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The Ascent of Tech

Horace Dediu, 8/4/2016


On August 1st, 2016 a remarkable milestone was achieved. The top five companies by stock market capitalization were all US technology companies. Apple, Alphabet (Google), Microsoft, Amazon and Facebook became the biggest companies, bar none, in the world.

It’s certainly a remarkable achievement and it has been noted as symbolic of the ascent of “new economy” technology companies and the descent of "old economy" energy giants. The contrast is exemplified by a comparison with five years ago. On August 1st, 2011, the top five were Exxon, Apple, PetroChina, ICBC (Industrial and Commercial Bank of China) and Shell. Apart from Apple, energy and banking were heavily represented in the list. GE also made frequent appearances in the last few decades.

But the categorization is perhaps imperfect. Oil companies use technology to deliver energy. Banks use technology to deliver services and Facebook uses technology to deliver connectivity between individuals. If we inspect both the old and the new, all the companies in the world are “technology companies” and none of the top tech companies actually sell technology per se. Amazon is a retailer, Apple is a brand attached to services and products, Microsoft sells licenses and is a service provider, Google enables advertising. They leverage technology they developed and that of their suppliers to deliver products and services that solve pressing problems and are thus handsomely rewarded. Why precisely should these companies be labeled as “technology” and older companies like GE which sells jet engines or Ford which sells vehicles not be?

This labeling or categorization of companies seems arbitrary when considering how little in common these “tech” companies have with each other. They are uniquely organized, they employ different processes, own different assets and set different priorities. Categorization by “technology” seems to be an euphemism for “newness” and correlates with their age but it does not shed any light on what made them successful vs. their competition. There have been many failed technology companies in the last few decades and, conversely, when GE and Ford were young they were marvels of technical innovation. Technical affinity seems to be a label that is context sensitive.

So what alternatives do we have? What would be a better way to categorize companies that achieve the pinnacle of success while displacing an old guard?

How about disruptive vs. sustaining?

Every one of these top five achieved their position through a process of disruption.

Facebook introduced new forms of communication and thus offered good enough messaging, media distribution and engagement to its audience and better targeting to advertisers. In so doing they “stole” usage from traditional media and in doing so increased consumption.

Amazon introduced mass market online retail and thus offered good enough shopping for a vast number of users. It honed and refined the concept of shopping with deduced recommendations, packaged Prime offerings and then outsourcing of its computing assets. As a result they are increasingly eating into the brick-and-mortar retail segment while laying waste to vast tracts of mall real estate.

Microsoft introduced mass computing through software modularity that enabled the cost of computing to drop and availability to soar. They parlayed that advantage into software which changed how office workers do their jobs and eventually how every business is run. As a result Microsoft disrupted large computing systems, layers of middle managers and simultaneously created enormous opportunities for small firms to do what only larger ones could.

Google introduced “low end” advertising in the form of adwords. By indexing the web they allowed buyers and sellers to find each other more easily. Instead of blasting messages in the hope of finding a customer, sellers could make offers only to those who were asking for what they were selling. As a result, ad dollars poured into Google and crippled other ad inventory spaces like print, radio and some TV.

Finally, Apple introduced a series of integrations which opened up new categories of products. Personal computing, media consumption on devices, smartphones and tablets and watches. Through these integrated experiences, Apple “stole” usage from IBM, Sony, Nokia, Microsoft and many others. Most importantly though, they effectively competed with non-consumption, bringing users to machines that were otherwise too hard to use

Each of these companies managed to collect billions of users and did so very quickly and under the noses of those who otherwise served them. That is what disruption looks like.

And that should be celebrated. The five new top capitalization champions created more than they captured and expanded the markets they conquered. It’s reflected in their valuations which are not only the biggest relative to those they replaced but the biggest that have ever existed.

Disruption is not only a displacement but it’s an expansion and creation of customers. The fact that all these companies are recent disruptors only highlights the speed with which disruption is taking place. It should be an inspiration to all those who have ideas to make things different, if not better.