Alphabet, Amazon, Apple, Microsoft: With great scale comes great destructive powers
Looking at the rich harvest of tech earnings last week, I couldn't help but think of “Scale,” a surreal story that Will Self wrote in 1995, the same year Amazon set up its online store.
“Some people lose their sense of proportion; I've lost my sense of scale,” says the protagonist, a drug addict whose febrile narration is both a vision for the future and a nightmare in which the world scales ever larger around him. It must be how companies in media, health care, auto manufacturing and other industries soon ancillary to tech feel watching companies like Amazon and Alphabet grow ever more capable of crushing them by the day.
For their first two decades, these big-tech companies were content to grow inside their own industries – Amazon inside retail, Alphabet inside online ads. Growth became more than a business model, it became something of an addiction, and the things they were best at - organizing information, offering discounts, machine learning, cloud services – eventually allowed them to encroach on industries that were once not worth an afterthought.
Google, and later on Facebook, began siphoning off revenue from the content publishers they were so good at aggregating. Netflix began selling deadly sharp blades to cable cordcutters. Amazon bought a stodgy grocery chain and put all other stodgy grocery chains on notice. Waymo is so confident about its autonomous cars it's testing them on Michigan ice patches. Big tech is not only good at eating the lunches of young startups (when not ingesting them outright), they are beginning to do the same to placid, overfed giants accustomed to grazing turf outside tech.
Growth is a compulsion that drives companies in all industries. But only inside tech do companies worship at the altar of scale. Forget the talk about innovation – your innovation is nothing if you can't get it to scale. In Silicon Valley, mere growth is for wimps: It lacks the exponential magic of scale. When you grow, you simply get bigger. When you scale, you chart out all the potential you can grow into. And now big tech is scaling the hell out of the rest of the business world.
Alphabet and Amazon drove this point home last week. Here are two companies that posted revenue well north of $25 billion last quarter even while that revenue grew above 25%. They represent a species rarely sighted before 2010: the gigantic growth company. Investors who sought growth usually found it in smaller, recently listed companies. Now, when they can find growth there, they needn't bother. Just add to your positions in good-old big tech.
This has been the tale of the tech giants for some time. Invest in them and you can't go wrong. They are the future incumbents, the predators eating the present-day dinosaurs. But even with years-long rallies behind them and heady expectations for strong earnings each quarter, they are still managing to surpass expectations.
Consider that Alphabet's revenue last quarter came in $600 million ahead of analyst expectations. Microsoft's surprise was even stronger: It beat on revenue by a solid $1 billion. Amazon was the biggest surprise of all, beating Wall Street expectations by $1.5 billion. And that's just the tech earnings from Thursday, a single day from the earnings calendar.
The reasons for these positive surprises are rather mundane: Alphabet's Google is succeeding in its recent focus on mobile ads. To take one example: YouTube users now spend an hour a day watching video on their mobile devices, and YouTube ads have an ad-viewability rate of 95%. If Netflix is king of video subscriptions, YouTube is king of mobile video ads.
Microsoft, meanwhile, is benefiting from its early focus on the enterprise cloud. And Amazon is, well, Amazon is Amazon. Prime is growing in international markets like India; video is hindering people from unsubscribing from Prime; and Amazon Web Service is, recent discounts notwithstanding, pulling in so much new revenue that it's as profitable as ever. Amazon was supposed to post a mere 3 cents a share in profit. It reported 52 cents. The Whole Foods acquisition had little impact, good or bad.
On Friday, the day after those earnings, Alphabet rose 4%, Microsoft 6% and Amazon 13%. Even Facebook, which reports this coming Wednesday, rose 4% Friday, while Apple, which reports on Thursday, rose 3%.
Last week was, in miniature, a model for how these companies will likely perform for some time. Sure, a downswing in the market will hurt their performance, as will a disappointing quarter here and there. But, scaled up to longer-term trends, they will outperform expectations and rivals because they have cracked the code of scale itself.
It's the very scale of their cash holdings that allows them to either acqui-hire or squash any nascent rival. It's the scale of their user bases that allows them to push into new industries. But scale is double edged. If growth is a kind of gateway intoxication for investors, scale is full-on fentanyl, a rush that investors will demand even if it ruins the shareholder value of other industries.
The latest example is Amazon's threat to health care. Reports indicating Amazon wants to sell prescriptions has caused pharmacy stocks to tumble. On its earnings call, Amazon refused to talk about prescriptions (which, knowing Amazon, could well be a silent confirmation). Pressed further, Amazon executives signaled the company has bigger plans in health-care, beyond selling drugs, through AWS as well as Amazon Business, an enterprise service it's been quietly building.
That reads according to the doctrine of creative destruction that made the tech industry what it is today. The trouble is, scale changes everything. There's an important corollary to that superhero chestnut about power and responsibility: With great scale comes great destructive powers. Not desired powers of destruction, or even imagined ones. Just add a few sloppy lines of code, a few long-ass meetings where people say yeah-yeah just to move on, a few too many fuck-it-no-one-will-ever-know moments.
Now scale these micro-failures up enough and they become dangerous indeed. Google and Facebook wonder why it's now so easy to be owned by trolls with anti-democratic intentions. Amazon's warehouse jobs haven't grown more humane even as they grow more numerous. Amazon may soon face antitrust concerns, just as Google and Facebook are facing Congressional inquiries this week.
There's a quiet rustling sound throughout Silicon Valley as executives scratch their heads wondering how their simple intentions were outrun by the world-changing machines they worked to hard to build. Like the narrator in Will Self's story, they forgot their sense of scale. But scale didn't forget their hard work.
“I remain a technology optimist,” Google CEO Sundar Pichai said in wrapping up his prepared remarks during Alphabet's earnings call, “not only because I believe in technology, but because I believe in people.” But here Pichai has his cheese on the wrong side of the burger. Once big tech could believe in both.
Then it scaled too far.
Now it can trust neither.