Skip to main content

How Facebook, Google and other U.S. titans could destroy the technology ecosystem

How big can the largest tech companies get? How completely can they come to dominate the economy?

The Big Five – Apple, Alphabet, Microsoft, Facebook and Amazon – now have a combined valuation of over $3.3-trillion (U.S.) and make up more than 40 per cent of the value of the Nasdaq 100 index.

Story continues below advertisement

As the digital economy continues to grow faster than the old economy, it's hard to see what can stop these juggernauts. Unless reality intrudes.

After all, what exactly is their business? Who are their customers? What role do they play in the economy? Each answer points toward some limit on the size, scale and profitability of these giants.

These companies are big for a reason: Nearly every aspect of the digital economy touches them in some way or another. We know that Facebook Inc. and Alphabet Inc.'s Google represent a digital-advertising duopoly. We know that Amazon.com Inc. is gobbling up more and more of e-commerce. Amazon, Google and Microsoft Corp. are leaders in providing cloud services. Apple Inc. sells high-margin smartphones and other computing devices. Put it all together, and you're talking about hundreds of billions of dollars of annual revenue and tens of billions of dollars in profits.

What's forgotten, as these companies seemingly gobble up the rest of the economy, is they remain dependent upon customers who get value from their services. Companies advertise on Facebook and Google only if they've determined it's more profitable than not doing so. Cloud revenue requires the existence of profitable businesses that need business software and services. Third-party vendors choose to sell on Amazon because it's profitable for them to do so. In other words, for the most part, the big five tech companies exist at their current size and scale only because they serve a larger underlying economy of profitable companies.

But the disruptive nature of the tech companies raises questions about how much they can grow. Because, in a sense, at some point they'll only be able to grow by putting some of their customers out of business either directly or indirectly.

Consider a couple examples. Blue Apron, a meal-delivery company that went public this year, has been a prolific advertiser online. If Amazon came out with a competing service that put them out of business, Facebook and Google would lose out on some advertising revenue, and Microsoft and Google (and Amazon) might lose some cloud revenue. Another company, Fossil Group, has struggled mightily over the past several quarters as consumers have bought fewer watches, perhaps in part because of the Apple Watch. If the Apple Watch disrupts Fossil, Facebook and Google would lose ad sales from Fossil, and Amazon would lose Fossil watch sales as well.

The retail vision put out by some tech optimists would be devastating to overall advertising revenue. Imagine it in the extreme: If Amazon put all physical retail stores out of business, and private-label goods replaced all branded goods, you'd kill the source of a large swath of advertising demand.

Story continues below advertisement

In a sense, Amazon could partially disrupt Facebook and Google without ever competing directly with them.

These tech platforms and the companies they serve exist in an ecosystem, where there must be some sort of balance. Profitable companies can allocate only so much of their revenue to advertising, cloud services, information technology and the like. If their profits go away or are disrupted by tech companies, their ad and tech spending will go away. A few highly successful predators could decimate their ecosystem and wind up hungry.

Markets and the overall economy got in trouble by making a similar mistake about another sector – finance – a decade ago. Finance, like these tech companies, exists as a layer on top of an underlying economy. Markets became irrational about how profitable the financial sector could become relative to the underlying economy, and in response to these market pressures, finance came up with increasingly elaborate schemes to make money that weren't sustainable.

We may not be quite there with tech yet, but as stock valuations climb higher and higher, tech will be feeling the same pressures that Wall Street did a decade ago. Expect a similar collapse of the ecosystem.

Report an error
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter