Stuffed.

Photographer: Dale de la Rey/AFP/Getty Images

Tech's Giants Keep Devouring the Competition

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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Here's a fun fact: 30.3 percent of the market capitalization of the Nasdaq is now accounted for by just five companies -- Apple Inc., Alphabet Inc. (Google's parent), Microsoft Corp., Amazon.com Inc. and Facebook Inc. That percentage is high, historically speaking.

The Big Have Gotten Bigger
Top five companies' share of Nasdaq float-adjusted market cap
 
Source: Bloomberg

I don't have data from the 1990s handy, but I'm guessing things were even less concentrated then. So the current dominance of Nasdaq's top five is probably unprecedented. Whether it's significant is another matter: I picked the Nasdaq because it's home to most of the tech industry and lots of other growth-oriented companies, but this isn't exactly a scientific measure. Thirty-plus percent also isn't dramatically higher than the 28 percent of 2003 or 28.1 percent of 2011.

Still, the increased concentration of the Nasdaq squares with other evidence that big companies in the U.S. have been getting bigger while others struggle. From a recent paper by finance scholars Gustavo Grullon, Yelena Larkin and Roni Michaely:

More than three-fourths of U.S. industries have experienced an increase in concentration levels over the last two decades. Firms in industries with the largest increases in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, suggesting that market power is becoming an important source of value.

The tech sector is of course known for startups that are supposed to disrupt such cozy arrangements. Despite a big wave of venture capital investment over the past few years, though, the biggest tech companies seem to have been solidifying their status at the top of the heap. Maybe some of that is because venture-backed companies are staying private longer than they used to, or just that it's still early days for the most recent wave of startups. But most indications are that the most recent wave of tech startups is now fizzling.

The five companies I listed at the beginning of this article aren't exactly ancient. Facebook, the youngest, was founded just 12 years ago. Still, Apple is 40 and Microsoft 41. These are big, established corporations. And there hasn't been much threat to their dominance lately, either from competitors or from competition regulators (at least not on this side of the Atlantic). 

Still, there has been one possibly important change in the past few days: the election of Donald Trump, who made repeated antitrust threats on the campaign trail against Amazon in particular. And sure enough, the shares of Amazon -- and the other tech giants -- dropped after Trump's surprise win last week, even as the stock market as a whole rose.

Signs of a Trump Effect
Total return since October 1
 
Source: Bloomberg

Trump's animosity toward Amazon appeared to be due mostly to the fact that Chief Executive Officer Jeff Bezos also owns the Washington Post, and there's reason to be dubious that a Republican administration really will go on an antitrust tear. (Since the Reagan years, Republicans haven't had much enthusiasm for antitrust enforcement.) Still, the growing concentration of U.S. industry, including the tech industry, seems like a phenomenon that is inviting an inevitable backlash.

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:
Stacey Shick at sshick@bloomberg.net