The strategic question for investors and managers is whether Big Tech, despite its network effects and demand-side economies of scale will also, eventually fall prey to the same forces of bigness that rendered their industrial predecessors obsolete. JL
Christopher Mims reports in the Wall Street Journal:
The dismantling of General Electric, Toshiba, Johnson & Johnson, Siemens, DowDuPont United Technologies has been heralded as the demise of the idea that brilliant management can succeed in different industries. But today’s tech giants (are) latter-day conglomerates. They boast valuations bigger than any other companies in history, and have diversified through acquisitions and new starts just like conglomerates of old. But big tech platforms are more dominant and long-lasting because they are interconnected (which creates) “demand-side economies of scale" taking advantage of network effects. Amazon, Microsoft, Apple and Alphabet might just be where GE was in the middle of the 20th century, a time when, in terms of revenue and market value, it was just getting started.The eulogies for the corporate conglomerate have been pouring in fast. But in fact, these monsters of modern business are now bigger, more powerful and perhaps more world-consumingly durable than ever—they also look very different than in the past.
The dismantling of General Electric, Toshiba, Johnson & Johnson, Siemens, DowDuPont, United Technologies and other sprawling business empires in recent years has been heralded as the end of the conglomerate and the demise of the idea that brilliant management teams can succeed operating in very different industries. But just as those giants of traditional industry are being dismembered, today’s tech giants have arisen as latter-day conglomerates—what some even call “neo-conglomerates.” They boast valuations bigger than any other companies in history, and have diversified their businesses through acquisitions and new starts just like conglomerates of old.
Amazon, the $1.8 trillion do-everything-for-everyone company, operates online and bricks-and-mortar retail stores, sells outsourced computing services, runs a global logistics operation, produces movies, provides a social network built on streaming, dominates smart speakers, peddles home security services, aims to launch a satellite network, provides healthcare services, and last year acquired Zoox, a self-driving car company.
Microsoft, worth $2.5 trillion and battling Apple AAPL 3.16% for the title of America’s biggest public company, sells business software, videogames, outsourced computing power, runs a social-media service where it sells ads, and hawks gadgets, among other things.
Smartphones, laptops, wearables, advertising and self-driving vehicles are now in the works or on the market from both Google-parent Alphabet and Apple.
Even Facebook -parent Meta, which is diversifying its business from monetizing human attention through its apps to doing the same through an all-consuming “metaverse,” seems to at least be trying to turn itself into a conglomerate, making virtual reality headsets, offering smart glasses and attempting to run a marketplace.
Management case studies that once focused on GE and its legendary Chief Executive Jack Welch now are more likely to analyze the actions of Amazon and its founder Jeff Bezos or Apple and its CEOs Steve Jobs and Tim Cook.
The corporate passing of the torch has been in the making for decades. But this month punctuated the transition, with GE, Toshiba and J&J all saying they would split apart in an attempt to get leaner and more efficient. The same week Amazon boosted its investment in electric truck company Rivian, which went public Nov. 10 and now sports a market cap roughly on par with GE.
But there are important differences between today’s tech conglomerates, which continue to grow in value and scope, and those of yesteryear, say those who study the history of the subject. The way today’s big tech conglomerates glue their products together into “platforms” makes them potentially much more dominant and long-lasting than the industrial conglomerates. In those older conglomerates, sibling businesses weren’t nearly as interconnected or mutually supporting, and instead vied for investment from their corporate parent.
“For Apple, all of its products are plugged into this one platform,” says Kim Wang, an assistant professor of strategy and international business at Suffolk University’s Sawyer Business School. “How could you ever divide up Apple—it is like cutting an egg in half,” she adds.
Dr. Wang defines a platform company as one in which all services rely on a common infrastructure or are otherwise intimately interconnected.
Amazon’s platform approach means it can gather consumer data from all its products, then sell or advertise against that. An Amazon Prime membership comes with discounts at Whole Foods and down the road maybe a cheaper ride in a Zoox autonomous car. For Microsoft, the platform is the cloud, the huge datacenters that power so much of what people do these days. Your Teams calls with colleagues runs via the cloud, LinkedIn uses it, and Doom videogames played on the Xbox console also increasingly rely on those data centers.
