The big four — Apple, Amazon, Facebook, and Google — have literally changed the face of the world economy, and are collectively responsible for creating a combined market capitalization equivalent to the GDP of India with a population the size of the Lower East Side of Manhattan.
This, according to Scott Galloway, professor of marketing at NYU Stern, founder of L2 Inc. and author of The Four: The Hidden DNA of Apple, Amazon, Facebook, and Google, means we need to watch these four — and other potential disruptors — very closely, as they point the way toward understanding the economy as a whole and where innovation will lead us.
How Dominant Are They?
It’s easy to compare these companies to industrial powerhouses that existed at the turn of the Twentieth Century. But, if we look at them from the perspective of market share, the picture turns out a bit different.
Except for Google, which now controls 90 percent of the market for internet searches — now a larger market by dollar volume than the advertising market of any nation with the exception of the United States — Facebook, Amazon, and Apple don’t enjoy excessive market share, Galloway noted. Amazon, for example, captures around 4 percent of retail, and Apple only has 15 percent share of the phone market.
“By traditional share standards, they’re not as dominant and have competition everywhere,” Galloway noted. “But you can flip those numbers pretty easily. For example, Amazon has probably a 40 percent share of online retail, and depending on the numbers you look at, captures somewhere between a third and a half of all retail growth in the US”.
This has given Amazon tremendous leverage, and it enjoys the ability to enter nearly any space and be disruptive by virtue of the capital it can bring to bear in any sector, Galloway noted.
Does Amazon’s Profitability Matter?
Despite its huge market cap, Amazon hasn’t been profitable, in contrast to the other names in the group of four.
“They’re selling vision and growth,” Galloway said. “We’ve never seen anything like it, and you could argue that our tax system isn’t prepared for it.”
For example, since the Great Recession, Wall Mart has paid $64 billion in corporate income taxes, where Amazon has only paid $1.4 billion because Amazon runs at break-even on purpose.
This has inverted the traditional relationship between markets and companies, at least in Amazon’s case.
“Amazon is the exception,” Galloway said. “They purposely run their company at break-even, giving every consumer 100 cents back on the dollar in terms of product and service, making the value proposition to consumers just incredible.”
Apple a Juggernaut of Profitability
“The rumor of the death of stores has been greatly exaggerated,” Galloway said. “There is no such thing long-term, in my view, as a successful pure-play e-commerce company. There are two types of e-commerce companies: Those that will open stores, and those that will go out of business.”
We are going through a rational, cyclical culling of stores, however, and the US is severely overstored, he noted. From 1970 to 2015, malls grew at twice the pace of the population in the United States, for example.
This makes Apple’s relatively recent decision to invest billions of dollars into Apple Stores one that produced more shareholder value than any other decision in modern business, Galloway stated.
Apple’s 500 “temples” to its brand and have created tremendous brand equity, giving Apple operating margins equivalent of Ferrari, Galloway noted, with the production volume of Toyota.
As a result of high margins and high production volume, Apple has become the most profitable company, by a long shot, in the history of business. It has more cash on its balance sheet than the GDP of many countries, Galloway stated, and it will create more profit this year than Google, Facebook and Amazon combined.
Google and Facebook Dominating Media
While Google and Facebook have been reluctant to recognize themselves as media companies, they control a huge portion of the advertising market and are producing content at incredible speed with large amounts of capital investment.
Both also collect huge amounts of data about their users’ behavior, something that has many concerned about privacy and control through data mining.
While we haven’t caught up to technological development, Galloway doesn’t think this is an inherently bad development.
“If you can understand how (these companies) make money; if you can understand what is so powerful about their culture; if you can understand the relationship they have with investment markets, you will have a greater understanding of where technology and innovation collide with information services and media,” Galloway said. “You’re going to understand 50 to 70 percent of our consumer economy.”
Article by Financial Sense