Historically, there has been diversification among the largest public companies. Over decades, the five largest companies have included representatives from different segments of the economy such as technology, industry, energy and finance. Many have seen today's giants and concluded that such spread has disappeared. But on closer examination, another picture comes in focus. There is still diversity at the top:
- Apple is a design company that sells tools that strengthen people.
- Amazon is a retailer focused on providing the best retail experience that is conceivable.
- Microsoft is a company-focused service company focused on helping people get the job.
- Google is a service company that aims to deliver data collection tools to as many as possible.
- Facebook is a service company that offers curated versions of the web (Facebook and Instagram).
The five previous companies rely on different business models to form unique customer relationships. More impressive, every company has come to where it is today without interfering with the others' business models. We see some skirmishes on the edges. (Facebook and Google offer both first-class real estate for advertisers, while Amazon has entered the Google search area.) But things have remained shockingly benign when it comes to all-out wars among the giants.
The five giants are not treated and seen right on Wall Street. Along with having different business models, each also has unique tales with someone stronger than others. Amazon currently has one of the strongest reports. Of the five giants, Amazon is regarded as the most sound business model with company positioning itself as a type of tool that will ultimately own the most cost effective and efficient way goods are transferred from merchants to people's homes. One way to confirm this strong story is to look at the market reaction to Amazon that announces M & A activity. News from Amazon into a new industry (grocery store and now pharmacy) is accompanied by significant losses on the market in the industry's existing players.
However, Facebook and Google are considered to be more receptive to competition that addresses users' attention with different types of data collection services. Nevertheless, the market is still rewarding the two companies for their apparently more predictable revenue streams based on delivering ads.
Apple is seen as the most exposed to the group. There is still serious doubt about Apple's ability to continue to come up with new products that people love. This skepticism has surrounded Apple for decades, and is used by the company as a factor that motivates employees to surprise the world.
Valuation multiples given to each company reflect these different narratives. Amazon shares trade on the highest multiples among the Apple-based group that brings the backside, trading at 1
The following valuation measurement is operational cash flow dividends (operating cash flow / market value). The lower the return, the higher the valuation. For example, the market is currently willing to pay 3x more for one dollar of the Amazon cash flow (and Amazon's future cash flow) against one dollar of operating cash flow from Apple.
The five largest US companies Have one thing in common: software device. Three out of five were able to exploit the power found with mobile-time software to achieve a scale that was once unimaginable. All five were software development to come up with new customer experiences. Facebook and the Alphabet cater to more than two billion customers each. Microsoft and Apple have more than a billion customers each.
Some market observers wonder if the combination of software development and clean scale has resulted in another kind of business giant. Have today's biggest businesses gained so much power thanks to their abilities and loyal customer bases that they will be able to avoid the inevitable fall of grace? Similar issues have been pointed to non-American companies, including Tencent and Alibaba.
Today's corporate giants have significant power in two ways:
Four of the five largest US American companies have remarkably strong balances. The following totals reflect net cash (excluding debt) positions by the end of March 2018:
- Apple: $ 145B
- Alphabet: $ 100B
- Microsoft: $ 55B
- Facebook: $ 44B
- Amazon: $ 6B
More impressive, each company is kicking off significant amounts of cash flow. The following totals reflect the cash flow for FY2017:
- Apple: $ 64B
- Microsoft: $ 40B
- Alphabet: $ 37B
- Facebook: $ 24B
- Amazon: $ 18B
Strong balance sheet and superior Cash flows provide management team with flexibility to finance and pursue ambitious ideas. Each company has seen a dramatic increase in R & D expenditures in recent years. Apple, historically known for its R & D cost-effectiveness, will spend more on R & D in 2018 than it did from 1998 to 2011. The following totals are R & D costs in FY2017.
* Estimated as Amazon includes R & D in its "technology and content "line item.
Add topics like AI and machine learning in the discussion, and some think these giants achieve value, not just from having many users but also from users' data. There are an increasing number of market observers and pundits who see a new breed of monopoly being born, a "data monopoly". This group sees data, or the lack thereof, as a formidable barrier for entry, and prevents others from competing with today's giants. In such a scenario, government regulation would be the only thing that could reduce the giants.
Nothing Goods Forever
This may be a controversial statement, but the odds are good that today's giants will not be tomorrow's giants. Despite the fact that some companies are considered more sound than others, each of them is brutal. New companies, some of which are not yet founded, will rise and compete with today's leaders for the market's superiority. Critics will argue that this thinking is too old school and that today's companies only spend too much power (via cash and user data) to one day disturbed. I disagree.
