The three tech giants overshadowing the future of the web

The performance of a large slice of the digital economy will be on display next week when just three companies — Amazon, Alphabet and Facebook — release their latest earnings.

To call these web giants the bellwethers of a new economy hardly does the description justice. Between them, the three leading internet companies now account for a mind-bending $1.64tn of stock market value. That is up $450bn from a year ago.

No wonder talk of a new tech bubble has become more than a murmur. On most valuation metrics, they are rising back towards the top end of recent ranges. Momentum investing and Fomo — the fear of missing out — have been the order of the day among fund managers, quickly eradicating a temporary stock market stumble in June.

But what if the re-rating reflects deeper changes in the advertising and ecommerce markets? The dominant platforms have been taking a larger share of the spoils. As the travails of Snap, Twitter and Yahoo show, the returns to scale, in the internet world, have been increasing.

Nor has there been any sign of slowdown in the underlying online markets. Rather, digital advertising and ecommerce growth in the US have accelerated this year, according to Goldman Sachs.

Against that background, the move into mobile advertising by Google and Facebook has been nothing short of breathtaking. A few short years ago, the rise of smartphones looked like it might disrupt the entire digital advertising market, as consumers balked at receiving commercial messages on such small screens.

Instead, mobile has grown to account for more than half of spending on digital ads, supercharging overall growth. Five years ago, digital was taking a 2 percentage point bite out of the total US advertising market each year. That share has since doubled. To sustain their growth, Facebook and Google are now circling the next big opportunity: TV advertising.

Amazon, meanwhile, has been eating into large segments of ecommerce. On one estimate, it accounted for more than half of the growth in US ecommerce last year, up from 40 per cent in 2015. Its success at bringing more shopping online has also accentuated a gathering crisis for bricks-and-mortar retailers.

Other giant market opportunities are also starting to come more clearly into view. With the maturing of cloud computing, a large slice of the $1.5tn annual IT market is up for grabs. Led by Amazon, and with Microsoft and Google in hot pursuit, this looks like a market that will reward a small number of winners.

One sign that the internet giants are gearing up for another dash for growth has been a rise in capital spending in recent quarters. This is the kind of thing that used to send Wall Street into a tailspin. But internet investors have seen this movie enough times now to feel more confident that today’s splurge on new data centres will turn into tomorrow’s gains in market share.

So what could go wrong? The sheer pace of recent growth has brought forward the time when market saturation will start to become an issue. If digital advertising were to continue its current growth rate in the US, it would devour the entire advertising industry within five years, says Brian Wieser, an analyst at Pivotal Research. Growth must slow. Facebook has already been warning for some time that it cannot continue to cram more adverts into its news feed without damaging the user experience, though the stock market has continued to drive its shares higher.

As they start to feel cramped in their original markets, the biggest internet companies are also starting to move on to each other’s turf. Following its acquisition of Yahoo, Verizon may upset the duopoly that has formed in digital advertising. It may just as easily be Amazon, which also has its eyes on the market.

Regulators represent another risk, evidenced by the European Commission’s recent €2.4 billion fine imposed on Google — though it has taken eight years to get to this point and a final outcome is still uncertain. And as the web giants account for a growing share of the consumer economy, cyclical effects will become more pronounced.

Considerations such as these are unlikely to intrude next week, however. For any company whose business lies in the path of these digital behemoths, it is likely to be an intimidating moment.

richard.waters@ft.com

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