Suddenly, Amazon is Number Two (Premium)

Amazon.com this week surpassed Google parent company Alphabet to become the world’s second-largest corporation by market capitalization. And it has its sights on Apple, which is currently the world’s largest and most successful company.

I’d like to consider what this means, solely within the context of personal technology.

No, Amazon is not by any means a “pure” technology company: It is most widely known for its online retail store, of course. But then Alphabet/Google isn’t arguably a “pure” technology company either, in that it makes over 90 percent of its revenues from advertising.

No matter: The success of these companies allows them to fund personal technology products and services that might not otherwise exist. And in doing so, they are having a dramatic impact on our daily lives, and purely from a personal technology perspective.

First, the numbers.

Market capitalization is kind of a bullshit measurement because it relies so heavily on stock price, which I consider to be too volatile, especially for tech stocks, and overly-reliant on market black magic. But I’m not a financial expert, so let’s not worry about that right now. Market capitalization is a figure that represents the “value” of a company. And as any Google search will tell you, it is calculated by multiplying the total number of a company’s shares by its current share price.

Apple, the world’s largest company, has a market cap of roughly $890 billion at the time of this writing. One of the big financial stories of 2017 was the expectation that Apple would be the first corporation to surpass a $1 trillion market cap sometime in 2018. But the disastrous iPhone X launch scuttled that notion somewhat, with analysts noting that Apple has now twice reduced component orders for the device. And the market has responded by halting Apple’s previous stock growth trajectory. (Looking at the stock today, it seems like Apple has actually rebounded in recent weeks, and after a February nosedive. Again, not a financial analyst.)

Amazon, meanwhile, just surpassed Alphabet/Google, with a market cap of $768 million, and its stock has been rocketing upward for the past year, with no interruptions at all. Alphabet/Google, with a more volatile and Apple-like stock price performance over the same time period, is settled in at $762 billion. The expectation is that Amazon will basically increase its lead over Alphabet/Google. And the conjecture, now, isn’t when Apple hits $1 trillion. It’s whether Amazon does it first.

Microsoft, by the way, is world’s fourth-largest company, with a market cap of $717 billion. Interestingly, its stock price growth over the past year is much more like Amazon’s than it is like Apple’s or Google’s, meaning that it has experienced a near-uninterrupted upward trajectory over the past year. (There was a hiccup in February, at the same time that Apple experienced its biggest stock price dive in this time period.)

That Microsoft doesn’t factor very much into any financial stories lately is interesting to me, but then Microsoft is often ignored for whatever reasons. (It’s a younger company that Apple, for example, and Apple is a darling of both the personal technology industry and the financial markets.) More generally, it is also interesting that four of the top five corporations are in the tech industry. (The fifth is Berkshire Hathaway.) And five of the top ten are tech firms; Facebook inexplicably is the world’s 8th largest company. I have no idea how that makes any sense.

That Apple, Google, and, to a lesser degree, Microsoft dominate personal computing would not surprise most people. That Amazon has been able to shoehorn itself into this club, however, is somewhat of a curiosity.

Amazon’s finances are about as mysterious as they can be, given the law. And its revenues from digital products and services, not to mention their relative successes, are particularly well-guarded by the firm. But there was a recent blockbuster revelation of internal data around the firm’s Prime subscription and Prime Video that I think didn’t get the attention it deserves. And that very much factors into this discussion.

These companies all exert some form of leverage of their users, and they do so by taking advantage of—illegally, as some may claim—their most dominant offerings.

Apple, to date, has utilized the purest form of leverage. Its iPhone is responsible for over 70 percent of Apple’s direct revenues. But thanks to a halo effect, where Apple’s hundreds of millions of faithful customers are so taken with the iPhone that they willing spend money on related products and services, the iPhone is really responsible for about 95 percent of Apple’s revenues. This product is so successful that the services that serve iPhone users would constitute a large and powerful company all on their own.

Microsoft, of course, invented this strategy, though it beat it into the ground and kept trying long after it had stopped working. But Windows was so successful back in the day that Microsoft was able to enter and then dominate related markets for servers (first smaller, workgroup-type solutions, but eventually the enterprise) and office productivity software. Those two markets have evolved to accommodate the cloud era and are, somewhat ironically, now much bigger than Windows, and more crucial to Microsoft’s future.

Amazon and Google, however, are different. And the ways in which they are different pose significant challenges to traditional tech firms like Apple and Microsoft. That is, these companies also leverage their successes with some dominant offering. But their dominant offerings are not (at least directly) technology products.

Google, of course, owns the online advertising industry, and its success there funds digital products and services that, while good, would never amount to a very large or successful company on their own.

And Amazon is a retail store-killing tsunami thanks to its hugely-successful online store. As I’ve discussed so often, Amazon has further bolstered its retailing success by weaving in an amazing array of digital services perks that make its core consumer offering, Amazon Prime, even more compelling. This combination of physical and digital services is a huge advantage, and it is one that its competitors cannot match.

From the perspective of a Microsoft watcher, which I am, I have watched these companies usurp and then surpass Microsoft in many ways, and in some cases, even in core markets.

Microsoft and Google, for example, should own cloud computing in a duopoly, by all rights. But here, Amazon has usurped them both and is widely-regarded as the number one player thanks to AWS. Why does AWS even exist? Because Amazon, thanks to its fast growth and sheer size, needed a way to scale its online operations to match the up-and-down nature of retailing. And in doing so, it realized that this capacity was something that other companies would need, something it could sell. So Microsoft is number two here and Google is an also-ran.

Office productivity might be the next Microsoft pillar to take a hit. Today, Microsoft does dominate this market and, according to the most recent data, its revenues from Office 365 are many times the size of Google’s comparable business. But Google’s biggest success is coming from education, startups, and very small companies, and these markets together equate to the future. Plus, Amazon is getting involved too, with a quiet effort to build on its AWS success with Office 365-like products and services.

On the client, of course, it’s already game over for Microsoft, thanks largely to the success of the iPhone and Android, and of Google’s free (and advertising-funded) services. Here, Amazon plays a much smaller role: Its Alexa-based smart speakers are popular, but that is a small market and one that Google should be able to run away with. And Amazon’s more traditional portable devices overall are a non-event, with relatively small numbers of tablets and e-book readers sold each year. Even the PC market looks impressive compared to those offerings.

But here, again, there is a path forward for Amazon, and it’s part of an overall ecosystem strategy that actually makes sense. Amazon doesn’t have to sell more tablets than Apple does iPads, per se. It just needs to continue offering a wide range of products and services that revolve around its core Prime subscription. And if these perks do nothing more than keep Prime members happy, and in the fold, great. That’s how Amazon measures success. That’s how Amazon is successful.

Well, that and market cap. It will be interesting to see whether Amazon’s unique advantages allow it to catapult past Apple and achieve that $1 trillion market capitalization first. But in some ways, it almost doesn’t matter. Yes, Amazon does compete with Apple, Google, and Microsoft in some ways. But in more important ways, it is a unique company that has no direct competition. There just isn’t a company quite like Amazon anywhere. And I doubt there ever will be.