Apple, Google, Amazon, and the Advantages of Bigness

Demand for new platforms that enable constant digital connectivity may help American tech giants defy the so-called law of large numbers. Credit PHOTOGRAPH BY DAVID PAUL MORRIS / BLOOMBERG / GETTY

At some point in a big, successful company’s life, it comes up against the problem of the law of large numbers. In the simplest terms, a fast-growing company can’t keep growing at the same fast rate forever. It eventually has to slow down. For years, people have been looking for signs that Apple is finally hitting its growth limits. And this year Apple revenue fell for the first time since 2003. The same concerns face other giants in the tech economy: Google (now part of the parent company Alphabet), Microsoft, Amazon, and Facebook.

And, yet, for a brief time in July, the stock markets, arbiters of future fortunes, anointed those five technology companies—Apple, Google, Microsoft, Amazon, and Facebook—as the top five American companies by market capitalization. Market value changes all the time, but, still, for that moment, they were the Big Five.

I can’t speak for the mind of the markets, but I do see these companies getting even bigger and more central to our lives. Our economy, for a long while, has been transitioning from one reliant on industrial strength to one based on digital information. The next step in this transition is a digital economy shaped by connectivity. That the Big Five are valued so highly by investors is a reflection of their ballooning revenues, profit-making potential, and Pac-Man-like gobbling of market share. But it’s also a recognition that shifts in technology are only going to make these companies more important in the short term.

To get a sense of just how big these companies are, take a look at a small slice of their corporate performance during three months—April, May, and June—of 2016, and compare it with the same three months of 2015. Alphabet reported sales of $21.5 billion, up an astonishing twenty-one per cent, from $17.73 billion. Amazon, which sparked the e-commerce revolution more than twenty years ago, saw its revenues go to $30.4 billion, up thirty-one per cent. Facebook sales were up fifty-nine percent, to $6.44 billion. The laggards were Apple, whose revenues fell fifteen per cent, to $42.4 billion, and Microsoft, which saw a decline of about seven per cent.

But the markets deem these momentary dips. Apple is set to release a new phone, in addition to boosting its services, so it’s assumed that it won’t be long before it returns to Apple-like growth. Microsoft, too, is moving into the future with its Azure cloud services and a new strategy to become the platform for productivity and work.

High double-digit growth rates on top of already impressive revenues remind me of an aphorism—the big get bigger. And, for a while at least, this cliché might keep the law of large numbers at bay.

We are ever more dependent on digital connectivity. Want to get somewhere? Tap the Uber app or ask Siri to give you directions. Want to buy diapers? Order them on Amazon—maybe even ask Alexa to order them for you—and have them delivered the next day. Want to check up on friends and family? Open Facebook. Each of these conveniences was adopted with astonishing speed, and demand for products and platforms that enable connection will remain huge. The Big Five provide those platforms of the future.

A skeptic might point out that the Big Five are reminiscent of the “Four Horsemen of Tech,” a moniker for Microsoft, Intel, Dell, and Cisco Systems coined by the CNBC commentator and hedge-fund manager Jim Cramer during the first Internet boom, in 1999. They grew at breakneck speed as the commercial Internet weaved its way into our lives. Three of the four companies’ fortunes have faded, but I would argue that is because they weren’t platforms.

A platform is essentially a business model that thrives because of the participation and value added from third parties with only incremental effort from the owner of the platform. Take Apple. With the iPhone and iPad, the company has put its iOS in the hands of hundreds of millions of people. That has allowed its active App Store to thrive—Tim Cook, Apple’s chief executive, recently tweeted that Apple has given away about fifty billion dollars to its developers. Assuming a thirty-per-cent cut for Apple, that means more than twenty billion dollars to Apple for little effort.

Size clearly has its advantages. No one would award Apple a gold medal for its Internet services, but the revenues from those services—Apple Music, iCloud, and Apple Pay, among others—grew nineteen per cent during the last quarter, to six billion dollars, thanks in large part to hundreds of millions of iOS users. Today, services account for fourteen per cent of Apple’s quarterly revenues and, if Cook’s predictions are right, will be “the size of a Fortune 100 company next year.” This growth occurred despite the chorus of critics, including me, panning Apple Music as well as iCloud’s multiple outages.

Apple Music has acquired fifteen million users in just over a year. Spotify, which has been around for five years, is still bigger, with an estimated thirty-five million paying subscribers, but Apple is on a great growth trajectory. Moreover, Spotify has to pay Apple a cut when it gets a paying subscriber on iOS, putting the Swedish music company at a competitive disadvantage—a topic that will be the subject of debate and legal scrutiny in the coming months.

Apple isn’t alone. Facebook got media companies addicted to cheap traffic and then changed its news-feed algorithm. Now the same addicts have to pay to promote their stories in order to keep the traffic coming. It’s good to be sitting on a platform, collecting tax, coming or going.

Amazon, too, is raking in the dollars by becoming an infrastructure company; it provides a commerce platform for its own products and those of many smaller sellers as well as a cloud-computing platform, Amazon Web Services, which allows other businesses to operate. Either way, Amazon is collecting money.

Bigger profits also make it easier for Apple and Google to lure the best and brightest minds. The rising cost of talent is turning out to be a big problem for midsize companies. LinkedIn recently sold itself to Microsoft, and, in a letter to employees announcing the sale, the social-networking company’s chief executive, Jeff Weiner, wrote, “Imagine a world where we’re no longer looking up at Tech Titans such as Apple, Google, Microsoft, Amazon, and Facebook, and wondering what it would be like to operate at their extraordinary scale—because we’re one of them.” Underneath the flowery language was a tactical admission that even a company the size of LinkedIn can’t go it alone in this market.

When you look at some of the companies that had big market capitalizations twenty years ago, you may feel some reason to question the Big Five’s ability to hold on. Back then, Cisco Systems, Microsoft, and Intel had the greatest value on the market among technology companies. But, the way I see it, the bigness of today’s Big Five gives them an opportunity to keep building larger moats around their platforms. For starters, these companies are able to hoard data, which allows them to become smarter in learning about their customers. Because of their leviathan-scale operations, they have the infrastructure and resources to write algorithms and make their platforms more effective. As I pointed out in an earlier post, this amalgam of algorithms, infrastructure, and data is highly potent.

This mix becomes even more important as we start to transition from more familiar ways of accessing the Internet—via browsers, apps, and desktop software—to new ways like chat bots and devices equipped with Alexa-style voice-command software. For such new interfaces to be effective, they will need a lot of diverse data and the ability to crunch that data and derive vital intelligence, quickly and smartly.

Google, thanks to a large corpus of photo services, has developed smart ways to analyze images, which make its search more effective. Similarly, the more often people use Google’s voice-related services, the more accurate they become. Google’s maps and traffic data become more accurate as more people use its Android operating system and the app Waze. Google Home (an Alexa competitor) will eventually have enough smarts to be more effective in answering questions, and Google’s connected car will benefit from weaving together these disparate data streams. Google won’t be alone in its pursuit. Facebook, Amazon, Apple, and Microsoft are building their own versions of the future. And they get bigger and bigger.

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