Google, Apple, Amazon, Facebook - the Gang of Four's winning ways

Who are the digital platform winners?

Digital giants Apple, Facebook, Google and Amazon make money in very different ways, but each one exploits the power of a business pattern known as the platform.

By David Walker

In May 2011, Eric Schmidt, chairman of Google parent company Alphabet, dubbed Google, Apple, Facebook and Amazon the “Gang of Four” internet-based business leaders. He observed that they each competed, cooperated and worked to take advantage of their own unique strengths: Google in search; Facebook in social networking; Amazon in e-commerce; and Apple in devices. These four very different businesses were together valued at more than half a trillion US dollars.

More than half a decade later, Schmidt’s four remain the global digital leaders – and are now worth more than US$1.8 trillion. Why does the Gang of Four seem to be settling in at the top of global business’s pecking order?

Platform pioneers

Part of the answer is that each of the four is a platform company. They connect people who might otherwise struggle to connect – searchers and web publishers, music-makers and listeners, buyers and sellers of just about anything.

Often they provide a common technology on which innovators can develop complementary products and services, the Apple (iOS) and Google (Android) smartphones being just two examples.

Michael Wade, professor of innovation and strategy at the Swiss-based IMD business school, says that businesses create just three kinds of value: they sell something cheaper, they offer a better experience, or they offer a platform. He calls platform value the newest and most powerful form of value. The Gang of Four’s continued rise, says Wade, shows the perils of competing against platforms.

Platform businesses are not entirely new. Newspapers and magazines have long brought together readers and advertisers; your local mall brings you together with various jeans retailers to replace your worn-out pants. The Gang of Four, however, has forced business strategists worldwide to think harder about platforms.

It’s probably no coincidence that the platform companies have risen to dominance during an age of unprecedented computing power, bandwidth, networking and storage capacity.

Economists David S. Evans and Richard Schmalensee, authors of Matchmakers: The New Economics of Multisided Platforms, call these “turbocharging technologies” because they multiply the digital platform companies’ power.

“Apple makes enormous profits; Amazon, in most years, almost none.”

One of platforms’ most important characteristics is that use increases their value. It’s common to see platform companies give away their offering or sell it cheap to one group of users so as to attract users from the other side of the transaction. Google gives away search results to attract advertisers.

Amazon CEO Jeff Bezos said in 2012 that the company sold its iPad-like Kindle Fire device at cost to encourage users to buy content from Amazon.

By standing in the middle of the transactions, these platform companies acquire huge amounts of customer data. They can then try to use that data over time to learn more and more about their customers’ needs, and about those customers’ propensity to spend money. Those platforms may allow them to gain a long-term edge on their competitors, Wade points out.

These companies are also, at least for the moment, innovation machines. In a 2016 report for the Center for Global Enterprise, researchers Peter C. Evans and Annabelle Gawer estimate that in 2014 alone, nine US platform companies – the Gang of Four plus Microsoft, Intel, Yahoo, eBay and Salesforce – were awarded 11,585 patents. In fields from machine learning to telehealth, they are spinning off new ideas at a frantic pace.

Bumping up against each other

As Evans, Gawer and many others point out, the four now compete against each other more and more – particularly Google, Apple and Amazon. Apple and Google have famously duelled over smartphones since Google launched Android in 2008.

As Andreessen Horowitz analyst Benedict Evans noted in July 2016, it’s now clear that they will be the only two players in the market for some time. Google’s Schmidt has called Google’s struggle with Apple the “defining fight of the computer industry”.Schmidt, however, also calls Amazon “our biggest search competitor”.

Amazon is competitive enough with both Apple and Google that it no longer sells Apple TVs or Google Chromecasts, the two major competitors to its own Fire TV device. Amazon’s AWS (Amazon Web Services) cloud computing service for developers competes with Google Cloud Platform.

Meanwhile, Google’s ad services battle Facebook’s, and Google, Apple and Amazon all fight over the subscription music-streaming market.

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Among the most important battlegrounds in this struggle is the battle over voice search. Apple has Siri on its iPhone and iPad. Google Now plays the same role on Android devices. On top of that, both Amazon’s Alexa and Google’s Home are being positioned as devices that link all your electronics together and respond to voice requests.

John Hempton, head of Australian investment fund Bronte Capital, believes voice search is the single biggest threat to Google’s central search business, because it is becoming an important consumer interface to computing – one that competes with Google’s search pages. The ads on the pages supply the bulk of Google’s revenue, but as Hempton notes, “if you no longer have a screen, you no longer click the ad”.

Comparing the giants

They may all be platforms, but each of the Gang of Four has risen to fame and market valuation a different way.

The biggest contrast: hardware-driven Apple makes enormous profits; Amazon, in most years, almost none. Yet Amazon’s US$400 billion market capitalisation is more than 60 per cent of Apple’s.

The message from that valuation is that the markets are focused on the power of the platforms, and the profits that they may bring to the Gang of Four in the years ahead.


