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Big Tech And The Optical Illusion Of Monopoly

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Includes: AAPL, AMZN, AXP, COST, FB, GOOG, GOOGL, KR, SHOP, TGT, UBER, WMT
by: Karen Webster
Summary

Between the close of business on Tuesday and end of day on Friday, though, Barron's reported that Alphabet, Apple, Amazon, and Facebook collectively added $370 billion to their market caps.

In the pre-COVID-19 days, Apple, Amazon, Facebook, and Google were already making great strides in eliminating the frictions of connecting people with other people and with businesses in a digital world.

The impressive performance of Big Tech's Fab Four reflects how much confidence investors have in the role that each of these platforms will play in powering the connected economy for the benefit of businesses, consumers and innovation in the years to come.

The most interesting thing about Big Tech's Fab Four tour of Capitol Hill last Wednesday (July 29) wasn't the perfunctory lawmaker grandstanding, or even the number of times lawmakers used "dominant" and "crushing the competition" to describe their views on the companies' behavior.

It was watching the stock prices of each of the companies whose CEOs were on the hot seat that day.

Throughout the six-plus-hour grilling, the stock prices of Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) were all up - and stayed that way throughout the day.

The very next day, the four companies reported their earnings - and by all accounts, it was a rout.

That was true even for Alphabet, whose results beat estimates but whose stock price took a bit of a drubbing the next day. A large chunk of Google's ad revenue comes from the sectors that were hardest-hit by the pandemic - travel, hospitality, and retail - and some analysts seem concerned about the longer-term hit to that piece of Google's business as those sectors struggle to rebound. Analysts have since upped their price targets for Google, confident in the resiliency of its platform.

Between the close of business on Tuesday and end of day on Friday, though, Barron's reported that Alphabet, Apple, Amazon, and Facebook collectively added $370 billion to their market caps. To put that three-day increase in market cap in perspective, $370 billion is more than the GDP of Hong Kong, the GDP of Singapore, and roughly 4.5 times the entire market cap of American Express (NYSE:AXP).

All of this, unfortunately, is likely to make the lawmakers even more eager to regulate or break up Big Tech - or both. The big are only getting bigger, they will say. And going into these hearings, no one really expected that the testimony of Jeff Bezos, Tim Cook, Sundar Pichai, or Mark Zuckerberg would change any or many minds.

In fact, Wednesday's closing remarks by House Antitrust Subcommittee Chair, Rep. (D-RI) David Cicilline, sounded like they were written long before the hearings started. They went something like this:

"This hearing has made one fact clear to me," Cicilline said. "These companies as they exist today have monopoly power. Some need to be broken up; all need to be properly regulated and held accountable. We need to ensure the antitrust laws, first written more than a century ago, work in the digital age."

Let's hope he really meant that last sentence.

Once Upon A Time In Pre-COVID-19 America

In the pre-COVID-19 days, Apple, Amazon, Facebook, and Google were already making great strides in eliminating the frictions of connecting people with other people and with businesses in a digital world. Their formula included using, a growing portfolio of connected devices, data, artificial intelligence (AI) and payments to expand choice and make it easy and efficient for consumers and businesses to find each other, interact and transact.

In the decade that we left behind in December of 2019 and the new one we started in January, doing business in the physical world was always an option, and consumers regularly moved back and forth between the physical and digital worlds.

Eight months ago, we used to call that "omnicommerce."

What we meant then was how digital as a new channel extended the reach of the physical world.

By mid-March, we observed the abrupt - and global - digital shift. By digital shift, I mean the simultaneous reduction in the use of physical world channels and the increase in the use of digital ones.

Based on PYMNTS research, we estimate that 41 percent of Americans have shifted to digital, as I have defined it. That's 104 million Americans, with more shifting every day. And even more of them are sticking with the digital habits they have already created.

Now, it's digital that makes the physical world relevant - or not.

Since mid-March, in a world gripped by a global pandemic, Apple, Amazon, Facebook, Google, and many of the innovators that depend on them for distribution have become valuable ways for consumers to access essential goods and services and for businesses and consumers to interact.

As consumers increasingly make their decisions about reentering the physical world - including going to the doctor or dentist, riding in the back of an Uber (NYSE:UBER), going out to eat at a restaurant, getting on an airplane with their families to go on vacation or riding an elevator in an office building to go to work - their personal health and safety is now their primary consideration.

According to PYMNTS' latest research, as of just a few weeks ago, two-thirds of consumers say they still fear shopping in a physical store because of the risk of contracting the virus. That's despite the great lengths to which these businesses have gone to make consumers feel safe to reenter.

We need only look at the earnings of airlines, reports from restaurants and retailers, and the explosion in curbside pickup, delivery and other touchless commerce experiences to see how true to their word consumers are.

