At a glance, it may seem like the world’s biggest technology companies have a lot in common.
Q4 hedge fund letters, conference, scoops etc
For starters, all five of the Big Tech companies (Amazon, Apple, Facebook, Microsoft, and Alphabet) have emerged as some of the most valuable publicly-traded companies in the world, with founders such as Jeff Bezos or Bill Gates sitting atop the global billionaire list.
These tech giants also have a consumer-facing aspect to their business that is front and center. With billions of people using their platforms globally, these companies leverage user data to tighten their grip even more on market share. At the same time, this data is a double-edged sword, as these same companies often find themselves in the crosshairs for mishandling personal information.
Finally, all of these companies have a similar origin story: they were founded or incubated on the fertile digital grounds of the West Coast. The company that has the weakest claim to such origins would be Facebook, but even it has been based in Silicon Valley since June 2004.
Sizing Up the Tech Giants
For all of their commonalities, it seems that there is less of a mold for how these tech giants end up generating cashflow.
But before we get to how Big Tech makes its money, let’s start by looking at the financials at a higher level. The following data comes from the 2018 10-K reports filed last year.
Together, the Big Five tech giants combined for just over $800 billion of revenue in 2018, which would be among the world’s 20 largest countries in terms of GDP. More precisely, they would just edge out Saudi Arabia ($684 billion GDP) in terms of size.
Meanwhile, they generated a total of $139 billion of net income for their shareholders, good for a 17.3% profit margin.
How Big Tech Makes Money
Let’s dig deeper, and see the differences in how these companies generate their revenue.
You are the Customer
In the broadest sense, three of the tech giants make money in the same way: you pay them money, and they give you a product or service.
Apple (Revenue in 2018: $265.6 billion)
- Apple generates a staggering 62.8% of its revenue from the iPhone
- The iPad and Mac are good for 7.1% and 9.6% of revenues, respectively
- All other products and services – including Apple TV, Apple Watch, Beats products, Apple Pay, AppleCare, etc. – combine to just 20.6% of revenues
Amazon (Revenue in 2018: $232.9 billion)
- Amazon gets the most from its online stores (52.8%) as well as third-party seller services (18.4%)
- Amazon’s fastest-growing segment is offline sales in physical stores
- Offline sales generate $17.2 billion in current revenue, growing 197% year-over-year
- Amazon Web Services (AWS) is well-known for being Amazon’s most profitable segment, and it counts for 11.0% of revenue
- Amazon’s “Other” segment is also rising fast – it mainly includes ad sales
Microsoft (Revenue in 2018: $110.4 billion)
- Microsoft has the most diversified revenue of any of the tech giants
- This is part of the reason it currently has the largest market capitalization ($901 billion) of the Big Five
- Microsoft has eight different segments that generate ~5% or more of revenue
- The biggest three are “Office products and cloud services” (25.7%), “Server products and cloud services” (23.7%), and Windows (17.7%)
The remaining tech giants charge you nothing as a consumer, so how are they worth so much?
You are the Product
Both Alphabet and Facebook also generate billions of dollars of revenue, but they make this money from advertising. Their platforms allow advertisers to target you at scale with incredible precision, which is why they dominate the online ad industry.
Here’s how their revenues break down:
Alphabet (Revenue in 2018: $136.8 billion)
- Despite having a wider umbrella name, ad revenue (via Google, YouTube, Google Maps, Google Ads, etc.) still drives 85% of revenue for the company
- Other Google products and services, like Google Play or the Google Pixel phone, help to generate 14.5% of total revenue
- Other Bets count to 0.4% of revenue – these are Alphabet’s moonshot attempts to find the “next Google” for its shareholders
Facebook (Revenue in 2018: $55.8 billion)
- Facebook generates almost all revenue (98.5%) from ads
- Meanwhile, 1.5% comes from payments and other fees
- Despite Facebook being a free service for users, the company generated more revenue per user than Netflix, which charges for its service
- In 2018 Q4, for example, Facebook made $35 per user. Netflix made $30.
So while the tech giants may have many similarities, how they generate their billions can vary considerably.
Some are marketing products to you, while others are marketing you as the product.
Article by Visual Capitalist
