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How the Tech Giants Make Their Billions

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How the Tech Giants Make Their Billions

How the Tech Giants Make Their Billions

At a glance, it may seem like the world’s biggest technology companies have a lot in common.

For starters, all five of the Big Tech companies (Amazon, Apple, Facebook, Microsoft, and Alphabet) have emerged as some of the most valuable publicly-traded companies in the world, with founders such as Jeff Bezos or Bill Gates sitting atop the global billionaire list.

These tech giants also have a consumer-facing aspect to their business that is front and center. With billions of people using their platforms globally, these companies leverage user data to tighten their grip even more on market share. At the same time, this data is a double-edged sword, as these same companies often find themselves in the crosshairs for mishandling personal information.

Finally, all of these companies have a similar origin story: they were founded or incubated on the fertile digital grounds of the West Coast. The company that has the weakest claim to such origins would be Facebook, but even it has been based in Silicon Valley since June 2004.

Sizing Up the Tech Giants

For all of their commonalities, it seems that there is less of a mold for how these tech giants end up generating cashflow.

But before we get to how Big Tech makes its money, let’s start by looking at the financials at a higher level. The following data comes from the 2018 10-K reports filed last year.

CompanyRevenue (2018)Net Income (2018)Margin
Apple$265.6 billion$59.5 billion22.4%
Amazon$232.9 billion$10.1 billion4.3%
Alphabet$136.8 billion$30.7 billion22.4%
Microsoft$110.4 billion$16.6 billion15.0%
Facebook$55.8 billion$22.1 billion39.6%
Combined$801.5 billion$139.0 billion17.3%

Together, the Big Five tech giants combined for just over $800 billion of revenue in 2018, which would be among the world’s 20 largest countries in terms of GDP. More precisely, they would just edge out Saudi Arabia ($684 billion GDP) in terms of size.

Meanwhile, they generated a total of $139 billion of net income for their shareholders, good for a 17.3% profit margin.

How Big Tech Makes Money

Let’s dig deeper, and see the differences in how these companies generate their revenue.

You are the Customer

In the broadest sense, three of the tech giants make money in the same way: you pay them money, and they give you a product or service.

Apple (Revenue in 2018: $265.6 billion)

  • Apple generates a staggering 62.8% of its revenue from the iPhone
  • The iPad and Mac are good for 7.1% and 9.6% of revenues, respectively
  • All other products and services – including Apple TV, Apple Watch, Beats products, Apple Pay, AppleCare, etc. – combine to just 20.6% of revenues

Amazon (Revenue in 2018: $232.9 billion)

  • Amazon gets the most from its online stores (52.8%) as well as third-party seller services (18.4%)
  • Amazon’s fastest-growing segment is offline sales in physical stores
  • Offline sales generate $17.2 billion in current revenue, growing 197% year-over-year
  • Amazon Web Services (AWS) is well-known for being Amazon’s most profitable segment, and it counts for 11.0% of revenue
  • Amazon’s “Other” segment is also rising fast – it mainly includes ad sales

Microsoft (Revenue in 2018: $110.4 billion)

  • Microsoft has the most diversified revenue of any of the tech giants
  • This is part of the reason it currently has the largest market capitalization ($901 billion) of the Big Five
  • Microsoft has eight different segments that generate ~5% or more of revenue
  • The biggest three are “Office products and cloud services” (25.7%), “Server products and cloud services” (23.7%), and Windows (17.7%)

The remaining tech giants charge you nothing as a consumer, so how are they worth so much?

You are the Product

Both Alphabet and Facebook also generate billions of dollars of revenue, but they make this money from advertising. Their platforms allow advertisers to target you at scale with incredible precision, which is why they dominate the online ad industry.

Here’s how their revenues break down:

Alphabet (Revenue in 2018: $136.8 billion)

  • Despite having a wider umbrella name, ad revenue (via Google, YouTube, Google Maps, Google Ads, etc.) still drives 85% of revenue for the company
  • Other Google products and services, like Google Play or the Google Pixel phone, help to generate 14.5% of total revenue
  • Other Bets count to 0.4% of revenue – these are Alphabet’s moonshot attempts to find the “next Google” for its shareholders

Facebook (Revenue in 2018: $55.8 billion)

  • Facebook generates almost all revenue (98.5%) from ads
  • Meanwhile, 1.5% comes from payments and other fees
  • Despite Facebook being a free service for users, the company generated more revenue per user than Netflix, which charges for its service
  • In 2018 Q4, for example, Facebook made $35 per user. Netflix made $30.

