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.

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.

40 Stock Market Terms That Every Beginner Should Know

Understanding the stock market can be a daunting task for any new investor.

Not only are there many concepts and technical terms to decipher, but nearly everybody will try to give you conflicting pieces of advice.

For example, if a stock in your portfolio falls in price, should you be accumulating additional shares at a lower price or should you be strategically cutting your losses?

Some experts will tell you one thing, while others will tell you precisely the opposite.

A Place to Start: Terminology

Before you drift into the many debates that the investing pundits are weighing in on, perhaps the most proactive step for a beginner is to simply learn to talk the same language as the pros.

Today’s infographic comes to us from StocksToTrade.com, and it covers the most important stock market terms that every new investor should know and understand. It’s enough to get any beginner on the same playing field, so they can start toying with the more nuanced or complex concepts in the investing universe.

While we don’t agree with the exact definitions of all of the terms, the list is adequate enough to get any new investor off the ground. It covers basic order terms like “bid”, “ask”, and “volume”, but it also goes into concepts like “authorized shares”, “secondary offerings”, “yield”, and a security’s “moving average”.

What’s Next?

Already got a handle on 40 of the most important stock market terms?

Visual Capitalist has a ton of other powerful visual resources for new investors, or anyone else hungry to learn about how markets work:

• Learn how to read stock charts
• Visualize the power of compound interest
• See this simple introduction to investing we published
• See how elite growth investors pick stocks
• Learn about the basics of ETFs and mutual funds, and even the differences between them
• Learn about the basics of creating a stock portfolio
• See how stock market indices work
• Understand 12 types of technical indicators for investing
• See how Warren Buffett’s brain works

Crush the above resources, and you’ll be market savvy in no time!