The Economist - UK (2022-04-30)

58 Business TheEconomistApril30th 2022

brokers’reports,hedge­fundanalysesand,

most revealing, antitrust court cases

brought by would­be competitors and

competitionregulatorsaroundtheworld.

Allthesearebringingtolightdetailsabout

theinnerworkingsofbigtech.

Tounderstanditall,TheEconomisthas

rifledthroughcourtdocuments,internal

emails, analyst notes and leaked files

aboutAlphabet,Amazon,AppleandMeta

(Microsofthasmanagedtoavoidantitrust

scrutinythistimearound,sosecretinfor­

mationaboutitsfinancesisscarcer).What

emergesisa pictureofbigtechinwhich

the titansappear more vulnerable than

their ostensible omnipotence suggests.

Their secretive profit pools are indeed

deep.Butthefirms’financesecretsbetray

weaknesses,too.Threestandout:a high

concentrationofprofits,waningcustomer

loyaltyandthesheersumsatriskfromas­

sortedantitrustactions.

Startwiththeprofitpools.Thebiggest

ofthesetendtobetransparent.TheiPhone

remains Apple’s profit engine, Amazon

rakes inmost ofits money fromcloud

computing, and Alphabet and Meta

couldn’tsurvivewithoutonlineadvertis­

ing.Thefirmsarelessforthcoming whenit

comes to disclosing details about their

smallerbutfast­growingunits.

Perhaps the biggest untrumpeted

sourcesofprofitsforAlphabetandApple

aretheirappstores.Thefirmstakea com­

missiononallin­appspendingonthese

platforms,usuallyofupto30%(thoughin

a bid to appease regulators, they are

increasinglyofferinglowerratesforsmall

developersandthosewhoseappsrelyon

subscriptions).The revenuestreams are

middling.In 2019 theywerearound$11bn

forGoogle,accordingtoonecasebrought

againstitinAmericabya groupofstateat­

torneys­general.Analystsestimatethatfor

Apple’sstoretheywere$25bnlastyear.

Becausethecosts ofmaintainingthe

appstoresarelow,however,theprofitmar­

ginsarevast.TheoperatingmarginforAp­

ple’sappstorehasbeenestimatedat78%,

accordingtoonecasebroughtagainstthe

firmbyEpicGames,a video­gamesmaker.

ForGooglethefigureis62%. Thatcom­

pareswithanoperatingmarginof35%for

Apple’soverallbusinessandof31%forAl­

phabet’sbusinessasa whole(whichcon­

tinuestorelyonadvertisingforrevenues).

Theappstoresarebooming.Revenues

fromrelatedcommissionsforGoogleand

Appleroughlydoubledbetween 2017 and

2020,according totheCompetitionand

MarketsAuthority (cma),Britain’s trust­

bustingagency.In 2020 Google’sstorehad

800,000­900,000 developers offering

2.5m­3mapps.Thatmadeitslightlybigger

thanApple’s,whichwashometo500,000­

600,000developersand1.8mapps.There

isnosignofthegrowthslowingdownor

margins shrinking,according to Apple’s

Epic caseandthecmaprobe.Thegross

marginonGoogle’sappstorehastickedup

bya fewpercentagepointsinrecentyears.

InApple’sannualreportitsapp­store

revenuesareina categorycalled“services”,

whichmade$68bninsaleslastyear,or19%

ofApple’stotal.Buttheappstoreisnotthe

mostprofitablesubsetofApple’sservices.

Thoughtheexactfigureisunknown,the

grossmarginonApple’ssearch­advertis­

ingsegmentisevenlargerthanonitsapp

emporium,thecmareckons.That,accord­

ingtotheregulator,isdowntoa dealstruck

between Apple and Google. The terms

meanthatGooglesearchisthedefaultop­

tiononmostAppledevices.Inexchange,

Google gives Applesomewhere between

$8bnand$12bna year(2­3%ofApple’stotal

revenue). This arrangementcosts Apple

closetonothing,soit isnearlyallprofit.