So while the tech giants may have many similarities, how they generate their billions can vary considerably.

Some are marketing products to you, while others are marketing you as the product.

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Visualizing the Size of Amazon, the World’s Most Valuable Retailer

Amazon’s valuation has grown by 2,830% over the last decade, and the tech giant is now worth more than the other 9 largest U.S. retailers, combined.

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Visualizing the Size of the World’s Most Valuable Retailer

As brick-and-mortar chains teeter in the face of the pandemic, Amazon continues to gain ground.

The retail juggernaut is valued at no less than $1.4 trillion—roughly four times what it was in late 2016 when its market cap hovered around $350 billion. Last year, the Jeff Bezos-led company shipped 2 billion packages around the world.

Today’s infographic shows how Amazon’s market cap alone is bigger than the nine biggest U.S. retailers put together, highlighting the palpable presence of the once modest online bookstore.

The New Normal

COVID-19’s sudden shift has rendered many retail outfits obsolete.

Neiman Marcus, JCPenney, and J.Crew have all filed for bankruptcy as consumer spending has migrated online. This, coupled with heavy debt loads across many retail chains, is only compounding the demise of brick-and-mortar. In fact, one estimate projects that at least 25,000 U.S. stores will fold over the next year.

Still, as safety and supply chain challenges mount—with COVID-19 related costs in the billions—Amazon remains at the top. It surpasses its next closest competitor, Walmart, by $1 trillion in market valuation.

How does Amazon compare to the largest retailers in the U.S.?

10 Largest Public US Retailers*Market Value July 1, 2020Market Value July 1, 2010 Normalized % Change 2010-2020Retail Revenue
Walmart$339B$179B90%$514B
Costco$134B$24B458%$142B
Amazon$1,400B$50B2,830%$140B
The Kroger Co.$26B$13B107%$118Be
Walgreens Boots Alliance$36B$26B38%$111B
The Home Depot$267B$47B466%$108B
CVS$84B$40B112%$84B
Target$60B$37B64%$74B
Lowe's$102B$29B251%$71B
Best Buy$23B$14B59%$43B
Combined value of retailers (without Amazon)$1,071B

Source: Deloitte, YCharts
*Largest public US retailers based on their retail revenue as of fiscal years ending through June 30, 2019, e=estimated

With nearly a 39% share of U.S. e-commerce retail sales, Amazon’s market cap has grown 2,830% over the last decade. Its business model, which aggressively pursues market dominance instead of focusing on short-term profits, is one factor behinds the rise.

By the same token, one recent estimate by The Economist pegged Amazon’s retail operating margins at -1% last year. Another analyst has suggested that the company purposefully sells retail goods at a loss.

How Amazon makes up for this operating shortfall is through its cash-generating cloud service, Amazon Web Services (AWS), and through a collection of diversified enterprise-focused services. AWS, with estimated operating margins of 26%, brought in $9.2 billion in profits in 2019—more than half of Amazon’s total.

Amazon’s Basket of Eggs

Unlike many of its retail competitors, Amazon has rapidly diversified its acquisitions since it originated in 1994.

Take the $1.2 billion acquisition of Zoox. Amazon plans to operate self-driving taxi fleets, all of which are designed without steering wheels. It is the company’s third largest since the $13.7 billion acquisition of organic grocer Whole Foods, followed by Zappos.

Accounting for the lion’s share of Amazon-owned physical stores, Whole Foods has 508 stores across the U.S., UK, and Canada. While Amazon doesn’t outline revenues across its physical retail segments—which include Amazon Books stores, Amazon Go stores, and others—physical store sales tipped over $17 billion in 2019.

Meanwhile, Amazon also owns gaming streaming platform Twitch, which it acquired for $970 million in 2017. Currently, Twitch makes up 73% of the streaming market and brought in an estimated $300 million in ad revenues in 2019.

Carrying On

Despite the flood of online orders due to quarantines and social distancing requirements, Amazon’s bottom line has suffered. In the second quarter of 2020 alone, it is expected to rack up $4 billion in pandemic-related costs.

Yet, at the same time, its customer-obsessed business model appears to thrive under current market conditions. As of July 1, its stock price has spiked over 51% year-to-date. On an annualized basis, that’s roughly 100% in returns.

As margins get squeezed and expenses grow, is Amazon’s growth sustainable in the long-term? Or, are the company’s strategic acquisitions and revenue streams providing the catalysts (and cash) for only more short-term success?

