Tech Dominance Begets More Dominance

As we’re nearing the end of earnings season, one of the things that’s become increasingly clear is that the big companies have mostly performed consistently with their past performance, delivering strong growth and profits. Meanwhile, smaller companies have struggled to find growth and profitability, often losing share to their bigger competitors. The recurring theme for me has been that the dominant become ever more dominant, while the smaller players continue to struggle to break in and cross over to the other side of what’s increasingly looking like a chasm.

The Big Get Bigger

On the big side, we have the giants of the consumer tech industry, as measured by revenue or by influence, all of which have now reported their results:

  • Alphabet reported 21% revenue growth and a 24% net margin
  • Amazon reported 25% revenue growth and, an exception among this group, a 0.5% net margin
  • Apple reported 7% revenue growth and a 21% net margin
  • Facebook reported 45% revenue growth and a 39% net margin
  • Microsoft reported 13% revenue growth (aided somewhat by LinkedIn) and a 24% net margin
  • Samsung reported 20% revenue growth and a 14% net margin, with its strongest quarter for both revenues and profits ever.

With one exception, these are highly profitable companies, and with one exception again, they grew by double digits year on year. Beyond the mere financials, though, these companies individually or in pairs or trios dominate key markets:

  • Amazon is increasingly dominant in e-commerce, not taking majority share of spend, but certainly eating up the vast majority of growth in the market
  • Alphabet’s Google and Apple carve up the smartphone operating system market between them
  • Facebook dominates social networking, with no viable competitors on a global basis
  • Amazon, Google, and Microsoft dominate cloud computing
  • Samsung and Apple remain the top two players in the smartphone market, and the only ones to make more than minimal profits in the market
  • Microsoft continues to dominate the PC OS market, with Apple and Google rounding out the rest
  • Facebook and Google dominate online advertising, and especially mobile advertising, and as with Amazon soak up much of the annual growth in the market in the US
  • Amazon and Google dominate the home speaker market between them, with Amazon having the lion’s share
  • Apple dominates the premium smartphone and tablet markets.

I could go on, but you get the picture: these big, successful companies are only becoming bigger and more successful, and more dominant in the various markets where they compete.

The Small Continue to Struggle

Not all of the smaller consumer tech companies have reported yet, but we have enough of a picture from those that have, and from past earnings from those that haven’t, to know what we’ll end up with:

  • Twitter’s revenue declined for the second straight quarter, down 5% year on year, and continues to lose buckets of money, with a negative net margin of 15% in Q2
  • Fitbit saw continued rapid declines year on year in its shipments and revenue, and also saw significant losses
  • GoPro will be reporting on Thursday, and my guess based on last quarter’s results is that losses and revenue declines are on the cards there too
  • Snap reports next week, and although it’s seen decent growth driven by rising ARPU, its user growth continues to struggle and it’s also losing lots of money
  • Smartphone vendors from LG to HTC to Lenovo either have reported or will likely report losses and shrinkage, with few exceptions.

Now, some of this is down to company lifecycles, with both Twitter and Snap still to generate any profits at all in any quarter, while Fitbit and GoPro have been profitable and high-growth companies in the past but have run into trouble. The lower-tier smartphone vendors, meanwhile, have always struggled in markets that offer little differentiation and intense competition and which heavily reward scale and premium offerings.

Barriers to Independent Success Remain High

In an earlier piece, I wrote about the danger of being a one-trick pony in the tech industry, with both Fitbit and GoPro among the examples I cited. And that remains a key issue for these companies, many of which are single-product companies and have failed to build broader platforms and ecosystems that can attract consumers and differentiate against powerful competitors.

But the barriers to success go well beyond that. Many of the largest players in the industry enjoy significant network effects and scale which enable them to quickly ramp up new products and services by selling them to massive installed bases of devices or regular users. I wrote about the power of Amazon’s Prime in this regard last week, but Facebook is another great example. If Facebook feels threatened by a new app or feature offered by a rival, all it has to do is copy it and make it available to its own massive user base of 2 billion monthly active users or the smaller but still substantial WhatsApp, Messenger, and Instagram user bases. The rise of Instagram Stories to 250 million daily active users over the past year, eclipsing Snapchat’s 166 million daily active users as of the end of Q1 2017, is perhaps the perfect example of this.

On the rare occasions when companies and products do manage to break through these barriers and create real differentiated value, they’re often simply acquired by the bigger players. WhatsApp, Instagram, LinkedIn, DeepMind, and others are among the list of companies which had created interesting businesses  or technologies outside of the big tech companies and yet have now ended up being absorbed by them.

For all these reasons, it’s almost impossible to cite an example of a consumer technology company that’s emerged in the last few years and achieved real financial success independently of and despite the dominance of the big tech companies. Of those that have tried, the vast majority have run up against the power of ecosystems, been cloned and eclipsed by the big companies, created markets which ended up dominated by larger players, or been acquired.

I’m far from convinced, as some are, that this means regulators should start looking at these companies on antitrust grounds, mostly because I don’t think they’re doing anything illegal. But we are going to see calls for regulatory intervention, especially in Europe and other markets outside the US, and we’re going to see an increasing backlash against these dominant players from consumer groups, would-be competitors, and politicians. Dealing effectively with these complaints and threats is going to be an important skill for these companies over the coming years, even as they begin to feel more and more invincible.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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