Whether you are aware of it or not, we have become dependent of a handful of internet companies. With almost 100% certainty you have used one of their products, simply because otherwise you were probably not able to read this article. Begging the question, have these companies become too big to fail?

Introducing the leading tech companies (MAAAFAT)

Before answering the main question, we need to dig in to some terminology. If you are not an investor, you probably never heard of the FAANG [1], BAT [2] or the MAAN [3], and why should you? Well maybe you should, just because they are so important to us. Simply put, these acronyms stand for a selection of stocks. Hence, FAANG stands for Facebook, Apple, Amazon, Netflix and Google (although that is now called Alphabet), MAAN stands for Microsoft, Apple, Amazon and Netflix and BAT stands for Baidu, Alibaba and Tencent. But why do we use these names? Well, the FAANG was born since these stocks have something in common: they are the best performing tech stocks and are called growth stocks, since their value increases almost steadily year on year. The other acronyms are just some competitor combinations, where the BAT is China’s equivalent.

As told in the introduction, you are probably using one of their products. If you are on a phone you either are using an Apple or an Android phone (which is owned by Alphabet/Google) since they have a combined market share of about 99% [4] in the phone operating systems market. One may think there was a time when there was a battle between more platforms/companies. Although this is true, the only smartphone competitor that had quite some market share was Microsoft, which is basically just another big tech company. So if you are using a computer, you may think you are better off. This is true, but only marginally. The desktop operating system market is dominated by Windows (Microsoft) and Mac OS(Apple). Their dominance ranges from 94 to 97% [5][6], so the total operating system market is dominated by Microsoft, Google and Apple (96-97%)[7]. So yeah, there is a possibility that you are not using a product from these companies (you’re among the 3-4%) just to get to this article, but is seems very unlikely. And then we’re not even considering which browser, search engine or web host you are using to get here.

 

When looking at other markets, we find similar but less extreme cases. The web browser market is dominated by Google, Apple and, to some extend, Microsoft. The search engine market is dominated by Google and, to some extent, Microsoft. But also the cloud market is dominated by big tech companies: Amazon, Microsoft and Google. The list goes on, but you will see they especially dominate the tech market. Special attention should be paid to Facebook. Although they are relatively new to this tech landscape, they’re quickly becoming dominant in the social media world. Of course they own Facebook, but they also own Instagram, Whatsapp and Messenger, all of which have more than 1 billion users each. In total Facebook counts around 2.5 billion users, that is close to 1 out of every 3 humans on earth (numbers no one can compete against). Especially since there exists a networking effect on social media, you want to go where others are too. Hence, going to another platform is even less likely. 

How does too big to fail apply on tech companies?

The question we’re looking to answer here: have these companies become too big to fail? This term “too big to fail” is a term that was widely used for financial institutions during the crisis. If one of them would fail, what systematic risk to the financial sector would they cause. Hence, would the costs of their failure be greater than the costs required to save them? For this, we need to look at several factors. First, let’s determine which companies we will be looking at. Although the FAANG do have a lot in common, it feels wrong to exclude Microsoft here. Actually, it feels like Microsoft, Alibaba and Tencent belong here more than Netflix does, as Netflix is still a relatively small player. Whereas Alibaba is similar to Amazon, Tencent has more in common with Facebook (especially with WhatsApp). So let us dubb a new acronym, the MAAAFAT; Microsoft, Apple, Amazon, Alphabet, Facebook, Alibaba and Tencent. We are thus not considering Netflix and Baidu, since they are a relatively small companies in comparison to the others. So what is small? Well, Netflix has a market capitalization of about 120 billion. Tencent being the smallest of the others has about 400 billion. 

