You may have heard that the tech giants are on their heels.
Over the last two years, lawmakers and the public around the globe have been awakened to fears about the expanding powers of the largest technology companies, particularly the ones I’ve called the Frightful Five: Apple, Amazon, Google, Facebook and Microsoft, the most valuable companies on the American markets.
The concerns span the gamut. There are calls for renewed antitrust investigations. Some people have accused the companies of political biases, while others have criticized their lack of diversity and how narrowly they distribute their wealth. Then there are the questions of their vulnerability to foreign influence and their capacity for addicting us to their products.
In different ways, the companies have conceded some of these fears and have vowed to address them. Taking stock, cleaning up, admitting “moral responsibility” for their contributions to society — these are the buzzwords of a tech ecosystem that is supposedly subsumed by remorse and committed to rehabilitation.
Yet there is something deeply incongruous at the heart of the supposed “techlash”: It is not really making a huge dent in the tech giants’ financial performance. Over the last two weeks, each of the five reported earnings that were brimming with mostly fantastic news for its investors. Amazon, which has long conditioned shareholders to expect a lot of growth but not much earnings, reported a record profit. Microsoft and Google’s parent company, Alphabet, both handily beat Wall Street’s projections. On Tuesday, so did Apple; if its price jumps as a result, it could become the first company to reach a market valuation of more than $ 1 trillion.
Wait, but what about Facebook, which told investors to expect lower growth rates and higher expenses, causing its stock to lose $ 120 billion in market value in a single day?
In a strange way, the social network’s troubles only underscored its dominance. Even after its stock crash, Facebook remains the fifth most valuable corporation in the American markets, ahead of Berkshire Hathaway, and there are almost no serious calls for its chief executive to resign, as you might expect for any other company experiencing such a loss. That’s because the company reported little to cause experts to alter their long-term outlook. Pretty much everyone who studies Facebook believes that it will hold its grip on the culture and the advertising industry for the foreseeable future.
“This is one of the most profitable business models I’ve ever seen, and that really hasn’t changed,” said Mark Mahaney, an analyst at the firm RBC Capital. He added that Facebook’s stock now “may be the single most attractively priced asset across technology.”
Together the earning statements tell a clear story. Despite the public outcry, the five are all expanding their foothold in our lives, and the forces arrayed against them, which range from regulation to apathy, aren’t having a substantial impact. To the extent that the five companies face meaningful competition, it is usually from other members of the group; that is, one of the five might steal market share from another without affecting the overall dynamic in the tech business.
Why is this happening? If you dig into their reports, you find several powerful forces keeping these companies at the top.
Software really is eating the world
Back when it was just an e-commerce company, Amazon was dogged by a persistent worry: Could it ever make a lot of money? The company has spent more than two decades methodically building out its capacity to deliver an ever larger number of products at an ever-increasing rate. That takes a lot of investment, so even though Amazon’s sales grew like crazy every year, it had to plow its revenue back into further expansion.
Three years ago, Amazon began to report small but consistent profits. And in the last year, its earnings began to grow, and now they’ve reached a level that stands out even in the tech industry. In the quarter ending in June, Amazon booked a $ 2.5 billion profit. That’s only about half what Facebook made, but it is real money.
Where did Amazon find all the new money? The same place the tech industry always finds profits: software. Though most people think of Amazon as a place to buy toilet paper, the vast majority of its profits come from its cloud-services business, Amazon Web Services, which allows companies to store their data on Amazon’s servers rather than locally. Another new source of profits is its advertising business, which charges companies to place ads for their products across Amazon’s site.
For rival retailers, Amazon’s new profitability constitutes a kind of nightmare scenario. By shuttling profits from software into its retail business, Amazon can keep expanding its store at a breakneck pace.
“These high-margin businesses allow Amazon to run its entire store at close to zero margin — and once you do that, it becomes effectively impossible for someone whose sole business is commerce to compete with you,” said Youssef Squali, an analyst at the firm SunTrust Robinson Humphrey.
But it’s not just Amazon that’s profiting under the venture capitalist Marc Andreessen’s thesis that “software is eating the world.” Microsoft’s surging earnings were also driven by its cloud business, while Apple’s software services — things like sales of apps, music subscriptions, cloud storage and Apple Pay — are the fastest-growing part of its business.
Regulatory pressure isn’t having a huge impact
The European Union recently fined Google $ 5.1 billion for abusing its mobile software monopoly, which followed a $ 2.7 billion fine last year for abuse of its search monopoly. (Google is appealing both decisions.) Apple agreed last year to pay nearly $ 16 billion in back taxes to the European Union over its cozy tax deal with Ireland. (The funds will be held in escrow while Ireland appeals the decision; Apple has disputed any wrongdoing.) Facebook, which has been hauled before lawmakers in Europe and the United States for its role in politics, faces threats of increased regulation and possible fines for mishandling private data.
But Big Tech’s earnings so far don’t show much of an impact from the increased scrutiny. Google paid its fine and still reported a $ 3.2 billion quarterly profit. Neither Google nor Facebook saw much of an effect from Europe’s new privacy rule, the General Data Protection Regulation. Facebook’s user base declined by only a million users in Europe (367 million people use it every month there). Both companies warned that the law may have a greater effect in the future, but several analysts said both Google and Facebook could benefit from the law, because compliance costs could sink their smaller rivals.
There is also the possibility that regulatory zeal will abate. Google watchers say it’s notable that President Trump tweeted criticism of the European Union’s fine against Google, suggesting, perhaps, that American regulators won’t take up a similar case. (Of course, it is hard these days to really know how much to read into a presidential tweet.)
Or consider the changing dynamics of the digital advertising business, which is dominated by Google and Facebook and has been a top target of antitrust activists. Amazon’s growing ad business poses a threat to both Google and Facebook — which suggests that the ad economy is becoming more competitive even without the government’s help.
“There’s been this fear that advertising was going to become a duopoly owned by Google and Facebook,” Mr. Mahaney said. “Now it’s going to be a triopoly — but if you were worried about the duopoly, you’re probably saying, ‘Couldn’t the third company have been someone besides Amazon?’”
The Five still have a lot more ways to make money
Finally, there are what Mr. Mahaney calls the “green fields” — the nearly endless opportunities that many of the Five have to start minting more and more money from various parts of their businesses.
Facebook, for instance, has experienced a slowdown in the growth of its core social network, but its other properties — Instagram, Facebook Messenger and WhatsApp among them — are still growing quickly, and the company has only just started to make money from them. At Google, there’s a similar opportunity for YouTube, which, like Facebook, will benefit from the billions in TV advertising money that marketers will shift online over the next few years.
And that’s just in the short term. The earnings reports show that all of the five are investing heavily in the tech that will dominate the future, from artificial intelligence to voice services to self-driving cars.
“The one thing that is likely to keep these companies at the top for much longer than traditional megacap companies is that they are not afraid to reinvent themselves,” Mr. Squali said. “They see themselves as laboratories for new ideas, and they’re not afraid to destroy something that’s working today to make the longer-term work even better for them.”
In other words: Get used to the Five. They’re not going anywhere.