Silicon Valley is undergoing a seismic shift. And for perhaps the first time, it’s not because of a new product “disrupting” things, or a sassy new unicorn that just arrived on the scene.
This time, dangerous pressures are being brought to bear by good, old-fashioned competition.
The latest example: Oracle Corp. ORCL, -7.67% and its recent earnings trouble. Despite delivering much desired proof of growth in its cloud business, weak guidance scuttled the stock.
But that’s what happens when you’re behind the eight ball, going toe-to-toe with Amazon.com Inc AMZN, -0.55% and Google parent Alphabet Inc. GOOGL, -0.51%GOOG, -0.52% in the cloud.
Now, before you run out and hold a bake sale for Larry Ellison, it’s worth noting the big picture.
And the big picture is this: If legacy tech names like Oracle and peer Microsoft Corp.MSFT, +0.72% are pushed out of the cloud altogether, that leaves only Amazon and Google on the top of the heap.
Raise your hand if you think they are going to simply divide the pie 50-50 and part as friends.
Ok. Then you get it.
Because now that even $200 billion corporations like Oracle have trouble delivering when they are competing with the FAANG quintet, life is going to get very interesting in the tech sector.
This is when FAANG stocks start fighting in earnest
Some hysterical investors in 2017 have already warned against the decline in FAANG stocks — that would be Facebook Inc. FB, +0.40% Amazon, Apple Inc. AAPL, +1.01%Netflix Inc. NFLX, -0.15% and Alphabet, for those who have been in a coma for the past five years.
Sure, there’s an a unpredictable septuagenarian in the White House with a Twitter account and an ax to grind with Amazon CEO Jeff Bezos. And, yes, some discerning Facebookers are starting to wonder what the heck is behind what they are “liking,” after Mark Zuckerberg & Co. unwittingly played a role in publishing Russia-linked content meant to sway the presidential election.
But let’s get real. Collectively, those five tech darlings command over $3 trillion in market capitalization — roughly 13% of the entire S&P 500 SPX, +0.18% And they’re not going anywhere.
Still, you have to wonder: How big can these companies get before the only option is to find growth in a business dominated by one of the others?
Just look at hardware, which has long been the sole territory of Apple. There was much anticipation before the iPhone X event, but after we got the actual device there seemed to be a lot of investors and consumers who were let down. And at the same time, Amazon’s power play on next-gen hardware — the Echo Show — just started shipping in June to rave reviews. This innovative gadget has all the power of voice assistant Alexa, married with video calling and a mainline into the Amazon.com e-commerce ecosystem.
Go ahead, wander around outside and ask 100 people on the street which device they were more excited about in the past two years — the Alexa-powered Echo line or the last few iterations of the iPhone. Then tell me which device most consumers think is more impressive, and has more long-term potential.
This is quite a coup in itself, but even more substantial when you consider Amazon also shipped 2.4 million devices in the Kindle family during the second quarter, cementing itself as the No. 4 tablet producer on the planet.
And it doesn’t stop there.
Amazon isn’t just taking a shot at consumer-electronics hardware with its strategy, but also gunning to snag share from Google search results. After all, it’s easier to ask “What is Pokemon Go?” to Alexa than to tappity-tap on your mobile device, isn’t it?
Looking beyond Alexa, what is the Fire tablet with Amazon Instant Video if not a way to get people off Netflix and iTunes, and on to the Amazon content platform instead?
Those are the stakes in Silicon Valley right now.
It’s tempting to laugh off competitive attempts in Big Tech after so many false starts. Yes, BlackBerry Ltd. BBRY, +0.00% has fallen on its face. And, yes, Microsoft has been largely been laughed out of the room with its also-ran Bing search engine and its all-but-extinct Windows Phone efforts.
But right now, in 2017 and looking ahead to 2018, the other FAANG companies would be stupid to not see Amazon as a serious threat to their business models and future profitability.
In Silicon Valley 2.0, competition is reborn
The most amazing thing of all is that it has taken us the better part of two decades to arrive at a moment when tech companies actually see themselves as competitors.
For many years the big names of Silicon Valley were partners in crime. Just wrap your head around the fact that Eric Schmidt was on Apple’s board until 2009, a little over two years after the original iPhone hit the market and four years after Google acquired the company that would be the foundation for its world-dominating Android OS.
To investors and traditional capitalists, that kind of access used to be the premise of corporate espionage cases. But until recently, it was just the way techies did business!
Many Silicon Valley fanboys chalk that up to bonhomie, some kind of dot-com fraternity that prevented these mega-companies from separating hard-fought friendships from billion-dollar businesses. But personally, I think it’s more hubris than anything else.
After all, in the famous words of Silicon Valley billionaire Peter Thiel, competition is for losers and monopolies should be every entrepreneur’s goal — not just for profits, but for all mankind!
“Creative monopolists give customers more choices by adding entirely new categories of abundance to the world,” he wrote. “Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.”
Deep down, I honestly think Apple, Google, Amazon and the rest thought they could take over the world on their own, and without consequences.
The problem is that, at best, each of the FAANG stocks is only 20% of the way there.
So what are you going to do if you’re Amazon, after you’re done gobbling up the lowbrow retailers and traditional booksellers of the world?
Put it in neutral and pay a dividend? Abandon revenue growth and instead rely on layoffs, buybacks and price increases to drive the bottom line?
Or are you going to hunger for more, and turn on your friends?
History may record 2000 as the year that tech companies were catapulted to another level, thanks to the convergence of internet technologies and a new generation of innovative tech personalities.
But there’s a good chance that 2017 and 2018 will go down in history as the period when the tech sector turned on itself, with previously untouchable internet giants knocked down a peg or two by one another.
Or maybe regulators will crash the party. There’s a small, but serious, chance that somebody in Washington wakes up and channels the attitudes of trust-busting regulators who split up the likes of AT&T T, +2.15% in 1984 and Standard Oil in 1911.
But either way, it will be a sight to see
And no matter what, investors in each and every one of those FAANG stocks better be prepared for a fight.