INTRO: We’ve all heard the narrative Apple is too big,
Amazon is too big, Google is too big. It seems like these tech giants have formed unbreakable
monopolies around various segments of the market, and that they’re quote on quote “too big to
fail”. But, if history has taught us anything, it’s that no company is too big to fail. Sure,
the government and stockholders can bail out a failing company and give it another 10, 20,
30 years worth of lifetime, but you can only do this for so long. And eventually,
these companies will fail as well. Just take a look at the biggest companies throughout history.
Sears, Roebuck, and Co, for example, is often credited with inventing the department store,
and throughout the 1900s, they were the biggest retailer in the entire world by far. Yet,
in 2018, Sears filed for bankruptcy and shut down all of their stores. Similarly,
Chrysler and General Motors were two of the biggest names in the automotive industry
throughout the 1900s, yet in the late 2000s, both of them filed for bankruptcy. Now of course, these
guys got bailed out because they were integral to the automotive industry in the late 2000s. But do
you think they’ll be bailed out again if they miss out on the EV transition? If there’s a handful
of EV companies like Tesla, Rivian, and maybe even Ford overshadowing them, I don’t think
they’ll be bailed out. Also, if these companies were truly too big to fail, they would’ve never
needed to be bailed out in the first place. So clearly, all companies come and go, but how does
a company go from being an unstoppable force in the market to eventually being forgotten about.
PAINS OF SCALE: Well,
the first struggle that every large corporation has to deal with is the pains of scale. We always
hear about economics of scale, and I’m sure you guys know exactly what this is. Economies of scale
is a cost advantage that large companies enjoy due to serving a large market. Pains of scale or
diseconomies of scale on the other hand are a cost disadvantage that comes along with being too big.
You see, small companies don’t have human resources, or fancy corporate events,
and they don’t fly around executives and directors around the world. Their employees also don’t spend
hours every day answering emails or participating in meetings. In other words, smaller companies
generally have little to no operational costs. YouTubers are a great example of this. While there
are some creators like Mr. Beast and Good Mythical Morning with massive teams and production expenses
behind them, most creators have extremely small operational costs. PewDiePie, Sssniperwolf,
Athlean X, Graham Stephan, Andrei Jikh, and Mark Rober are all basically just one man shows.
Sure, they may have a few employees that help them edit and make sponsorship deals and so on,
but compared to their income, the amount they spend on payroll is extremely small.
Not to mention, most of these guys just record in their bedroom or a small set inside their house.
So, if they have a bad month in terms of views, it doesn’t really matter.
They won’t make as much money, but they’re also not in any risk of losing money. The same,
however, cannot be said about a channel like the Infographics Show. If you were to try to replicate
one of their videos using professional talent, it’ll easily cost you $10,000 per video.
But I’m sure they have insane economies of scale. Maybe they’re cost per video is only $3000.
But, to get to that number, they had to take on a boatload of fixed costs. In the last month, for
example, the Infographics Show posted 42 videos, and even if each video only cost them $3000,
we’re talking about a fixed cost of about $126,000 per month. Given how many views the Infographics
Show gets every month, I’m sure they pull in way more than this in terms of revenue.
But with that being said, their operational costs are a much bigger percentage of their revenue than
someone like Andrei Jikh. This means that it would be significantly easier for Andrei to weather a
50% downturn than it would be for the Infographics Show to weather a 50% downturn. This same
principle applies to the biggest companies in the world. Regardless of how the next iPhone performs,
Apple has to pay tens of millions to keep the UFO in California alive, they have to pay for the tens
of thousands of man hours spent in meetings and answering emails, and they have to pay large
salaries to thousands of managers and directors that a smaller corporation simply wouldn’t need.
While these may seem like negligible expenses compared to Apple’s profits, the thing to note
is that all of these factors create friction. And this friction makes Apple slower and slower
which gives up and coming competitors the perfect opportunity to overtake them.
PROFITS OVER INNOVATION:
Aside from being a slower behemoth, larger companies usually fall into the trap of
prioritizing profits over innovation. This is not always the company's fault
per se. The problem is often that they’ve simply hit a deadend within their industry.
I mean honestly, how much better can you make an iPhone or a MacBook. Really, all that’s
left is consistently improving the speed and reliability of these devices year after year.
And as each generational jump becomes a smaller and smaller difference, people upgrade less
often which forces these companies to look for alternative modes of revenue to continue growth.
