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From Strength to Strength

Wall Street made headlines in the media world on two fronts this week. First, the Big 5 (Alphabet, Amazon, Apple, Facebook, and Microsoft) have now passed $3 trillion in total combined market cap. Second, Netflix reported another great quarter and now has over 100 million subscribers worldwide. In both cases, it seems the rich just keep on getting richer. Why is this happening, and what does it mean for the future of TV?

Two thoughts.

1. The Big 5 Do Not Fundamentally Compete With Each Other
In the old days, competition was simple and pretty much zero-sum. Two or more companies provided more-or-less equivalent products or services, and the consumer picked the brand they liked best. Think of Ford vs. Chevy, Coke vs. Pepsi, or Burger King vs. McDonalds. There are plenty of markets that still function like this.

The Big 5 (we’ll get to Netflix in a moment) are not actually like this. Yes, the Big 5 do have products and services that compete directly with each other (e.g., Alphabet, Amazon, Apple, and Microsoft all offer voice-powered AI assistants and all have subscription music services of one kind or another). This is more a function of their massive size and the breadth of product offerings than a function of true strategic intent, however.

The truth is that each of the Big 5 has a fundamentally different core business than all of the others. Moreover, each of these core businesses actually complements the core businesses of the others. Let’s look at each briefly in turn.

Alphabet (aka Google) is still primarily a search company. Although Google Android now has the largest share of the smartphone market, search is fundamentally platform-independent, meaning that a large portion of Google’s search traffic comes from Apple and Microsoft device platforms. In addition, two of the biggest search topics are “people” and “stuff.” Facebook has more data about people than any other public Internet site, and Amazon does the same for “stuff.” As a result, a significant amount of Google search results point to users to one or the other of these two companies.

Amazon is an e-commerce and cloud services company (AWS). With respect to e-commerce, as with Google, shopping is fundamentally platform-independent. Consumers on Apple, Google, or Microsoft device platforms make the vast majority of Amazon purchases. With respect to AWS, Amazon fundamentally makes it cheaper to build and operate apps at scale, including Netflix. This has been a huge boon to the app ecosystem as a whole, two of the biggest beneficiaries being Alphabet (i.e., Google Play) and Apple.

Apple is a consumer device company whose most important device remains the iPhone. Smartphones are fundamentally agnostic with respect to content and services. What do people use their iPhones (and iPads and Macs) for? The most popular single app (by far) is Facebook. Not far behind, however, in both usage and utility, are services provided by Google (including YouTube as well as search) and Amazon.

Facebook is a social network. Social networks are inherently device-independent. Facebook users overwhelmingly come from Google Android, Apple, and Windows device platforms. Moreover, social networks are fundamentally a free service that leverages people’s desire to connect with their friends and families as a form of entertainment. This has minimal overlap with both Amazon (shopping is a totally different activity) and Microsoft (which increasingly focuses on people’s work lives).

Even with respect to online advertising (which is dominated by a Facebook and Google duopoly), these two companies take fundamentally different approaches. Google’s model of search advertising is intent-based, regardless of the identity of person doing the searching (e.g., when you and I search for a Toyota on Google we both see ads related to Toyotas and Toyota dealerships). Facebook takes the opposite approach, packaging up vast amounts of data on real people that an advertiser may want to reach (e.g., Toyota may advertise minivans to Facebook moms and a Prius to environmentalists).

Microsoft these days is fundamentally a cloud-based productivity software company. The company’s biggest franchises (Azure, Office, Windows for PCs, and LinkedIn) are all fundamentally about helping people and businesses get work done. As a cloud company, Microsoft is increasingly device-agnostic, and thus happy to provide apps and power services on both Google Android and Apple device platforms. Microsoft Azure and Amazon AWS do compete directly with Microsoft in the cloud services market (an exception to the rule), but Microsoft’s total lack of interest in e-commerce (and Amazon’s total lack of interest in office productivity) means that the ‘surface area’ of competition between these two Seattle giants is much less than one might think. LinkedIn has succeeded first-and-foremost by not competing with Facebook as a friends-and-family social network, instead focusing all of its energies on people’s professional networks. The overlap between these two services is actually quite small.

The point is simple. The Big 5 succeed as a group by growing the overall global Internet ecosystem. The success of one tends to help the others more than it hurts. As a result, these companies pose no real threat to (and have no real need to directly compete with) each other. In short, there is no inherent strategic reason why each of the Big 5 can’t continue to thrive (and even dominate) their respective categories.

Netflix Rode The Wave Created By The Big 5, Then Added A Virtuous Cycle Of Its Own
Netflix is the poster child for the global expansion of the broadband Internet. No, it did not create the Internet. In fact, it didn’t even enable it in any meaningful way. But, man, does Netflix benefit from it.

Like the proverbial sucker fish, Netflix rides on top of the massive global device-and-app ecosystem that Google, Apple, and Microsoft have created. Its ability to deliver TV-as-an-app in over 100 countries could not exist without the Big 5 app stores, as well as AWS’s vast (and inexpensive) cloud infrastructure. Even Facebook has been a huge boon to Netflix. What do people enjoy talking about online? Many things, but TV shows remain very high on the list. House of Cards and other Netflix original shows would never have become so popular so fast without the free word-of-mouth marketing provided by Facebook, Twitter, and other social networks.

To Netflix’s credit, however, once it got the ‘flywheel of growth’ turning, the folks in Los Gatos did a tremendous job of continuing to invest and re-invest in their own growth. Those millions of new subscribers didn’t turn into profits – they turned into a torrent of original shows that in turn keeps attracting new subscribers. As the 100 million subscriber milestone indicates (including a majority of subscribers now outside the US), this virtuous cycle shows no signs of slowing down anytime soon.

The continuing success of the Big 5 is due, at least in part, to the complementary relationships between and among each other. Netflix, for its part, has done a masterful job of surfing the Big 5’s wake. The only real open question is whether Netflix is ultimately acquired by one of the Big 5 (most likely Amazon or Apple) and itself becomes a variable in this increasingly complex equation.

Stick with TDG and stay ahead of the curve.

Joel Espelien is Senior Advisor for TDG and VP of Client Services for the Corum Group doing sell-side technology acquisitions. He lives near Seattle, WA.