Market Capitalization

Some more elaboration on the market capitalization is valuable for the general understanding of the situation. The MAAAFAT are 7 of the 9 most valuable companies in the entire world. Yes, these predominantly tech companies are dominating our world. The only companies not included from the 9 are Berkshire Hathaway and Saudi Aramco. Berkshire Hathaway is an investment company and has a stake of $50 billion in Apple. Saudi Aramco is a Saudi Arabian oil company which just went to market. The market capitalizations of these companies are as follows: Apple $1.09 trillion, Microsoft $1.06 trillion, Amazon $880 billion. All of these three companies have crossed the $1000 billion mark and were ranked #1 on market value at some point in time. Continuing, Alphabet $860 billion and than the relative smaller ones: Facebook $540 billion, Alibaba $450 billion and Tencent about $400 billion. Those numbers are probably a bit vague, so let’s compare them to the Dutch stock market. Altogether, the companies in the AEX, which includes well-known companies such as Shell, Unilever, ASML, Heineken, Philips, ING and many more (24 in total) are worth around $930 billion together, which is roughly the same as one of the largest companies of MAAAFAT.

At the time of the financial crisis, the “too big to fail” companies of that time did not even come close to these numbers, neither were they as dominant. So in that sense, these companies have grown far beyond too big to fail. Imagine if a company worth a $1000 billion suddenly goes bankrupt, meaning that other companies and people lose this value. Many more companies will go bankrupt, people would lose significant amounts of money. Besides, if such a company can fail, distrust will spread quickly, just as it did during the financial crisis. Whether it is $1000 billion or $400 billion, if one of the 9 most valuable companies goes bankrupt, there will be huge consequences.

Impact of their bankruptcy

So yes, in financial terms, these companies have grown to be too big to fail. But, we are actually more interested in what will happen if their infrastructure disappears. Prior, we have been talking about their dominant position in several markets and we will work from there. Although these companies have a lot in common, it becomes interesting to go over what influence they have on our lives, one by one. 

Apple

Let us start with Apple, by now the second most valuable company. They are famous for their iPhone, iPad, Macbook, but also the iPod, iWatch and iTunes. How dependent of Apple have we become? The conclusion that a bankruptcy of Apple would cause a huge financial problem has been made, but what about our services? Hundreds of millions of people use an iPhone, iPad or Macbook. But also iCloud, the App store and many more products are dependent on their mother company Apple. If Apple would go bankrupt, you will no longer have warranty, the app store and iTunes would no longer be supported, your product would no longer be updated and would become prone to malware. Your cloud services will go offline, the Apple browser (Safari) will stop working and many more services will be disrupted. Of course, some companies will try to solve some of these issues. You can buy another computer or phone, but the world is not ready to take on such a scale of production. Recovery will take months, companies will no longer be able to use their products, they need new licenses, support desks must learn to work with new operating systems, and so on. Summarizing, Apple’s bankruptcy would result in a gigantic problem in the tech world. Billions would be lost at other companies and recovery for individuals and companies will be problematic. YES, Apple has become too big to fail.

Microsoft

Apple might be a bad omen with regards to the other companies. Where we have millions of Apple fanatics, there are less Microsoft fanatics. However, our dependency on Microsoft might be even bigger. When buying a computer, you almost certainly use Windows and it is even more likely to use Office products (like Word, Excel and PowerPoint). Yes, there are alternatives, but no one can work with them. Apple has their own set of utilities but it only works on Macbooks, Linux works fine on the same computer, but certainly most people will not be able to work with it due to its complexity. Hence, our dependency on Word, Excel and PowerPoint is huge. There are several competitors in the market, but they all work differently. It may sound like a pure apocalypse, but when support for Window XP ended, many companies got in trouble. Imagine what will happen if all support ends. Servers, web hosting and several other Microsoft services (like LinkedIn and GitHub) will stop working. Many companies would barely be able to execute anything, everyone would have to be re-trained and things would almost stop moving entirely. The difference being that Microsoft provides less of a structural demand to their suppliers (since it is a software company, they have significantly less suppliers compared to a hardware company). Thus, less suppliers are dependent on its demand. However, make no mistake, it is certainly too big to fail, maybe even more so than Apple, due to Microsoft’s operating systems, Azure and Navision.

