devices and services’ strategy has shown to be a ‘phenomenal error’ by some accounts. PC sales continue to decline, and Microsoft was unable to effectively crack the smartphone market. The past quarter revealed declining revenue volume for phones even with 10% more volume as the only market segment MS gained traction was phone models at lower cost points. And it is hard to see that Samsung or other handset makers will add Windows OS to their product mix. Further, traditional Windows OS revenue (from OEMs) dropped 22%. The bright spots for MS were gaming (Xbox) and of course enterprise software and cloud services. There remain major concerns for the enterprise area where the rapidly growing cloud services has far lower margin than their traditional software business. Microsoft should continue to worry that increasing import of dominance in the consumer space often translates later into winning business space – thus,  the Google and Apple productivity platforms could be the long term trojan horses that blow up the enterprise cash cow for Microsoft. Microsoft may lose the war by trying to maintain its OS platform by limiting the reach of its productivity platform to consumers on their device of choice. Already, Google and Apple have changed the game by offering such software on the platforms for free, with free upgrades. Some assessments already show Microsoft lagging in feature without even considering its far higher cost. Windows 10 should be a solid hit for Microsoft, reversing some of the ground lost with Windows 8, but it will not dent the momentum of the Apple and Android platforms – especially when Microsoft introduces such new ways to monetize as the formerly free Solitaire’s lengthy advertisements or $9.99 annual subscription fee. They continue to misread the consumer market. Despite these continual missteps, or as recently called out in a New York Times article, their ‘feet of clay’, Microsoft has a strong enterprise business, a well-positioned productivity platform, and plenty of money. Can they figure out how to win in the consumer world while growing their productivity ecosystem with compelling extensions?

There remain multiple gaps that Microsoft, IBM, HP or even Oracle could exploit to win the next platform or obtain strong enterprise market share. While Apple and Android are pursuing the future car and the home platforms, the internet of things is still an open race. And there is opportunity given that most of the gazillion apps in the Android and Apple space are games or other rudimentary (1st generation) apps oriented for consumers. But there could be tremendous demand for myriad vertical industry applications that can easily link to a company’s legacy systems. IBM has started down this road with Apple, but plenty of opportunity remains for enterprise software players to truly leverage the dominant platforms for their own gain. Let’s hope the tech product companies can rekindle their growth by bringing out great products again.

Best, Jim Ditmore