Who Has More Money Apple Or Google

Business organization | Lifting the silicon veil

The secrets of large tech

We dig within the finances of Apple tree, Amazon and others

Apr 30th 2022 | San Francisco

A MERICA'S TECH giants make ungodly amounts of money. In 2021 the combined revenue of Alphabet, Amazon, Apple, Meta and Microsoft reached $i.4trn. These riches come from a wide and constantly expanding set of sources, from phones and pharmaceuticals to video-streaming and virtual assistants. Analysts expect the tech quintet's combined sales to surpass $340bn in the offset three months of 2022, around vii% more than in the aforementioned period last yr.

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In a quarterly ritual that kicked off on Apr 26th, when the big five started reporting their latest earnings, the staggering headline numbers again hit headlines. Alphabet unveiled revenues of $68bn, upwards by 23% compared with a year ago, though slowing advertising growth saw net profit dip to $xvi.4bn. On the same mean solar day Microsoft announced revenues of $49.4bn, up by 18%, and net profits of $16.7bn. A day later Meta revealed sales of $27.9bn with net profits of $seven.5bn. Amazon and Apple reported afterward The Economist was published.

Big tech firms are understandably eager to trumpet these impressive figures, as well as their various offerings. They are considerably more coy virtually how much many of their products and services really make. Annual reports and other public disclosures tend to lump large revenue streams together and describe them in the vaguest terms. Terminal year, for example, the five giants' sales were split out into 32 business segments in total. That compares with 56 segments for America's 5 highest-earning non-tech firms.

Apple tree breaks its sales into five slices; Meta into only three (encounter chart 1). The category that Alphabet labels every bit "Google Other'' made $28bn in revenue terminal year. It includes Google's app store, sales of its smartphones and other devices, and subscriptions from YouTube, a subsidiary. Terminal year YouTube's advertising revenue, which Alphabet kickoff revealed simply in 2020, reached $29bn. That means that in 2021 Google Other and YouTube's advertisement business concern each generated more money than four-fifths of the companies in the S&P 500 alphabetize of the biggest American firms.

The opacity makes business concern sense. Keeping rivals in the nighttime helps ensure that they volition not try to replicate a prized business unit and eat into its margins. Andy Jassy, Amazon's boss, has lamented the prospect of breaking out his firm'southward financials because they incorporate "useful competitive information".

Annoyingly for the tech barons, the veil of secrecy is getting thinner. Regulators, lawmakers and investors run across it as a problem, and are calling for more than transparency about everything from how big tech's payments platforms work to the corporeality of carbon the companies discharge out. And new sources of information are emerging, from brokers' reports, hedge-fund analyses and, most revealing, antitrust courtroom cases brought by would-be competitors and competition regulators effectually the world. All these are bringing to light details about the inner workings of big tech.

To understand information technology all, The Economist has rifled through court documents, internal emails, analyst notes and leaked files virtually Alphabet, Amazon, Apple and Meta (Microsoft has managed to avoid antitrust scrutiny this time around, so secret information virtually its finances is scarcer). What emerges is a picture of big tech in which the titans announced more than vulnerable than their ostensible omnipotence suggests. Their secretive profit pools are indeed deep. Only the firms' finance secrets betray weaknesses, too. 3 stand up out: a high concentration of profits, waning customer loyalty and the sheer sums at risk from contrasted antitrust actions.

Beginning with the turn a profit pools. The biggest of these tend to exist transparent. The iPhone remains Apple tree's turn a profit engine, Amazon rakes in about of its coin from cloud computing, and Alphabet and Meta couldn't survive without online advertising. The firms are less forthcoming when information technology comes to disclosing details about their smaller but fast-growing units.

Maybe the biggest untrumpeted sources of profits for Alphabet and Apple tree are their app stores. The firms take a commission on all in-app spending on these platforms, unremarkably of upward to xxx% (though in a bid to appease regulators, they are increasingly offering lower rates for small developers and those whose apps rely on subscriptions). The revenue streams are middling. In 2019 they were around $11bn for Google, according to one example brought against it in America by a group of state attorneys-general. Analysts judge that for Apple tree's store they were $25bn last year.

Because the costs of maintaining the app stores are low, however, the turn a profit margins are vast. The operating margin for Apple's app store has been estimated at 78%, according to one example brought against the firm past Ballsy Games, a video-games maker. For Google the figure is 62%. That compares with an operating margin of 35% for Apple tree'southward overall business organisation and of 31% for Alphabet's business as a whole (which continues to rely on advertising for revenues).

