By Christopher Mims
Here's a stark example of how the global coronavirus pandemic
affects America's tech giants, versus how it affects pretty much
On May 12, Alphabet Inc. subsidiary Waymo announced it had
scored an additional $750 million to make self-driving cars a
commercial reality, bringing its total external fundraising to $3
billion inside two months. Then, on the 18th, The Wall Street
Journal reported that Uber Technologies Inc. is cutting $1 billion
in fixed costs. This included laying off roughly a quarter of its
workforce and rethinking big, expensive bets -- such as its own
work on self-driving vehicles.
It isn't just Uber that is suffering. Many brand-name retailers
are now bankrupt or on the precipice, all weakened by shopping
habits transformed by e-commerce. Then there are the internet-era
businesses in every category, from Airbnb to from WeWork, that
might not have the cash to survive in their current forms.
Meanwhile, Big Tech's biggest advantage -- business models which
convert cash into innovation, market share and an ever-larger lead
over their competitors -- is accelerating, thanks to the pandemic.
The biggest of the big -- not just Google-parent Alphabet, but also
Amazon.com Inc., Apple Inc., Facebook Inc. and Microsoft Corp. --
all have businesses that throw off huge profits and bigfoot anyone
and anything that gets in their way.
Investment in developing proprietary systems is key to keeping
firms dominant in their markets. And spending on acquisitions helps
them do that and quash competition. With the eye-popping warchests
these companies have accumulated, it is clear they have the power,
and the habit, of continuing to spend -- even if the current
situation damages their revenue and profits.
And it might. Economists at the International Monetary Fund
predict this will be the largest global recession since the Great
Depression. Anindya Ghose, professor of business at New York
University's Stern School of Business, says even the big tech
companies will "see a much bleaker scenario" in coming months, and
perhaps beyond, with revenue potentially depressed for a long time
if reopening leads to new waves of infections and additional
These firms are still likely to come out ahead, says Rita
McGrath, a professor at Columbia Business School. What they are
selling -- e-commerce, cloud services, social media, devices
required to work from home and the like -- are all in high demand
and will be for the foreseeable future.
The tech giants that are thriving aren't merely doing it by
acquiring competitors and dominating markets. Like some monopolists
of ages past, these companies spend heavily on research and
At the end of the roaring '20s, General Electric invented the
first television. Throughout the Great Depression, GE and its
subsidiary RCA continued to invest in its development. The result
was RCA's dominance of the medium in the decades that followed.
Big Tech is adopting the same strategy today. Overall R&D
spending at the five biggest U.S. tech companies -- the five
biggest companies in the U.S., period -- continued to rise, even in
the first months of the pandemic. Facebook, Apple, Amazon, Alphabet
and Microsoft, or the "Faaam, " as I like to call them, spent
almost $29 billion on R&D last quarter, up 17% from the same
quarter last year. That is bigger than the entire annual budget of
the National Aeronautics and Space Administration -- and NASA is
supposed to get us to Mars.
Some initiatives are related to the coronavirus pandemic:
Microsoft is rolling out services to help health-care
professionals, Facebook is going all-in on remote work. Amazon
founder Jeff Bezos told investors to "take a seat" as he conveyed
the company's plans to spend its entire second-quarter profit --
about $4 billion -- on dealing with Covid-19. That program includes
the creation of an internal testing program for the virus. The
company is also considering developing yet more automation for its
fulfillment centers so they won't be as packed with humans.
Traditionally, these expenses could be classified as R&D, since
the money isn't being spent on activities with a proven commercial
benefit, and there is no telling when and how they might pay
Any shortfalls in future R&D spending by the Faaam could be
made up by acquisitions -- a form of outsourced R&D. The giants
let others build businesses around new ideas, then buy them up.
Since the U.S. declared a state of emergency and lockdowns
commenced, Apple bought a VR company, Facebook bought Giphy, Amazon
Web Services bought DataRow, Google bought Pointy and AppSheet, and
Microsoft bought or agreed to buy Metaswitch Networks, Softmotive
and Affirmed Networks. The chip giant Intel -- not technically part
of the Faaam, but one of their key enablers -- did two deals in
May, adding to its capabilities in self-driving cars and Wi-Fi.