Old-timey industrial conglomerates like GE were built on the logic that management excellence would allow their centralized corporate leadership to succeed in almost any line of business, or to quickly sell it off or shut it down if it didn’t pan out. There are several reasons that argument has lost its luster, though, and the companies that bet on the logic with it, says Dr. Wang.
One is that stockholders who would prefer more targeted investments now value conglomerates at a price lower than what they could be worth as individual businesses—what’s known as the “conglomerate discount.” For GE, the company’s healthcare division is performing well, but its energy and transportation businesses aren’t nearly as profitable, says Dr. Wang. The other is that some of their constituent companies are, manifestly, not as good at delivering goods and services as smaller and nimbler competitors.
There are parallels between the old and the new business empires. Modern neo-conglomerates like Alphabet, Apple, Meta and Amazon subsidize newer lines of business with the profits from more mature ones, but one reason they escape the “conglomerate discount” on their stock price is that they are doing so well overall. Amazon Web Services, the leader in cloud computing, may be many times more profitable than its e-commerce and retail businesses, for example, but investors are betting they will all continue to grow swiftly, regardless.
A characteristic of platform companies, says Kai Wu, founder and chief investment officer of investment firm Sparkline Capital, is that they take advantage of “network effects” such that every additional user they add potentially brings greater value than the previous one.
Social networks, for example. tend to have a big-get-bigger, winner-take-all tendency, because everyone wants to be where everyone else is, and their value to advertisers goes up as users aggregate themselves—a classic network effect.
The same is true of smartphone operating systems—think of the duopoly of Android and Apple’s iOS—e-commerce marketplaces like Amazon’s, and the like.
The large companies of yesteryear bet on things like economies of scale in manufacturing—everything gets cheaper to make, the more you make of it. Modern platform companies take advantage of something unique to the internet age. That something is “demand-side economies of scale,” which arise because platform companies are taking advantage of network effects, says Mr. Wu.
Old-style industrial behemoths were largely premised on supply-side economies of scale that were exhausted long before a company could completely take over and monopolize a market for goods, which is one reason that General Motors, for example, never ate the entire auto market. The network effects the tech companies are enjoying create a whole new class of economies of scale, which were largely unavailable to industrial conglomerates.
In today’s world, demand-side economies of scale, driven by every additional user, developer, marketplace seller, and advertiser added to a platform, mean that tech conglomerates are playing in markets that tend toward monopoly or at least oligopoly. That gives them tremendous power and, potentially, resilience for the long term.
Another important difference between conglomerates old and new is that today’s tech conglomerates usually add new businesses that can plug directly into their platforms, while capturing more of our time and money. When Microsoft bought ZeniMax Media, the maker of the Doom videogame, last year it added more users and bolstered the Xbox franchise, but with gaming moving to the cloud, it also fit neatly into the company’s cloud computing business that generates the bulk of the software giant’s revenue.
In this light, Apple’s move into automobiles also makes sense. Autos, and especially self-driving ones, have the potential to become the next popular place for companies to deliver services and apps to a screen, after phones, personal computers, TV and wearables, where Apple already does quite well.
Taken together, these features of new conglomerates mean that they could be at least as durable as their forebears. GE began in 1892 and was the most valuable publicly traded company as recently as 2005. The platform conglomerates might last even longer, says Mr. Wu. The only real roadblock to their growth, he says, would be antitrust action by governments—a threat that is gaining steam in China, Europe and the U.S.
Until and unless those regulations have a meaningful impact on the profits or acquisitiveness of these tech giants, all evidence from the study of platform economies suggests that they will only grow bigger. In other words, Amazon, Microsoft, Apple and Alphabet might just be where GE was in the middle of the 20th century, a time when it dominated its industries but was, in terms of revenue and market value, only just getting started.
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