Matthew Lynn: Why Apple is only the first of US$1 trillion tech giants

Apple is leading the way. Photo / Getty Images

Opinion

COMMENT: In the end, all it took was a stellar earnings report to push Apple over the line. Wall Street had been speculating for months about which company would be the first to be worth a trillion dollars, with Amazon, Alphabet and a resurgent Microsoft all making strong late runs.

It ended up being the manufacturer of the ubiquitous iPhone that claimed the prize. For a company that is less than four decades old, it was a remarkable achievement and confirmation that while it may have lost some of its old magic under CEO Tim Cook, it remains a formidable design, marketing and sales machine.

But while it was the first to hit the magic trillion figure, it is unlikely to be the last. In fact, two powerful forces are coming together to create a select group of mega-mega-caps that will dominate the global economy for decades. The network effects of the internet are creating a few vast enterprises, while the globalisation of investment means more money is pouring into a select group of firms. There may be a dozen of them by the end of the decade.

Of course, on one level, US$1 trillion in market value is just a number. With inflation and a bull market, someone was always going to get there. On another level, it symbolises both the power of the company's unique business model and the growing dominance of the American technology firms.

Apple could have easily started to fade after Steve Jobs's death. But its successes validate Cook's strategy of consolidating its upmarket, tech-savvy, exclusive brand, while also building up revenues from apps and services.

Jeff Bezos, the Amazon founder, must have been feeling a bit bruised when he heard Apple got there first.

He will probably get there soon, however, and so will quite a few others. Amazon is only US$110 billion ($163b) behind Apple. Alphabet, the parent of Google, is only US$150b, and Microsoft US$175b. Those might sound like big numbers but it will only take a 10 per cent to 20 per cent rally in any of those companies to take them into 12-figure territory as well.

It won't just be a few American companies either. If Saudi Aramco ever manages to complete its much-hyped IPO, then the oil giant is expected to have a market value of $2 trillion. And the Chinese internet giants are growing at a startling rate. Alibaba is halfway towards a trillion already, and so is Tencent. If Huawei lists it will be for a huge price. Indeed, there is already a fascinating theory the real industrial contest of this century is between the west coast of the US and the east coast of China.

In fact, two forces are creating a select group of mega-mega-caps that are pulling away from the rest of the world. Virtually all the top-valued companies are concentrated in technology. Saudi Aramco is the only real outsider, on account of its vast oil reserves. The only other company even close to this league is Warren Buffett's Berkshire Hathaway, with a value of half a trillion (helped ironically by a huge stake in Apple).

The explanation? The internet creates incredibly powerful network effects, which mean we all end up using one company. There is one search engine, one retailer, one social network, one TV streaming site and so on. Most industries have a few leading businesses, but the web creates natural near-monopolies. Those companies inevitably end up being hugely valuable. The winners take it all - and are priced accordingly.

The next to hit a trillion - probably Amazon - will create a few headlines. The third and fourth will only get a footnote. By the end of the decade, there could be a dozen of them, and Apple may not even be the largest.

One or two of them may end up stumbling, as Facebook is at the moment. Over time, however, their dominance will grow and grow - and investors won't be able to afford to ignore them.