July 16, 2024


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Collusion and collisions – The new rules of competition in the technology industry | Business

TECHNOLOGY COMPANIES exhibit a curious lexical property. Google and Zoom are verbs. So, in Chinese, is Taobao, the name of Alibaba’s vast e-mall. Uber and Didi, its Chinese ride-hailing rival, are synonyms for “cab”. Facebook means, simply, the internet in Vietnam, where people mostly access the web through its social networks. Amazon, Apple, Microsoft and Netflix are not literally bywords for, respectively, online shopping, smartphones, office software and video-streaming—but they might as well be.

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To tech’s critics, these definitional regularities point to something insidious, encapsulating in a word the dominance that each firm wields over its digital fief—some of it possibly ill-gotten. In December American trustbusters sued Facebook for alleged anticompetitive behaviour, and Chinese ones launched an investigation into Alibaba. The central plank of one of three antitrust cases against Google is an agreement under which it pays Apple between $8bn and $12bn a year—about a fifth of Apple’s global profits—for its search engine to appear as the default on Apple devices. Google also allegedly offered Facebook a sweetheart deal not to support a rival ad system backed by news publishers.

Efforts to sever the linguistic links are multiplying. Epic Games, a video-game company that claims Apple is fleecing developers of apps in its App Store, has lodged complaints against it in America and Europe. On February 22nd Britain’s competition watchdog warned of looming antitrust actions against big tech. The European Union is working on regulations to check the firms’ power. Australia has just passed a law that would force them to pay publishers more for news displayed alongside search results or social-media feeds.

From the outside, then, the industry leaves an impression of a cosy club, whose members stay out of each other’s way—or worse, help one another perpetuate their monopolies. And the giants are only becoming more powerful. Last year the world’s ten biggest digital firms by market value raked in net profits of $261bn, as people depended on them for socially distant work, play, shopping and socialising. Their combined market capitalisation swelled by $3.9trn—more than the entire British stockmarket’s worth—implying that investors expect them to gain further clout.

Big tech sees things differently. Alibaba, Apple, Google and Facebook say their various arrangements are perfectly legitimate. The American firms co-operate, it is true, but only in order to ensure interoperability between their products. In fact, all tech titans insist, their relationships are for the most part not chummy but fiercely combative. Brad Smith, president of Microsoft, puts the balance of competition versus co-operation at “80:20” in favour of rivalry. Mark Zuckerberg, Facebook’s chief executive, recently called Apple “one of our biggest competitors”. “We feel like every day we wake up, we are under incredible competitive pressure,” says Apple.

In recent weeks big tech has certainly seen more barbs than bonhomie. Facebook has run ads attacking Apple over new iPhone privacy settings that would ask users if they wanted to opt out of being tracked across other firms’ apps and websites—which, in Facebook’s telling, would hurt small businesses that need it to reach customers (see article). For his part Tim Cook, Apple’s boss, has been hinting that Facebook is playing fast and loose with users’ data.

On February 22nd Microsoft teamed up with European news publishers to develop a system similar to the one Google and Facebook had objected to in Australia. When this month Microsoft first expressed support for the Australian scheme, Google shot back that “of course [Microsoft would] be eager to impose an unworkable levy on a rival and increase their market share,” referring to Microsoft’s Bing search engine.

The fighting talk reflects a growing sense within the technology industry that incumbents are under assault. Though dominant firms remain powerful, and occasionally collegial, in one digital market after another challengers are gaining ground. Old-industry champions are at last getting their digital act together, as Walmart is doing in online retail and Disney in streaming. Less-big tech, such as Shopify in e-commerce or Salesforce in the cloud and business software, is also in encroachment mode. A flood of capital pouring into startups could easily translate into even more competition. Most significantly, tech’s mightiest titans are increasingly stomping on each other’s turf.

A defining moment

On this view, the era of winner-takes-all land grabs is fading, as tech enters a new, more competitive phase. If so, the industry’s lexicon may be about to get considerably more complicated.

The shift is furthest along in China. Its two biggest digital groups, Alibaba and Tencent, already compete with each other—and with up-and-coming rivals—across a variety of markets. Alibaba’s share of Chinese e-commerce peaked in 2013 at 62%, according to CLSA, a broker. Last year it was 51% (see chart 1). Once-fragmented competition is consolidating. The next two biggest firms, Pinduoduo and JD.com, an e-emporium backed by Tencent, have captured 24% of the market between them. They could reach 33% by 2026, reckons CLSA. Tencent’s WeChat Pay and Alibaba’s Alipay have long vied to be Chinese shoppers’ digital wallets. Last year Tencent announced it will invest 500bn yuan ($70bn) over five years, a slug of it to catch up with Alibaba in cloud computing.

