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Land of the Giants

Another blowout last week on Wall Street, with Amazon, Alphabet, and Microsoft all announcing better-than-expected earnings and the Big-5 (Alphabet, Apple, Amazon, Facebook, and Microsoft) adding $181 billion in market cap in just a single day. These companies are now the five most valuable businesses on the planet, with a combined value of more than $3.2 trillion. This staggering sum is significantly greater than the combined annual GDP of all countries but four: the US, China, Japan and Germany.

How are all these companies succeeding at the same time, and what does it mean for everyone else?

1. The Returns To Scale Are Increasing
Scale efficiencies are not new. Industrialization rewarded size, and across the board; everything from coal mining to steel plants, railroads, and auto factories. As big as companies like US Steel or General Motors were in their time (and they were big, accounting for a larger portion of the economy in percentage terms than today’s giants), there were actually some very real limits on growth. In particular, the “natural” size of large companies tended to correspond to a singular country or continent (in the case of Western Europe). Economists of this era spoke confidently (and correctly) of the diminishing returns of scale.

Industrial-era companies tried to be global, to be sure, but they invariably ran into significant challenges of coordination and control when trying to operate at a global level. The GM of the 1970s was large and present in a number of different countries, but it was also bloated, inefficient, and highly dysfunctional, making it incredibly vulnerable to more nimble competitors from Japan and Germany.

Something very different is happening with today’s giants. Not only are each of the Big-5 companies operating successfully at planetary scale, but they actually seem to be getting better as they get bigger. Amazon, in particular, is becoming faster and more efficient (not less) with size. This is unprecedented and suggests that the Seattle giant is actually gaining increasing returns from growth. The reason for this brings us to our second point.

2. Data Does Not (As Yet) Seem To Have Diminishing Returns
All of the Big-5, even Apple, are increasingly AI businesses that leverage massive data centers in the cloud. (I’ve written before that all computing problems of sufficient scale ultimately become AI problems.) For our purposes, here, however, data has one really interesting property: it gets more valuable as it grows, not less. A database comprised of customer purchase information, Internet searches, or conversations with Siri or Alexa from a million people is a nice start. The same data for 10 million people is significantly more interesting. Once that data covers 100 million people, you can derive insights with another level of granularity entirely. At one billion, you can start talking seriously about training your own AI.

People talk about data being “the new oil,” but the analogy is flawed. Oil is valuable because it is inherently scarce, its limits set by nature. The whole reason OPEC was created was to artificially limit the production of oil. Too much supply and its value is diminished.

The supply of data, on the other hand, has yet to encounter the declining returns of scale. In practical terms, machine-learning algorithms (i.e., AI) are by nature insatiable when it comes to data. To the extent more data is better, one would expect that the companies with the most data (i.e., the Big-5) begin to pull away from everyone else. This is precisely what we are seeing, which brings us to our final point.

3. “Winner Take All” Could Start To Be A Real Problem
In the 20th century, the spoils of economic growth spilled over industries, companies, and social groups; the proverbial rising tide that lifted all boats. Obviously, that is no longer the case. Others have written far more ably on the subject of income inequality, but there’s another problem here. Call it company inequality. In other words, what happens when a small number of companies capture most (all?) of the profits in significant sectors of the economy? This is arguably already happening (or happened) in smartphones (Apple and Alphabet), online advertising (Facebook and Alphabet), and cloud services (Amazon and Microsoft).

The result, among other things, is significant inequality among cities, depending on whether you happen to have one or more of the Big-5 in town or not. Hence, the 238 frenzied proposals from cities across North America to serve as Amazon’s second headquarters (i.e., “hq2”). Unfortunately, simple math suggests that 236 of these cities (Seattle doesn’t count) are going to lose. And remember this example covers only Amazon, and only the US and Canada. What’s the rest of the world to make of a global technology ecosystem in which five (predominantly US) companies dominate to this degree? This could well become a major problem across economic, political, and social dimensions.

The Big-5 companies are each getting bigger. More importantly, they appear to be getting stronger (not weaker) as they grow. As we intimated five years ago, it is now their world and the rest of us are just living in it.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.