The Big Question: How does Big Tech make its billions?

In the sales manual of these top companies, you are the customer as well as the product.

The Big Question: How does Big Tech make its billions?

Five companies representing Big Tech – Amazon, Apple, Facebook, Microsoft, and Alphabet – are today among the most valuable publicly traded companies in the world, with their collective revenues topping $800 billion.

In fact, four of these head the list of Most Valuable Companies in terms of brand value:

  • Amazon ($221 billion)
  • Alphabet ($160 billion)
  • Apple ($141 billion)
  • Microsoft ($117 billion)

Facebook takes seventh place (after Samsung and ICBC) with a valuation of $80 billion. The combined revenues of these companies make them richer than even Saudi Arabia, the kingpin of the petrodollar.

It’s enough to make one wonder: What is it that makes these five tech companies tick?

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Patent innovations

One answer could be patents, considering that the very nature of their business dictates that they invest in patent innovations. This is borne out by the data available.

According to French analytics solutions provider PatentSight, four of the 10 most innovative companies in the world are tech companies, which include Microsoft and Google and its subsidiaries.

Moreover, Microsoft and Apple (along with IBM) top the list of patent innovations in hardware and software. These patents have helped these companies to protect their turf, much like pharma majors.

For instance, in 2012, Apple successfully brought a patent infringement lawsuit against Samsung, winning over $1 billion in damages after the jury found the Korean chaebol to have violated several utility and design patents of the plaintiff’s marquee product, the iPhone.

It is tempting to see patents as the differentiator, for this is what Big Pharma rode on to emerge as an economic powerhouse at the turn of the last century.

In fact, Pfizer has made nearly $200 billion in revenues every year for the past 20 years from just two drugs, both patented. One is Lipitor, which lowers blood cholesterol, and the other is Norvasc, which improves blood flow.

But patents do not explain the billions in revenues for Big Oil and Big Tobacco, which work on consumer need and demand, rather than technological edge and innovations. Moreover, patents work for hardware providers, not primarily content-dependent companies like Facebook and Alphabet (the entity born out of the merger of Google with its subsidiaries).

Clearly, there has to be something else that sets Big Tech apart. 

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Big Tech overview

To figure out what that ‘something else’ is, it is essential to understand one basic difference first: companies that makeup Big Pharma, Big Oil, and Big Tobacco can be lumped together because they sell similar types of products – and in fact, together work as big monopolies.

Big Tech companies, on the other hand, are very distinct from each other in their products and business outlook despite the simple perception that all are ‘tech’ companies. Their core revenue sources are clearly different, and as a result, their sales strategies are by and large different as well.

For instance, the main source of revenue for both Facebook and Alphabet is advertising; the two companies account for over 60% of digital ad revenues in the US. For the other three, it is mainly hardware.

There is another difference. For Facebook and Alphabet, you are the product, as both use your profile while bringing you specific, precise advertisements. They also help you design the perfect campaign as per your budget and make money off your campaign.

For Microsoft, Amazon, and Apple, you are the customer, as is the case with any standard business: different products and services are brought to you. Microsoft and Amazon are into mixed retail, computing and media, and you as the customer buy their products. Similarly, Apple brings you electronic hardware, though it has been diversifying like the others. In November 2019, it launched the streaming service Apple A+.

That is the broad overview of the business strategies of Big Tech; next, let us look at each company to see what makes them tick.

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Alphabet

  • Revenue in 2019: $135 billion
  • 85% of revenue generated by advertisements (via Google, YouTube, Google Maps, Google Ads, etc.)
  • Other Google products and services, like Google Play or the Google Pixel phone, help to generate 14.5% of total revenue
  • A minuscule 0.4% comes from new ventures, from which Alphabet hopes will emerge the group’s ‘next Google’

Alphabet does not charge the advertiser for its campaign; it receives payment only if a browser clicks on a paid link.

Advertisers naturally find this more attractive than the ad policy of traditional media outlets (TV, radio, print), which is to charge for space/time span given for inserted/aired ads, irrespective of whether readers have seen/watched/heard an ad or shown an interest in it.

