Can anything stop big tech? After a post-lockdown wobble in 2022, America’s digital giants have come roaring back. Last week Alphabet, Meta, and Microsoft all reported robust results in the second quarter, following a stellar set in the first. Between January and June, the three of them together raked in $106bn of operating profits, up by $9bn from the same period last year.
Do not look to regulators to stop their march. Last month a court threw out an effort by America’s trustbusters to block Microsoft’s acquisition of Activision Blizzard, a games developer. Markets have shrugged off other fitful efforts to rein in the tech giants, such as the EU’s new rules for digital markets.
What is more, investors expect the tech giants, with their deep technological insights and even deeper pockets, to capture the spoils of artificial intelligence (ai). The share prices of Alphabet, Amazon, and Meta are all climbing back towards their peaks of 2021. Those of Microsoft and Apple (which, with Amazon, announces its latest quarterly earnings on August 3rd) are higher than ever.
However, the digital behemoths must still reckon with the most powerful force of all: arithmetic. Big tech’s main limit to growth is its own bigness. In the years ahead that will be big tech’s real challenge.
Alphabet, Amazon, Apple, Meta, and Microsoft lord it over American business. The five firms dominate the S&P 500 stock market index, collectively accounting for 9% of its sales, 16% of its net profits, and 22% of its market capitalization. Last year their capital spending of $360bn made up over a tenth of all American business investment.
But it is their sustained growth that makes them unique in the history of capitalism. When ExxonMobil and Ge were the Titans of America Inc in the 1990s and 2000s, their revenues were rising at an average annual rate of 5-6% and their net profits at 5-10% or so. The tech giants’ have been growing at 16% and 13%, respectively, for a decade or more.
To sustain its long-term average sales growth of 28%, Alphabet needs to add $86bn to its top line in 2024, more than any of the S&P 500’s 461 smallest firms generated last year—and a further $111bn in 2025 and so on, year after exhausting year. To keep profits growing at their historical rates, next year Apple and Alphabet must earn an extra $25bn, or roughly Meta’s worth of net income; Meta must earn Verizon’s. And then they need to beat their own records all over again.
Maintaining those averages, in the long run, is surely asking too much. Indeed, growth has already been less blistering of late. But the firms’ bosses and investors are unlikely to settle for a slowdown. If so, they will need to focus on the three main ways that companies have to grow. Could these work for big tech?
The first is to pursue profits and slim down. Cutting costs, scaling back projects, and hiving off non-core units is the go-to strategy for a conventional business seeking to cushion Big tech may be as unconventional as it gets, but it, too, sees the need for a diet. Apple is the only one of the five giants not to have announced lay-offs this year; the others have sacked more than 70,000 workers, all told. Still, the iPhone maker has pushed back the launch of some new devices. Alphabet has scotched a few cash-burning moonshots bankrolled by Google search. Amazon has abandoned some physical shops.
A second route to growth is for companies to go all-in on their core businesses. Microsoft’s souped-up ai search engine, Bing, got all the attention earlier this year as a potential Google slayer. In fact, Bing remains an also-ran in search (the old barb is that its most-searched term was “Google”). But the same Chatgpt-like powers are, with less fanfare, making their way into Microsoft’s corporate offering. Last month it said it would make generative AI tools available to Office 365 users for an extra $30 a month. Google and Meta, for their part, are investing in ai services for their advertising clients.
The most ambitious growth strategy is to seek new markets. All five firms are encroaching on each other’s turf. Their share of sales in overlapping areas has doubled since 2015, to 40%. Alphabet is elbowing in on Amazon and Microsoft in cloud computing. Amazon and Microsoft are trying their hand at advertising. In June Apple unveiled a virtual-reality headset to compete with Meta, which has so far had that market mostly to itself. All five are also sizing up the last undisrupted markets—including finance, health care, and public procurement—that are large enough to make a noticeable difference to their gargantuan revenues. Or, like Microsoft, they may try to buy growth—its $69bn purchase of Activision would bring in annual sales of around $8bn.
None of these approaches is foolproof. Slimming down boosts profits for only a year or two, and comes at the expense of future revenues. Big tech’s main markets—be they iPhones, digital ads or business software—are no longer reliably growing at 20% or more. Competing against each other brings fresh revenue but compresses margins. Undisrupted markets are often undisrupted for good reason: they are highly regulated and controlled by incumbents, from Wall Street banks to Pentagon contractors. And not even cash-rich big tech can splurge $69bn for an extra few billions of revenue for long.
Down from the heavens
Perhaps computing will, one day, eat the world. If so, big tech could use its AI prowess to wrest business from incumbents in all manner of industries—eventually. Between today and eventually, the mix of strategies that each company chooses will speak volumes about how it sees itself. A preference for cost-cutting will signal maturity, but also a lack of faith. A hunger for expansion will hint at self-confidence—or perhaps hubris. Shareholders and executives should brace themselves for a period of uncertainty, as old rents are lost and new ones are not yet found. Everybody else will enjoy the wealth of products that big tech dreams up to stay ahead.
Comments are closed.