AmazonandMetaare(abit)lesssecre­

tiveaboutthesourcesofrevenuesandpro­

fits.Despiteitsrebrandingandpivottothe

virtual­reality“metaverse”,Metaisn’tshy

aboutadmittingthatitcontinuestomake

97%ofrevenuesfromonlineadvertising.

Amazonishappytodiscloserevenuesof

itscontroversialMarketplace,wherethird­

partyvendorsselltheirwares,payingthe

equivalentof19% ofthosesales forthe

privilege(upfrom11%in2017)andcompet­

ing withAmazon’s ownretail business.

Marketplacecontributed$103bntoAma­

zon’stoplinein2021,a six­foldincrease

from 2015 and22%ofthefirm’stotal.

Butittookdiggingbyanalyststoesti­

matethatInstagramaccountedfor$42bn

ofMeta’srevenueslastyear,nearlytwo­

fifthsofthetotalandupfroma reported

$20bn,ora quarterofthetotal,in2019.The

photo­sharingapp’sroleinthesocial­me­

diaempire’sprospectshasrisendramati­

cally, in other words. And a lawsuit

broughtbytheattorney­generaloftheDis­

trictofColumbiathatrevealedMarketplac­

e’sprofitmarginstobe20%,fourtimes

higherthanthoseofAmazon’sownretail

business(thecasedoesnotspecifywheth­

erthemarginsinquestionweregross,net

oroperating).

Fairgame

Allthismakes forplenty ofdeepprofit

pools.Lookcloser,though,andtheyare

surprisinglynarrow.InApple’sappstore,

forexample,gamesaccountfor70%ofall

revenues,accordingtodocumentsuncov­

eredduringtheEpiccourtbattle.Mostof

thiscomesfromin­apppurchases,suchas

wacky accessories for avatars or virtual

currencies.In2017,6%ofapp­storegame

customersaccountedfor88%ofthestore’s

gamesales.Thoseheavyusersspent,on

average,morethan$750eachyear.

TheEpictrialalsorevealedthatthetop

1%ofApplegamersintermsofspending

generated64%ofsalesandsplurgedanav­

erageof$2,694annually.Internallythese

super­spenders are known as “whales”,

liketheircasinoequivalents.Aninvestiga­

tionbythecmafounda similarpatternat

Google’sappstore.In 2020 around90%of

the store’s Britishsales camefromless

than5%ofitsapps.Onceagainspending

onin­appfeaturesingamesmadeupthe

vastmajorityofrevenue.

Spendingisconcentratedintheonline

ad industry, too. Another cma probe

lookedatdataonBritishadvertiserswho

spenta combined£7bn($8.9bn)in 2019 on

GoogleAds, anad­buyingtoolaimedat

smallbusinesses.Thetop5­10%ofadver­

tisersbyspendingmadeupmorethan85%

ofrevenuefor GoogleAds. Thehighest­

spendingsectorswereretail,financeand

travel. A similar exercise showed even

greaterconcentrationatFacebook.Thetop

5­10%ofthesocialnetwork’sadvertisers

Shy tech

Revenuesbytopreportedcategory,2021*,$bn

Source:Bloomberg

*Financialyear †GoogleSearchandother ‡ExcludesOcecloud services

§Fivebiggestnon-techUScompaniesbyrevenues **Includesdouble-countingfromother categories

1

ExxonMobil

UnitedHealth

CVSHealth

BerkshireHathaway

Walmart

MetaPlatforms

Microsoft

Alphabet

Apple

Amazon

0 100 200 300 400 500 600

Number of categories reported

4

12

12

18

10

3

9

8

5

Big tech

Non-tech§

Online stores

iPhone

Advertising†

Server/cloud‡

Advertising

Grocery

Pharmacy services**

Premiums

Downstream

McLane Company

Others