By Jason Dean
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 6, 2019).
Google, Facebook Inc. and other tech giants have long tinkered
with ways to grow outside the core businesses they dominate. Now
those efforts are becoming urgent.
Facebook Chief Executive Mark Zuckerberg, beset by public anger
over abuses on the social network, spent the company's annual
developer conference last week talking up his vision for a Facebook
more focused on private messaging and small groups than on the
advertising-driven social-media hub that gained it nearly 2.4
billion monthly users.
Messaging is one of several areas Facebook has been eyeing for
new opportunities. Another got the spotlight last week when The
Wall Street Journal reported that Facebook is recruiting financial
firms and online merchants to help launch a cryptocurrency-based
payments system.
Apple Inc., meanwhile, said last week its sales-and-profit slump
extended into a second straight quarter -- the first time that has
happened in more than two years -- thanks to falling sales of the
iPhone, the product that turned it into a colossus. Its response
has been to try to morph itself into a services company fueled by
app and entertainment sales as much as hardware.
Google parent Alphabet Inc. has been Big Tech's most eclectic
big-idea factory. It has worked on self-driving cars for a decade
and has arms devoted to everything from balloon-tethered internet
access to extending human life. But it has had little success
turning those efforts into moneymaking businesses. Advertising is
still 85% of its revenue, and operating losses at its "other bets"
segment ballooned by 52% in the last quarter to $868 million,
Alphabet said last week. The perils of its ad dependence were laid
bare when an unexpected drop in quarterly sales sent Alphabet
shares down 7.5% on Tuesday, their biggest one-day drop since
2012.
A confluence of forces is behind Big Tech's business-model
ferment. Blowback over privacy abuses and misinformation threatens
ad-driven strategies at Facebook and Google built on harvesting
people's information and maximizing the time they spend glued to
the internet. The smartphone, which underpinned so much of the tech
industry's boom over the past decade, is maturing, with incremental
innovation and flagging sales.
And the law of large numbers, combined with the tech industry's
history of upstarts leapfrogging incumbents on innovation, compels
executives to seek out new places to disrupt, lest they themselves
be disrupted.
"Their perspective is: We have to keep the growth," says Tim
Kendall, a former senior executive at Facebook and Pinterest Inc.
who now runs Moment, an app to help manage smartphone use. Mr.
Kendall says the need to diversify is all the greater because
regulatory concerns make it risky for giants to bet on growing
their share of the markets they already dominate. "The current
regulatory climate is such that all of them are saying, 'We can't
acquire growth into our core business because the [Federal Trade
Commission] will block it.'"
Mr. Zuckerberg in an interview with the Journal last week
emphasized the significance of Facebook's changes, calling his plan
to build out less-public communication networks "the beginning of a
new chapter" and attributing some of the recent executive
departures to the magnitude of the switch.
But he and other tech leaders aren't panicking. Google and
Facebook are still winning the vast bulk of new online-ad dollars.
The revenue growth number that so spooked Google investors was 17%
-- most companies would love that. Executives insisted to anxious
analysts that they're optimistic about the opportunities ahead.
Apple served up a relatively rosy outlook for its current
quarter.
Many investors, for now, are focused more on the opportunities
than the risks. Apple is on course to regain the $1 trillion market
capitalization that it hit last August, when it became the first
U.S. company to cross that threshold. Microsoft Corp., which itself
has thrived in recent years by upending its former business model,
closed above $1 trillion for the first time on Tuesday. Facebook's
stock has gained almost 50% this year, and Alphabet's was at a
record high just before last week's lurch down.
Amazon.com Inc. won a vote of confidence last week from Warren
Buffett's Berkshire Hathaway Inc., which recently took a stake in
the e-commerce giant. Jeff Bezos' well-documented allergy to
complacency has made Amazon a Big Tech forerunner in
diversification. It launched a cloud-computing business 13 years
ago that delivered almost 60% of its operating profit last year,
and has built big operations in entertainment and groceries.
But even at Amazon, revenue growth in the latest quarter was its
slowest rate in four years (also 17%). Profit more than doubled, as
advertising, a business it has been expanding aggressively, helped
offset weaker growth in the core online retail operation.
"There is a theme emerging here: There is reasonable doubt about
just how much low-hanging fruit is left for the largest tech
companies," Ben Thompson, a former tech executive who now runs
research firm Stratechery, wrote to clients on Thursday. "Apple has
sold the world iPhones, Google has stuffed mobile search, and now
Amazon has seized the obvious parts of e-commerce; what comes next
is much more difficult and expensive."
The companies have been laying the groundwork for their more
varied futures for a while. The engines of Facebook's pivot to
messaging are WhatsApp, which it bought in 2014 for $19 billion,
and Messenger, which it launched three years earlier. Apple started
amping up its services push several years ago.
Still, as they stretch into new domains, tech's titans
increasingly bang into each other. Amazon's advertising effort is
impinging on Google and Facebook, both of which are also muscling
up against Amazon in e-commerce. Facebook's messaging shift
threatens Apple, whose Messages app is important to its services
push. So do Amazon and Google's forays into hardware. Apple's
Hollywood campaign encroaches on Amazon, which already spends
billions of dollars annually producing entertainment.
Peter Barrett, a veteran tech executive who co-founded venture
investor Playground Global, says the shifting business models could
reorder the dominance of the tech giants. The rise of new
technologies like voice assistants that build on or displace the
smartphone will help determine which established companies -- and
which new players -- thrive. "Some will make the transition," he
says, "and some will see their power eroding."
--Tripp Mickle and Jeff Horwitz contributed to this article.
Write to Jason Dean at jason.dean@wsj.com
(END) Dow Jones Newswires
May 06, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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