February 5, 2019

One thing UnHerd cannot be accused of is underplaying the power of big tech over the economy, culture and just about everything. Quite right too – the rise of the tech giants is one of the most important stories of our time. And yet there’s an important counter-narrative, which is that these companies are exhausting their potential.

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It’s a case examined by Derek Thompson in a thought-provoking piece for the Atlantic:

“…[in] a widely circulated eulogy prepared by Vincent Deluard, a strategist at INTL FCStone, a financial-services company, [wrote that] “If technology is everywhere, the tech sector no longer exists… If the tech sector no longer exists, its premium is no longer justified.” When the Financial Times got its hands on the document, it leaned into the death thesis, declaring: “The tech sector is over.””

Some big attention-grabbing claims there – but what do they actually mean?

Thompson is quick to explain that “over” does not mean dead, which is just as well, as the tech sector is still very much in existence. The tech giants are among the biggest companies on the planet and they’re still making lots of money. Only last week, Facebook reported record profits.

However, if you believe that stock markets accurately ‘price-in’ the future, then, as Thompson puts it, the boom years do appear to be over:

“Publicly traded companies that are classified as “tech” now trade at one of the smallest premiums in history, according to a recent JP Morgan analyst note. The most famous of these companies—the so-called FAANGs, of Facebook, Apple, Amazon, Netflix, and Google—have seen their price-earnings ratios collapse by more than 60 percent in the past two years.”

Last year was a tipping point: in 2018 Apple and Amazon became trillion dollar companies (on the basis of their market capitalisation) – and then lost this enviable status as share prices sunk back down again. This isn’t just about the de-hyping of tech stocks – there is some hard data behind the dampening of expectations. For instance, the fall in iPhone sales – and of smartphone shipments generally.

Each of the tech giants owes its rise to mastery of a particular field: for Google it was search; Amazon, online retail; Facebook, social media; and Apple (in its current incarnation), the high-end smartphone.

They’ve got other irons in the fire, of course, but there’s no doubt about the importance of their flagship products.

It’s not that markets fear an imminent Kodak-like scenario in which consumers switch en masse to a disruptive rival product. Rather, it is a growing sense that the things that took the giants to the top have reached a plateau. After all, if a company pretty much perfects a flagship product, or saturates a market, or establishes a near monopoly position then where do it go next? The best it can hope for is to come up with enough new bells-and-whistles to hold off price trimming competitors; or expand into tricky non-western markets (good luck with China!); or hire enough lobbyists to counteract trust-busting regulators.

Ah, but what about the tech giants’ trump card – their control over our data? If information is knowledge and, knowledge is power, doesn’t that mean that they hold the keys to the kingdom? It doesn’t matter that their expansion into their respective primary markets has gone as far as it can go – with our data they can now control and, therefore, make money out of all sorts of other markets.

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Well, that’s the theory and I sometimes wonder whether all those stories about the omniniscience/omnipotence of Silicon Valley isn’t a carefully orchestrated PR campaign to push up share prices. Obviously, there are markets – most notably advertising – where tech has taken over by controlling data. But as Thompson points out “in the U.S., overall ad spending has historically averaged no more than 3 percent of GDP”. Other markets where the tech giants have been able to make major inroads are similarly limited scope:

“Online shopping is a $500 billion industry in the U.S., which sounds like quite a lot. But really, it’s no more than Americans spend each year at gas stations. Yep, gas stations.”

Amazon, of course, is making a big push into real world retail, but all such moves require massive real world capital investments – not to mention the challenges of dealing with a workforce that extends far beyond the pampered Silicon Valley elites.

Perhaps, the most fundamental issue facing the tech giants is that ‘tech’ (meaning networked information technology) is not everywhere. Think about all the things you do in your daily life, in which tech is either absent; or only peripherally present; or plays a major, but mostly useless, role.

For instance, to date, our cars are not networked, let alone automated – and if, in time, they become so, there’s no guarantee that any of the existing tech giants will be in the driving seat.

An example of the peripheral tech presence is the property market. Various apps and websites play a role in helping people find properties they might be interested in, but those data flows are clearly not the key to extracting most of the value from market transactions. That remains with estate agents, lawyers, financiers and, above all, land owners. Most sectors of the economy aren’t even close to ‘Uberisation’.

And then there’s the biggest weakness of them all. Even in areas where the tech companies do genuinely dominate – for instance social media – more and more people are coming to realise that what they do for us, though compulsive and addictive, is also distracting and quite possibly harmful.

In this respect, the tech giants’ business model isn’t just vulnerable to competition from new and disruptive technology, but also from the old-fashioned threat of people finding something more useful to do with their time.

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