Amazon

If we look at Amazon then we are looking at quite a different type of company. Whilst they initially were an online marketplace for books, they have now expanded into many areas (such as cloud computing and E-commerce). Their core business is obviously their webshop, but they are also an important player in the cloud market. Although financially it would definitely be too big to fail, it seems that there is higher possibility that their business, although huge, does not necessarily have to be accounted for as too big to fail. Yes, the cloud market will get a huge shock, but there are quite a lot of competitors. A lot of websites will have troubles (Netflix for example) and it will be chaos, but most business and our daily lives will be able to continue and can quickly be taken care of by a competitor. Of course it will become more difficult to buy goods online, but the physical network of stores is still present and there are competitors in the market that can flourish now. Although life might get harder for some, it does not seem like everything will go wrong. Although massive, Amazon does not seem too big to fail.

Alphabet (Google and numerous others)

Another giant created by the internet world, is Alphabet, where the core component is Google. So before even going in depth let us consider what services we should consider. First of all, we have the search engine Google. However, also services like Gmail, Google Maps, Google Drive, Google Chrome and Google Calendar are widely used products. So, what will happen if Alphabet would fail? Well, searching the web through Google will no longer be able, many people will lose their email, road navigation will break down, managing your calendar will be troublesome and you might need a new browser. However, for all of these services, alternatives are readily available. Many other search engines exists (whether they are better or not is another discussion), but also competitors for email services, browsers and calendars exists. Maybe the biggest impact would be Google Maps. Although there are competitors, the massive collection of the data for maps is expensive and only few rivaling networks exists. However, there are some competitors (like TomTom). So for all of these services rivals exist, and searching the web through another search engine may lead to different results, but in essence it will not create chaos. Switching to another email is different, but in essence an email server works the same (especially since a lot of companies already work with Outlook). Maybe the biggest chaos will be on routing. Competitors might not be able to handle the new users, so people have to navigate the old fashioned way again. It might lead to more mistakes and some people getting lost, but eventually, the chaos created will be limited. Maybe surprisingly (thinking about how much we use it), Alphabet has not become too big to fail.

Facebook

Will our social media giant Facebook switch this around again and be too big to fail? There are clear signs that they might. With around 2.5 billion users, it has a huge impact. It is the appearance platform for most companies and actually so many services are connected to it, that a collapse of this giant should almost certainly create chaos. Although we might be addicted to social media, we are not completely dependent on it, we do not need Facebook. It is one of the ways we stay in contact with many people, messages get spread easily and you can convey your message quickly. Organizing an event might be harder without creating a Facebook event, but the old fashioned way or reaching out to people still exists. The downfall of WhatsApp might actually influence more lives than the downfall of Facebook. Many people do not use other messaging platforms than WhatsApp, so what happens if WhatsApp goes bankrupt? Like some of the earlier cases, enough competitors exists in this field. Together they will be able to take care of a lot of users. Also, the old fashioned SMS does still work, we still have email and if we combine this with competitors we can quickly get around this problem. Hence, there will be short lived chaos, but it will be contained quickly. Another NO.

Alibaba

After making the case for Amazon, we can make a similar case for Alibaba. Certainly, products might get more expensive when the cheap competitor disappears, but there are competitors in the market, and the local shops will flourish. So NO, Alibaba is not too big to fail.

Tencent (WeChat and numerous others)

Then we reach our final company. Although probably less known, it is a true social media giant in China. We are talking about Tencent. The most striking of these might actually be WeChat, but also QQ IM is very important. Both are chatting tools, though QQ is for messaging on desktops, while Wechat is an app more similar to WhatsApp. However, Tencent also owns major stakes in gaming companies, e-commerce and many other branches. However, for now we stick with WeChat for the evaluation (though the valuation of the company is also largely derived by the gaming revenues). WeChat is more than just a chatting platform.Connected to WeChat is a payment platform, a social media platform (similar to Facebook) and even a trading platform (comparable to Ebay). WeChat is called a “Super app” for a reason. It has integrated so many services in one, that you can do almost everything with it. Although it’s primary market is China, it still has a huge potential due to China’s growing dominance in the world market. A shutdown of WeChat would cause huge problems in China, since so much is connected. While there are competitors, nothing is integrated to take care of this shutdown. Business will respond quickly and other alternatives will thrive individually. Imagine though, if 50% of the Chinese population can do just 50% less for only 4 months, that is 25% of the Chinese economy shut down for 4 months. There are no preperations for such a massive impact. Chaos will be spread mainly in China and, although in lesser extend, will hit the rest of the world (because so much is related). So maybe surprisingly, Tencent fits the scale of too big to fail, although less certainly.

