Computing hardware has long served as the critical backbone of business operations. Today, the Internet economy is powered by an infrastructure that has become virtual, and is controlled by a small handful of tech giants.

Computing hardware has long served as the critical backbone of business operations. Today, the Internet economy is powered by an infrastructure that has become virtual, and is controlled by a small handful of tech giants.

These companies are delivering online search, messaging, advertising, applications, computing and storage on demand — which has positioned them not only to empower business but to extract extraordinary value as it grows.

The latest evidence comes in the form of record earnings and towering stock-market valuations. Facebook Inc., for example, on Wednesday reported a 41% surge in quarterly revenue that was propelled by a dramatic rise in advertising on mobile devices. The social network’s shares rose 5.4% Thursday, reaching an all-time high and pushing its valuation above $300 billion.

The company’s strong numbers come on the heels of equally impressive results and upward stock movements at Google parent Alphabet Inc., Microsoft Corp., and Inc., which have built online platforms that allow them to profit as consumers and companies seek to connect with others.

Anyone building a brand, for example, can’t ignore Facebook’s highly engaged daily audience of 1 billion. Anyone starting a business needs to make sure they can be found on Google. Anyone with goods to sell wants Amazon to carry them. Any mobile app maker needs to be available in Apple Inc.’s or Google’s online stores. Any marketer with a video to promote needs to be on Google’s YouTube, while producers selling music, film, and television distribute their works through Apple’s iTunes or Amazon Video.

The giants have spent billions of dollars on computing hardware and data centers that run their own operations while increasingly providing free or low-cost services for startups and many large corporations. Many longtime Silicon Valley executives are convinced that these companies have become fundamental to the business landscape.

“You are seeing ecosystems built around all of these companies now,” said Enrique Salem, a managing director at Bain Capital Ventures and the former chief executive of Symantec Corp. “There is a platform shift happening.”

Put another way, they own the digital equivalent of railroad lines just as the Web enters a new phase of growth.

“We’re just having an expansion of the total size of technology — whether it’s cloud computing, whether it’s devices, whether it’s social networks,” said Aaron Levie, chief executive of online file-sharing company Box Inc., one of the sector’s new entrants.

As revenues roll in, the giants can spend more money than rivals to improve their services.

“All of these companies are operating in industries where scale is rewarded and where there is a very high level of capital intensity required to even hope to compete,” said Karl Keirstead a senior analyst with Deutsche Bank Securities.

Facebook, which says 1.55 billion people logged in during the month of September, has become particularly important as an advertising venue. The social network appears to have captured the market for ads on smartphones, which accounted for 78% of its ad revenues in the most recent quarter, up 66% from a year earlier. It also hosts free pages for 45 million small and midsize businesses, allowing them to interact with potential customers world-wide free of charge.

Amazon’s market value has nearly doubled in 2015 largely on the strength of its cloud-computing business. Besides online shopping, the Seattle-based company pioneered the business of selling metered computing and data storage to other companies. Its cloud unit, Amazon Web Services or AWS, claims more than 1 million active customer accounts, including high-profile startups like Uber Technologies Inc., Airbnb Inc. and Pinterest Inc. as well as government agencies and many well-established companies.

Google and Microsoft, meanwhile, have spent aggressively to build rival cloud services. They have matched AWS in cutting prices, adding new data centers and online software offerings and internally developed innovations that go far beyond raw computing.

At Microsoft, CEO Satya Nadella has pushed hard on cloud services to reduce the software maker’s reliance on the shrinking PC business. While its Azure service offers special advantages to longtime users of its Windows and Office software, more than 40% of its revenue comes from startups, said Takeshi Numoto, a Microsoft vice president in charge of cloud and enterprise marketing.

But older companies also are joining. ThyssenKrupp AG, a German industrial conglomerate that makes elevators among other things, collaborated with Microsoft to create a cloud-based system that gathers data such as how often and quickly doors open and close, said Patrick Bass, chief executive of the company’s North American unit.

Not that all computing jobs are moving to the cloud. Companies in industries like financial services and health care are expected to keep most operations in their own data centers, partly because of regulations about how they handle transactions and customer data.

But cloud backers believe many of those barriers will fall. Rob Alexander, chief information officer of Capital One Financial Corp., said last month that the new security safeguards developed with AWS’s cloud service should let the credit card company operate even more securely in the cloud than on its own computers.

According to the article, ”Giants Tighten Grip on Internet Economy”, a small handful of tech giants, such as Facebook, Amazon, Google, Apple, Microsoft control the internet economy and generate record earnings.

What are key factors for them to dominate the internet economy? Why do think other companies do not share a significant portion of revenues with them? Briefly discuss.

Source: Don Clark and Robert McMillan, ”Giants Tighten Grip on Internet Economy”, Nov. 06, 2015, the Wall Street Journal (Eastern Edition).


In: Economics

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