Now, Apple has done a phenomenal job with all of their services whether that be iCloud or Apple
Music, but none of these are new inventions or are particularly innovative. The same thing can be
said about Amazon. A lot of logistics innovation had to be done to get delivery timeframes down
from 1 week to 2 days to next day to same day to 1 hour delivery. But, how much more could Amazon
really push this, and how much would consumers even care about said improvement? The truth is
that Apple has solved the smartphone problem and Amazon has solved the logistics problem. The only
step left is to refine and maintain as long as possible, but the problem is that the top talent
is not interested in refining and maintaining. Do you really think the top engineers are interested
in making the iPhone notch smaller or removing the camera bump? No, the top engineers are interested
in developing artificial intelligence, leveraging machine learning, programming self-driving cars,
creating the metaverse, launching rockets, and so on and so forth. So, as larger companies start to
prioritize profits over innovation, the top talent will slowly bleed into up and coming companies.
In the meantime, the largest companies are left with MBA businessmen who are generally
more interested in progressing themselves than progressing the company. Now, I’m not faulting
these guys for prioritizing self preservation over pushing forward the company. But whether their
reasoning is justified or not, in the end, the company is hurt, and this leads to an extremely
dangerous negative feedback loop. As employees care less about the future of the company,
their products become less inspiring which attracts worse talent which makes their
products even less inspiring. If this sustains for long enough, you end up like JCPenney,
Wells Fargo, AT&T, Dish, GE, etc. If we’re being honest, none of the employees at these companies
give a crap about the future of the company. They’re all there for one reason
and one reason only: a paycheck. And when a company gets to this point, it’s all but over.
A RACE TO THE BOTTOM:
When all the innovation within an industry is gone, what follows next is always a race
to the bottom. In the automotive industry, for example, once most of the innovation was done,
Toyota and Honda stepped in and made cars cheaper and more affordable than ever before. Similarly,
once the airline deregulation act of 1978 passed, airline ticket prices fell off a cliff. This is
quite natural. As innovation slows down, a given product or service loses much of its appeal, and
company’s fanbases dissipate. This isn’t to say that people no longer use said product or service,
but simply that they no longer take pride in a certain brand. For example, in the late 1800s,
a wealthy gentleman may have been proud to get their electricity from the best provider
in the nation. Today, electricity is used more than ever before, but no one gives a crap about
who their electricity provider is. Electricity is just a part of daily life and people choose their
provider based on who’s the cheapest not what brand it’s from. Similarly, when was the last time
you cared about where your gas comes from or where your steel came from? Even if you do care about
these factors, it’s likely because you care about the product itself as opposed to the company.
Maybe you only buy your steel and gas from one company because you need a certain quality of
steel or you want the highest quality of gas. But, in these scenarios, you’re not loyal to the brand,
you’re loyal to the product. If a new gas company came out tomorrow and offered a better quality of
gas for the same price, you’d likely switch in a heartbeat. Clearly, the same thing cannot be
said about iPhones and Androids or Mac OS and Windows. These inventions are still rather new
and people are still extremely divided on these subjects. But with time, people will care less
and less as these products basically become the same thing. Something else to note is that many
of these companies have already experienced this in the past. Apple, for example, nearly went
bankrupt in the late 1990s after the initial PC boom came to an end and budget options flooded the
market. They had to pivot to the mobile market to reignite growth. Similarly, Microsoft had a decade
of stagnation after 2000 as they had already won the PC market. It wasn’t until Microsoft embraced
the cloud and servers that they started to grow once again. If Microsoft and Apple hadn’t made
these shifts, it’s likely that they would’ve already gone bankrupt or ended up like IBM.
30 YEARS:
I know a lot of people would like to see Amazon go bankrupt, but what’s ironic is that the
person who’s most confident that Amazon will go bankrupt is Jeff Bezos. In 2018, Jeff said quote,
“Amazon is not too big to fail ... In fact, I predict one day Amazon will fail. Amazon
will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years,
not a hundred-plus years." And if we think about it, many of the big tech companies that people
complain about are even 30 years old. Amazon, Google, Tesla, Nvidia, and Facebook are all
less than 30 years old. The two big tech companies that are older than that are Apple and Microsoft,
and as we previously touched on, the only reason these guys are still crushing it is because they
basically became a new business right around that 30 year mark. Meanwhile, Amazon and Google are
fast approaching that 30 year mark, and likewise they’ve basically reached market saturation in
their main industries and they’re facing more backlash than ever before. Similarly, Facebook may
be the most hated company in the world, and they haven’t even been around for 20 years. This isn’t
to say any of these companies are gonna collapse anytime soon, but this next decade could very well
be the largest and most dominant that you’ll ever see them. After all, it’s just a matter of time
until a company’s friction builds up, they start to prioritize profits over innovation,
they lose their top talent, cheaper alternatives enter the market, the customer base dissipates,
and the company becomes a shell of their former self. And I think Jeff Bezos says it best. When
do you guys think Apple will file for bankruptcy? Comment that down below. Also, drop a like if you
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