The app stores are booming. Revenues from related commissions for Google and Apple tree roughly doubled betwixt 2017 and 2020, according to the Competition and Markets Dominance (CMA), U.k.'s trustbusting agency. In 2020 Google's shop had 800,000-900,000 developers offer 2.5m-3m apps. That fabricated information technology slightly bigger than Apple's, which was dwelling house to 500,000-600,000 developers and 1.8m apps. There is no sign of the growth slowing down or margins shrinking, according to Apple's Epic case and the CMA probe. The gross margin on Google's app store has ticked up by a few percentage points in contempo years.

In Apple's almanac study its app-store revenues are in a category called "services", which made $68bn in sales last year, or xix% of Apple'south full. Only the app store is not the most profitable subset of Apple'southward services. Though the exact figure is unknown, the gross margin on Apple'south search-advertizing segment is fifty-fifty larger than on its app emporium, the CMA reckons. That, according to the regulator, is downwardly to a deal struck between Apple and Google. The terms mean that Google search is the default option on nigh Apple devices. In exchange, Google gives Apple tree somewhere between $8bn and $12bn a year (2-3% of Apple's total acquirement). This organization costs Apple close to nothing, so information technology is about all profit.

Amazon and Meta are (a flake) less secretive about the sources of revenues and profits. Despite its rebranding and pivot to the virtual-reality "metaverse", Meta isn't shy almost admitting that information technology continues to make 97% of revenues from online advertising. Amazon is happy to disembalm revenues of its controversial Market place, where third-party vendors sell their wares, paying the equivalent of xix% of those sales for the privilege (up from xi% in 2017) and competing with Amazon's own retail concern. Marketplace contributed $103bn to Amazon'due south top line in 2021, a vi-fold increase from 2015 and 22% of the house'south total.

But it took digging by analysts to estimate that Instagram accounted for $42bn of Meta's revenues last year, nigh two-fifths of the full and upward from a reported $20bn, or a quarter of the full, in 2019. The photograph-sharing app's role in the social-media empire'southward prospects has risen dramatically, in other words. And a lawsuit brought by the chaser-general of the District of Columbia that revealed Marketplace's profit margins to be twenty%, iv times higher than those of Amazon'south own retail concern (the example does non specify whether the margins in question were gross, cyberspace or operating).

Fair game

All this makes for plenty of deep profit pools. Look closer, though, and they are surprisingly narrow. In Apple tree's app store, for example, games account for lxx% of all revenues, according to documents uncovered during the Epic court boxing. Virtually of this comes from in-app purchases, such as wacky accessories for avatars or virtual currencies. In 2017, 6% of app-store game customers accounted for 88% of the store'due south game sales. Those heavy users spent, on average, more than $750 each yr.

The Epic trial besides revealed that the top one% of Apple tree gamers in terms of spending generated 64% of sales and splurged an average of $two,694 annually. Internally these super-spenders are known as "whales", like their casino equivalents. An investigation by the CMA found a similar pattern at Google'south app store. In 2020 around 90% of the store's British sales came from less than 5% of its apps. Once once again spending on in-app features in games made upwardly the vast majority of revenue.

Spending is concentrated in the online ad industry, too. Another CMA probe looked at data on British advertisers who spent a combined £7bn ($viii.9bn) in 2019 on Google Ads, an ad-buying tool aimed at small businesses. The top v-10% of advertisers past spending made up more than than 85% of revenue for Google Ads. The highest-spending sectors were retail, finance and travel. A similar exercise showed even greater concentration at Facebook. The top five-10% of the social network's advertisers made up more than 90% of revenue (encounter chart 2). Retail, amusement and consumer-goods firms splurged virtually.

Concentration is likewise nowadays at the level of "impressions", as each incident of an advert actualization on a user's screen is known in the concern. That was one finding of internal inquiry by Google, which was unearthed as part of a case bought confronting the tech giant by another group of American state attorneys-general. The report found that in America 20% of all impressions produce fourscore% of spider web publishers' ad revenue. High-value impressions are ones aimed at users likely to brand a buy. Google referred to this phenomenon internally as "cookie concentration".

Besides a heavy reliance on a few big profit generators, another undisclosed weakness is customer churn. Tech giants' customers are oftentimes assumed to be devoted to their products and services—or even hooked. The companies do not challenge this assumption in public, considering it conveys the sense of captive markets, which are dearest of investors. In fact, their markets may not be quite and then captive.

The Epic case revealed that roughly 20% of iPhone users who bought a new phone in 2019 and 2020 switched to another smartphone. Leaked documents from Meta prove that fewer teenagers are signing up to Facebook and those that do are spending less time on information technology. Even Instagram, Meta'southward youth-friendlier platform, is losing out to rivals. A leaked internal report from March terminal year found that teenagers were spending more than twice every bit much time on TikTok, a hipper brusque-video app.

