The dominance of just four tech companies is increasing, as they look set to control the next generation of online businesses as well, says trends investor Jack Neele.
Facebook, Amazon, Netflix and Google (FANG) already have near monopolies over their respective markets of social media, online shopping, video streaming and web search. Now they’re also at the forefront of new trends in self-driving cars, virtual reality and cloud computing, he says.
This has produced rich pickings for investors, including Neele’s Robeco Global Consumer Trends Equities fund, but these companies are starting to face a regulatory backlash along with wider concerns of how they benefit society, he warns.
“FANG is what most investors are still focusing on,” says Neele. “The leading companies nowadays are not the old-style employers like General Electric, Wal-Mart or Exxon were in the past. Facebook has something like 20,000 employees, whereas Wal-Mart has over two million. These new companies are extremely efficient, have very high margins, and very highly paid employees in Silicon Valley.
“They’re also becoming dominant in the new areas: look at what Google is doing with Waymo self-driving cars, while Facebook has Oculus virtual reality glasses and is now dominant in instant messaging with WhatsApp. Besides its dominance in online retail, Amazon is the world’s biggest company in cloud computing as well. So these companies are using their dominance to become dominant in other areas as well. All these new growth areas are coming from the same companies.”
Neele says two new growth areas are emerging that are largely outside the clutches of FANG, in video gaming and one-touch online payments. “In the past, video gaming was hit and miss, where if you had a good game, you had a good quarter, but if the game that you launched was a flop, then you had a bad quarter,” he says.
“So the video game makers are investing heavily in their franchises to get repeat customers: Activision is doing that with Call of Duty, while Electronic Arts has FIFA and Nintendo has Super Mario. And as more people are using digital downloads direct to a device, they enjoy higher margins as they don’t have to pay a 20% margin to the retailer.”
Twitch has more daily viewers than CNN; it’s incredible
“On top of that, there are new avenues for in-game monetization, where virtual items such as gold bars or swords are sold to the gamer within the game, at a 100% margin. And we now see a lot of advertising in games, particularly on mobiles, which is high margin as well.”
“Then there’s the potential e-sports opportunity where people watch other people play games professionally. It’s like watching Formula 1, but instead you’re watching someone play Call of Duty; a recent final of League of Legends was streamed 36 million times over the internet. There’s a new video subscription channel called Twitch – it is owned by Amazon, so again it’s owned by one of the existing dominant players – which has more daily viewers than CNN. It’s an incredible undercurrent.”
The second new growth area is payment systems where it becomes progressively simpler to pay a bill using a smartphone or tablet. “We still hold Visa and MasterCard: these benefit from the increase in mobile payments where you can pay with one click or even your fingerprint,” Neele says.
“A lot of the friction in the buying process has been removed, so this makes the adoption of these services faster. It’s very important in online trading to remove the friction; if you have to do one little extra thing, then people won’t do it. Putting in a password takes too long, but doing it with a fingerprint is easy, and its use is rising.”
“Everything goes so fast now – we want instant gratification. If you click on a website and it takes two seconds too long to load, then you click out of it. We apparently only want it if it’s there immediately, so in a sense it’s weird, because you would assume that if you’re interested in something you would be prepared to wait another five seconds… but we don’t. If it’s not available instantly, it is instantly no good!”
The stellar rise in tech stocks – which has helped propel equity markets generally to new records in 2017 – has led some commentators to fear a repeat of the 2000 tech bubble.
“I don’t think we’re in a bubble because these companies are insanely profitable, and that’s driving the share prices and returns,” says Neele. “I do though acknowledge that the number of ‘winner’ companies dominating the market is getting smaller and smaller, and people are obviously worried whether these companies can continue to deliver these amazing returns.”
There may be some more regulatory issues coming
“I think the main headwind is regulatory issues, as we saw when Google was fined by the European Union for anti-competitive behavior with Google Shopping. There may be some more regulatory issues coming. The dominance of these companies is starting to cause a backlash, amid concerns that they are stifling competition, and maybe leading to more inequality in society.”
“The bigger worry is whether this is all benefiting society, or is the amount of billionaires in Silicon Valley increasing at a faster rate than ever before? Especially given the taxes that these companies pay overseas – which are currently close to zero – there is something to be said for higher taxation, or some way of them paying their dues to society.”
“A bigger and bigger proportion of new wealth is accruing to a smaller and smaller percentage of people. That’s a different topic, but at some point it’s going to have a negative impact on these companies.”
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