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The 'big five' could destroy the tech ecosystem

If Amazon puts retailers out of business, who will advertise on Google and FB?

Conor Sen | Bloomberg 

Amazon could partially disrupt Facebook and Google without ever competing directly with them. (Photo: iSTOCK)
Amazon could partially disrupt Facebook and Google without ever competing directly with them. (Photo: iSTOCK)

How big can the largest get? How completely can they come to dominate the economy? The “big five” — Apple, Alphabet, Microsoft, and —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.

These are big for a reason: Nearly every aspect of the digital economy touches them in some way or another. We know that and represent a duopoly. We know that is gobbling up more and more of e-commerce. Amazon, and are leaders in providing cloud services. 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 seemingly gobble up the rest of the economy is they remain dependent on customers who get value from their services. advertise on and 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 because it’s profitable for them to do so. In other words, for the most part, the “big five” exist at their current size and scale only because they serve a larger underlying economy of profitable

But the disruptive nature of the 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 came out with a competing service that put them out of business, and would lose out on some advertising revenue, and and (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 Watch. If the Watch disrupts Fossil, and would lose ad sales from Fossil, and 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 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, could partially disrupt and without ever competing directly with them.
 
These tech platforms and the they serve exist in an ecosystem, where there must be some sort of balance. Profitable can allocate only so much of their revenue to advertising, cloud services, information technology and the like.

First Published: Thu, November 16 2017. 22:38 IST
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