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Topical Discussion 4: FAMGA

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https://www.nytimes.com/2018/08/02/business/apple-trillion.html (Links to an external site.)

Apple’s $1 Trillion Milestone Reflects Rise of Powerful Mega companies

By Matt Phillips

Aug. 2, 2018

U.S. Steel. General Motors. AT&T. Exxon Mobil.

Small potatoes.

In July of 2018, Apple reached a milestone that these icons of capitalism never dreamed of: a market value of more than  (Links to an external site.)$1 trillion (Links to an external site.).

That landmark is the result of an extraordinary corporate success story (Links to an external site.). In a span of just 21 years, a near-bankrupt computer maker evolved into the most valuable publicly traded company in the United States, pushing the tech industry away from big, bulky machines and producing some of the world’s most popular consumer products, like the iMac, the iPod and the iPhone. Apple’s products have reshaped swaths of everyday life.

Apple’s new 13-figure valuation highlights how a group of enormous companies has come to dominate the United States economy. Today, a smaller cluster of American companies commands a larger share of total corporate profits than since at least the 1970s.

The impact of this phenomenon has been clear in the stock markets, where a band of household-name companies — led by Apple, Amazon, Facebook and Google — has fueled the nine-year bull market, the second-longest behind the rally that ended in 2000. Their successes also are propelling the broader economy, which is on track for its fastest growth rate in a decade.

But the effects of the consolidation of corporate profits extend far beyond the stock markets — and they are not entirely benign.

Economists, for example, are starting to look into whether the rise of so-called superstar firms is contributing to the lackluster wage growth, shrinking middle class and rising income inequality in the United States. The vast social and political influence wielded by these megacompanies has prompted some lawmakers to demand more regulation to rein them in.

“It’s one of the most important trends that we’re experiencing,” said Roni Michaely, an economist at the University of Geneva. “It’s really about economic growth, economic inequality and consumer welfare.”

In the past few decades, a profound shift has taken place in the distribution of corporate profits among American companies. In 1975, 109 companies collected half of the profits produced by all publicly traded companies. Today, those winnings are captured by just 30 companies, according to research by Kathleen M. Kahle, a University of Arizona finance professor, and René M. Stulz, an economist at Ohio State University.

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On Tuesday, 7-31-18, Apple reported the latest in a string of strong quarterly earnings, with its profit increasing to $11.52 billion, up nearly a third from the same period a year earlier. The report helped bolster the company’s stock price; as of Thursday, Apple’s shares were trading at $207.39.

More than three-quarters of all American industries have grown more concentrated since 1980. Scholars have linked corporate consolidation to rising income inequality.

The difference between how much it costs American companies to make their products and how much they sell those products for — a metric of the power that companies possess in their markets — is at its highest level since at least 1950, according to a 2017 paper by two economists, Jan De Loecker of Princeton and Jan Eeckhout of University College London.

More than three-quarters of all American industries have grown more concentrated since 1980, as measured by the Herfindahl-Hirschman Index, the standard formula that antitrust regulators and others use to analyze proposed corporate mergers, according to a paper written by Professor Michaely, along with Gustavo Grullon of Rice University and Yelena Larkin of York University in Toronto.

A consensus has formed among economists that the trend toward corporate concentration — in terms of the size of companies and their grasp on profits — is real and may be long-lasting. “The number of papers that are being written on this from week to week is remarkable,” said David Autor, a Massachusetts Institute of Technology economics professor who has studied the phenomenon.

The consolidation is especially pronounced in the technology sector, where a group of large, efficient companies now lord over the fastest-growing and most dynamic parts of the United States economy.

When the iPhone was introduced in 2007, it quickly transformed the way society interacts with technology. More than 1.4 billion have been sold since.

Apple and Google combined now provide the software for 99 percent of all smartphones. Facebook and Google take 59 cents of every dollar spent on online advertising in the United States. Amazon exerts utter dominance over online shopping and is getting bigger, fast, in areas like streaming of music and videos.

But the trend is not confined to technology.

