The Model Of The 'New' Modern Corporation

by: John M. Mason

More and more is being written about the "new" Modern Corporation and the differences between it and the "old" model.

Focusing on networks and platforms is the essence of the new world, not a focus on "things."

Scale is the driver of the "new" Modern Corporation, but this scale is achieved through intangibles, not through productive capacity or capital investment or building conglomerates.

I have been writing for several months now about the “new” Modern Corporation. I have used Apple, Inc. (NASDAQ: APPL) as my primary model of what makes the “new” Modern Corporation different from the older model.

Now, I would like to refer you to an op-ed piece that appeared recently in the Financial Times, written by Nicholas Johnson, the founder of Applico. He also co-authored a book with Alex Moazed with the title of “Modern Monopolies” (St. Martin’s Press: 2016). I strongly recommend that you read both.

Mr. Johnson argues that “scale” has become the focus of most businesses now… both large businesses and smaller businesses.

The reason for this focus is that the major stars in the heavens now, like Apple, have achieved an enormous scale for their businesses and this has caused many to claim that the only way to achieve competitiveness now is to achieve enormous scale.

Consequently, for businesses in the non-tech sectors, this has caused them to try and grow by mergers and acquisitions. Scale at any cost seems to be the mantra.

The problem with this, according to Mr. Johnson is that just achieving scale in physical production capabilities does not do the job. The legacy companies pursuing this path, however, just focus on size… and little else.

As a result, they fail to achieve their goals.

The reason?

These “traditional companies misdiagnosed the challenge. Lack of scale is not the cause of their struggles. Rather it is a symptom of their real affliction.”

And, what is this?

“Rather than owning assets, (these “Big Tech” companies) are all platform businesses that facilitate networks of users.”

It is “this model (that) enables them to achieve unprecedented scale.”

It is this model that was “the secret sauce of Silicon Valley for decades and it is the same model that is driving the next generation of tech titans….”

“The biggest hurdle is a mental, not a technical one.”

The non-tech companies “must accept that what you ‘own’ is no longer the key to your success.”

“Instead it is who and what your business can connect.”

And, there you are… the intangibles.

Add to this the genius of financial engineering and you have the “new” Modern Corporation:

“Mating two dinosaurs will not ward off their extinction.”

Mr. Johnson brings up the subject of “two dinosaurs” when he discusses the AT&T (NYSE: T) acquisition of Time-Warner (NYSE: TWX). He quotes AT&T chief executive Randall Stephenson who said that this acquisition give AT&T “all the elements of a modern media company.”

Well, Mr. Johnson argues… not quite. If Mr. Johnson and AT&T focus upon the connectivity that the combination can provide, then well and good. If they look at the combination as just “bundled” products, then there are problems in the future.

But, this shows how the “old thinking” dominates the environment and this can be seen in the trial that finally approved the linking of AT&T and Time-Warner.

What we are learning about the trial is, I believe, quit revealing. There are three parties here: AT&T, the Department of Justice, and U. S. District Judge Richard Leon.

Mr. Johnson is not sure that AT&T, and its CEO, Mr. Stephenson, understand the “new” concepts of networks and platforms and will build the “new” company as a “new” Modern Corporation.

The Department of Justice certainly does not seem to understand the world of the “new” Modern Corporation. The DOJ cries out that the judge “ignored economics and common sense.” Yet, the arguments that the DOJ have made seem to revert to a time even before the world that Mr. Stephenson and AT&T are talking about.

The world the DOJ appears to be talking about is one that came out of an economics textbook on price theory that was published in the 1970s, way before the “Big Tech” companies even saw the light of day. The DOJ’s approach reflected more the politics of the situation rather than reality.

The judge also struggled as well. Everyone at the trial seemed to be on a different page.

And, now the Justice Department is “gearing up to appeal a judge's decision allowing AT&T to buy Time Warner.”

Oh, well, my view has always been that politicians and regulators always seem to be fighting “the last war” and not what is currently relevant.

So we move on. I still recommend that you read Mr. Johnson’s op-ed piece and the book that he wrote with Mr. Moazed. The world is changing and we need to understand as well as possible what the differences are relating to business structure and business operations.

Focusing upon networks and platforms is entirely different from focusing upon products or production lines. From what we can see, they are making all the difference in the world.

And, in the meantime, as Mr. Johnson writes, focusing upon networks and platforms “achieve faster growth, higher profit margins and better return on investment.”

Do we need to hear more?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.