The lightening of the unbearable heaviness of Big Tech

24 Jun 2024

An astonishing amount of power resides in a select group of companies which dominate the public markets, but it seems as though the emergence of AI is going to reshuffle this deck.

For those of us who enjoy a daily dose of world news – reading, watching, listening or skimming accounts of all that’s happened over the past 24 hours – there is a single news item that is always there, as reliable as sunset, at least on weekdays. The headline that indicates the performance of the stock market over the previous 24 hours. You know the type – “The Nasdaq fell by 1.8% on fears/news of…” It is usually followed by some grasping attempt at an explanation citing investor confidence, world events, support or resistance levels, political uncertainty, or a central bank interest rate announcement.

It turns out that there is less to this than meets the eye. Startling statistics caught my eye last week, but we’ll get back to that in a moment.

Adam Smith, known as the “Father of Economics”, wrote his iconic Wealth of Nations in 1776. Much has been written about this book. About his muscular defence of free markets, his distaste of the market-warping effects of government intervention, what he really meant by the corrective “invisible hand” – the idea that the hidden benefits of self-interest supposedly fuel social good.

Then there were his musings on monopolies. Nasty and foul-smelling piles, he argued (in somewhat more erudite terms), which keep prices artificially high, reduce the free flow of goods and services, stunt competition, unduly influence politics and have a host of other odious consequences. While he admitted that they were sometimes a natural inevitability, he also implied that they would eventually collapse under the competitive imperatives of a laissez-faire economy.

OK, back to the stock markets and the statistics I promised.

If you have many tens of billions in discretionary cash, moats are easier to build. The deeper the moat, the more defendable the monopoly.

The S&P 500 is an index tracking the 500 largest stocks on the US markets. Stock market news often refers to the aggregate movement of the index price as an indicator of general market movement. It turns out that just seven companies – Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta and Tesla – make up more than 28% of the value of the entire S&P 500. If you add some of the other lesser-known tech giants like Broadcom and Adobe, the figure jumps to 35%.

But here is the statistic that really shocked me. In 2023 the S&P 500 racked up a gain of almost 12%. However, if you remove the 20 Big Tech stocks from the index, the gain would be only 1.41%.

Meaning that the value of the 500 biggest public companies in the US are monopolised by just a handful of tech stocks. About 20 stocks did very nicely indeed. The rest barely moved the needle.

Adam Smith is no doubt turning in his grave.

The story of how these few companies became so inordinately powerful, even hegemonic, is often colourful and perhaps a little surprising. It has to do with incentives and, as we know, economics is about nothing if not incentives. And it is not purely a simple result of great products.

For instance, many of them have benefited from government tax incentives, from government lobbying in support of favourable policies and laws, and a slew of other cunning moves like property abatements and global tax arbitrage.

And from acquisitions, many of them. Including companies such as those innovating around the edges of the innovator’s main product, or those showing signs of being pesky competitors, those with valuable patents or those with appetising customers.

Google has acquired more than 240 companies, Apple and Microsoft more than 100 each. Acquisition has become such a staple of growth that many startups now go into business in order to be acquired by one of the tech behemoths – it is their entire exit strategy.

The metal and wheels on the roads will not be where the value resides, it will be in the artificial brain that drives the car.

I wonder what Smith would have thought about this. He did not address it directly – corporate mergers and acquisitions were not a thing in his day. It is difficult to know where to place them on the spectrum of fair practice.

The Big Techs have amassed enormous war chests, partly due to great high-margin product, partly to having grabbed land first, partly to overvalued share prices and partly to the easy levers of monopolistic dominance. And by the aforementioned strategic gobbling up of anyone of interest. If you have many tens of billions in discretionary cash, moats are easier to build. The deeper the moat, the more defendable the monopoly.

Read more in Daily Maverick: Apple unveils ‘Apple Intelligence’ at WWDC 2024: a game-changer or just another tweak?

All of this leaves us with a conundrum, wondering whether all this power residing in a select group of companies which dominate the public markets is a good thing for the consumer stuck on the end of the value chain. We may bitch and moan about certain aspects of their products and services – their high prices or impersonal customer support, their privacy policies or the walled gardens from which there is little escape – but there are few of us who could imagine life without these mega companies – our world would be impoverished without them. I love my Mac, I buy stuff on Amazon, I use WhatsApp and Gmail and Outlook every day.

Which brings me to this:

It seems as though the emergence of AI is going to reshuffle this deck, perhaps adding some new cards to the pack. For instance, I never use Google for search anymore. I now use a product from an AI startup named Perplexity which combines AI with traditional search. Tesla looks like it is becoming an AI company, not an EV company; the metal and wheels on the roads will not be where the value resides, it will be in the artificial brain that drives the car. Amazon and Meta will have to fight off AI-muscled challengers and Apple has already had to partner with Microsoft’s ChatGPT to stay in the race. And Nvidia, which supplies the AI chips to everyone, was nowhere near this group of seven a few years ago. Now it is the highest-valued company in the world.

Perhaps Adam Smith will be proved correct, and monopolies will implode under the natural weight of an unfettered capitalist economy. No matter how deep the moats, it seems that there are, eventually, other ways to break into castles. DM

Steven Boykey Sidley is a professor of practice at JBS, University of Johannesburg. His new book It’s Mine: How the Crypto Industry is Redefining Ownership is published by Maverick451 in South Africa and the Legend Times Group in the UK/EU, available now.

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