Of course, the role of Big Tech in enabling these digital-first experiences is by now all too familiar.

When the physical economy locked down, consumers turned to Amazon to buy groceries and other essentials that they couldn't or didn't want to go to a store to buy, to stream music and movies, and to buy Alexa-enabled speakers to make their homes smarter and their at-home commerce experiences touchless. Amazon reported that online grocery and new Prime signups drove its Q2 earnings, while physical-store sales at Whole Foods were down 13 percent.

Consumers turned to Google to get information about COVID-19 and many other things, to find out which businesses were open in their local communities, to download apps and play games, to access digital content on YouTube and to cut the cord in favor of YouTube TV, and to check out online with Google Pay using card-on-file credentials via browsers and mobile devices.

Consumers turned to Apple to buy tablets and phones and laptops so they could work at home (and their kids could go to school online), visit the App Store to download apps and play games, use Apple Music and Apple+ to stream music and digital content, use Apple Pay to make contactless purchases in the physical stores where they shopped, and use the Apple Watch and Apple Health to monitor their vitals.

Consumers turned to Facebook and its family of properties to keep in touch with family and friends, get information about the virus, support first responders, share pictures, discover new brands and buy from them, send and receive messages, and sell stuff they no longer wanted on the Marketplace. During its earnings call, Facebook reported three billion monthly active users on its platform - 40 percent of the world's population - who want to stay connected more than ever, as social distancing makes it impossible to get together in many situations.

Businesses, of course, want to be where consumer eyeballs are, and where digital wallets are ready to spend. So do innovators with new tech and big ideas to help improve the experience. Big Tech has leveraged its platforms to help businesses and the connected economy endpoints do just that.

Amazon reported on its Q2 earnings call that third-party sellers saw higher revenue growth than online stores on the Amazon platform. More than half (52 percent) of paid units sold on Amazon in Q1 2020 were from third-party sellers, and Amazon CFO Brian Olsavsky confirmed that more than 50 percent of units sold in Q2 came from third-party sellers as well. Amazon also announced new initiatives to make voice commerce - perhaps the most touchless form of commerce possible - more useful (via shopping list enhancements) and more portable (via new Alexa app functionality).

Google is giving SMBs $340 million in free ad credits and other search-enabled innovations to help boost traffic to their physical storefronts or their new online shops. It rolled out Shoploop, which blends user-driven content with commerce for featured brands. Its deal with Shopify (NYSE:SHOP) underscores the value of Google as an aggregator of consumer eyeballs for the merchants who have set up shop using the Shopify platform, but lack distribution and want a piece of the 3.5 billion daily searches that happen on Google's platform. For Google, it's a way to buff up Google Shopping by improving its Buy With Google options, and to use commerce to monetize search as more and more product searches start on other platforms - Amazon, in particular, but also many other vertical aggregators.

Apple reported that developers scored $500 billion in sales from apps in the App Store in 2019. Google Play and Apple's App Store also make it possible for consumers and restaurants to do business via apps - their own or aggregators' - something that has helped these Main Street businesses navigate the cash flow gaps caused by the physical lockdown of the economy and its capacity-constrained reopening.

Hyperlocal apps like OfferUp have helped consumers buy and sell merchandise that all of a sudden became essential - much of which stores didn't have - like swimming pools, badminton and volleyball sets, puzzles and games. Apple also just bought a FinTech that uses software to make any NFC mobile device a point-of-sale terminal, in an effort to boost the utility of Apple Pay in physical commerce encounters and to give Main Street merchants a new option for making sales.

Facebook opened Facebook Stores to help Main Street SMBs complement the physical storefronts that had been shuttered. Businesses used Instagram's news feed to promote their shops and to streamline payments. Outside of the U.S., WhatsApp for Business now has 50 million users.

The actions of each of these Big Tech platforms in enabling these digital experiences have helped businesses make sales while the physical world has been broken down. This has also helped the rest of the commerce ecosystem survive and thrive. The tech companies, payments processors, software platforms, digital wallets and card networks all benefit from the efforts of these Big Tech platforms to keep business flowing, despite the physical world disruptions.

Competitive Optical Illusions

One of the most famous optical illusions is the drawing of the old woman and the young girl. I'm sure you've seen it a million times.

Optical illusions trick us into seeing things that scientists say "make sense," but may not be the most accurate interpretation of the image. FYI, it's a biological trait we share with horseshoe crabs (go figure).

It explains why some people immediately see the old woman with her long nose and chin on her chest, and the young woman wearing a hat with a plume only after someone points her out.

Understanding how to identify the competition in a digital-first world that is rapidly reshaping the boundaries of our now very connected economy is a lot like trying to find the young girl.

