A crisis can distract as much as it can reveal. This week has seen earnings announcements from Big Tech: Microsoft, Facebook, Google, Amazon and Apple. In the depths of fear and confusion, the market has shown just how immune these tech giants are to the financial fallout of COVID-19 compared to the rest of the global economy. Each has made robust gains in sales of their own, despite the shrinking economy and skyrocketing unemployment. And this is hardly coincidental.
The coronavirus outbreak reinforces existing trends rather than reverting any of them: (1) software is still “eating the world,” (2) the notion of big still getting bigger remains strong in the platform economy, and (3) the government breaking up winners won’t be happening anytime soon. How clearly we see these factors during the pandemic’s gilded age will shape how effective we are, as individuals, in seeking employment or investing our pensions well beyond 2020 and 2021.
The Software Is Feasting
In a recent, widely-circulated essay entitled “It’s Time to Build,” venture capitalist Marc Andreessen urged the U.S. to recover its national ambitions by building things: more factories, more ventilators, more ICU beds, more surgical masks, better hospitals, better schools, better transportation, better cities, better housing. That perspective, of course, likely goes against his own interests as an investor. Between building a factory to churn out physical widgets and installing data centers to run algorithms, a software business may incur significant capital costs. But unlike a hardware manufacturer, a software business has mostly zero marginal costs. Once an app is written, adding another user requires no additional cost, but you can’t sell an iPhone twice. This means software businesses represent—in both theory and practice—an unlimited upside compared to hardware production. That’s why software companies get more attention in America. That’s also why “software is eating the world,” as Andreessen so clearly stated in 2011.
We see that effect in earning announcements too. The one tech giant getting hit hardest was Apple and it’s the exception in Silicon Valley. Its factory production was crippled after China shut down economic activities and sought to contain the outbreak in February. Its retail stores were closed. And iPhone sales in China dropped 61 percent compared to the previous year. These same dynamics are now unfolding in the U.S. and Europe.
At Apple headquarters in Cupertino, Calif., engineers are also struggling to work remotely. Unlike Google, Facebook, and Microsoft, where most managers have long been flexible about letting employees work from home, Apple is especially reliant on face-to-face meetings. Employees are required to examine physical product components in person and conduct stress and drop tests of their designs in the laboratory, where they frequently huddle around a 3D printer or a milling machine. Until the COVID-19 pandemic, Apple routinely sent its employees to China to learn about the manufacturing processes and tour the factories involved in its projects. Now, Apple finds itself asking Chinese factories to send grainy photos to engineers in Cupertino to assess a problem if, say, a hardware component breaks on the production line. Add in the time difference between Asia and the Bay Area and problems that used to take seconds to resolve in person now drag out into hours, if not days. Is it therefore a surprise that Apple is pushing back the launch of the next iPhone by at least a month? That’s not a problem that Facebook’s Mark Zuckerberg or Microsoft’s Satya Nadella will ever face.
Big Is Still Getting Bigger
Could Apple shares tank? Only if there’s no share buyback. The company is fortunately holding some $200 billion in cash with a net-cash balance (after debt) of roughly $100 billion. Apple CEO Tim Cook once vowed to return any excess money to shareholders “over time.” He only needs to push up that timetable slightly to keep shareholders happy and protect his own executive bonus.
That Apple has one of the biggest cash piles of any U.S. company is a unique advantage that smaller players don’t have. The biggest tech companies can always throw enough resources to expand capacities where needed or use its cash reserves as a buffer against the uncontrollable.
At a time when foot traffic to non-grocery retail stores has dramatically declined, with a more than 97 percent drop during the last two weeks of March, Amazon saw consumer spending rise by 35 percent. That surge in demand could only be captured because of Amazon’s ability to hire and train 80,000 new workers within a few weeks. Not even comes close to matching that, let alone the e-commerce operations of Target, Best Buy, and Home Depot. You can’t win if you aren’t already big enough.
Following this logic is that the biggest tech platforms will not only dominate in size but in functionalities as well as experience. Nearly all tech companies are lavishing fortunes on hiring the best. They have to—and are willing to—pay millions to experts in the fields of self-driving cars, robotics, health care, and artificial intelligence to name a few. Given this trend, what was difficult for smaller players to do is now impossible.
Yelp, for instance, has persistently complained that Google favors its own search results and review services. With almost all its revenue from advertising by local gyms, salons, cafes, and brick-and-mortar stores, Yelp saw search traffic fall more than 73 percent, and so the company has had no choice but to lay off some 2,000 people, or about a third of its workforce. Similarly, Eventbrite had to furlough or layoff nearly half its staff, with some of the dismissed employees personally referred by the CEO to Facebook. While small companies are failing, big companies are picking up talent, showing no sign in slowing R&D only because they have a comfortable cash position.
No Breaking Up Winners
It is beside the point to judge whether tech giants have grown too powerful and have unfairly crowded out competitors. Their size and scope are unprecedented, and regulators are encouraging a new sort of cartel collaboration to contain the pandemic. Had the COVID-19 pandemic not happened, a service cobbled together by Apple and Google would have triggered a tedious antitrust review. Now, the contact tracing app the two companies jointly released is hailed as our answer to a global crisis. Not only have we acknowledged the gilded age we are living in, but we also have no choice other than to celebrate it.
For small-time asset owners and retail investors, it might be worth noting the following fact: The Schwab S&P 500 Index Fund tracks the Standard & Poor’s 500, which has suffered an annual loss of close to 8 percent during the past 12 months. The iShares S&P 100 ETF, which tracks investment results of the S&P 100, has registered a smaller loss of 4 percent during the same period. By contrast, the Invesco S&P 500® Top 50 ETF, which is based on the world’s 50 largest companies, generated a 6 percent gain despite the so-called crisis. I do not own any shares of these investments and understand that past performance is no guarantee of future results. Still, isn’t this a sign of two Americas? Or two worlds in which companies operate during a global pandemic? One world is for everyone; the other only for the biggest of them all.
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