Here’s a stark example of how the global coronavirus pandemic affects America’s tech giants, versus how it affects pretty much everyone else.
On May 12, Alphabet Inc. (GOOG) subsidiary Waymo announced it had scored an additional $750 million to make self-driving cars a commercial reality, bringing its total external fundraising to $3 billion inside two months. Then, on the 18th, The Wall Street Journal reported that Uber Technologies Inc. (UBER) is cutting $1 billion in fixed costs. This included laying off roughly a quarter of its workforce and rethinking big, expensive bets—such as its own work on self-driving vehicles.
It isn’t just Uber that is suffering. Many brand-name retailers are now bankrupt or on the precipice, all weakened by shopping habits transformed by e-commerce. Then there are the internet-era businesses in every category, from Airbnb to WeWork, that might not have the cash to survive in their current forms.
Meanwhile, Big Tech’s biggest advantage—business models which convert cash into innovation, market share and an ever-larger lead over their competitors—is accelerating, thanks to the pandemic. The biggest of the big—not just Google-parent Alphabet, but also Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Facebook Inc. (FB) and Microsoft Corp. (MSFT) —all have businesses that throw off huge profits and bigfoot anyone and anything that gets in their way.
Investment in developing proprietary systems is key to keeping firms dominant in their markets. And spending on acquisitions helps them do that and quash competition. With the eye-popping warchests these companies have accumulated, it is clear they have the power, and the habit, of continuing to spend—even if the current situation damages their revenue and profits.
And it might. Economists at the International Monetary Fund predict this will be the largest global recession since the Great Depression. Anindya Ghose, professor of business at New York University’s Stern School of Business, says even the big tech companies will “see a much bleaker scenario” in coming months, and perhaps beyond, with revenue potentially depressed for a long time if reopening leads to new waves of infections and additional shutdowns.
These firms are still likely to come out ahead, says Rita McGrath, a professor at Columbia Business School. What they are selling—e-commerce, cloud services, social media, devices required to work from home and the like—are all in high demand and will be for the foreseeable future.
The tech giants that are thriving aren’t merely doing it by acquiring competitors and dominating markets. Like some monopolists of ages past, these companies spend heavily on research and development.
At the end of the roaring ’20s, General Electric (GE) invented the first television. Throughout the Great Depression, GE and its subsidiary RCA continued to invest in its development. The result was RCA’s dominance of the medium in the decades that followed.
Big Tech is adopting the same strategy today. Overall R&D spending at the five biggest U.S. tech companies—the five biggest companies in the U.S., period—continued to rise, even in the first months of the pandemic. Facebook, Apple, Amazon, Alphabet and Microsoft, or the “Faaam,” as I like to call them, spent almost $29 billion on R&D last quarter, up 17% from the same quarter last year. That is bigger than the entire annual budget of the National Aeronautics and Space Administration—and NASA is supposed to get us to Mars.
Some initiatives are related to the coronavirus pandemic: Microsoft is rolling out services to help health-care professionals, Facebook is going all-in on remote work. Amazon founder Jeff Bezos told investors to “take a seat” as he conveyed the company’s plans to spend its entire second-quarter profit—about $4 billion—on dealing with Covid-19. That program includes the creation of an internal testing program for the virus. The company is also considering developing yet more automation for its fulfillment centers so they won’t be as packed with humans. Traditionally, these expenses could be classified as R&D, since the money isn’t being spent on activities with a proven commercial benefit, and there is no telling when and how they might pay off.
Any shortfalls in future R&D spending by the Faaam could be made up by acquisitions—a form of outsourced R&D. The giants let others build businesses around new ideas, then buy them up.
Since the U.S. declared a state of emergency and lockdowns commenced, Apple bought a VR company, Facebook bought Giphy, Amazon Web Services bought DataRow, Google bought Pointy and AppSheet, and Microsoft bought or agreed to buy Metaswitch Networks, Softmotive and Affirmed Networks. The chip giant Intel (INTC) —not technically part of the Faaam, but one of their key enablers—did two deals in May, adding to its capabilities in self-driving cars and Wi-Fi.
While acquisition volume isn’t necessarily up, this could be a good time for these companies to buy up firms they have been eyeing. After WeWork’s collapse, valuations for many highflying startups cooled, and the coronavirus pandemic could drive valuations down even further. Facebook buying Giphy last week could be a harbinger of what’s to come.
As public companies, none of the Faaam are willing to comment on their plans for future quarters beyond the guidance they gave in earnings calls. Amazon predicted continued strong revenue growth compared with a year ago, and noted the outsize expenses and investments related to Covid-19. Facebook CEO Mark Zuckerberg said his company plans to hire 10,000 more people in product and engineering roles across 2020 so the company can “continue building.” Facebook CFO Dave Wehner said, “We plan to continue to invest in product development and to recruit technical talent.”
Microsoft predicted it will have modest revenue growth next quarter, and CFO Amy Hood said that in the year ahead the company would leverage its “strong financial position” to make “significant investments.” Apple CEO Tim Cook said that the company has entered the crisis in a position of financial strength, and that he will continue to manage the company for the long term. “We’ve always managed through difficult moments by doubling down and investing in the next generation of innovation and that’s our strategy today,” he added.
Just as no one predicted the coronavirus (well, almost no one), it is impossible to know what’s coming for these companies in terms of revenue and whether they’ll dip into their reserves. In an unusual move, Apple, Alphabet and Facebook all declined to offer revenue guidance in their last quarterly reports, given the uncertainty in the global economy.
It is possible that advertising will crater for Facebook and Google in the way it has cratered for traditional media companies, forcing them to pull back on spending in unprecedented ways, notes Dr. Ghose. People stuck at home, driving up user-engagement numbers for big tech, don’t matter much if advertisers aren’t spending to reach them. And Alphabet’s CFO said in the company’s last earnings call that the second quarter would be a difficult one for the company’s advertising business.
Maybe demand for iPhones and other consumer electronics crashes because of high unemployment and low consumer spending. Perhaps Amazon’s competitors make inroads against its e-commerce business in unexpected ways, even as spending drops across all categories.
Even if all of this happened, all of these companies have enough cash to sustain their innovative core and avoid laying off the kinds of design, engineering and product talent that are so expensive to hire in good times.
All market signals indicate investors are confident these companies can continue to grow in the long run. The value of these five companies are at or near their highs. In the middle of a pandemic, their collective market capitalization is $5.6 trillion.
One thing that could trip up the Faaam is antitrust action. The Journal revealed on May 15 that both the Justice Department and state attorneys general are well into planning antitrust lawsuits against Google. Facebook’s intended acquisition of Giphy is raising antitrust alarms on both sides of the aisle in Congress. Last June, the House Judiciary committee announced a sweeping investigation of the market power of “big tech” companies, the FTC is investigating every member of the Faaam, and the European Commission’s scrutiny of them is unrelenting.
Sen. Josh Hawley (R., Mo.) is pushing the Justice Department to launch an antitrust investigation of Amazon after a Journal investigation found the company had used data about independent sellers on its platform to develop competing products. Apple is facing a potential antitrust investigation by the EU, for allegedly abusing the power of its App Store.
As long as managing the pandemic continues to take precedence in the halls of governments everywhere, it seems unlikely regulators will act on any of the still-unofficial proposals before them. Those include splitting up Amazon’s web and retail businesses, decomposing Facebook into its constituent acquisitions, limiting Apple’s power over its own App Store, or curtailing Google’s dominance of online advertising. This buys Big Tech even more time to lobby politicians and mollify regulators, build goodwill with consumers, and plow resources into opening up an ever bigger lead over competitors.
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