The illusion, of course, is that what's really happening with Big Tech is based on what they are doing, what they are investing in and the partnerships they are striking: They are much more competing aggressively with each other rather than acting like monopolies with a particular segment locked up. Lawmakers see what makes sense to them, instead of what is really happening in the complex, dynamic connected economy.

That doesn't mean some haven't crossed the line - maybe a lot, sometimes - and violated the antitrust law. I have been highly critical of Facebook over the years for its seemingly lax policies about content. But proving that requires showing that they have harmed consumers or their business customers. And it should require Congress to show that whatever they end up proposing will help consumers - who, after all, are also voters.

Take grocery shopping.

In January, going to the grocery store was a weekly pilgrimage that consumers worked into their schedules. Most of the time, they shopped at the stores that were between two and four miles from their homes, even if they heard that another store farther away offered a better experience. Getting there introduced friction - too much time, and too much uncertainty about whether it would deliver. The status quo won out.

Since the pandemic, we have observed a massive shift to online grocery shopping. Based on PYMNTS' studies of a national sample of now 20,000 American consumers since March 6, we estimate that 41 percent of consumers - some 18 percent of the U.S. population - have done two things simultaneously: shopped in physical grocery stores less often and used digital grocery store channels more often.

We see this in their numbers.

Grocery stores, warehouse clubs like Costco (NASDAQ:COST) and mass-merchandise giants like Walmart and Target are reaping the benefits of that digital shift.

Kroger (NYSE:KR) reported a 92 percent jump in online sales in Q1, Target reported that its online ordering platform, Shipt, grew 278 percent in Q1, and Walmart's Q1 earnings were bolstered by a 74 percent increase in online ordering, which includes grocery sales. Amazon reported that its online grocery sales tripled in Q2 at the expense of Whole Foods' in-store sales, which were down 13 percent over the same period.

But that doesn't really tell the whole story.

Some of this shift no doubt came from existing customers who shopped at Kroger online instead of at the physical store, and Target (NYSE:TGT) customers who decided to try online ordering and curbside pickup. Amazon Prime customers who never used Amazon for online grocery but shopped at Whole Foods shifted online to place their orders. And based on Amazon's reported quarterly results, more consumers got Amazon Prime memberships and used them that way, too.

But some of this shift came from an entirely new customer. These customers used platforms like Instacart or Shipt to buy groceries from places that were once too inconvenient to reach physically, but now had become as easy as any other online ordering experience. Costco's CFO said that if they counted Instacart-driven sales in the Q3 2020 numbers, the company's online orders would have increased by 100 percent.

These platforms, with a business model based on using third-party shoppers and offering consumers a choice of stores, introduced a new way for grocery stores to acquire new customers while simultaneously bolstering their online capabilities. They also enabled them to be more competitive against Amazon, which offered one and only one choice: the products and quantities of products on offer at Whole Foods.

Using these platforms, consumers no longer had to trade choice in exchange for the convenience of a two- to four-mile trip to the grocery store. Instead, they could decide where to shop based on which grocery store had the products they wanted to buy and would let the shoppers do the schlepping.

These platforms also did something else: They reduced the friction associated with getting consumers over the digital grocery shopping hump.

Consumers who now had accounts and payment credentials on file with these platforms became more likely to make them a new part of their grocery shopping routine. That's 41 million consumers (and counting) who may never go back to shopping in-store the way they once did.

Grocery stores have a new way to compete, and Amazon and Walmart (NYSE:WMT) have new competition. As these platforms and others like them gain traction, more grocery stores and other retailers will want to hop on board, too.

That will give consumers even more choice, and introduce even more competition into the market.

Now What?

If Rep. Cicilline is true to his words, he and his Congressional colleagues must prove that the actions of Big Tech are harming consumers and stifling competition.

They have work to do.

The impressive performance of the companies that lawmakers (on both sides of the aisle) now love to hate stems from how much consumers and businesses like and use their platforms, in a world where innovators with new options and alternatives are funded and flourishing. These platforms help expose consumers to products and places that might not be found any other way.

Doing business digital-first holds sway, and likely will for a very long time. First, because it was the only way - and now because it is the preferred way.

That won't be lost on the brands that wish to diversify away from the physical store channels that have blunted their sales, and need a way to tap into eyeballs and consumer aggregators to build that demand. I have a funny feeling that Big Tech will be an important part of that mix, regardless of how big or small that direct-to-consumer brand is.

The impressive performance of Big Tech's Fab Four reflects how much confidence investors have in the role that each of these platforms will play in powering the connected economy for the benefit of businesses, consumers and innovation in the years to come. The inertia that must be overcome isn't the shift to digital, but the shift away from the platforms that consumers - and the businesses that want to reach them - use, like and trust.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.