Tech Giants Rethink The Businesses That Made Them Big

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Includes: AAPL, AMZN, FB, GOOG, GOOGL, MSFT, T
by: John M. Mason
Summary

The latest concern of journalists seems to be the "dilemmas" many big tech firms are facing in this new era, dilemmas the journalists think are forcing these companies to "rethink."

These journalist, however, are just focusing upon company products and not upon the changing nature of the modern corporation built upon intellectual property and platforms and networks.

The investor must avoid focusing upon just the the products a company produces and concentrate more upon how the economics of wide-ranging platforms and networks builds value and wealth.

This headline in the Wall Street Journal points to the dilemma that the “big Techs” are apparently facing as they look out into the future.

Urgency is the word used by the press to define this dilemma:

“Google, Facebook Inc. (NASDAQ: FB) and other tech giants have long tinkered with ways to grow outside the core businesses they dominate. Now those efforts are becoming urgent.”

“Apple Inc., (NASDAQ: APPL) 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….”

“Google parent Alphabet Inc. (NASDAQ: GOOGL) has been Big Tech’s most eclectic big-idea factory. But it has had little success turning those efforts into moneymaking businesses.”

And, “even at Amazon, (NASDAQ: AMZN) revenue growth in the latest quarter was its slowest rate in four years (also 17%).”

Why?

Well, concerns over privacy abuses and misinformation “threatens ad-driven strategies at Facebook and Google while the slowdown in sales of the smartphone are dogging others.

The question being kicked around in the press is whether or not these giants need to build a new business model.

To me the venture of the press into this issue is captured by the focus that has been given AT&T (NYSE: T) in recent weeks. I have tried to capture this situation in a series of posts on AT&T, the latest of these articles came out last week.

The point I am trying to make it that the people analyzing the situation at AT&T and at the big tech firms focus upon products and services. They are looking at the situation through the eyes of a previous era where the relationship between a “producer” and a “customer” was direct and singular.

The picture of the era of the “new” Modern Corporation is not “linear” and focuses upon the intellectual property that is used to construct platforms and networks that create the opportunity for corporations and customers to interact and build upon one another.

Furthermore, the economics of the platform and network structure also helps to explain the ability of these institutions to expand scale at zero or close to zero marginal costs. This capability helps the “new” Modern Corporation generate massive amounts of cash with very little usage of debt.

As a consequence of this latter characteristic, these Tech giants can innovate on the basis of “time pacing” because with all the cash around and with little or no need to go to the capital markets, they have no need to rely upon financial markets or economic conditions to build their future.

In order to get a better picture of this “new” world, I would suggest digging into the book “Modern Monopolies” by Alex Moazed and Nicholas Johnson. The authors produce a pretty clear picture of what this future is all about.

The take away from this analysis is that the Tech giants are always rethinking their businesses. But, since they don’t specifically have to rely upon ‘inventions” or upon the conditions of the financial markets or the economy they can focus upon their innovations in terms of a systematic timing connected with their overall vision of the future.

And, this vision of the future takes on the nature of platforms and networks, of connections and interactions. As a result their efforts spread into new domains, areas in which the Tech giants, more and more, invade one another’s territories.

In order to get a better idea of what is going on in this space, analysts, journalists, and others, must get away from the narrow focus of products and services. This just limits the concept of what the “next big thing” might be.

One must get away from the concern over what follows the smartphone or what is going wrong with ad-driven strategies.

We must focus on the platforms and networks, on how the pieces of the platforms and networks are connected with one another and build off of one another. We must identify on how scale is built within this environment.

In this way we can back off from wondering why, say, revenues have declined modestly.

As mentioned above, in the first quarter of this year Amazon’s revenues declined to the point where they were only 17 percent ahead of last year, their slowest increase in the last four years.

First of all, a 17 percent increase is not bad and many companies would celebrate achieving such a result. The slowdown came from a “weaker growth in the core online retail operation.” But, profit more than doubled, as advertising, a business it has been expanding aggressively offset” the weaker growth. And, this carried Amazon through.

Investors…and analysts and journalists…must realize the shift that is taking place within the business world. The future is being constructed around the intellectual capital that is used to build platforms and networks. Strictly “linear” business models are becoming less and less profitable and limit the markets a firm can serve.

Perhaps the company getting the least press coverage these days is Microsoft Corp. (NASDAQ: MSFT) because things seem to be functioning very smoothly there. Becoming the latest company to reach a $1.0 trillion valuation, with a return on shareholder’s equity in excess of 20.0 percent, with very little debt and lots of cash on hand, Microsoft can seem awfully dull to reporters.

The biggest concern I have about “Big Tech” is the ill-considered regulations that the government might impose on the industry. Talk about the possibility of creating unintended consequences. Scary.

Investors need to take a page out of Warren Buffet’s book, and the successful investor seems to finally moving into the tech space.

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.