While acquisition volume isn't necessarily up, this could be a
good time for these companies to buy up firms they have been
eyeing. After WeWork's collapse, valuations for many highflying
startups cooled, and the coronavirus pandemic could drive
valuations down even further. Facebook buying Giphy last week could
be a harbinger of what's to come.
As public companies, none of the Faaam are willing to comment on
their plans for future quarters beyond the guidance they gave in
earnings calls. Amazon predicted continued strong revenue growth
compared with a year ago, and noted the outsize expenses and
investments related to Covid-19. Facebook CEO Mark Zuckerberg said
his company plans to hire 10,000 more people in product and
engineering roles across 2020 so the company can "continue
building." Facebook CFO Dave Wehner said, "We plan to continue to
invest in product development and to recruit technical talent."
Microsoft predicted it will have modest revenue growth next
quarter, and CFO Amy Hood said that in the year ahead the company
would leverage its "strong financial position" to make "significant
investments." Apple CEO Tim Cook said that the company has entered
the crisis in a position of financial strength, and that he will
continue to manage the company for the long term. "We've always
managed through difficult moments by doubling down and investing in
the next generation of innovation and that's our strategy today,"
Just as no one predicted the coronavirus ( well, almost no one),
it is impossible to know what's coming for these companies in terms
of revenue and whether they'll dip into their reserves. In an
unusual move, Apple, Alphabet and Facebook all declined to offer
revenue guidance in their last quarterly reports, given the
uncertainty in the global economy.
It is possible that advertising will crater for Facebook and
Google in the way it has cratered for traditional media companies,
forcing them to pull back on spending in unprecedented ways, notes
Dr. Ghose. People stuck at home, driving up user-engagement numbers
for big tech, don't matter much if advertisers aren't spending to
reach them. And Alphabet's CFO said in the company's last earnings
call that the second quarter would be a difficult one for the
company's advertising business.
Maybe demand for iPhones and other consumer electronics crashes
because of high unemployment and low consumer spending. Perhaps
Amazon's competitors make inroads against its e-commerce business
in unexpected ways, even as spending drops across all
Even if all of this happened, all of these companies have enough
cash to sustain their innovative core and avoid laying off the
kinds of design, engineering and product talent that are so
expensive to hire in good times.
All market signals indicate investors are confident these
companies can continue to grow in the long run. The value of these
five companies are at or near their highs. In the middle of a
pandemic, their collective market capitalization is $5.6
One thing that could trip up the Faaam is antitrust action. The
Journal revealed on May 15 that both the Justice Department and
state attorneys general are well into planning antitrust lawsuits
against Google. Facebook's intended acquisition of Giphy is raising
antitrust alarms on both sides of the aisle in Congress. Last June,
the House Judiciary committee announced a sweeping investigation of
the market power of "big tech" companies, the FTC is investigating
every member of the Faaam, and the European Commission's scrutiny
of them is unrelenting.
Sen. Josh Hawley (R., Mo.) is pushing the Justice Department to
launch an antitrust investigation of Amazon after a Journal
investigation found the company had used data about independent
sellers on its platform to develop competing products. Apple is
facing a potential antitrust investigation by the EU, for allegedly
abusing the power of its App Store.
As long as managing the pandemic continues to take precedence in
the halls of governments everywhere, it seems unlikely regulators
will act on any of the still-unofficial proposals before them.
Those include splitting up Amazon's web and retail businesses,
decomposing Facebook into its constituent acquisitions, limiting
Apple's power over its own App Store, or curtailing Google's
dominance of online advertising. This buys Big Tech even more time
to lobby politicians and mollify regulators, build goodwill with
consumers, and plow resources into opening up an ever bigger lead
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Write to Christopher Mims at email@example.com
(END) Dow Jones Newswires
May 23, 2020 00:14 ET (04:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.