THE TECH The industry seemed to be on cloud nine recently. One record after the other fell when the quarterly figures were published three months ago. Revenue was up an average of 40% year-over-year and profits were up 90% for the five western tech titans – Alphabet (Google’s parent company), Amazon, Facebook, Apple and Microsoft, collectively known as GAFAM. Technology stock indices, such as S&P 500 information technology benchmark, climbed to stratospheric heights.
If the last round of quarterly earnings is a benchmark – three of the digital giants have already reported, and results from Amazon and Apple are expected afterwards The economist goes to press – the tech industry is coming back to earth. Assuming the couple meet analyst expectations, GAFAMSales and profits will both have increased, but by a more modest 30%. The share prices are falling. The slowdown – or breather, if you will – provides additional evidence of how the pandemic has transformed the tech industry. The question now is whether the industry is on a new path or will fall back on typography in the next few years.
For starters, one of the first predictions when Covid-19 hit in early 2020 was that Big Tech was going to get even bigger. These firms, it is theorized, would be best placed to benefit from increased demand for digital offerings, while smaller firms with fewer resources to cope with the pandemic would suffer the most from their disadvantages. The first half of that prediction has come true: as the market capitalization growth of the five companies shows. In January 2020, their combined value was 17.5% of the S&P 500. Today their share is around 22%.
However, many smaller businesses have also grown in size and value. The pandemic has spawned a group that could be described as “tier two tech” whose weight, as measured by market capitalization, has increased significantly compared to the titans. In May, we defined this group to include 42 companies with a market value then no less than $ 20 billion that were founded in 2000 or later. In February 2020, these had a combined market capitalization of 22% of GAFAM‘S. Today the number is 31%
There are many reasons for this new strength. One of them is the large number of listings recently, especially from tech startups: more than 100 since the beginning of the year, says data provider Renaissance Capital. Despite some high-quality deals, a backlash against acquisitions by the big tech companies has slowed the pace of mergers and acquisitions this year. Most importantly, the pandemic has shown that there are large digital markets that are not dominated by GAFAM. For example, the tier 2 group is led by PayPal, a payment service provider with a market capitalization of $ 276 billion.
But the most fascinating changes are qualitative in nature. The first is that the tech industry has become much more murky than it was before. “We have seen two years of digital transformation in two months,” said Satya Nadella, the head of Microsoft, at the beginning of the pandemic, referring mainly to the growth of his cloud. Taken together, the sales of the three largest clouds – Microsoft’s cloud business, Amazon’s AWS and Google Cloud Platform, which together provide more than 60% of online infrastructure services, rose more than a third from $ 27 billion in the fourth quarter of 2019 to nearly $ 37 billion in the second quarter of this year.
However, the larger beneficiaries of the collecting cloud appear to be smaller companies. If you look at a group of around 50 second-level technology companies today, around four-fifths are providers of cloud services. Some are to be expected now: Snowflake, a cloud-based data platform, is valued at US $ 104 billion; Twilio, which provides corporate communications services, approximately $ 61 billion; and Okta, which manages employee digital identities, approximately $ 39 billion.
Older tech companies are now also more firmly anchored in the cloud. Salesforce, a software giant, was one of its pioneers. Adobe, another software titan, has successfully reinvented itself for this new form of computing. Even the cloud laggards, Oracle and JUICE, the world’s largest providers of conventional business software, are finally making use of it. The largest hardware manufacturers – Cisco, Dell, and IBM– are also increasingly selling their goods “as-a-service”, which is accessed remotely via the cloud on a pay-per-use basis instead of being installed on office computers.
The second industry shift is that despite migrating to computing heaven during the pandemic, there has also been some sort of low hardware comeback. Most surprisingly, personal computers were experiencing a revival as remote workers needed better equipment. In 2020 Pcs saw the fastest growth in a decade, with more than 300 million units shipped, 13% more than in 2019, according to the previous year IDC, a market research company. Since then, growth has slowed, but mostly because scarcity of chips and other components slows production. Dell, the third largest manufacturer of Pcs according to Lenovo and PS, did the best and increased deliveries in the third quarter by almost 27% compared to the previous year, so IDC– Almost guaranteed good results when Dell reports on November 23rd.
Chipmakers are sending an even stronger signal for hardware to return to the core of the industry. Although Intel disappointed investors when it released its quarterly results on October 21, dragging its share price down, sales soared 5% to $ 19.2 billion and earnings increased 60% to $ 6.8 billion . Samsung Electronics, the world’s largest manufacturer of memory chips, which will also present its results on October 27th, recorded a jump in profits to the highest level in three years. and TSMC, the leading contract manufacturer of semiconductors, announced on October 14th that sales had continued to grow rapidly and amounted to $ 14.9 billion.
The big question is whether the three companies can profitably implement their record-breaking investment plans. These should not only satisfy the growing demand for chips from cloud providers, but also from companies that are preparing for the so-called “edge”: devices that connect to the cloud or expand it, from smartphones to intelligent sensors. For example, Intel has announced that it will invest up to $ 28 billion in 2022. TSMC plans to spend $ 100 billion over the next three years to expand its chip manufacturing capacity.
The third big change in the tech industry during the pandemic could be the most momentous: increased competition. Although members of GAFAM each other’s major franchises, such as online search in the case of Google and e-commerce for Amazon, have not yet attacked, the rivalries have intensified. So far, highly competitive clouds and changes in Apple’s data protection guidelines on the iPhone – which are damaging Facebook Advertising revenue according to the results published on October 25th – are the main examples. But on October 21, Google announced it would cut the fee it charges subscription providers on its app store to 15%, putting pressure on Apple to do the same. And with so many people working remotely now, and likely to continue to do so, a platform battle has broken out between Google, Microsoft, Salesforce and Zoom, a popular video conferencing service, that will dominate the virtual office.
Other companies also start more fights GAFAM. Facebook’s social media fortress looks a lot more insecure now as it has at least two serious rivals: America’s Snapchat, a social network operated by Snap, and TikTok, the short video app from Chinese internet giant ByteDance. According to data released in a recent wave of leaks, Facebook teenagers in America now spend two to three times longer on TikTok than on Instagram, which is part of the American social media conglomerate. Amazon is also facing more competition, both in the form of established companies that have finally embraced the digital world, including Walmart, and newbies like Shopify, which helps merchants sell and fulfill orders online. PayPal’s attempt to buy Pinterest, another social network, now appears to have been abandoned, but it would have helped PayPal move deeper into e-commerce.
After almost two years of Covid-19, the technology industry is cloudier, more hardware-related and more turbulent. Of these trends, the first two, at least in their current form, are unlikely to last forever. Digital meteorologists argue that the cloud has already reached the “peak of centralization”, which means that in future it will no longer grow through data centers the size of a soccer field, but rather at the “edge”, where their digital services touch the physical world. And given the economics of the semiconductor industry – manufacturing equipment often costs over $ 10 billion and takes years to build – chip shortages could eventually lead to oversupply.
The question of how long the new phase of the competition will last is more open. Optimists argue that after a long period of ossification, the pandemic has helped propel the industry into a more dynamic phase in which the giants compete with each other as well as with smaller companies. Pessimists say this phase won’t last long – and that sooner or later industry leaders will strengthen their fortresses and buy out competitors. And that’s why Trustbusters should be on their guard more than ever.■
For more expert analysis of the biggest stories in business, business and markets, Sign in to Money Talks, our weekly newsletter.
This article appeared in the business section of the print edition under the heading “Cloudy with lack of chips”