Too big to fail?

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How Tech's Undisruptables Got That Way

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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We live in an age of rapid technological change and disruption. Launching revolutionary startups is cheaper and easier than ever. No established company is safe. Except for, you know, Apple, Amazon, Facebook and Google (Alphabet, if you prefer). Oh, and maybe Microsoft.

The notion that the biggest tech companies have an unsurmountable advantage is in fashion. “The period where tech startups can readily disrupt larger tech companies is ending,” Jessica Lessin wrote last week at The Information.  Twitter co-founder and Medium Chief Executive Officer Ev Williams chimed in, arguing that while “it’s easier to start a company than ever before, it’s harder to compete.” And last month, New York Times tech columnist Farhad Manjoo anointed the companies I listed above “the Frightful Five”:

By just about every measure worth collecting, these five American consumer technology companies are getting larger, more entrenched in their own sectors, more powerful in new sectors and better insulated against surprising competition from upstarts.

I’m not a Quentin Tarantino fan like Manjoo, and I don’t know that “frightful” is the best word. So I vote for calling them the Undisruptables.

They’re not quite untouchable: Apple has lost about $250 billion in stock market value over the past year as the great sales boom that followed the 2014 launch of the iPhone 6 petered out. But that seems to be mainly because investors are worried that only so many people can buy only so many $750 phones, not that they think Apple is about to be supplanted by an upstart competitor.

And Apple, after briefly being passed by Alphabet last week, is back to being the most valuable company on the planet. Alphabet is second, Microsoft is third and the other two Undisruptables are also in the global market-value top 10.

Clearly, there’s something special about these five companies. But what exactly is it? And can it last? I don’t have a definite answer to either question, but I can see four possible explanations for the Undisruptables’ success:

1. It’s nice to be big. The advantages of corporate bigness have long been understood -- size gives a company resources, bargaining power with suppliers, influence with politicians, relationships with millions of customers. In recent years, though, as financial markets have become more willing to provide resources to promising startups and cloud services have made it cheaper to get a company up and running, the focus has shifted to the advantages of smallness -- you can be more nimble, you aren’t stuck with legacy businesses to defend, etc. Lessin argues that today’s tech giants have learned to combine bigness with startup-like nimbleness, giving them a formidable advantage.

2. These companies are uniquely suited to succeed. Companies compete, a trio of Boston Consulting Groupers wrote in an influential 1992 Harvard Business Review article, on the basis not of their products but their capabilities -- the business processes that enable them to deliver value to customers. This notion of capabilities has always felt a little fuzzy to me, but it is still popular with the consultants, and it may capture something important about the Undisruptables. Here’s Medium’s Williams:

A certain class of tech companies used to be about technology, mostly. Then they were about technology + design. Now they need to be about tech + design + marketing/distribution. Exclusive deals, sales teams, lawyers, lobbyists, and other competitive advantages are getting built on top of technology as the rewards increase.

The Undisruptables have evolved sets of business capabilities that are both hard for startups to match yet different in key ways from the capabilities that made earlier generations of corporations successful. They are capabilities optimized for the digital era. Or something -- like I said, this feels a little fuzzy. But it does seem to be working for them.

3. These companies are natural monopolies. Information-technology businesses often benefit from increasing returns -- as they make more of something, the cost per-piece-goes down, to effectively zero in the case of software. They also often “lock in” consumers, who once they’ve chosen a particular technology (Microsoft’s Windows operating system, Apple’s mobile devices) can find it a big hassle to switch. And many of them take advantage of “network effects,” in which the more people use a product, the more valuable that product becomes to its users (Facebook being an obvious example). All these characteristics lend themselves to the creation of winner-take-all markets, and the Undisruptables have been the biggest winners. Or as Manjoo puts it, “They own many of the world’s most valuable ‘platforms’ -- the basic building blocks on which every other business, even would-be competitors, depend.”

4. This actually isn’t an age of rapid technological change and disruption. While the rhetoric of change and disruption is everywhere, actual economic evidence of it has been lacking of late. The rate of new-business creation is down in the U.S., as are other signs of business dynamism such as turnover in the Fortune 500 list and CEO tenure. One possibility, as economist Robert Gordon has argued, is that we’re in for a future of stagnating living standards and decelerating technological change. Another is that this is a lull -- more than a decade long at this point -- that will eventually be superseded by a new wave of change. In either case, the Undisruptables have landed at the top of the heap at a time when no one is really upending the heap.

Put these four together, and I think you can get a pretty good sense of what's going on right now -- if not necessarily what's going to happen next. But there's a historical parallel worth considering. In the late 1960s, investors anointed a group of big, growing U.S. corporations the Nifty Fifty. The idea was that these companies had such impregnable competitive advantages  that you could just buy their stock, at pretty much any price and forget about it. Which sounds a little bit like the Undisruptables, no?

In one sense that’s a warning sign, as the Nifties got hammered in the 1970s bear market. But while a few Nifty Fifty members -- Digital Equipment, Polaroid, Schlitz Brewing -- foundered, many are still big, successful corporations. Two of them (General Electric and Johnson & Johnson) are in the global market-cap top 10. The world of big business just doesn’t change that fast, apparently. And when it does, it is often not by wiping out existing companies but by adding new giants that make products or provide services that no one knew they needed before. The Undisruptables surely won’t rule the business world forever. But they won’t necessarily go away, either.

  1. It’s behind a paywall. Sorry.

  2. People in the 1960s probably didn’t use that term, which Harvard Business School professor Michael Porter popularized in the 1980s.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net