When Google’s parent company, Alphabet, said recently that revenues at the company had soared past 161 billion US-Dollar last year, it was a stark reminder of the widening gap between tech’s wealthiest outfits and the rest of the industry. And there is in our opinion little reason to believe that this will change. In the last weeks, Microsoft, Apple and Amazon – like Alphabet, all flirting with a 1 trillion US-Dollar stock value on Wall Street – posted record results. The final member of tech’s Big Five, Facebook, which has a little more than halfway to a 1 trillion US-Dollar valuation, also reported strong earnings.
With each passing quarter, tech’s wealthiest companies are building on their power, making it harder for smaller outfits to compete and for entrepreneurs to build the next Google or Facebook.
Amazon and Microsoft are profiting from the shift to cloud computing. Apple continues to own the premium market for apps, smartphones and wearable devices, while Google and Facebook are maintaining their grip on digital advertising.
This gravitational pull toward a handful of companies could in our opinion have far-reaching implications for the global economy. Few tech outfits can afford to make the investments necessary to keep pace with the giants. The rest? They often have to pay up for access to the giants’ many, many customers and technology. There is in our opinion no doubt that the stronger are getting stronger, and the weak are getting weaker. It’s a market of haves and have nots.
Despite saber-rattling in Washington and elsewhere, it is clear that regulatory and legal scrutiny of the tech industry’s most valuable companies so far has done little to hurt the bottom line. Last year’s financial results could lend more weight to arguments that a handful of companies, with dominant market shares and outgunned competition, are unfairly cashing in on their control.
Amazon, Apple, Alphabet, Microsoft and Facebook – all based in the United States made a combined 55.2 billion US-Dollar in net profit in the most recent quarter. The next five most valuable tech companies made roughly 45.5 billion US-Dollar in their four most recent quarters. While Facebook is lagging behind the rest of the Big Five, it is still worth twice as much as the next most valuable company, Intel.
The picture is even getting darker the further down tech’s food chain you go. A growing number of start-ups are cutting jobs to get their expenses under control. And older tech companies, still profitable but slowly losing influence, are struggling to adapt to the changing landscape.
As the rich get richer, they are also branching out. They are muscling aside or buying out rivals. And they are locking in the industry’s best engineers with paydays smaller companies could never match.
Amazon said recently that it had invested in the infrastructure needed to speed up shipping times for its Prime members to one day from two, raising the bar even higher for retail competitors. But current trading on Wall Street shows just how hard it is to stay in the trillion-dollar club. Despite Amazon’s e-commerce and cloud-computing dominance, the company’s value dipped recently just a bit below 1 trillion US-Dollar.
Apple earmarked billions of dollars to create shows and movies for its video subscription service in a challenge to Netflix, while Alphabet agreed to buy the activity tracker Fitbit for 2.1 billion US-Dollar in November and the analytics software firm Looker for 2.6 billion US-Dollar in June. Today’s dominant Big Tech companies have so much power across such as broad array of markets and continue to leverage that power to expand into new markets to become even more powerful. Sonos has sued Google for example, accusing Google of infringing on five of its patents, including technology that lets wireless speakers connect and synchronize with one another.
Tech’s richest companies seem to be defying a Wall Street assumption that as a company gets bigger, it becomes difficult to find new ways to make money and maintain rapid growth. Alphabet said profit in the last quarter of 2019 were 19% more than a year earlier. Revenue rose 17% to 46.1 billion US-Dollar, slightly below Wall Street expectations. The company’s stock fell 4% in after-hours trading.
To assuage some concern about sluggishness in its main search and business, Alphabet disclosed for the first time detailed revenue figures for its YouTube and cloud computing units, which are growing faster than the rest of the company. YouTube sold 15.1 billion US-Dollar worth of ads in 2019, up 36%, while its cloud unit grew more than 50% to 8.9 billion US-Dollar. Ad revenue from search increased 15% to 98.1 billion US-Dollar.
These figures clearly indicate that it is getting harder and harder than ever for new challenges because the top incumbents are so effective at “incremental evolution”, like for example Apple’s building subscription offerings to go with its hardware or Google’s branching out into cloud computing. The big tech companies skillfully more into new markets with lower prices and more money for marketing than their new competitors. In time, they take over.
The outside nature of the profits at some of these companies has driven an explosion of wealth on the stock market. The total value of Microsoft shares has risen nearly 70% over the last year, adding more than half a trillion dollars to the company’s market cap. Apple tacked on more than 550 billion dollars in an 85% surge. Alphabet’s rise of more than 30% has added more than 200 billion dollars to its market cap. Amazon, which had a 20% jump, has been something of a laggard but still added roughly 200 billion dollars to its market cap.
The large technology firms that dominate the public stock market are in our opinion at the extreme edge of a broader trend in American corporate life. Over the last half-century, the biggest American companies have captured a fatter share of profits produced by public companies, according to research from University of Arizona. In 1975, the top 100 public companies shared about 49% of the earnings of all public companies. By 2015, that share had jumped to 84%, their research showed. There are a lot of small, unprofitable firms and a handful of large, very profitable ones. We therefore foresee the five companies competing for 2 trillion dollars in new technology spending over the coming years. It will be hard for the rest of the industry to match that. Over the last few years, we’ve seen a fork in the road between the winners and the losers.