Move Over, GE. Tech Giants Are the New Leaders of Industry.


Luca Durbino

The eulogies for the group of companies were pouring in quickly. But in fact, these modern business beasts are now bigger, more powerful and perhaps more consuming the world than ever before – and they also look very different than they did in the past.

The dismantling of General Electric, Toshiba, Johnson & Johnson, Siemens, DowDuPont, United Technologies and other sprawling business empires in recent years has marked the end of conglomeration and the demise of the idea that brilliant management teams can work big. different industries.

But just as these traditional industrial giants are being dismantled, today’s tech giants have arisen as modern conglomerates – what some call “new conglomerates.” They boast greater valuations than any other company in history, and have diversified their business through acquisitions and new beginnings just like the old conglomerates.

Amazon, at $1.8 trillion, is a do-it-all company that operates online and brick-and-mortar retail stores, sells outdoor computing services, operates global logistics, produces films, provides a broadcast-based social network, and dominates On smart speakers, it sells home security services, aims to launch a satellite network, provides healthcare services, and last year acquired Zoox, a self-driving car company.

Microsoft, which is worth $2.5 trillion and Apple is struggling for the title of America’s largest public company, sells business software, video games and external computing power and runs a social media service where it sells ads and hawk tools, among other things.

Smartphones, laptops, wearables, ads, and self-driving vehicles are now in the works or on the market from Alphabet and Apple subsidiary Google.

Even Meta – the parent company of Facebook, which diversifies its business from monetizing human attention through its apps to doing the same through its mass “metaverse”, appears to be at least trying to turn itself into a conglomerate, making virtual reality headsets offer smart glasses and trying Market management.

Management case studies focused on General Electric and its legendary CEO Jack Welch are now likely to analyze the actions of Amazon and its founder Jeff Bezos or Apple and its chief executives Steve Jobs and Tim Cook.

The company’s passing on the torch has been in the making for decades. But this month the shift has been punctuated, with General Electric, Toshiba and J & Johnson saying they will split in an effort to make them more agile and efficient. That same week, Amazon boosted its investment in electric truck company Rivian, which went public on November 10 and now has a market value roughly equal to General Electric.

But there are important differences between today’s tech conglomerates, which continue to grow in value and scope, and those that existed in the past, say those who study the history of the subject.

The way today’s large tech conglomerates stick their products together in “platforms” makes them more dominant and long-lasting than industrial conglomerates. In those older conglomerates, the sister companies were not interlinked or mutually supportive, and instead competed for investment from the parent company.

“For Apple, all of their products are connected to this one platform,” says Kim Wang, associate professor of strategy and international business at Suffolk University’s Sawyer School of Business.

“How do you split an apple one day – it’s like cutting an egg in half,” she adds.

Dr. Wang defines a platform company as a company in which all services rely on a common infrastructure or are closely interconnected.

Amazon’s platform approach means it can collect consumer data from all of its products, and then sell or advertise them. An Amazon Prime membership comes with discounts at Whole Foods, and it’s probably a cheaper ride in a Zoox self-driving car.

For Microsoft, the platform is the cloud, the massive data centers that power a lot of what people do these days. Your Teams calls with your colleagues run through the cloud, used by LinkedIn, and Doom video games played on the Xbox console are increasingly dependent on these data centers.

Old industrial conglomerates like General Electric were built on the logic that management excellence would allow their centralized leadership of companies to succeed in almost any area of ​​business, sell quickly or close if unsuccessful.

Dr. Wang says there are many reasons why the argument has lost its luster, and which companies are betting on logic.

One is that shareholders who prefer more targeted investments now value conglomerates at a lower price than they would be worth as individual companies – what’s known as “conglomerate discounting.”

For GE, the company’s healthcare division is doing well, but the energy and transportation business isn’t nearly as profitable, says Dr. Wang. The other is that some of its constituent companies are, obviously, not as good at providing goods and services as smaller, smarter competitors.

There are similarities between the old and new trading empires.

Newer conglomerates like Alphabet, Apple, Meta, and Amazon support new lines of business with earnings from more mature companies, but one reason they are dodging the “mass discount” on their stock prices is that they’re doing well overall.

Amazon Web Services, the leader in cloud computing, may be many times more profitable than e-commerce and retail business, for example, but investors are betting that they will all continue to grow quickly, regardless.

One feature of platform companies, says Kai Wu, founder and chief investment officer of investment firm Sparkline Capital, is that they benefit from “network effects” so that each additional user they add potentially brings more value than the previous.

Social networks, for example. They tend to have a big trend – bigger – winner takes all, because everyone wants to be where everyone else is, and their value to advertisers rises as users group themselves – the classic network effect.

The same is true for smartphone operating systems — think Apple’s Android and iOS duopoly — and e-commerce marketplaces like Amazon, and the like.

Big companies last year bet on things like economies of scale in manufacturing — everything gets cheaper to make, and the more you earn. Modern platform companies are benefiting from something unique in the age of the internet.

This thing is “demand-side economies of scale,” which arise because platform companies benefit from network effects, says Mr. Wu.

Old-fashioned industrial giants were built largely on supply-side economies of scale that were exhausted long before the company could fully control and monopolize the goods market, which is one reason General Motors, for example, hasn’t eaten up the entire auto market. .

The network effects that tech companies have are creating a whole new class of economies of scale, which were largely unavailable to industrial conglomerates.

In today’s world, demand-side economies of scale, driven by each additional user, developer, market seller, and advertiser added to a platform, mean that tech conglomerates play in monopolistic or at least oligopolistic markets. This gives them tremendous strength and perhaps long-term resilience.

Another important difference between old and new conglomerates is that today’s tech conglomerates usually add new business that can connect directly to their platforms, while taking more of our time and money.

When Microsoft bought ZeniMax Media, the video game maker Doom, last year it added more users and boosted the Xbox franchise, but as games move to the cloud, it also fits nicely with the company’s cloud computing business that generates the bulk of the software giant’s revenue.

In that light, Apple’s move to cars also makes sense. Cars, and especially self-driving cars, have the potential to become the most popular place for companies to offer services and apps on screen, after phones, PCs, TV and wearables, where Apple is already doing well.

Taken together, these features of the new conglomerates mean that they can be at least as powerful as their predecessors.

General Electric started in 1892 and was the most valuable publicly traded company as recently as 2005. Platform conglomerates may last much longer, says Mr. Wu. He says the only real obstacle to its growth will be antitrust measures by governments – a threat that is gaining strength in China, Europe and the United States.

Even and unless these regulations have a measurable impact on the earnings or acquisitions of these tech giants, all the evidence from studying platform economics suggests that they will grow even more.

In other words, Amazon, Microsoft, Apple and Alphabet may have been where General Electric was in the mid-20th century, a time when it dominated their industries, but it was, in terms of revenue and market value, only in its infancy.

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