The breaking up of a bunch of old-school industrial conglomerates is leading some to question the very long-term prospects of the “new conglomerates” – tech giants like Apple, Amazon, Facebook, and Google.
But a piece in the WSJ argues that they have two advantages over companies like General Electric, which could see them last even longer …
Traditional conglomerates – large companies whose business activities span a range of business types – were based on two ideas. First, good management is good management, so if they can be successful in one sector, they can be successful in others. Second, the financial clout to create very large businesses means they benefit from economies of scale when it comes to both the purchase of raw materials and the operation of production processes.
But the WSJ says it appears that industrial conglomerates have had their day, leading to questions about whether tech giants will similarly implode in time.
The dismantling of General Electric, Toshiba, Johnson & Johnson, Siemens, DowDuPont, United Technologies and other sprawling business empires in recent years has been heralded as the end of the conglomerate and the demise of the idea that brilliant management teams can succeed operating in very different industries. But just as those giants of traditional industry are being dismembered, today’s tech giants have arisen as latter-day conglomerates—what some even call “neo-conglomerates.” They boast valuations bigger than any other companies in history, and have diversified their businesses through acquisitions and new starts just like conglomerates of old […]
Smartphones, laptops, wearables, advertising and self-driving vehicles are now in the works or on the market from both Google-parent Alphabet and Apple.
However, while some are suggesting the same fate is in store for them, others argue that tech giants have two advantages – Apple especially.
First, while the company may now operate in sectors as diverse as smartphones and streaming video, the ecosystem is what glues everything together.
“For Apple, all of its products are plugged into this one platform,” says Kim Wang, an assistant professor of strategy and international business at Suffolk University’s Sawyer Business School.
Second, while industrial conglomerates relied on economies of production, tech giants benefit from what one investment expert calls “demand-side economies of scale.” In other words, the more customers you have, and the more interconnected services you sell to each, the more each customer is worth to you.
A characteristic of platform companies, says Kai Wu, founder and chief investment officer of investment firm Sparkline Capital, is that they take advantage of “network effects” such that every additional user they add potentially brings greater value than the previous one […]
In this light, Apple’s move into automobiles also makes sense. Autos, and especially self-driving ones, have the potential to become the next popular place for companies to deliver services and apps to a screen, after phones, personal computers, TV and wearables, where Apple already does quite well.
(I love “quite well.”)
Wu says this points to tech giants growing dramatically larger.
All evidence from the study of platform economies suggests that they will only grow bigger. In other words, Amazon, Microsoft, Apple and Alphabet might just be where GE was in the middle of the 20th century, a time when it dominated its industries but was, in terms of revenue and market value, only just getting started.
Wu does, however, acknowledge that while the pure economics models point to a rosy future, antitrust actions are the potential stumbling block.
The only real roadblock to their growth, he says, would be antitrust action by governments—a threat that is gaining steam in China, Europe and the U.S.
This, like “quite well,” is something of an understatement.
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