Bits Blog: Growth Returns to Tech, but Profits Will Not Be So Easy

Bits Blog: LinkedIn’s Profits Soar as User Growth Accelerates

Free-Messaging Apps Siphon Profits from Cellular Providers

Relief is on the way. Cellphone users are sending more text messages than ever, but increasingly they are free — thanks to the Internet. While that is good news for consumers, it could cost the world’s wireless companies tens of billions of dollars in lost revenue.

Standard texting, the kind where you send abbreviation-filled messages over a cellphone network, has been in decline in many parts of the world, and now appears to be shrinking in the United States. That is because smartphones can use free Internet-powered services that send messages over data networks instead, and those services are attracting millions of users.

The shift is opening an opportunity for big companies like Facebook and Apple and smaller start-ups like WhatsApp and Kik, which are making aggressive grabs at this market, aiming to put themselves at the center of how people communicate in the smartphone era.

Peter Deng, a product director at Facebook who oversees its Messenger software, said that text messaging was “ripe for innovation” because it had been held back by outdated technology.

“It’s limited to 160 characters,” Mr. Deng said, “and it’s not at all rich in its expression. People want to connect deeply with each other, and they don’t want to be constrained by various technical boundaries and decisions made 20 years ago.”

Unlike ordinary text messages, Facebook’s messaging service allows people to see when their friends are typing a reply and when messages are received, among other features, he said.

Standard texting is still popular. CTIA, the wireless industry trade group, said that in the first half of this year, Americans sent 1.107 trillion text messages. But that was down 2.6 percent from the 1.137 trillion messages sent in the first half of last year. Ovum, a mobile communications research firm, estimates that by 2016, Internet-based message services will have eaten up $54 billion in revenue that carriers could have made from text messaging.

For years, text messages have been a source of pure profit for carriers because it costs nearly nothing to deliver them. In response to the rise of Internet services, they have been overhauling their pricing plans to stay profitable.

Verizon Wireless and AT&T, for example, offer new plans that include unlimited texting and phone calls, while charging bigger fees for using Internet data, which is likely to be their main source of growth. (Internet messaging over a carrier’s data network does use up some of a customer’s monthly data allotment, but it is a tiny amount relative to, say, watching a video.)

John Walls, vice president for public affairs at CTIA, said carriers were always expanding their services by offering things like all-you-can-eat texting plans and the ability to donate to charity via text. He noted that 72,000 text messages were being sent every second of every day.

“I hardly think the end is in sight for texts,” Mr. Walls said.

For Internet companies, messaging will never be a cash cow. But they have other reasons to get excited about this market.

Facebook benefits if more people use its messaging service, because those people are likely to spend more time on its Web site and mobile apps, seeing more ads. On Tuesday the company said it would allow Android users in some countries to sign up for its messaging service with just a phone number, no Facebook account required, partly because this might eventually persuade non-Facebook users to cave in and sign up for an account. That feature will come to the United States at some point, Facebook said.

Apple’s free texting service, iMessage, comes installed on iPhones, iPads and iPod Touch devices, where it automatically routes messages over the Internet if they are being sent to another Apple device. The service also works with the Messages app on Apple’s computers. That could encourage people to continue buying Apple products to keep in touch with family and friends cheaply and easily. Even the design of iMessage makes people feel like they’re in a special clique: an iMessage shows up on an Apple device as a blue bubble, while a normal text message from a non-Apple phone is green.

Perhaps the most talked-about player in texting right now is the small start-up WhatsApp, based in Mountain View, Calif. The 30-person company, founded by Jan Koum and Brian Acton, two former Yahoo executives, says its service is used in more than 100 countries. Its app is one of the most popular in the world on iPhones and Android devices, and on the BlackBerry it is even bigger than Research in Motion’s own messaging service.

Media Decoder Blog: Olympics and Asset Sales Help Lift Comcast Profits

Aided by the sale of assets and a lift from the Summer Olympics, Comcast reported strong third-quarter growth on Friday, surpassing expectations on several crucial measures.

Comcast, the nation’s largest cable company, said its net income rose to $2.11 billion, or 78 cents a share, compared with $908 million, or 33 cents a share, in the same quarter last year. Most of the increase was attributed to the sale of wireless spectrum to Verizon Wireless and the sale of its 15.8 percent stake in A&E Television Networks. Excluding the sales, net income was $1.25 billion, or 46 cents a share, in line with analysts’ estimates.

The company’s overall revenues rose to $16.5 billion, beating estimates. Its core cable business lost 117,000 of 22 million video subscribers, not quite as many as analysts had forecast — and more important, 29 percent less than were lost during the same quarter last year. Its broadband business gained 287,000 subscribers, topping 19 million for the first time, a bit more than forecast.