So, are they too big to fail?

So what can we conclude? Well some of the MAAAFAT are truly too big to fail. If their business would go down due to a bankruptcy, chaos will be widespread and the impact will be enormous. However, there is also hope. Not all of the MAAAFAT companies are strictly necessary and we would survive without their services through the rise of their competitors. Nevertheless, one thing seems certain. Financially, their bankruptcy might cause way more problems than the loss of their services. As famously said by former US Treasury Secretary Hank Paulson: “when confidence goes, it goes”. As soon as one of the world’s 9 largest companies can go bankrupt, anything can happen, panic will spread, causing the investment market to plummet, resulting in various other companies having serious issues to remain operational. This would lead to a crisis we certainly would not want to risk. Although, by putting one of these companies slowly to rest, we could certainly ensure that most of their services will be taken over. Yet, the impact that one of them goes down might be more in the disbelief than in the direct impact. Therefore, the MAAAFAT has become too big to fail.

Mitigating the risks

So what should we do next? Well, that is a harder question to answer. Trying to break up these companies will remove much of their synergies and might take away their competitive advantage, causing the very undesired bankruptcy of them which would essentially be a self-fulfilling prophecy. Perhaps it’s more important to acknowledge that these companies became giants for a reason. They all have hugely profitable components, that for some cases subsidize their other components. Since they are so profitable at the time, it seems very unlikely that they will suddenly go bankrupt. As long as they stay in their business and manage their risk, they will be around for a while. Therefore, good supervision (from government organizations) might perhaps be better than a call to split these giants. 

No longer using their products does not seem to be a solution either, they have already grown too big. Though one could consider not using their products for many other reasons. These companies are driven by one very important aspect, they own a lot of data about you. So you might consider not using their services and avoid the ‘big brothers’ watching you. This however, could be a topic for another article. For now, we can conclude that the MAAAFAT has become too big to fail. Splitting the giants might be more risky, therefore adequate supervision seems to be a safer possibility of mitigating the risks concerned with their possible downfall.

References

  1. https://www.investopedia.com/terms/f/faang-stocks.asp
  2. https://www.ibc.org/manage/bat-vs-faang-the-battle-for-digital-dominance/3103.article
  3. https://www.cnbc.com/2018/10/25/faang-leadership-is-over-its-time-to-bet-on-your-fellow-maan.html
  4. https://gs.statcounter.com/os-market-share/mobile/worldwide
  5. https://gs.statcounter.com/os-market-share/desktop/worldwide/
  6. https://netmarketshare.com/operating-system-market-share.aspx?options=%7B%22filter%22%3A%7B%22%24and%22%3A%5B%7B%22deviceType%22%3A%7B%22%24in%22%3A%5B%22Desktop%2Flaptop%22%5D%7D%7D%5D%7D%2C%22dateLabel%22%3A%22Trend%22%2C%22attributes%22%3A%22share%22%2C%22group%22%3A%22platform%22%2C%22sort%22%3A%7B%22share%22%3A-1%7D%2C%22id%22%3A%22platformsDesktop%22%2C%22dateInterval%22%3A%22Monthly%22%2C%22dateStart%22%3A%222018-10%22%2C%22dateEnd%22%3A%222019-09%22%2C%22segments%22%3A%22-1000%22%7D
  7. https://gs.statcounter.com/os-market-share

 

Artikel door Quirien Raat