Leaders of the internet revolution - will they
earn their market valuation?

'How shall we beguile the lazy time, if not with some delight?'

M.N. Dream

The morning of Tuesday 25th April was glorious in London. Green Park was beginning to colour up, the birds sang gleefully and strollers were out in force. Some wandered in groups, often quite large ones. One consisted of some 12 souls. As spring burst around them not a word was exchanged. Each held an electronic device into which they were speaking, typing, or otherwise conversing with a different world. They acknowledged neither the presence of their neighbours nor the beauty surrounding them. Their consciousness existed only in the cyber world. Many lives, it seems, are lived in that world. One survey suggests that the average adult in America and Britain spends 7 hours per day watching screens of one sort or another.

Technological advance has improved the lot of humanity in countless ways. Rarely, however, has it made an impact so immediate and profound as that wrought by the internet revolution. It has reconfigured daily life.

The internet has accelerated social and commercial exchange to the speed of light. Consumers shop increasingly via the internet, less by visiting stores. Social media users extend friendships, and widen business and political connections by instant delivery of personal information. Email gives immediate access to an infinitely large readership. Data mined from online sources is reassembled in algorithms capable of anticipating consumer response to custom-built propaganda.

Stock markets reflect the money-making potential of these developments. Five digital communications giants dominate Wall Street today: Alphabet (owns Google), Amazon, Apple, Facebook, and Twitter. These currently account for about 11% of the value of the S&P 500 equity index. Information technology stocks collectively constitute about 24% of the total index value. Ten years ago, their corresponding weight was 17%. The market value of Apple alone, the world’s most valuable company, stands at over US$800 billion. The prices of these five titans evidence the commercial value of life-changing products and services already engineered. They also reflect investors’ hopes for similar gains from future successes.

So far, the growth of these cyber superstars has been translated, naturally enough, into huge gains for their shareholders. It has not, however, been reflected in commensurate gains for the wider economy. On the contrary, UK output per hour worked is lower than it was ten years ago. American productivity is better, but not much. Companies are employing more people but they are producing less per head than they were before the financial crash. The authoritative Institute of Fiscal Studies has yet to fathom the reasons. Yes, Amazon’s customers have a vastly improved access to the products and services of their choice. But companies supplying those choices for Amazon’s customers don’t seem to share much of the gain. Analysts suggest that the main effect of digitalisation, post the 2008 crash, has been to boost companies’ cash flows at the expense of capital investment – hence the fall in productivity. Others think that workers may be close to a point where they are unwilling to raise their output at current wage levels. Many may be preferring to spend more of their available time on digitally generated amusement and leisure pursuits.

Surprisingly, analyses of productivity failure give little attention to the impact on behaviour of the communications revolution. Intuition suggests that if much of the population whiles away hours each day screen-watching or trifling with electronic devices, little extra value is likely to be added.

Consider also the splurging growth of business email communication. According to an American survey commissioned by Adobe Systems Inc the average white collar worker spends six hours a day sorting emails – half at work, half personal. James Dyson, Britain’s most successful inventor, has reached his own conclusion about emails. He thinks that most are completely useless and a waste of time. He restricts his intake to 6 a day. 

How workers or people at home manage their connection with the cyber world may not alter much the prospects of info-tech companies as a group. Some will discover new applications for existing technologies; others new markets with technologies yet to be developed. Yet others will vanish. However, even for the best and, especially, the biggest communications companies, enduring prosperity will depend on political rather than economic considerations.

Market power in the digital communications sector is highly concentrated. According to Rana Foroohar writing in the FT, Google has an 88% market share in search advertising, Facebook and its subsidiaries control more than 70% of media on mobile devices while Amazon claims to have 70% of the e-book market. Dominant market positions provide the communications giants with a defensive moat. Sheer size enables them to harvest more personal data, their main asset. A bigger data bank raises, in turn, their ability to garner more market share. The growth cycle could continue until their position becomes impregnable. This situation can only invite political interference. Monopolies in America are rarely left unchallenged.

Given the value of personal data, it is little surprise that the sector falls victim to hacking. As the WannaCry virus has just shown all too vividly, there is no such thing as a fail-safe cyber protection system. Continuing disruption of vital public and private services will likely provoke regulatory intervention. Communications systems providers will be held increasingly accountable for ‘accidents’. That will inevitably mean higher costs. So will any requirement for companies to monitor more carefully the content of their own information platforms.

Hitherto the cyber world has been largely unregulated. Jurisdiction struggles to reach or restrain electronic signals floating in the ether. Legislation cannot in the end frustrate popular choice. Nevertheless, shared global concern for cyber security may well push national authorities to develop protocols for deterring and pursuing miscreants. Such a development would likely redefine the responsibilities of data providers.

The internet jungle is where fiction locks horns with fact on equal terms. Viewers read contradictory messages and do not know what to believe. Confusion has bred cynicism. Voters no longer trust any information source, however authoritative. Before long, their resentment may prompt demands that platform providers’ licence to publish be restricted.

Given this summary of the mounting difficulties, political repercussions look inevitable. These will eat into the working and profitability of information technology companies. The way they deploy the data at their disposal has become an urgent global concern.

It is against this background that one has to assess the future of the industry. Current market valuations reflect a clear distinction between companies that are merely social facilitators, and those like Amazon that demonstrate secure positions in value-added commercial applications. Investors need to focus on one simple question. Will the profit growth of even the most successful over the next decade be sufficient to justify the exotic market values currently attributed to many of them? Much turns on the issue. Any re-evaluation of these market leaders would shake one of the main pillars supporting global equity market levels.

Today’s consumers take the convenience of the cyber revolution for granted. But they have grown fretful about its unintended consequences. No doubt walkers in the park will continue living in their virtual world. And like it or not, many more of us will be unavoidably bound into future communications technologies. Whether our changed lifestyle will be as profitable for info-tech investors in the next ten years as in the past ten is far less clear. Certainly communications companies have wrought technical miracles and afforded customers across the globe access to their benefits. But they have yet to supply an ‘app’ that reproduces the gentle loveliness of a spring day. There may be limits after all.

31st May 2017

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