Companies such as Microsoft (MSFT), Google (GOOG), Facebook, Apple (AAPL), Netflix (NFLX) and Amazon (AMZN) used to all operate fairly quietly in their own fields without making too much noise. They improved their products, worked on improving the user experience, and in the end that translated into funding, revenues and profits.
Technology being a “growth” sector, these companies have focused on expanding their offering instead of returning their increasing cash reserves to investors. It’s not that difficult to understand why, as technology has completely changed what used to be a simple landscape, transforming it into a much more complex universe.
First, let’s take a look at these companies five years ago or so; be sure to notice that there are basically no conflicts or competing products:
- Microsoft: Operating System, Software
- Google: Search
- Apple: Computers, Portable Music Players (iPod)
- Netflix: Movie distribution (DVD)
- Amazon: E-commerce
- Facebook: Social
- eBay (EBAY): Auctions
How the world has changed. These days, these companies are increasingly competing on all types of fronts and using their power and influence in order to buy companies, attract top talent and create their own landscape:
- Mobile Operating Systems: Google’s Android, Apple’s Iphone OS, Microsoft’s Windows Mobile
- Software: Microsoft, Google, Apple
- Movie Rentals: Streaming on Netflix, Amazon, Google’s YouTube, Apple’s iTunes
- Mobile Apps: Google (through its Android store), Apple (through iTunes), Amazon (Android stores), eBay
- Telecommunications: Microsoft (through its recent Skype purchase), Google (Google Voice & Android), Apple (iPhone)
- Social: Facebook remains dominant with Google & Apple doing their best to compete
- Display ads: Google, Facebook, AOL, Yahoo (YHOO)
- Search: Google, Facebook, Microsoft (Bing), Apple (through iTunes), Twitter
- Cloud computing: Microsoft, Google, Apple, Amazon
- E-commerce: Amazon, eBay, Google (through Checkout), Facebook (increasingly thanks to Credits, etc.)
- Electronic Payments: eBay’s Paypal, Facebook Credits
- Online Music: Apple’s iTunes, Amazon, Google’s music store
So what has changed? I would say that the landscape has gotten much more complex and competitive. Perhaps the remaining dominant companies are Google in search, Apple in music and Facebook in social media, but even those are not as dominant as what we could see only a few years ago.
Is it a good thing for these companies? I think one of the best examples is Netflix. Facing increasing competition from Apple, Amazon and even Google’s YouTube will certainly affect its future growth, pricing power and negotiating power with the studios. Those studios want to avoid losing power like the RIAA did with Apple. All of those factors will directly affect Netflix’s P/E ratio and thus its stock price. Companies will all try to continue building the equivalent of an Apple world.
It also means that before investing in a company, we must consider the competition and how likely it is to affect short to medium term growth.