How big can the largest tech companies
get? How completely can they come to dominate the economy? The “big five” — Apple, Alphabet, Microsoft, Facebook
—now have a combined valuation of over $3.3 trillion, and make up more than 40 per cent of the value of the Nasdaq 100 index. As the digital economy continues to grow faster than the old economy, it’s hard to see what can stop these juggernauts. Unless reality intrudes.
After all, what exactly is their business? Who are their customers? What role do they play in the economy? Each answer points towards some limit on the size, scale and profitability of these giants.
are big for a reason: Nearly every aspect of the digital economy touches them in some way or another. We know that Facebook
represent a digital advertising
duopoly. We know that Amazon
is gobbling up more and more of e-commerce. Amazon, Google
are leaders in providing cloud services. Apple
sells high-margin smartphones and other computing devices. Put it all together, and you’re talking about hundreds of billions of dollars of annual revenue and tens of billions of dollars in profits.
What’s forgotten as these companies
seemingly gobble up the rest of the economy is they remain dependent on customers who get value from their services. Companies
advertise on Facebook
only if they’ve determined it’s more profitable than not doing so. Cloud revenue requires the existence of profitable businesses that need business software and services. Third-party vendors choose to sell on Amazon
because it’s profitable for them to do so. In other words, for the most part, the “big five” tech companies
exist at their current size and scale only because they serve a larger underlying economy of profitable companies.
But the disruptive nature of the tech companies
raises questions about how much they can grow. Because, in a sense, at some point they’ll only be able to grow by putting some of their customers out of business either directly or indirectly. Consider a couple of examples. Blue Apron, a meal delivery company that went public this year, has been a prolific advertiser online. If Amazon
came out with a competing service that put them out of business, Facebook
would lose out on some advertising revenue, and Microsoft
(and Amazon) might lose some cloud revenue. Another company, Fossil Group, has struggled mightily over the past several quarters as consumers have bought fewer watches, perhaps in part because of the Apple
Watch. If the Apple
Watch disrupts Fossil, Facebook
would lose ad sales from Fossil, and Amazon
would lose Fossil watch sales as well.
The retail vision put out by some tech optimists would be devastating to overall advertising revenue. Imagine it in the extreme: If Amazon
put all physical retail stores out of business, and private-label goods replaced all branded goods, you’d kill the source of a large swath of advertising demand. In a sense, Amazon
could partially disrupt Facebook
without ever competing directly with them.
These tech platforms and the companies
they serve exist in an ecosystem, where there must be some sort of balance. Profitable companies
can allocate only so much of their revenue to advertising, cloud services, information technology and the like.