America’s tech landscape is beginning to change, too. The Economist has looked at 11 big technology markets in America which last year generated combined gross revenue of $1.6trn. According to our calculations, which inevitably involved some guesswork, over the past five years the top firm’s share has plateaued in app stores, business software, cloud computing and online advertising. It has fallen by double digits in food delivery, ride-hailing and video-streaming since 2015.

In most markets, even where the incumbent’s share edged up, as it has in e-commerce and smartphones, the aggregate share of the next two biggest challengers rose faster (see chart 2). In six of the 11 areas the two runners-up now account for a third or more of the market, up from two areas in 2016. Stragglers outside the top three are being left in the dust.

Some of the up-and-comers hail from beyond big tech’s homes in Silicon Valley and Seattle. Disney’s new streaming service has signed up 95m subscribers globally since its launch in late 2019, reaching that number nearly ten times faster than Netflix did. Walmart’s years of investment in online fulfilment began to pay off in the pandemic. Other bricks-and-mortar retailers such as Best Buy, Home Depot and Target have also upped their digital game. Shopify, a 14-year-old Canadian firm, now controls a tenth of the American e-commerce market, up from one-70th in 2015. Its market capitalisation has risen seven-fold in the past two years, to $150bn.

Perhaps the most salient feature of the new grammar of competition is the growing overlap between America’s five tech behemoths. Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft are beginning to echo, on an even grander scale, the rivalry between Alibaba and Tencent. James Anderson of Baillie Gifford, a large asset manager that invests in tech firms around the world, does not yet see the “fight-it-out-on-the-beaches spirit” of the Chinese titans. But as Mark Shmulik of Bernstein, a broker, puts it, in a nod to the Boolean algebra that underpins modern computing, big tech is moving from the disjunctive world of “or” to the conjunctive world of “and”.

To be sure, the companies have an interest in ensuring their systems work seamlessly together. Demand for iPhones is encouraged by consumers’ desire to access Google’s search engine and Gmail, or Facebook’s social networks. Cheap cloud computing provided by Amazon translates into more apps for Apple’s App Store. Amazon is one of Google’s biggest advertisers. Microsoft licenses Android for its Surface Duo smartphone.

The quintet’s senior executives and cleverest clogs also know and, recent sniping notwithstanding, mostly respect each other. When Satya Nadella took over as Microsoft’s chief executive in 2014, he binned a pro-privacy ad campaign alleging that Google scanned emails to serve targeted adverts. According to Microsoft insiders his friendships among Google engineers probably played a role in his decision. Mr Nadella also decided to stop trying to out-Google Google in search.

The etymology of competition

A lot of earlier incursions big tech firms made against each other ended in tears. In the early 2010s all the big companies tried getting into device-making; remember Amazon’s Fire Phone? Microsoft’s Zune music player was no iPod and Bing is no verb. Many iPhone users navigate with Google Maps, not Apple’s unloved alternative. Facebook Gifts, the social network’s early foray into e-commerce, proved about as welcome as yet another pair of socks.

Indeed, the five American giants continue to derive the bulk of their revenues and, for the most part, profits from the businesses which made them into trillion- or near-trillion-dollar companies. Last year online ads generated 80% of sales at Alphabet and 98% at Facebook. Fully 80% of Apple’s revenues in 2020 came courtesy of its sleek devices (chiefly iPhones). Microsoft continues to rely on business software for a large chunk of revenues, and Amazon on its online emporium, though most of its (comparatively meagre) profits were generated by its cloud-computing arm, Amazon Web Services (AWS).

However, these figures used to be higher. With the number of first-time iPhone buyers declining, Apple has reduced its reliance on iPhones, iPads and Mac computers by moving into payments, finance and entertainment. The proportion of total revenue from services, at 20%, is double the share five years ago. Some of them, such as video- or music-streaming, compete with Amazon Prime Video and Prime Music, as well as with dedicated providers such as Netflix and Disney (for video) or Spotify (for audio). Amazon’s revenue share from e-commerce has declined from 87% in 2015 to 72%; a tenth of sales now comes from the cloud and 6% from digital advertising. The proportion that Alphabet got from advertising last year was ten percentage points lower than it was in 2015.