Most important for Comcast, its average video subscriber paid more than $150 a month for its services for the first time — more than offsetting the slight decline in total subscribers. Total revenue for video, broadband, business services and the rest of the cable communications business was $9.97 billion, up from $9.33 billion in the year-earlier period.

Comcast’s other business, NBCUniversal, acquired last year, also posted gains, thanks in part to the broadcast of the Summer Olympics in July and August. The company reported $120 million in profit from the Olympics, easily exceeding a projected $200 million loss, partly as a result of higher-than-expected television ratings. When revenue and expenses from other quarters are added up, NBC will break even on its investment, Comcast’s chief financial officer, Michael Angelakis, said on Friday.

The Olympics lifted NBCUniversal’s broadcast TV unit to an $88 million profit. Without the Games, broadcast would have lost $32 million, compared with the $7 million loss in the year-earlier period. Comcast’s earnings release cited two reasons for that: higher programming costs because NBC started some of its fall shows earlier than usual, and expenses tied to news coverage of the presidential election.

Brian L. Roberts, Comcast’s chief executive, told investors during a conference call on Friday morning that NBC was “off to a very strong start in this prime-time season.” The network has been winning in the advertiser-friendly demographic of adults 18 to 49 for seven weeks.

“It’s certainly early, but I believe and hope we are seeing the beginning of a turnaround at NBC,” Mr. Roberts added.

Including $1.2 billion in Olympics revenue, NBCUniversal as a whole posted $6.8 billion in revenue, up from $5.2 billion in the year-earlier period. The cable networks unit, an umbrella for channels like Bravo and E!, had no ad revenue growth, but had slight growth overall as a result of higher per-channel subscriber fees. The film unit showed a 24 percent revenue gain, to $1.4 billion, thanks to successful theater releases like “Ted” and “The Bourne Legacy.”

With Profits Dropping, High-Speed Trading Cools Down

High-frequency trading firms — the lightning-quick, computerized companies that have risen in the last decade to dominate the nation’s stock market — are now struggling to hold onto their gains.

Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities. By comparison, Wells Fargo and JPMorgan Chase each earned more in the last quarter than the high-speed trading industry will earn this year.

While no official data is kept on employment at the high-speed firms, interviews with more than a dozen industry participants suggest that firms large and small have been cutting staff, and in some cases have shut down. The firms also are accounting for a declining percentage of a shrinking pool of stock trading, from 61 percent three years ago to 51 percent now, according to the Tabb Group, a data firm.

It is a swift reversal for trading firms that have often looked to other investors like profit machines, thanks to high-powered software and superfast data connections that can take advantage of small changes in the price of a stock.

High-speed trading is far from disappearing from the market, but the struggles facing these firms have been greeted with enthusiasm by some traditional traders and investors who have viewed the firms as formidable adversaries, or worse, market manipulators that create sudden spikes and drops in share prices. Peter Costa, a longtime trader on the floor of the New York Stock Exchange, said the fading presence of the firms could “restore some order to stock markets.”

Regulators are still grappling with whether the rise of high-speed firms has been a net benefit or loss for investors, so it is hard to pinpoint what effect the decline of these firms will have on the markets. Many market experts have argued that the technical glitches that have recently hit the market have been a result of a broader trend of the market splintering into dozens of automated trading services and a lack of human oversight.

The challenges facing speed-focused firms are many, the biggest being the drop in trading volume on stock markets around the world in each of the last four years. This has made it harder to make profits for traders who quickly buy and sell shares offered by slower investors. In addition, traditional investors like mutual funds have adopted the high-speed industry’s automated strategies and moved some of their business away from the exchanges that are popular with high-speed traders. Meanwhile, the technological costs of shaving further milliseconds off trade times has become a bigger drain on many companies.

Among the firms scaling back is the Chicago Trading Company, which this year earned a spot on a government committee formed to explore the emerging phenomenon of high-speed trading. Since then, the company has been making cuts to its New York office, according to people with direct knowledge of the moves. The company’s chief executive, Eric Chern, said some employees had been moved to Chicago and 10 had left the firm. He declined to comment directly on the changes, but he did say that “the market environment always plays a factor in all our decisions.”

Douglas Cifu is the president of Virtu Financial, a big player in the industry. “There was this mythology that you could get 90 computers, some Harvard Ph.D.’s and you would turn on your machines and make money,” he said. “It’s just not the case.”

Virtu has not cut back, but it has acquired smaller firms that were struggling to continue operating on their own. Last month, Virtu bought Nyenburgh, a company that specialized in the most popular type of high-speed trading, known as market making, of European stocks.

At the same time that the firms are making trims, regulators around the world have increased their scrutiny of high-speed traders, and the structure of the financial markets has continued to shift. Executives at the trading firms worry that new regulations could curtail business even more, but so far regulators in the United States have taken few steps to rein in trading practices.