The problem with pioneering a new market is that you end up dominating it and then everyone wants to take you down. It’s an issue that has caused many a corporate innovator to come unstuck. When John D Rockefeller monopolised the oil market at the turn of the 20th century, his company was broken up into 34 pieces. Controlling America’s telephones in the mid-1900s sent regulators storming into AT&T (US:T), while federal antitrust laws put the brakes on Microsoft's (US:MSFT) seemingly unstoppable rise during the initial internet boom.
Similar concerns are encircling several pioneers of the latest digital age. And so, as Facebook (US:FB), Amazon (US:AMZN), Apple (US:AAPL), Netflix (US:NFLX) and Google’s parent company Alphabet (US:GOOGL) – the so-called FAANG stocks – emerge from another financial reporting season, a darker horizon looms.
That’s not to say the numbers weren't spectacular. Facebook nearly doubled earnings per share to $2.21 (£1.55), which beat analyst expectations by 26ȼ. At Amazon, revenues leapt 38 per cent to cross the $60bn quarterly threshold for the first time, while Apple’s profits hit yet another record high thanks to the iPhone X’s $999 price tag. Netflix added 6.36m new subscribers in the final quarter alone, and Alphabet reported revenues up by a quarter as demand for its pricey advertising slots surged.
But these numbers no longer feel like a badge of honour as was the case for corporate America during the Obama presidency. Instead, consumers and politicians have started asking whether these giants have grown too big, and there's a sense that Mark Zuckerberg, Jeff Bezos, Tim Cook, Reed Hastings and Larry Page are all dousing the sparks before they turn into fires of discontent.
Facebook’s fickle friend
Mr Zuckerberg has built Facebook’s image as a good giant of Silicon Valley. So for his company to be under the same scrutiny as other, potentially health-damaging, industries such as tobacco and sugar is far from ideal. In response, Facebook is overhauling its newsfeed to quell the accusations of causing mental health problems in young adults, aiding the spread of fake news and promoting the activity of terrorist groups.
But these changes could lessen the amount of time users spend on the social network, which will reduce the amount of money Facebook makes from advertising. Already the site’s popularity is dwindling: in the final quarter of 2017, average revenue per user in the dominant north American market fell for the first time.
But Facebook’s executives don’t believe the newsfeed changes will hurt revenues. The group has plenty of other avenues from which it can make money, including offering advertising space on Instagram, WhatsApp and Messenger or upping the price of marketing on the flagship site. In fact, Sheryl Sandberg, chief operating officer, thinks the newsfeed changes could lead to more 'monetisation' opportunities.
Amazon: health hero
Amazon and ‘not for profit’ in the same sentence sends shivers down the spine, and it's why news that Mr Bezos has teamed up with legendary investor Warren Buffett and JPMorgan’s chief executive Jamie Dimon to create an organisation aimed at cutting healthcare bills wiped billions of dollars off the market capitalisations of global health stocks.
But buttering up politicians by taking on the most hated industry in America won't hide the fact that Amazon has become worryingly enormous. In 2017, profits doubled (partly thanks to Trump’s tax cut) as revenues hit record highs, aided by a $4.5bn contribution from recently acquired grocery chain Whole Foods.
Having already toppled the book and music industries, the group has set its sights firmly on food, clothes and television. That’s not to mention its hugely profitable cloud hosting division – which is believed to account for 48 per cent of all global cloud computing business – and its data centre, which has put the insurance industry on edge. Calls for a break-up of the e-commerce giant are certainly getting louder.
Bite of the Apple
Consumers' desire to own the latest gadget means every time Apple launches its latest iPhone model, throngs of people queue up outside the stores to pre-order until stock runs out. But after those initial Apple-philes have had their fill, more rational buyers also start to order iPhones. But, for the first time, these more practical customers have said Apple is asking too much at $999 for a new phone. In the final quarter, volumes of iPhone sales dropped 1 per cent, missing market expectations. The price tag ensured iPhone revenues and profits rose overall, but analysts are concerned Apple could struggle to keep attracting customers.
Allegations that the world’s largest company purposely slowed down batteries to encourage customers to buy new models hasn't helped either. In the current quarter to March 2018, sales are expected to rise between 13 and 17 per cent to between $60bn and $62bn, but this falls short of the previous $68bn target.
Netflix's space
The one blip on an otherwise flawless set of results from the video streaming group was a $39m non-cash impairment relating to two episodes of House of Cards that Netflix commissioned but will now not air due to the sexual harassment scandal that erupted around the show’s leading man, Kevin Spacey. Netflix was quick to distance itself from the disgraced actor, cutting the star from its flagship show just two days after the allegations emerged.
Maintaining a clean image is important if Netflix is going to keep attracting talent and, amid rising competition in the TV market, big names and original content are the key to survival.
Investors may have cheered the swell in subscriber numbers in 2017, but there is no hiding from the cost of ensuring viewers come back for more. The group’s liabilities from content pre-payment and debt have increased fourfold in the past five years, hitting $24.2bn at the end of last year. With Amazon and Walt Disney (US:DIS) encroaching on its streaming space, Netflix is going to have to keep spending big.
Just Google it
Last year, European regulators hit Google with a €2.4bn (£2.1bn) fine for prioritising its own online shopping channel via its search engine. The criticism was that too many companies had become dependent on Google to drive business.
Ironically, it was Google’s own dependence on other companies that came to light following its latest earnings report. Alphabet’s shares stumbled after it reported a growing portion of revenue had been spent on setting the Google search engine as the default option on products and services such as iPhones and Mozilla’s Firefox browser.
But investment in these platforms is worth it. The growing use of smartphones around the world means more advertising dollars are being directed to mobile – great news for Google and Facebook, which together account for more than 60 per cent of the mobile advertising market.