Not every platform business makes money. Among the biggest losers: Twitter, the news and networking site where users post 140-character tweets. Revenue reached US$2.2 billion in 2015, and 2016 will be better. Yet it managed to spend even more than this, so that 2015 losses reached US$450 million.

In 2015, it spent US$871 million on sales and marketing and US$807 million on a ballooning research and development effort. Yet the company’s core product has changed little and analysts do not consider it a powerful innovator.

Its users, not its own employees, came up with the simple and now famous Twitter hashtags.

Says Bronte Capital’s John Hempton: “There is no way they need to spend that much money ... It’s unbelievably profitable if run properly.” He notes that when Facebook reached US$2 billion in revenue, it was already making, before tax, US$1 billion a year.


Amazon XEO Jeff BezosFounded: 1994
Valuation: US$359 bn*
12-month revenue: US$128 bn
12-month profit: US$2.10 bn
Price-to-earnings ratio: 174

It started in books, but these days Amazon will sell you almost anything. It probably won’t make a killing on the deal either; 2016’s record US$500 million quarterly profits are still tiny compared with Amazon’s surging revenues. Instead, founder and CEO Jeff Bezos keeps raising his spending on technology and distribution.

Andreessen Horowitz’s Benedict Evans said in 2014 that while Bezos seems to be enjoying himself, “he is also building a company, with all the cash he can get his hands on, to capture a larger and larger share of the future of commerce”. His latest success is Amazon Web Services, which simplifies the task of building web-based applications.

Stellar revenue growth keeps investors believing Amazon will end up a global commerce giant and will someday flick the switch to vast profitability. Meanwhile, it sucks margins out of its chosen markets, to the point where IMD’s Michael Wade calls it a “value vampire”.
* Financials for all companies are as of 6/12/2016; revenues and profits are for 12 months to September 2016. Profits are after tax but before extraordinaries. Source: NASDAQ.


Apple CEO Tim CookFounded: 1976
Valuation: US$584 bn* – the world’s largest company by market value
12-month revenue: US$216 bn
12-month profit: US$45.7 bn
Price-to-earnings ratio: 13.2

Apple occasionally innovates, notably with the iPhone, but much of the time it does with commodity parts what Coca-Cola does with sugar, water, bubbles and flavouring – mixes them to create almost irrationally happy customers. The secret ingredient is Apple’s obsession with the crafting of simple and elegant user experiences, particularly through software, from the original Apple Mac operating system to the iPhone touchscreen.

Apple does this at a remarkable margin: in 2016, technology analysis firm IHS Markit estimated the cost of an iPhone 7’s parts is less than A$300, and yet the little device sells for A$1079.

While the company has many other costs – it will spend more than A$12 billion on research and development alone this year – user enthusiasm means its profits are something that rivals such as Samsung, LG and Sony can only look on in wonder. Apple’s long-term challenges: entice customers to its growing range of services while coming up with the next great product idea after 2010’s iPad.


Facebook CEO Mark ZuckerbergFounded: 2004
Valuation: US$339 bn*
12-month revenue: US$24.7 bn
12-month profit: US$7.51 bn
Price-to-earnings ratio: 45.5

“Reach out and touch someone” went a famous 1980s AT&T phone company ad. That’s Facebook’s proposition, too.

Facebook may be the least liked of the digital giants; as IMD’s Michael Wade notes, its business model depends not just on connecting users, but also on injecting ads into their conversations. The company has nevertheless done a remarkable job of putting ads in people’s feeds, especially on phones. Ads made up 97 per cent of Facebook’s September-quarter 2016 revenue, and 84 per cent of that money came from mobile advertising.

With US users spending an average of 42 minutes a day on the Facebook network, according to a Cowen and Company survey, those users see a lot of ads. Incredibly, since 2012, mobile advertising has contributed all of Facebook’s revenue growth.

Facebook has bought up smaller companies shrewdly, too. Its Messenger chat app signed its one billionth user in July, its Instagram photo-sharing service has 500 million users, and WhatsApp dominates messaging in developing markets.

Google (Alphabet)

Google CEO Larry PageFounded: 1996
Valuation: US$532 bn*
12-month revenue: US$85.5 bn
12-month profit: US$19.1 bn
Price-to-earnings ratio: 28.4

From its beginnings in a caravan on the Stanford University campus, Google has pursued a quest to catalogue the world’s knowledge – first web pages, then pictures, maps, mobile phone data and much more. Like newspapers before it, Google has made money by putting ads next to that information. As with newspaper giants such as News and Gannett, it has busily acquired smaller businesses, from Sydney-based Where2 Technologies (maps) to DoubleClick (advertising).

Most were cheap; the Android mobile phone operating system cost just US$50 million, and video site YouTube handed Google control of the online video space for just US$1.65 billion in 2006. YouTube’s estimated yearly revenues now top US$6 billion.

Yet Google still relies on web search, which provides two-thirds of its revenue, according to a 2015 Credit Suisse estimate. Android and many services make Google barely any direct revenue, let alone profit. Google operates them largely to encourage users to adopt its core services – search, Maps, YouTube and so on – so that Google can show them ads.

Read next: Ori Allon: The digital wizard who changed Google and Twitter

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