Those percentage points relinquished by the core are instead coming from an ever wider array of new ventures. Many involve the big five getting in each other’s way. Nearly two-fifths of their revenues now come from areas where their businesses overlap, up from a fifth in 2015 (see chart 3). If you split tech into 20 or so business areas, from smartphones and smart speakers to messaging and videoconferencing, each giant is present in most of them, according to Bernstein.

Many of these endeavours have yet to make much money. But the giants’ stratospheric stockmarket valuations—of between 25 and 82 times annual earnings—require ambitious growth plans. As their main businesses mature and slow, they must seek fresh sources of growth somewhere else. With trustbusters on high alert, snapping up startup rivals—or otherwise neutralising them—is getting harder, says a Silicon Valley venture capitalist. “Growth might depend on competing through homegrown efforts in known big markets.”

The mutual toe-treading that ensues takes several forms. First, the companies are increasingly selling the same products or services. Second, they are providing similar products and services on the back of different business models, for example giving away things that a rival charges for (or vice versa, charging for a service that a competitor offers in exchange for user data sold to advertisers). Third, they are eyeing the same nascent markets, such as artificial intelligence (AI) or self-driving cars.

Direct competition is fiercest in the cloud, a $63bn business expanding at an annual rate of 40%, which Wall Street expects to become a $1trn one within a decade or two. Jeff Bezos, Amazon’s boss, once joked that Barnes & Noble understood within months it had to copy Amazon’s Kindle e-reader but it took his genius techie rivals years to twig they should ape AWS. They got there in the end.

Microsoft’s 11-year-old Azure cloud-computing division rakes in an estimated $20bn a year in revenue. Bernstein expects cloud-computing to make up 12% of Google’s revenues by 2024, up from 7% in 2020. Acknowledging the unit’s importance, in January Google broke out the operating results of its cloud business (which lost $5.6bn in 2020).

E-commerce, which the pandemic has turbocharged, is another area being contested. Facebook has had a second-hand goods market called Marketplace for a while. In May it launched Facebook Shops to take Amazon on more directly, giving the 160m or so businesses which already use the social network or its sister app, Instagram, as a shop window a way to sell their products. Facebook and Google are also both working with Shopify, whose merchants flog theirs on their platforms. Even Microsoft is eyeing retail, albeit by a more circuitous route, with plans to sell automated checkout technology to Walmart.

Social media—Facebook’s bread and butter—are likewise in rivals’ sights. Last year Microsoft hoped to beef up its consumer business, which includes Surface tablets and the Xbox video-game console, by buying TikTok, a Chinese-owned short-video app. This year it considered acquiring Pinterest, a photo-sharing network. Neither deal came to pass, but it was a clear statement of Microsoft’s intent.

Amazon, too, “would be crazy” not to look at social media, says an executive close to it. In 2013 it bought Goodreads, a platform where people rate books and find recommendations, which has been described as “Facebook with books”. The millions who rate purchases on Amazon’s online-shopping platform constitute a germ of a possible future social network. A former Amazon executive wagers that “it will be easier for Amazon to go into social than for Facebook to move into shopping,” because the logistics of delivery, which Amazon has mastered, are trickier to bootstrap than a social network.

Then there is search. Microsoft, emboldened by its cloud success, could start investing more in the decent but marginal Bing. Amazon has concluded that if merchants on its e-commerce platform want to flaunt their wares to online shoppers, why let Google make all the money? Its search-ad business remains a fraction of Google’s. But these days most product searches begin in Amazon’s app or on its website.

Apple, too, harbours search ambitions. In 2018 it poached John Giannandrea, Google’s head of search and AI. People have noticed that Applebot, a web crawler, has become more active of late, presumably gobbling up data on which to train. Siri, Apple’s voice assistant, “is basically a search engine”, says one tech insider. Apple could, he adds, “skim the cream” by answering the most valuable queries—those by well-heeled iPhone users.

Unlike Amazon, which competes with Google head-on for advertising dollars, Apple seems unlikely to want to profit from search-advertising directly. Instead, its search project may be aimed at luring the privacy-conscious deeper into the safety of its “walled garden”—much to Mr Zuckerberg’s understandable chagrin.

