The Economist

The EconomistAugust 4th 2018 Business 51

1

2 Tencent these often come with a board
seat and voting rights.
The Chinese government for its part is
surely delighted that its national technol-
ogy champions are snapping up stakes in
hundreds of startups. Being able to man-
age a handful of established private play-
ers with long-standing links to the Com-
munist Party with their tentacles in many
young firms makes the whole tech indus-
try easier to control be it through censor-
ship directives or in directing its know-
how to the state’s industrial plans.
For that reason the government is un-
likely to want to break up the “walled gar-
dens” that the giants have built round their
offerings in which startups must also oper-
ate. WeChat does not let users send friends
direct links to Taobao Alibaba’s main
shopping site. Apps owned by the two
firms tend to make it either finicky or im-
possible to pay usingtheir rival’s payment
system. Startups with backing from Ali-
baba or from Tencent have therefore come
to expect to be frozen out of parts of the
market. Liu Zihong founder of Royole an
independent startup valued at $5bn that
makes flexible displays says that as a rule
“if you band with one giant you lose the
chance to work with the other”.
As independents plenty of startups are
giving Alibaba and Tencent a run for their
money often serving markets into which
the giants have been slower to move. Pin-
duoduo a discount-buying app built its
group-buyingplatform by targeting Chi-
na’s poorer cities. Tencent soon took a
stake. Douyin and Huoshan short-video
apps backed by Bytedance a technology
firm with no current tiesto the two giants
have hooked youngsters and left Tencent
scrambling to create a rival offering.
Fast-growing platforms such as You-
miao a luxury-handbag rental firm based
in Hangzhou (also home to Alibaba) reck-
on they can take their pick of the giants’ in-
vestment offers (Alibaba and Tencent
came calling within months of Youmiao’s
launch). Some firms reject investment
from the duopoly. Lea Liu of QingCloud
an ambitious cloud-computing platform in
Beijing says that “if you want to be IBMfo r
the cloud you cannot be a pawn in a
giant’s data-technology strategy”.
Many entrepreneurs also welcome the
recent rise of a new tech trinity: TMD for
Toutiao (a news-aggregation app owned
by Bytedance) Meituan and Didi Chuxing
(a ride-hailing service). The trio are among
China’s fastest-growing platforms all
founded since 2010. Meituan and Didi
both rose with backing from a giant but
Bytedance publicly fell out with Alibaba-
backed Weibo a Twitter-like platform that
eventually retracted its investment from
the bolshie tech startup. It has since pur-
sued its own course. “Nobody thought that
a company like Toutiao would emerge to
rival the likes of Tencent and Baidu” says

Richard Peng a former investment chief

for Tencent who now runs Genesis Capital

a China-based venture-capital firm.

Last year Meituan set up its own invest-

ment fund opening a new channel for

startups (that is at some distance from Ten-

cent). It will doubtless be closely moni-

tored by the duopoly. The two firms have

rarely been so watchful of the other in a

competition that Tencent’s Pony Ma says

has been “formalised in our country”.

Even he has confessed on occasion that it is

an unhealthy one. But the two giants

should be on their guard for another rea-

son: having for so long fostered innova-

tion they are now at risk of sapping it.

They would be among the first to suffer. 7

I

N THE end it wasn’t enough at least for

now. On July 31st Apple announced re-

sults for its third quarter that handily beat

analysts’ expectations. Revenues rose by

17% compared with the same period in

2017 and profits were 32% higher. The

firm’s shares jumped by nearly 4% in after-

hours trading. But Apple did not quite

manage to become the world’s first widely

held listed company with a market capital-

isation of $1trn (see chart).

The near miss is a fitting coda to the lat-

est round of results in techland. Momen-

tum in this most upwardly mobile of in-

dustries is unbroken; sales and profits are

still rising. But the laws of economic gravi-

ty have not been repealed. In fact the era

of the FAANGs— as Facebook Amazon Ap-

ple Netflix and Google’s parent Alphabet

are collectively known—may be coming to

an end giving way to a period in which

two groups of tech firms follow different

trajectories.

This year the FAANGs and a few other

high-flying tech firms provided more than

half the returns in the S&P500 share index.

Netflix’s share price for instance more

than doubled between January and July.

Twitter’s almost did so. Facebook’s market

value quickly recovered from a low in

March after revelations that its data on

87m users had leaked to a British political-

campaign firm.

With their shares priced for near-per-

fect results the firmswere vulnerable to

bad news. This duly arrived starting with

Netflix a video-streaming service which

said in mid-July that it had added fewer

subscribers than expected. A few days lat-

er Facebook gave downbeat guidance

about future growth and margins. Then

Twitter a microblogging site announced

that its number of active users had de-

clined. All three firms’ share prices plunged

by about a fifth.

News of the wipeoutovershadowed

the fact that the other tech titans continue

to do well as also evidenced in July. Micro-

soft the world’s biggest software firm

reached $100bn in annual revenue for the

first time. Alphabet shrugged off the $5bn

fine recently imposed on it by European

trustbusters and posted strong results. Am-

azon announced a record quarterly profit.

These diverging results point to a broad-

er development. Throwing all the FAANGs

and other big tech firms into one basket has

always been lazy. In the future they will

probably be seen as two different groups: a

consumer-oriented one which could

somewhat awkwardly be called “FAT -

WIN” (Facebook Twitter and Netflix) and

a more business-to-business group which

some already dub “MAGA” (Microsoft

Amazon Google and Apple).

The first group shows signs of reaching

maturity. It is not that the firms will now

stagnate. Facebook’s revenues grew by

42%; Twitter’s were up by 24%. But signs

abound that social media’s best days are

over. Advertising revenues are not infinite.

Users are exhibiting social-media fatigue.

And regulators will continue to prod firms

to police their platforms (one of the rea-

The technology industry

FATWIN v MAGA

The era of the FAANGs may be over

Trillion-dollar wannabes

Source: Thomson Reuters

Market capitalisation $trn

2014 15 16 17 18

0

0.2

0.4

0.6

0.8

Apple 1.0

Amazon

Alphabet

Microsoft

Facebook

Netflix

Twitter