The gap is growing between the technology world's haves and have-nots.
It has become increasingly clear in recent weeks how technology winners are extending their lead over the older guard companies such as IBM and Yahoo. The tech elderly are wheezing because they can’t untether themselves from waning technologies like corporate hardware and personal computers. Meanwhile, the leading tech companies are turning in sparkling financial results -- and getting rewarded for it.
Facebook's third-quarter revenue climbed 41 percent, and Amazon's rose 23 percent. Share prices of those giants, and those of Apple, Google and Microsoft, each perked up after they reported recent quarterly earnings. By contrast, IBM's third-quarter revenue sagged 14 percent. Sales at data storage company EMC inched up less than 1 percent. In Hewlett-Packard's last quarter before it split up, revenue fell 8 percent. The companies' stock prices mostly have followed the downward revenue trend.
The divergent fortunes are the ripple effects of technology shifts such as the booming use of smartphones and the slow replacement of conventional corporate software with versions running from remote computer hubs. The big guys are thriving in the era of mobile and cloud computing, and the nature of those technologies fuels the winners' continued dominance.
Advertisers have to be in front of the huge user bases of Google and Facebook. Software coders build their best products for the iPhone and Android phones because that's where all the mobile users are. Corporate information technology departments increasingly want to work with a handful of one-stop-shops, like Microsoft, that have the heft to guide companies through dislocations in their businesses. Once companies start to rely on Amazon's cloud computing operation, it is tough to ditch. Size breeds success that breeds further success.
Investors falling in love (or staying in love) with the tech powerhouses have propelled them to a collective high-water mark. The combined stock market value of the Big Five – Apple, Google, Microsoft, Facebook and Amazon – is just more than $2 trillion, or about 12 percent of the total value of the S&P 500, according to Bloomberg data. That is the largest slice from the tech biggies since Facebook went public in 2012.
That doesn’t mean the tech haves can declare victory and head to a permanent beach vacation. The scary news is that the pace of technology change easily can turn today’s winners into tomorrow’s losers. Bay Area coffee shops are crowded with people who imagine themselves the future slayers of Amazon or Google. Some of them might even do it if the geyser of venture capital money doesn't dry up.
Even Apple, the world’s most valuable company, is feeling the sting from how fast a consumer technology can go from “Oh, cool!” to “Zzzz.” When the iPad went on sale in 2010, initial sales of the tablets helped put a permanent nail in the coffin of personal computer sales growth. Fast forward more than five years, and the tablet market itself is being eroded by newer tech habits, including a preference for bigger screen smartphones like the iPhone 6. Apple’s revenue from the iPad line has declined for seven consecutive quarters.
The scarier news is for the have-nots: It’s hard to catch up once a company has fallen behind the times. In the last 40 years of technology history, few examples exist of companies that were able to maintain their dominance during seismic shifts in the industry, such as the move from computer mainframes to personal computers, or when PCs gave way to mobile. IBM is the one example that gives hope to the laggards. The company reinvented itself twice in the last generation, although it almost died doing so and is trying another makeover.
Microsoft is shaping up to be another survivor. The company has migrated over to the tech winners camp even though the company’s revenue is shrinking. That is because the software company is growing in the right places, and CEO Satya Nadella for now has convinced Wall Street that he is hip to the cloud and mobile thing. The company absolutely could still fall on its face. (Have you seen a Windows smartphone recently? Do you even know that Microsoft makes smartphones?)
Oracle’s Larry Ellison, founder of one of the original Silicon Valley companies, last year compared the tech era of smartphones and cloud computing to the Cretaceous-Tertiary boundary. Those of you who aren’t Googling that right now will know this was a mass extinction that wiped out a majority of the Earth's species. Of course Ellison believes his corporate-database company will survive the die-off and take advantage of the victims.
How can the fallen techies avoid extinction? They know they have to change, but there is no single path to doing so. Two of the tech old guard, EMC and Dell, are teaming up in the hopes they'll be better together than apart. Hewlett-Packard split up in the hopes it will be better apart than together. IBM has done nearly $1 billion worth of acquisitions this year, largely to improve its fortunes in hot business technology areas like cloud computing and data analysis. And Yahoo ... Well, it's not clear what Yahoo is doing.
The left-behind have to hit on their own paths out of the tech wilderness. Because it's going to be tough to dislodge the tech kings.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Shira Ovide in New York at email@example.com
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