Tech's Frightful Five are too big to fail

There’s a little parlour game that people in Silicon Valley like to play. Let’s call it, Who’s Losing? There are currently four undisputed rulers of the consumer technology industry: Amazon, Apple, Facebook and Google, now a unit of a parent company called Alphabet. And there’s one more, Microsoft, whose influence once looked on the wane, but which is now rebounding.

So which of these five is losing? A year ago, it was Google that looked to be in a tough spot as its ad business appeared more vulnerable to Facebook’s rise. Now, Google is looking up, and it’s Apple, hit by rising worries about a slowdown in iPhone sales, that may be headed for some pain. Over the next couple of weeks, as these companies issue earnings that show how they finished 2015, the state of play may shift once more.

But don’t expect it to shift much. Asking “who’s losing?” misses a larger truth about how thoroughly Amazon, Apple, Facebook, Google and Microsoft now lord over all that happens in tech.

Who’s really losing? In the larger picture, none of them — not in comparison with the rest of the tech industry, the rest of the economy and certainly not in the influence each of them holds over our lives.

Tech people like to picture their industry as a roiling sea of disruption, in which every winner is vulnerable to surprise attack from some novel, as-yet-unimagined foe. “Someone, somewhere in a garage is gunning for us,” Eric Schmidt, Alphabet’s executive chairman, is fond of saying.
But for much of the last half-decade, most of these five giants have enjoyed a remarkable reprieve from the boogeymen in the garage. And you can bet on them continuing to win. So I’m coining them the Frightful Five.

It’s not just because I’m a Tarantino fan. By just about every measure worth collecting, these five US consumer technology companies are getting larger, more entrenched in their own sectors, more powerful in new sectors and better insulated against surprising competition from upstarts.

Although competition between the five remains fierce — and each year, a few of them seem up and a few down — it’s becoming harder to picture how any one of them, let alone two or three, may cede their growing clout in every aspect of US business and society.

“The Big Five came along at a perfect time to roll up the user base,” said Geoffrey G Parker, a business professor at Tulane University and the co-author of “Platform Revolution,” a forthcoming book that explains some of the reasons these businesses may continue their dominance. “These five rode that perfect wave of technological change — an incredible decrease in the cost of IT, much more network connectivity and the rise of mobile phones. Those three things came together, and there they were, perfectly poised to grow and take advantage of the change.”

Parker notes the Big Five’s power does not necessarily prevent newer tech companies from becoming huge. Uber might upend the transportation industry, Airbnb could rule hospitality, and Netflix is bent on consuming the entertainment business. But if such new giants do come along, they’re likely to stand alongside today’s Big Five, not replace them.

Indeed, the Frightful Five are so well-protected against startups that in most scenarios, the rise of new companies only solidifies their lead.

Consider that Netflix hosts its movies on Amazon’s cloud, and Google’s venture capital arm has a huge investment in Uber. Or consider all the in-app payments that Apple and Google get from their app stores, and all the marketing dollars that Google and Facebook reap from startups looking to get you to download their stuff.

This gets to the core of the Frightful Five’s indomitability. They have each built several enormous technologies that are central to just about everything we do with computers. In tech jargon, they own many of the world’s most valuable “platforms” — the basic building blocks on which every other business, even would-be competitors, depend.

These platforms are inescapable; you may opt out of one or two of them, but together, they form a gilded mesh blanketing the entire economy.

The Big Five’s platforms span so-called old tech — Windows is still the king of desktops, Google rules web search — and new tech, with Google and Apple controlling mobile phone operating systems and the apps that run on them; Facebook and Google controlling the Internet advertising business; and Amazon, Microsoft and Google controlling the cloud infrastructure on which many startups run.

Amazon has a shopping and shipping infrastructure that is becoming central to retailing, while Facebook keeps amassing greater power in that most fundamental of platforms: human social relationships.

Many of these platforms generate what economists call “network effects” — as more people use them, they keep getting more indispensable. Why do you chat using Facebook Messenger or WhatsApp, also owned by Facebook? Because that’s where everyone else is.

Their platforms also give each of the five an enormous advantage when pursuing new markets. Look how Apple’s late-to-market subscription streaming music service managed to attract 10 million subscribers in its first six months of operation, or how Facebook leveraged the popularity of its main app to push users to download its stand-alone Messenger app.

Then there’s the data buried in the platforms, also a rich source for new business. This can happen directly — for instance, Google can tap everything it learns about how we use our phones to create an artificial intelligence engine that improves our phones — and in more circuitous ways. By watching what’s popular in its app store, Apple can get insight into what features to add to the iPhone.

“In a way, a lot of the research and development costs are being borne by companies out of their four walls, which allows them to do better product development,” Parker said.

This explains why these companies’ visions are so expansive. In various small and large ways, the Frightful Five are pushing into the news and entertainment industries; they’re making waves in health care and finance; they’re building cars, drones, robots and immersive virtual-reality worlds. Why do all this? Because their platforms — the users, the data, and all the money they generate — make these far-flung realms seem within their grasp.

Which isn’t to say these companies can’t die. Not long ago people thought IBM, Cisco Systems, Intel and Oracle were unbeatable in tech; they’re all still large companies, but they’re far less influential than they once were.

A sceptic might come up with significant threats to the five giants. One possibility might be growing competition from abroad, especially Chinese hardware and software companies that are amassing equally important platforms. Then there’s the threat of regulation or other forms of government intervention. European regulators are already pursuing several of the Frightful Five on antitrust and privacy grounds.

Even with these difficulties, it’s unclear if the larger dynamic may change much. Let’s say that Alibaba, the Chinese e-commerce company, eclipses Amazon’s retail business in India — well, OK, so then it satisfies itself with the rest of the world.

Government intervention often limits one giant in favour of another: If the European Commission decides to fight Android on antitrust grounds, Apple and Microsoft could be the beneficiaries. When the Justice Department charged Apple with orchestrating a conspiracy to raise e-book prices, who won? Amazon.

So get used to these five. Based on their stock prices this month, the giants are among the top 10 most valuable US companies of any kind. Apple, Alphabet and Microsoft are the top three; Facebook is No 7, and Amazon is No 9. Wall Street gives each high marks for management; and three of them — Alphabet, Amazon and Facebook — are controlled by founders who don’t have to bow to the whims of potential activist investors.
So who’s losing? Not one of them, not anytime soon.