Why Tech Giants Are Now Reimagining the Businesses That Made Them

Eat lunch or be lunch.

That used to be the mantra driving tech companies in their assault on traditional industries.

Now they fear that they may be next as the mobile market matures, new innovation is incremental rather than revolutionary and competition from China (and maybe New York or Seattle..) forces Silicon Valley to wonder if it really is still the center of the tech universe. Continue to disrupt or be disrupted has become the new strategy. But the question is, who's left to disrupt besides themselves? JL 

Jason Dean reports in the Wall Street Journal:

“There is reasonable doubt about just how much low-hanging fruit is left for the largest tech companies." A confluence of forces is behind Big Tech’s business-model ferment. Blowback over privacy abuses and misinformation threatens ad-driven strategies at Facebook and Google built on harvesting people’s information and maximizing the time they spend glued to the internet. The smartphone is maturing, with flagging sales. The law of large numbers, combined with tech’s history of upstarts leapfrogging on innovation, compels executives to seek out new places to disrupt, lest they themselves be disrupted.“We have to keep the growth,”

Google, Facebook Inc. FB -0.81% and other tech giants have long tinkered with ways to grow outside the core businesses they dominate. Now those efforts are becoming urgent.
Facebook Chief Executive Mark Zuckerberg, beset by public anger over abuses on the social network, spent the company’s annual developer conference last week talking up his vision for a Facebook more focused on private messaging and small groups than on the advertising-driven social-media hub that gained it nearly 2.4 billion monthly users.
Messaging is one of several areas Facebook has been eyeing for new opportunities. Another got the spotlight last week when The Wall Street Journal reported that Facebook is recruiting financial firms and online merchants to help launch a cryptocurrency-based payments system.
Apple Inc., AAPL -1.54% meanwhile, said last week its sales-and-profit slump extended into a second straight quarter—the first time that has happened in more than two years—thanks to falling sales of the iPhone, the product that turned it into a colossus. Its response has been to try to morph itself into a services company fueled by app and entertainment sales as much as hardware.
Google parent Alphabet Inc. GOOGL 0.33% has been Big Tech’s most eclectic big-idea factory. It has worked on self-driving cars for a decade and has arms devoted to everything from balloon-tethered internet access to extending human life. But it has had little success turning those efforts into moneymaking businesses. Advertising is still 85% of its revenue, and operating losses at its “other bets” segment ballooned by 52% in the last quarter to $868 million, Alphabet said last week. The perils of its ad dependence were laid bare when an unexpected drop in quarterly sales sent Alphabet shares down 7.5% on Tuesday, their biggest one-day drop since 2012.
A confluence of forces is behind Big Tech’s business-model ferment. Blowback over privacy abuses and misinformation threatens ad-driven strategies at Facebook and Google built on harvesting people’s information and maximizing the time they spend glued to the internet. The smartphone, which underpinned so much of the tech industry’s boom over the past decade, is maturing, with incremental innovation and flagging sales.
And the law of large numbers, combined with the tech industry’s history of upstarts leapfrogging incumbents on innovation, compels executives to seek out new places to disrupt, lest they themselves be disrupted.
“Their perspective is: We have to keep the growth,” says Tim Kendall, a former senior executive at Facebook and Pinterest Inc. who now runs Moment, an app to help manage smartphone use. Mr. Kendall says the need to diversify is all the greater because regulatory concerns make it risky for giants to bet on growing their share of the markets they already dominate. “The current regulatory climate is such that all of them are saying, ‘We can’t acquire growth into our core business because the [Federal Trade Commission] will block it.’”
Mr. Zuckerberg in an interview with the Journal last week emphasized the significance of Facebook’s changes, calling his plan to build out less-public communication networks “the beginning of a new chapter” and attributing some of the recent executive departures to the magnitude of the switch.
But he and other tech leaders aren’t panicking. Google and Facebook are still winning the vast bulk of new online-ad dollars. The revenue growth number that so spooked Google investors was 17%—most companies would love that. Executives insisted to anxious analysts that they’re optimistic about the opportunities ahead. Apple served up a relatively rosy outlook for its current quarter.

“ There is reasonable doubt about just how much low-hanging fruit is left for the largest tech companies. ”

—Ben Thompson of research firm Stratechery

Many investors, for now, are focused more on the opportunities than the risks. Apple is on course to regain the $1 trillion market capitalization that it hit last August, when it became the first U.S. company to cross that threshold. Microsoft Corp. MSFT -0.58% , which itself has thrived in recent years by upending its former business model, closed above $1 trillion for the first time on Tuesday. Facebook’s stock has gained almost 50% this year, and Alphabet’s was at a record high just before last week’s lurch down.
Amazon.com Inc. AMZN -0.61% won a vote of confidence last week from Warren Buffett’s Berkshire Hathaway Inc., which recently took a stake in the e-commerce giant. Jeff Bezos’ well-documented allergy to complacency has made Amazon a Big Tech forerunner in diversification. It launched a cloud-computing business 13 years ago that delivered almost 60% of its operating profit last year, and has built big operations in entertainment and groceries.
But even at Amazon, revenue growth in the latest quarter was its slowest rate in four years (also 17%). Profit more than doubled, as advertising, a business it has been expanding aggressively, helped offset weaker growth in the core online retail operation.
“There is a theme emerging here: There is reasonable doubt about just how much low-hanging fruit is left for the largest tech companies,” Ben Thompson, a former tech executive who now runs research firm Stratechery, wrote to clients on Thursday. “Apple has sold the world iPhones, Google has stuffed mobile search, and now Amazon has seized the obvious parts of e-commerce; what comes next is much more difficult and expensive.”The companies have been laying the groundwork for their more varied futures for a while. The engines of Facebook’s pivot to messaging are WhatsApp, which it bought in 2014 for $19 billion, and Messenger, which it launched three years earlier. Apple started amping up its services push several years ago.
Still, as they stretch into new domains, tech’s titans increasingly bang into each other. Amazon’s advertising effort is impinging on Google and Facebook, both of which are also muscling up against Amazon in e-commerce. Facebook’s messaging shift threatens Apple, whose Messages app is important to its services push. So do Amazon and Google’s forays into hardware. Apple’s Hollywood campaign encroaches on Amazon, which already spends billions of dollars annually producing entertainment.
Peter Barrett, a veteran tech executive who co-founded venture investor Playground Global, says the shifting business models could reorder the dominance of the tech giants. The rise of new technologies like voice assistants that build on or displace the smartphone will help determine which established companies—and which new players—thrive. “Some will make the transition,” he says, “and some will see their power eroding.”