What happens when you own 99% of the market?

Tech giants are in a tough position. If your valuation is based on the promise of growth but you own 99% of the market where do you grow?

For decades, the goal of big tech has been clear and absolute: growth over everything else. Regardless of what obstacle came up, they were willing to push through no matter the cost. Whether it was concerns regarding privacy or data collection, predatory pricing, monopolistic practices, anti-trust lawsuits, or whatever, big tech kept charging forward hoping to maximise their user count. And for the longest time, this strategy worked. The more they pushed, the further they were able to reach. They were able to convince whole new demographics and even countries to adopt their technology. And over time, all of this growth has allowed big tech to be some of the most powerful, influential, and wealthy companies in the world.

However, it seems that big tech is finally facing a challenge that they can’t just brute force their way through: market saturation. This was historically something that most tech companies did not even consider simply because their target market was virtually everyone with an internet connection. But, guess what? Everyone with an internet connection now already uses most of the popular services offered by big tech. Take WhatsApp for example. In Brazil, they control 98.9% of the market. In India, they control 97.9%. In Italy, they control 97%. In Argentina, they control 96% and so on. And it’s not like they can grow in the countries where they don’t control nearly a 100% either because the rest of the market in these countries aren’t exactly open. They’re just controlled by another big tech offering whether that be iMessage or Android Messaging, and this is the case with basically every major industry.

Chrome has 3.2 billion users, Android has 3.3 billion users, YouTube has 2.7 billion users, Facebook has 2.9 billion users, Instagram has 2.3 billion users, and so on. When you combine all of these market shares, you’ll see that big tech already controls virtually the entire internet. In fact, just Google, Netflix, Facebook, Apple, Amazon, and Microsoft control 57% of all global internet traffic.

So, it’s safe to say that big tech has officially won the game. But, reaching market saturation may not seem like a big deal. After all, how hard could it be to just be the king of the hill and make billions every week, right? Well, that would be true if making billions every week was truly the end goal for these companies. For most of these companies, there is no concrete end goal. Their goal was to just grow infinitely. And given that tech is able to reach a larger demographic than any previous industry, this strategy was viable for decades. But, now that they’ve reached market saturation, the goal becomes a lot harder.

Now, you’re probably wondering, why does that even matter? Couldn’t these companies just hang up their hats and call it a day and enjoy market saturation? Well, they could definitely hang up their hats, but they wouldn’t really be able to enjoy it because many of these companies would end up losing hundreds of billions of dollars because the only thing holding up their massive valuations is infinite growth. Take Apple for example.

Apple is currently worth just under $3 trillion but on an annual basis, they only make a little over $100 billion. Now, that’s obviously an insane amount of money, but what we’re really concerned about is the ratio between their valuation and their annual earnings or their PE ratio which is currently about 30.

In other words, if you were to buy the entirety of Apple right now and they stop growing, it would take you 30 years to make all your money back. And even then, on your $3 trillion investment, you’d only be making a 3.3% yield on an annual basis. Aka, you took a $3 trillion 30-year long gamble with Apple just to end up making less than a high-interest savings account or a government bond. As you can see, investing in big tech at these valuations only makes sense if you think that they’re gonna continue doubling and tripling and quadrupling. If you think that they’re just gonna stay the same, it’s a terrible investment. For it to make sense to invest in a stagnant Apple, their valuation would have to come way down. Usually, the standard PE ratio for mature companies with stagnant bottom lines is 10. A lot of mature companies actually have PE ratios less than 10. Ford is at 6.78, Verizon is at 7.55, and United Airlines is at just 4.56, but let’s give Apple the benefit of the doubt and call it 10. This would mean that an investment in Apple would pay back in 10 years. Aka, the annual yield would be about 10% or a good amount higher than savings accounts and bonds, making the investment worth the risk.

But, for Apple to have a PE ratio of 10, their valuation would have to fall to $1 trillion which is obviously still a massive amount but it’s also $2 trillion less than their current valuation. And it’s the same case with the rest of big tech. For Microsoft to come to a PE ratio of 10, they would have to shed $2 trillion. Google would have to shed $1 trillion. Amazon would have to shed $1.3 trillion. And Facebook would have to shed $600 billion.

It’s worth mentioning that Apple’s net income has already been stagnating for 2 years, Google’s has been declining for 2 years, Amazon was briefly losing money, and Meta’s net income was straight up cut in half. The only big tech company that has managed to continue growing is Microsoft, and even that’s marginal. But, we don’t even have to speculate as to what would happen because this has already happened in the past.

This transition from hyper-growth to stagnation happens in basically every industry, whether it be railroad companies, banking, oil, automotives, you name it. Eventually, the exponentiality of the industry wears off, and valuations and expectations settle down. This isn’t to say that tech as a whole is done for. There are plenty of innovations that have yet to materialise, whether that be VR or AI or whatever else. But, it’s more than likely that these new revolutions will be led by a whole new generation of companies while current big tech gets left behind just like gen. 1 tech companies.

For Apple, that means they’ll have to grow their net income from $100 billion to $250 to $300 billion before they enjoy the same $3 trillion valuation. Big tech CEOs are well aware of this, and that’s why they’re scrambling to keep investor morale high and more importantly racing to monetise.

The race to monetise: Likely the first big tech CEO to come to this realisation was Satya Nadella. When he took over Microsoft, he was taking over from Steve Ballmer, one of the most controversial tech CEOs of all time. Steve had grown Microsoft’s revenue and profits by 3 fold, but Microsoft stock had fallen 36% throughout his 14 years of leadership. Satya saw this and decided that he didn’t want to play this game of constantly creating the next big thing and achieving infinite growth. That was clearly a young company’s game, and Microsoft was very much a mature company. So, what he did was transition Microsoft into becoming a tech holding company. Basically, he settled for modest growth with core Microsoft products and started investing hundreds of billions in up-and-coming companies with a bunch of exponential growth left. Just recently, they closed their $69 billion deal to acquire Activision Blizzard. But, the truth is, you can only do this so many times. Eventually, you get so big that even a $100 billion acquisition doesn’t move the needle.

The second big tech CEO to realise this was Tim Cook. In late 2018, he realised that iPhone sales were not only starting to stagnate but decline. So, he decided to take control of the narrative and stop reporting unit sales for all Apple products. Instead, he started focusing on services like Apple Music and iCloud, which were extremely successful. But, now they’re at nearly a billion paying users and running out of iPhone users to monetise.

The next big tech CEO to realise this was Mark Zuckerberg. After the pandemic boom, Mark realised that he had reached market saturation with his social media. So, he decided to start digging for new gold. He committed $100 billion to the Metaverse, changed the entire company’s name to Meta, committed $33 billion to a new language model, and tried to take on Twitter. But so far, none of these new efforts have quite panned out.

And that brings us into Sundar Pichai, arguably the last big tech CEO to realise this and as such, his solution seems to be the most lackluster. Google is basically just doubling down on the cloud and packing in as many ads as they can. But again, they can only pack in so many ads and take this so far which brings us into the core issue at hand. Big tech has enjoyed massive growth and tremendous returns in their pursuit to reach everyone on the entire planet.

But now, they’ve actually done it and they’re facing the real challenge which is not even growing but simply maintaining their sky high valuations despite a stagnant user base. Every big tech company has chosen a different path to overcome this new quick sand of high interest rates and market saturation. Will their efforts actually pan out? Only time will tell.