Young people are not the only customers beginning to retreat from the platforms. So are young companies. Final year was a bonanza for startups. Global venture-capital funding reached $621bn, more than than double the previous twelvemonth's total. According to a report past Bridgewater Assembly, the world's largest hedge fund, of all the money invested in early-phase companies about a fifth is spent on cloud services, a market dominated past Alphabet, Amazon and Microsoft. Some other two-fifths goes on marketing, which in the digital realm is dominated by Alphabet, Meta and, increasingly, Amazon. Bridgewater estimates that, all told, around ten% of the total acquirement of Alphabet, Amazon and Meta is derived from the startup ecosystem. That is the equivalent of $84bn each year.

That flow of money may be ebbing. Fears about rising inflation, Russia's war in Ukraine and the chance of a recession has sent the share prices of tech firms tumbling. The NASDAQ, a tech-heavy index, has fallen by 20% from its height in November. Falls in public markets are filtering down to the startup world. On March 24th Instacart, a grocery-commitment firm, cut its own valuation past 38%. Lower valuations volition in turn make it harder for firms to raise capital. Investors say they wait to see startups tightening their belts in the coming months. That means less spending on the cloud and ads.

What practice all these vulnerabilities add up to? In the worst-example scenario, where the toughest-talking regulators in America, Britain and the EU get their way, the answer is an awful lot. Europe poses the biggest threat. The Digital Markets Act (DMA) is a sweeping new set of Eu rules designed to rein in big tech that was finalised last month. It will only affect some concern units and is targeted at tech'due south European operations. Bernstein, a broker, finds that Alphabet, Apple tree, Amazon and Meta make $267bn of revenue, about a fifth of their combined total, in Europe. A back-of-the-envelope calculation past The Economist suggests the DMA puts peradventure 40% of the four firms' European sales at risk.

Globally, Alphabet is the most exposed, with about 90% of European revenues (equivalent to 27% of its global revenues) in danger. In America Google's search monopoly is beingness targeted in a case brought by a team of state attorneys-general. The Section of Justice is thinking about following suit. That puts American search revenue of $70bn, a quarter of Alphabet'southward total, at take chances of antitrust action. If Alphabet reduced its committee on in-app payments from xxx% to 11%—the share agreed in a deal betwixt Google and Spotify on March 23rd—American app-store revenues would plummet from $11bn to $4bn. Together these actions could imperil perhaps $150bn of Alphabet's revenue, or near 60% of its global full.

Many appy returns

Apple'southward worst-case exposure is smaller but still significant. If trustbusters put a stop to its sweetheart search deal with Google, that would imperil $8bn-12bn a twelvemonth. Should Apple follow Alphabet's lead and slash app-store commissions, or be forced to practice so by new laws, its app-related earnings would likewise drop, from virtually $25bn to $9bn. Apple'due south total exposure would exist roughly $35bn, or a 10th of global revenue. Amazon stands to lose up to $77bn per year, or 16% of global revenue, if it is barred from mixing its own retail operations with those of third parties on Marketplace.

Some lawmakers and regulators have been murmuring about breaking up Amazon altogether, into a retailer and a cloud-computing provider, for example. The rump Amazon would either exist deprived of its east-commerce sales (about 70% of current revenues) or its deject profits (nearly three-quarters of its profits). The same voices are calling to split Meta. If America's Federal Trade Committee got its way and forced the social-media conglomerate to hive off Instagram and WhatsApp, the company could lose $42bn in revenues from Instagram and some other $2bn from WhatsApp—or ii-fifths of its full.

All told, if everything went against large tech, perhaps $330bn in revenues would exist at risk, or about a quarter of the full for Alphabet, Amazon, Apple tree and Meta. That is before including the two antitrust bills making their way through America's Congress. Amidst other things, these aim to terminate platform owners, such as app stores and search engines, giving preferential treatment to their own products. The financial impact of such rules is hazy simply could, as in Europe, be substantial.

This catastrophic case for big tech is unlikely to materialise. Many attempts to check the power of the platforms have gone nowhere. The electric current crop is likely to exist watered down and could take years to have effect. Just a few successful tech-bashing efforts could brand a meaningful dent in the firms' prospects. And past lifting the veil on tech titans' secret finances, they are already alerting challengers to where exactly margins are ripest for eating into. ■

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This commodity appeared in the Concern section of the print edition nether the headline "The secrets of big tech"

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Source: https://www.economist.com/business/the-finance-secrets-of-big-tech/21808956

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