- Scaling Success: Each of these companies has been able to keep revenue growing rapidly, even as they scale up and acquire larger market share. In effect, they have been able to deliver small company growth rates, while becoming monoliths.
This success of these companies at delivering high growth, as they have become bigger, have some led some to rethink long-held beliefs about the limits of growth.
- Bigger Slice of a Bigger Pie: All four of these companies have also been able to change the businesses that they have entered, increasing the size of the total market by attracting new customers, while also changing the way business is run to their benefit. With Google and Facebook, that business is advertising, with Netflix, it is entertainment, and with Amazon, it is just about any business it enters, from retailing to entertainment to cloud services. In each of these businesses, they have not only made the pie bigger but also increased their slice of it, quite a feat!
- Promise of Profitability: Alphabet and Facebook are money-making machines, with very high profit margins; Facebook’s margins are among the highest among large market capitalization companies and Google’s are in the top decile.
Amazon has lagged on profitability historically, but it seems to be showing progress in the last few years, and Netflix still struggles to generate decent profit margins. The low margins that these companies show are deceptively low because they are after expensing what would be business building or capital expenditures in most other companies – $22.6 billion in technology and content at Amazon and almost $8 billion in content costs at Netflix.
- Centralized Power: These companies are more corporate dictatorships, than corporate democracies. All four of these companies continue to be run by founder/CEOs, whose visions and narratives have focused these companies; Brin and Page, at Alphabet, Zuckerberg, at Facebook, Bezos at Amazon and Hastings at Netflix, have unchallenged power at these companies, and the only option that shareholders who disagree with them have is to sell and move on.
- Big Data: While big data is often a buzz word thrown into conversations where it does not belong, these four companies epitomize how data can be used to create value. In fact, you can argue that what Google learns from our search behavior, Facebook from our social media interactions, Netflix from our video watching choices and Amazon from our shopping carts (and Alexa) is central to these companies being able to scale up successfully and change the businesses they are in. Google and Facebook use what they learn about us to allow companies to target their advertising, Netflix develops content that reflects our watching preferences and Amazon uses our shopping history and Prime membership to run circles around its competitors.
- Intimidation Factor: There is one final intangible in the mix and that is the perception that these companies have created in regulators, customers and competitors that they are unstoppable. Advertisers facing off against Google and Facebook increasingly settle for crumbs off the table, convinced that they cannot take on either company frontally, the entertainment business which once viewed Netflix as a nuisance has learned not only to live with the company but has adapted itself to the streaming world and Amazon’s entry into almost any business seems to lead to a negative reassessment of the status quo in that business.
- CEO heads cannot roll: Unlike traditional companies facing crises, where CEOs can be offered by a board of director as a sacrificial offering to calm investors, regulators or politicians, the FANG companies and their CEOs are so intertwined, with power entrenched in the current CEOs, this option is off the table. Even if Mark Zuckerberg performs like Valeant’s Michael Pearson did in front of a congressional committee next week, he will still be CEO for the foreseeable future, an advantage that having voting shares and controlling more than 50% of the voting rights gives him.
- The Dark Side of Sharing: I don’t know what we, collectively as users of these companies’ products and services, thought they were doing with all of the information that we were sharing so willingly with them, but until the last few weeks, we were able to look the other way and assume that it would be used benevolently. The Facebook fiasco with Cambridge Analytica has pushed some of us out of denial and perhaps into a reassessment of how we share data and how that data is used. It has also created a firestorm about data sharing and privacy that may result in restrictions in how the data gets used.
- No Friends: When other companies feel threatened by your success and growth, it should come as no surprise that many of them are cheering, as you stumble. From Elon Musk shutting down Tesla’s Facebook presence] to Tim Cook castigating Google and Facebook for misusing data, there seems to be a desire to pile on. Musk has far bigger problems at Tesla than it’s Facebook page, and Cook should be careful about throwing stones from a glass house, but watching the FANG companies squirm is evoking joy in the boardrooms of its competitors.
So, what now? As I see it, there are three ways to read the tea leaves, with the effects on value ranging from very negative to non-existent.
- Second Thoughts on Sharing: It is possible that the news stories about how exposed we have left ourselves, as a consequence of our sharing, will lead us to all to reassess how much and how we interact online. That would have significant consequences for all of the FANG stocks, since their scaling success and business models depend upon continued user engagement.
- Tempest in a teapot: At the other end of the spectrum, there are some who argue that after the Zuckerberg testimony, the story will blow over and that not only will the companies revert back to their old ways, but that they will continue to accumulate users and grow revenues, while doing so.
- Data Protections: The third possibility lies somewhere between the first two. While the news stories may have little effect on how people use these companies’ products and services, there may be new restrictions on how the data that is collected from their usage is utilized by the companies. That would include not only privacy restrictions, similar to those already in place in the EU, but also regulations on how the data is collected, stored and shared. In addition, the companies themselves may feel pressure to change current business practices, which while profitable, have left data vulnerabilities.
- Come easy, go easy: The Tech Takedown!
- Facebook: Friendless, But Still Formidable!
- Amazon: Glimpses of Shoeless Joe!
- Netflix: Entertainment’s Future?
- Alphabet: If Google is alpha, where is the “bet”?
There has been much talk in recent years about disruption and trying to pick companies that will disrupt their industries. The debate continued at the Morningstar Investment Conference as Bill Nygren of Oakmark Funds faced off with Morgan Stanley's Dennis Lynch. Q2 2021 hedge fund letters, conferences and more Persistence Morningstar's Katie Reichart moderated the Read More