This illustrates the second sort of competitive behaviour. Undermining Google’s or Facebook’s business model may not be the explicit aim of Mr Cook. It nevertheless forces his advertising-dependent opposite numbers, Mr Zuckerberg and Alphabet’s Sundar Pichai, to come up with services and product that would persuade users to respond “yes” to the tracking question.

Mr Pichai, for his part, is doing something similar by giving away all manner of products, from cloud-based word processors, spreadsheets and Hangouts video chat to TensorFlow, Alphabet’s machine-learning software, and Kubernetes, a cloud-computing project. Some observers see these giveaways, bankrolled by Google’s ad dollars, as an attempt to create a perfectly competitive profit desert that rivals have no incentive to enter—leaving Google with a Sahara’s worth of data.

Rather than electing to enter new technology niches, the companies are being dragged in, often by their users. As Amazon sees it, according to a former executive, the internet an
d copious amounts of data mean if you are in one business, you simply have to get into the one over the fence. E-commerce and social media offer a good example. “Social shopping”, where retailers organise mass virtual sprees for buyers on social media, are all the rage in China and may soon be in the West.

Thanks to customer bases in the hundreds of millions or billions, technology platforms can diversify easily and cheaply. Facebook’s Marketplace, for one, started after the company spotted large numbers of people buying and selling various things in Facebook groups, notes Javier Olivan, who oversees the company’s core products.

This process looks likely to intensify as the firms shift from looking over the others’ shoulders to gazing ahead. Often they end up staring in the same direction: towards data and AI. Four of the giants already offer digital assistants, which they would love to become consumers’ primary gateway to the internet. Everyone is also hungrily eyeing payments, especially in light of the recent success of PayPal, which has been gaining clout at the expense of Visa and Mastercard.

Big tech is pouring billions into ambitious AI projects. Apple has been in talks with several carmakers to build a self-driving car, which within the tech quintet has hitherto been the preserve of Waymo, an Alphabet subsidiary. Nothing has materialised but the idea of an Apple car is almost certainly here to stay. Last year Amazon bought Zoox, a self-driving startup. Alibaba and Baidu, a Chinese search engine, are also both interested in cars.

Not everything has improved. There is still scant competition in handsets. The two dominant mobile operating systems, Google’s Android and Apple’s iOS, remain a duopoly. So do their app stores. The online advertising market looks more competitive overall, but it is unclear if Amazon is really playing in the same sandbox as Google in search, or whether TikTok is a direct rival to Facebook in social media.

The tech giants have also become adept at playing the antitrust referees to keep potential competitors busy defending their core businesses from regulators, and thus less able to encroach on other markets. “Everyone is desperate to say it’s not me, it’s the guy over there,” says a tech executive. Microsoft got the antitrust ball rolling against Google in the late 2000s by building a coalition of companies against its dominance of search. Members of that coalition such as Yelp, a local search and reviewing site, are once again agitating against Google, leading insiders to chortle about how Microsoft “sleeper cells” have come to life.

Lina Khan of Columbia Law School, who was legal counsel for a congressional committee that investigated big tech, says that the giants are skirmishing in some areas, like the cloud and voice assistants. But still, she says, they are not battling over core territory, and, what is more, describing this as a fight risks overlooking the broader ways in which the firms mutually benefit from their collective dominance.

New coinage

If the skirmishes intensify, that could lead to lower profitability for the tech companies. Margins in cloud computing, where competition is most pronounced, are already tightening. According to Mr Anderson of Baillie Gifford, Google’s tilt at the AWS/Azure quasi-duopoly has pushed down prices. Tencent’s cloud investments are likely to add pressure.

Alphabet’s operating margins have declined by 13 percentage points over the past ten years. Even Apple’s are ten percentage points below their peak in 2012. Those of Facebook have come down from a lofty 50% in 2017 to less than 40%. The companies mostly keep mum about how their individual businesses are doing. But one possible explanation for slimmer overall margins is greater competition. Another is that entry into new markets eats into profits from core businesses. This could eventually put pressure on rivals also present in those markets.

The presumption that the tech giants are either colluding to divvy up the planet’s digital pie or carefully steering clear of each other is no longer right. Many people would of course prefer to see more than a handful of firms slug it out for the modern economy’s critical digital markets. Still, so long as they truly are slugging it out, that is good news for everyone else.

This article appeared in the Business section of the print edition under the headline “Collusion and collisions”