Alphabet is also aggressively pushing the idea that advertising on a digital platform gets the best results for the advertiser; the aim obviously is to establish Google as the place to visit for people seeking online information on products and services.

In a blog on the website ‘Think with Google’, Google's VP of global marketing, Lisa Gevelber, says research by her company shows that “searches for future needs largely happen on mobile, with 97% of people searching on a mobile phone to do so.”

Clearly, Alphabet has been successful in establishing Google as a perfect search engine, considering that advertisers paid it almost $135 billion in 2019, as per data from Statista.

Facebook

  • Ad revenue in 2019: $70 billion
  • 98.5% of revenue comes from ads
  • 1.5% of revenue comes from fees

Facebook takes quite the opposite route to advertising compared to Alphabet; in fact, it seems to resemble a traditional magazine that runs on advertisement revenue.

Its business model involves providing content that attracts eyeballs. It then sells this user attention to advertisers, just as TV, radio, and print do. Like traditional media, Facebook charges advertisers based on how many people see a message, not on how many take action by clicking.

However, there is also a key difference: a magazine has its writers and reporters; Facebook does not. It does not pay to source its content. Rather, it runs on you, the user – you create the material by way of posting personal messages and shared links.

Facebook monetises this content through customised advertising campaigns aimed at you and people on your friends list. This also means its content is free, produced by users.

So, although Facebook has no service charge, it earns more revenue per user than Netflix, which charges for service. In Q4 2018, for instance, it earned $35 per user while Netflix made $30.

The result: its ad revenue for 2019 was almost $70 billion, says Statista.

Apple

  • Revenue in 2019: $260.17 billion (a slight drop from the previous year’s $265.6 billion)
  • 62.8% of its revenue comes from sales of the iPhone
  • 7.1% comes from iPad
  • 9.6% comes from the Mac
  • 20.6% comes from other products and services (Apple TV, Apple Watch, Beats products, Apple Pay, AppleCare, etc.).

Apple is a predominantly hardware technology company that, as the data points above show, draws almost 80% of its revenue from products such as the iPhone, the iPad, and Mac computers.

The profit margins on these products give Apple the necessary legroom to pursue non-hardware ventures, which account for more than a fifth of its revenues, such as its iTunes music distribution business. Recently, it launched the streaming service Apple TV+ in over 100 countries through the Apple TV app.

All this is different from the policies of Facebook and Alphabet, who are dependent on ad revenue.

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Microsoft

  • Revenue in 2020: $143 billion
  • Most diversified among Big Tech
  • Largest market capitalisation ($901 billion)
  • 25.7% of revenues come from ‘Office products and cloud services’
  • 23.7% come from ‘Server products and cloud services’
  • 17.7% come from Windows

As is amply clear from the data points above, Microsoft is like Apple and has several revenue streams: It sells ‘Surface’ computers, ‘Azure’ cloud services, software (such as MS Office), gaming consoles, and search engine advertising.

One of the world’s most valued companies, Microsoft has a huge market capitalisation of over $900 billion. Its cash cow is the Microsoft Office System that has allowed it to use its resources on acquisitions.

For instance, it entered the search and advertising industry with the acquisition of Bing in 2008, and the professional network space through LinkedIn in 2016.

Amazon

  • Revenue in 2019: $280 billion
  • 70% of its revenues from its online stores
  • 18% from media services
  • Fastest-growing segment is its offline sales in physical stores (growing 197% y-o-y)
  • Most profitable segment is Amazon Web Services
  • Amazon’s ‘Other’ segment is also rising fast (mainly includes ad sales)

Launched as an online marketplace for books in 1994, the Seattle-based tech giant has today emerged as an e-commerce company with global reach, offering online retail, computing services, consumer electronics, digital content, as well as other local services such as daily deals and groceries.

Last words

The Big Tech companies have certain broad commonalities: all of them involve IT and ITES, gather data about their users and analyse user behaviour and experience, and are today challenging old and established players in sectors as diverse as media, transportation, and retail.

At the same time, what is most remarkable about these companies is that they are not in the same businesses; they are not even competing with each other, or for that matter, with anyone else to a great extent.

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