Today, almost half of all the assets in the American financial system are controlled by five banks. In the late 1990s, the top five banks controlled a little more than one-fifth of the market. Over the past decade, six of the largest United States airlines merged into three. Four companies now control 98 percent of the American wireless market, and that number could fall to three if T-Mobile and Sprint are allowed to merge.

Consolidation begets profits. “Whoever is left is more profitable and can generate higher returns to investors,” said Professor Larkin, who has studied the impact of corporate consolidation on financial markets.

That is great news for the stock markets.

This year, five tech companies — Facebook, Apple, Amazon, Netflix and Google’s parent, Alphabet — have delivered roughly half of the gains achieved by the Standard & Poor’s 500-stock index. Apple is the only company with a $1 trillion market value, but Amazon this year has been nipping at its heels. It is currently valued at more than $880 billion.

Of course, this is good only as long as profits keep pouring in. If the tech companies’ shares start to sputter, “it’s going to be tough for the rest of the market to keep things propped up,” said Justin Walters, a co-founder of the Bespoke Investment Group, which researches the stock market.

And in the labor market, scholars have linked (Links to an external site.) corporate consolidation to rising income inequality and the declining share of the nation’s wealth (Links to an external site.) that goes to workers. The so-called labor share of the economy has been declining in the United States and other rich countries since the 1990s, coinciding with the trend toward corporate concentration. And that decline has been most pronounced in industries undergoing the greatest consolidation.

Economists disagree about cause and effect. Some say that companies like Apple, Amazon and Google spent lavishly to establish their dominant market positions, and can now make enormous profits without spending much, as a share of their income, on labor.

Other economists argue that with fewer companies in a given industry, there is simply less competition for workers (Links to an external site.) and therefore little pressure to give raises to workers. That may be especially true in industries where skills are highly specialized, because it is harder for workers to look elsewhere for better pay. Recent research has highlighted examples of companies colluding to keep wages low by agreeing not to poach each other’s workers (Links to an external site.) and by inserting provisions into workers’ contracts that bar them (Links to an external site.) from joining competitors.

Although companies tend to gain power as they grow, that does not make them invincible. They can simultaneously become more susceptible to crippling assaults from politicians and regulators. That is especially true at a time when populism has gained currency on both the left and the right.

The same tech companies that are vacuuming up a greater share of corporate profits are also in the cross hairs of governments around the world.

Google was recently fined (Links to an external site.) a record $5 billion by European antitrust regulators who accused the search giant of abusing its market position by forcing mobile phone companies to install Google apps on their phones.

Have a look at this article on Apple’s payment of $15 billion in back taxes to the EU: https://www.reuters.com/article/us-eu-apple-lawsuit/eu-to-scrap-lawsuit-against-ireland-after-apple-pays-back-taxes-idUSKCN1LY271

Facebook is being forced by angry politicians and regulators to do more to safeguard users’ data and to prevent its platform from being used to interfere with American elections. Last week, Facebook reported that its growth was slowing and it was increasing spending on privacy and security. Its shares plunged 19 percent (Links to an external site.), lopping roughly $120 billion of the company’s market value in a single day.

And President Trump has repeatedly taken aim Jeff Bezos, Amazon’s chief executive. Mr. Trump – who has expressed anger about coverage of his administration in The Washington Post, which Mr. Bezos bought in 2013 – has accused Amazon of not paying enough taxes and of taking advantage of the United States Postal Service. If Mr. Trump’s rhetoric translates into policy changes, it could hit Amazon’s bottom line.

Google was recently fined (Links to an external site.) a record $5 billion by European antitrust regulators who accused the search giant of abusing its market position by forcing mobile phone companies to install Google apps on their phones.

Facebook is being forced by angry politicians and regulators to do more to safeguard users’ data and to prevent its platform from being used to interfere with American elections. Last week, Facebook reported that its growth was slowing and it was increasing spending on privacy and security. Its shares plunged 19 percent (Links to an external site.), lopping roughly $120 billion of the company’s market value in a single day.

*****************Discussion**********************************

Please write a few paragraphs sharing your thoughts on FAMGA and the overall trend toward big getting bigger, Thanks!

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