It's easy to believe that today's giants are where they are today because of a particular product, a function or a core competence. However, this is not the case. Instead, each company has developed a culture and process to create value for the customers. It is this process and the sheer level of difficulty that exists by changing such a process, which will act as a roadblock for today's giants.
Over time, new powers will rise that will challenge existing processes and demand that the giants come up with new ways to think about. The degree to which management team can respond and adapt to these new powers will determine how much success it is to stay at the top. There is nothing inherent with today's giants that prevent new companies from utilizing technologies to deliver customer value in new ways. Instead of being a kind of innovation black hole where advances can only come from the five giants, tomorrow's giants will probably use today's leaders as stepping stones to reach new heights. An example of this development will be the way the companies have used smartphones to review transport through equestrian sports.
Booting will be able to innovate within the areas of A.I. and machine learning despite not having access to the amount of data the giants have. In essence, too many people are positioning data and scaling like moats that will protect today's giants. Nor will it be true.
The five giants are concerned with their fragility. Nobody will miss the next big thing and be left behind. Think of the following actions to avoid irrelevance:
- Apple is spreading in wear while continuing to embrace additional vertical integration by owning the core technologies that drive their devices. Apple mapping a post-iPhone path forward.
- Google's alphabet organization was designed to better handle the various games the company had placed. While reorg does not seem to be very good from a leadership / leadership perspective, Alphabet has become more financially disciplined in terms of its long-term gaming.
- Facebook's annual developer conference has seen Mark Zuckerberg position various actions as the company's future. By 2016, VR was said to be the future of Facebook. The implication is that the world will increasingly go beyond text and images. In 2017, the future of AR Facebook was. Today, Facebook finds itself calling back things to put more resources into cameras and video.
- Microsoft's shift away from consumer markets symbolized management's acceptance of the missing mobile revolution and instead paved out a differentiated path forward.
- Amazon's vertical integration in product and delivery is elevated almost all parts of the heritage's retail complex.
While the giants have become more ambitious and willing to address challenges, there has been little change in their cultures or processes.
Case Study: Apple
Apple management is well aware that they are trying to make it seemingly impossible – remain relevant. Apart from a few luxurious brands, very few companies have been able to avoid what seems to be the inevitable fall from grace.
Apple's future will not be determined by iPhone, Apple Watch or Services. Instead, Apple's future will be based on the company's ability to provide valuable tools for people. This reality depends on a few ingredients:
- Deep collaboration between teams in Apple.
- A strong focus on design (ie how Apple products are used).
- Correct Market Position and Time Calculation (Possibly, these attributes become a design offshoot as they relate to how people will use Apple tools.).
Tim Cook is misunderstood as Apple CEO. Many have classified Cook as if he is Apple's product visionary. Instead, Cook's task is to manage something more important than any product. Cook looks at the process used to develop products. He has monitored major changes in the way Apple managed on a daily basis, as he doubled to position Apple's Industrial Design Group as vendors for the experience found in using Apple products.
As we enter the AI / ML era, Apple has not made internal changes to promote deeper collaboration between industrial designers (who monitor Apple's product vision) and other layers on the front line of new technology. The recent appointment of John Giannandrea as Chief of Machine Learning and AI Strategy emphasizes this last point. Apple's new headquarters is located in a design studio that promotes a greater level of ideology than what was possible in Apple's old headquarters.
We also see that Apple moves deeper into owning core technologies – a game that will likely give the company a competitive edge in terms of decades. Not only does Apple work to develop the necessary technologies for new product categories, but management is also waiting for proper market timing. The transportation industry is not completely ripe for a company that Apple enters. However, given the significant amount of change that unfolds in space, an Apple move for transport is inevitable. Such a move may be linked to Apple, depending on different processes to earn money on premium experiences. It's this kind of change that gives Apple the best opportunity to continue building tools for people. Waiting for the right time to move is a freedom that Apple never had twenty years ago.
A trillion dollar reminder
Without a kind of global decline in economic activity, there will probably be at least one trillion dollar company among today's giants. Over the next few years, it is likely that there will be several thousand dollar companies.
Instead of this milestone representing the start of a new chapter for these giants, it should serve as a reminder of the companies' fragility and the infinite supply of new companies that come up with new processes to deliver world-wide experiences and values.
While many believe that there will be increasing competition or war between today's giants, such a scenario is unlikely. Instead, competition comes from other directions, including new players who have dramatically different business models and processes.
The strongest opponents of the giant's struggle to remain relevant end up in the end. The natural reluctance of change will simply be too strong for most giants. Strong balances, billions of users and access to seemingly unlimited user data will all prove to be reasonable in their bids to remain relevant.
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