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10 Types of Innovation: The Art of Discovering a Breakthrough Product

How do companies like Amazon and Apple consistently make game-changing products? Here are 10 types of innovation, and the tactics that lead to big breakthroughs.

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The Art of Discovering Breakthrough Products

As venture capitalist Peter Thiel once put it, “competition is for losers”.

It’s inevitable that every company must be out there battling for market share, but you don’t really want to be in a situation where the competition is so stiff that any potential upside is eroded away in the process—―a scenario known as perfect competition in economics.

To avoid perfect competition, companies must strive to build an economic moat that gives them a sustainable competitive advantage over time. While these protective moats can arise from a number of different sources, in today’s information economy they most often arise from the power of innovation.

But where does innovation come from, and is there a universal framework that can be applied to help consistently make big breakthroughs?

The 10 Types of Innovation

In today’s infographic, we showcase the culmination of years of in-depth research from Doblin, an innovation-focused firm now owned by Deloitte.

After examining over 2,000 business innovations throughout history, Doblin uncovered that most breakthroughs don’t necessarily stem from engineering inventions or rare discoveries.

Instead, they observed that innovations can be categorized within a range of 10 distinct dimensions—and anyone can use the resulting strategic framework to analyze the competition, to stress test for product weaknesses, or to find new opportunities for their products.

Here are the 10 types of innovation:

#Innovation TypeDescription
1.Profit ModelHow you make money
2.NetworkConnections with others to create value
3.StructureAlignment of your talent and assets
4.ProcessSignature of superior methods for doing your work
5.Product PerformanceDistinguishing features and functionality
6.Product SystemComplementary products and services
7.ServiceSupport and enhancements that surround your offerings
8.ChannelHow your offerings are delivered to customers and users
9.BrandRepresentation of your offerings and business
10.Customer EngagementDistinctive interactions you foster

From Theory to Practice

What does innovation look like in practice?

Let’s see how well-known businesses have leveraged each of these 10 types of innovation in the past, while also diving into the tactics that modern businesses can use to consistently make new product breakthroughs:.

Innovation Types #1-4: “Configuration”

According to Doblin, the first four types of innovation center around the configuration of the company, and all the work that happens “behind the scenes”.

Although innovation types in this category are not directly customer-facing, as you can see in the examples below, they can still have an important impact on the customer experience. How your company and products are organized can have a crucial downstream effect, even enabling innovations in other categories.

Configuration innovation types

Two of the most interesting examples here are Google and McDonald’s. Both companies made internal innovations that empowered their people to make important advancements further on downstream.

In the case of McDonald’s, the franchisee insight that led to the introduction of the Egg McMuffin spearheaded the company’s entire breakfast offering, which now accounts for 25% of revenues. Breakfast is also now the company’s most profitable segment.

Innovation Types #5-6: “Offering”

When most people think of innovation, it’s likely the offering category that comes to mind.

Making improvements to product performance is an obvious but difficult type of innovation, and unless it’s accompanied by a deeply ingrained company culture towards technical innovation, such advancements may only create a temporary advantage against the competition.

This is the part of the reason that Doblin recommends that companies focus on combining multiple areas of innovation together—it creates a much more stable economic moat.

Offering innovation types

Apple has a reputation for innovation, but the product ecosystem highlighted above is an underappreciated piece of the company’s strategy. By putting thought into the ecosystem of products—and ensuring they work together flawlessly—additional utility is created, while also making it harder for customers to switch away from Apple products.

Innovation Types #7-10: “Experience”

These types of innovation are the most customer-facing, but this also makes them the most subject to interpretation.

While other innovations tend to occur upstream, innovations in experience all get trialed in the hands of customers. For this reason, intense care is needed in rolling out these ideas.

Experience innovation types

In the early days of the internet, online shipping was precarious at best—but Amazon’s introduction of Amazon Prime and free expedited shipping for all members has been a game-changer for e-commerce.

Executing on such a promise was no small task, but today there are 150 million users of Prime worldwide, including some in metro areas who can get items in as little as two hours.

Making Innovations Happen in Your Organization

How can organizations approach the 10 types of innovation from a more tactical perspective?

One useful resource is Doblin’s free public list of over 100 tactics that correspond with the aforementioned framework.

The one-pager PDF provides a range of typical dimensions for approaching each type of innovation. In essence, these are all different ways you could consider when trying to differentiate your product or service—and at the very least, it provides a useful thought experiment for managers and marketers.

For those interested in learning more on this topic, Doblin also has a highly-rated book as well as other accessories that leverage the above framework.

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