The Economist October 30th 2021 75
BusinessTechearnings
Cloudy with a dearth of chips
T
he techindustry recently appeared to
be sitting on cloud nine. One record
after another fell when quarterly results
were reported three months ago. Revenues
had grown by 40% on average compared
with the same period a year ago and profits
by 90% for the five Western technology ti
tans—Alphabet (Google’s parent compa
ny), Amazon, Facebook, Apple and Micro
soft, collectively known as gafam. Indices
of tech shares, such as the s&p500 Infor
mation Technology benchmark, climbed
to stratospheric heights.
If the latest round of quarterly earnings
are any guide—three of the digital giants
have already reported and results from
Amazon and Apple are due to after The
Economistgoes to press—the tech industry
is coming back down to earth. Assuming
that the pair meet analysts’ expectations,
gafam’s revenues and profits will both
have increased but by a more modest 30%.
Share prices are languishing. The slow
down—or breather, if you will—provides
additional evidence of the degree to which
the pandemic has changed the tech indus
try. The question now is whether the sector
is on a new trajectory or will revert to type
over the next few years.
For starters, one of the first predictions
when covid19 hit in early 2020 was that it
would make big tech even bigger. Those
firms, ran the theory, would be best placed
to benefit from an increased demand for
digital offerings, whereas smaller firms,
having fewer resources to get through the
pandemic, would suffer most from its
downsides. The first half of this prediction
has come true: as the growth of the five
firms’ market capitalisation shows. In Jan
uary 2020 their combined value accounted
for 17.5% of the S&P 500. Today their share
hovers around 22%.
That said, many smaller companies
have also grown in size and value. The pan
demic has given rise to a group which
could be called “tiertwo tech”, the weight
of which, measured by market capitalisa
tion, has grown notably relative to the ti
tans. In May we defined this group to include 42 firms with a market value then of
no less than $20bn that were incorporated
in 2000 or later. In February 2020 these had
a joint market capitalisation of 22% of ga-
fam’s. Today the figure stands at 31%
The reasons for this new strength are
multiple. One is the large number of list
ings of late, particularly of tech startups:
more than 100 since the start of the year,
says Renaissance Capital, a data provider.
Despite some highvalue deals, a backlash
against big tech’s acquisitiveness has
slowed the pace of mergers and takeovers
this year. Most importantly, the pandemic
has shown that there are big digital mar
kets that are not dominated by gafam. The
group of tiertwo firms, for instance, is led
by PayPal, a payments provider, that boasts
a market capitalisation of $276bn.
Yet the most intriguing shifts are quali
tative. The first is that the tech industry has
become far cloudier than previously. “We
saw two years of digital transformation in
two months,” said Satya Nadella, the boss
of Microsoft, early in the pandemic, refer
ring mostly to the growth of its cloud. Tak
en together, revenues of the three biggest
clouds—Microsoft’s cloud business, Ama
zon’s aws and Google Cloud Platform,
which between them provide more than
60% of onlineinfrastructure services—
have surged by more than a third from
$27bn in the fourth quarter of 2019 to near
ly $37bn in the second quarter of this year.
The gathering cloud’s bigger beneficiaS AN FRANCISCO
How the pandemic has changed the weather in the technology industry
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