Economics in the Internet Software and Services Industry - Part II

Running head: ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY Economics in the Internet Software and Services Industry Part II Fernanda Luvizotto do Amaral University of West Florida Advanced Managerial Economics – ECP6705 August 9, 2018 1 ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 2 Table of Contents Executive Summary ................................................................................................................... 3 Financial Ratios ........................................................................................................................ 5 Evidence of Scale Economies .................................................................................................. 10 Evidence of Scope Economies ................................................................................................. 13 Summary.................................................................................................................................. 16 References ............................................................................................................................... 19 ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 3 Executive Summary In the last five years, Alphabet Inc. has slightly decreased its leverage and its return on equity. The company’s ROE took a large fall in the last year as a result of a decrease in profit margin. However, this decrease was perceived as temporary by investors since Alphabet had to pay a one-time tax in order to repatriate its foreign earnings. Meanwhile, although Facebook Inc.’s profit margin and return on equity are increasing, and the company has zero debt, the decrease in its price-earnings ratio might indicate that investors are not confident that the company can keep its high growth rate. At a more mature growth stage, Apple Inc. has been increasing its leverage and its return on equity. However, the company’s profit margin has decreased in the last five years. Nevertheless, Apple’s price-earnings ratio has increased as investors remain optimistic about the company’s long-term investments. Also, revenue per employee (RPE) is an important ratio for the internet software and services industry since it represents earnings on intangible assets (Bryan, 2017). Accordingly, Alphabet’s and Facebook’s RPE show a direct relationship with the companies’ stock prices. Apple also shows efficiency utilizing its employees and has the highest RPE ratio and market capitalization of the three companies. A few large players dominate the industry and have advantages over smaller players. Large players have a considerable amount of capital resources as well as technical expertise (Kotkin, 2014). These capital resources allow these players to invest in acquisitions and innovations. Large companies also benefit from economies of scale as they own and operate their own data centers. One way in which companies could study economies of scale from data centers is by calculating the change in average cost to support one kW as data centers increase in size. Also, user networks provide large players with demand-side economies of scale (Colin, 2017). ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 4 These players are also able to collect a vast amount of user data and use this data to improve existing services (Malik, 2016). Large players’ intellectual property and brand images also contribute for the high barriers to succeed in the industry. Smaller companies focus on niche markets to avoid competing with larger companies. Small companies may also outsource computing power and use large players’ advertising services to reach users (Hadad, 2017). Industry players offer a wide variety of services that are related to each other. Many of these services are offered for free and contribute revenues as these services generate traffic and attract advertisers. By offering services that are related to each other, companies can benefit from economies of scope. Companies can spread their capabilities and costs across several platforms as they include similar features and supply chain competences. A study of economies of scope could be done by comparing the cost of offering two services separately with the cost of offering these services together. The industry attracts and invests in talent to achieve ambitious missions. Also, given the large scale of operations and the innovative environment of companies in the internet software and services industry, the industry players seem to provide a dynamic and engaging workspace. Personally, I would enjoy working along with bright minds toward a big purpose both in the short and long terms. I believe working in this industry would accelerate my personal development. In addition, industry players are in healthy financial positions, and economic conditions favor large players in the short- and long-terms as players expand both vertically and horizontally. Companies might increase prices and monetize services that are currently offered for free, suggesting increased revenues in the short term. Moreover, worldwide internet users are increasing in number and companies are increasingly investing in international opportunities. Thus, I would want to own capital and invest in the industry’s large companies. ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 5 Financial Ratios Given the fast-paced environment and the uncertainty related to technological innovations, companies in the internet software and services industry often keep low leverage as an attempt to reduce risk. In addition, these companies are able to generate high amounts of cash to finance its operations (Amigobulls, n.d.). In 2017, Alphabet Inc.’s debt-to-equity (D/E) ratio stayed somewhat consistent, and it has been decreasing from 0.06 in 2013 to 0.03 in 2017 (see Table 1). However, while Alphabet’s D/E ratio remained at 0.03, the company’s equity multiplier increased by 7.39% in the last year, and this increase might indicate that Alphabet slightly increased its leverage (Alphabet Inc., 2017). Table 1: Alphabet Inc.’s Financial Ratios 12/31/17 0.03 8.30 1.29 11.42 57.65 Debt to Equity ROE % Equity Multiplier Profit Margin % Price-Earnings Revenue per 1,383,785 Employee ($) (Alphabet Inc., 2017) 12/31/16 0.03 14.90 1.20 21.58 27.25 1,249,432 Alphabet Inc. 12/31/15 12/31/14 0.04 0.05 14.38 14.98 1.23 1.25 21.8 21.88 32.84 24.63 1,213,139 1,231,362 12/31/13 0.06 16.04 1.27 21.60 29.17 12/31/12 0.04 16.79 1.31 21.40 21.78 1,252,722 929,019 The decrease in leverage also led to a decrease in ROE, which decreased from 16.04% in 2013 to 14.90 in 2016. Also, the company’s ROE decreased 44.28% from 2016 to 2017. However, this decrease was largely due to the decrease of 47.08% in Alphabet’s profit margin. Profit margin was largely affected by the change in U.S. tax legislation in 2017 that caused the company to pay a one-time tax charge of $9.9 billion in order to repatriate foreign earnings. Accordingly, although the decrease in net income caused the profit margin to change from 21.58% in 2016 to 11.42% in 2017, the company’s price-earnings (P/E) ratio increased by ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 6 111.51% in the same period (Alphabet Inc., 2017). Thus, this inverse relationship may indicate that investors perceive the drop in profit margin to be temporary. Facebook does not count on leverage to finance its assets. The company is able to maintain its D/E ratio at zero as it has not issued any debt in the last years. Nevertheless, the company is increasing its ROE at a fast pace. Facebook’s ROE is 24.43%, and it increased by 133.11% from 2015 to 2017 (see Table 2). This increase is largely due to the company’s 90.53% increase in profit margin in the same period. The company holds an impressive profit margin of 39.20%. The ratio was 19.05% in 2013 (Facebook Inc., 2017). Besides the increasing number of active users, which has been the main driver of Facebook’s revenues, the company has shown efficiency managing its costs (Facebook Inc., 2016). Table 2: Facebook Inc.’s Financial Ratios 12/31/17 0 21.43 39.20 32.13 Debt to Equity ROE % Profit Margin % Price-Earnings Revenue per Employee ($) 1,619,319 (Facebook Inc., 2017) Facebook Inc. 12/31/16 12/31/15 12/31/14 0 0 0.01 19.47 9.19 11.29 36.97 20.57 23.58 32.32 79.89 69.66 12/31/13 0.03 10.58 19.05 88.15 1,616,758 1,412,655 1,355,147 1,242,228 However, the company’s price-earnings ratio decreased dramatically from 2015 to 2016 and slightly decreased from 2016 to 2017. The ratio decreased from 79.89 in 2015 to 32.13 in 2017 (Facebook Inc., 2017). Thus, the inverse relationship between the company’s profit margin and the company’s P/E ratio may indicate that investors are not confident that Facebook can keep growing at this pace over the long term. As Apple changed its capital structure to take advantage of low interest rates, it has a higher D/E ratio than Alphabet and Facebook (Carmichael, 2016). In addition, the company’s ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 7 D/E ratio has been increasing in the last five years (see Table 3). Meanwhile, Apple’s ROE at the end of last fiscal year was 38.39%. From 2013 to 2017, the company’s ROE increased by 18.79%, and its equity multiplier increased by 67.11%, from 1.68 to 2.80 (Apple Inc., 2017). Thus, the increasing financial leverage may have inflated the company’s ROE as Apple’s profit margin and asset turnover, which are components of ROE calculation, decreased in the 5-year period. Although the company still generates a good return, the 473.15% increase in long-term debt in the last five years may indicate increased risk. Table 3: Apple Inc.’s Financial Ratios Debt to Equity ROE % Equity Multiplier Asset Turnover Profit Margin % R&D (thousands) Price-Earnings Revenue per Employee ($) (Apple Inc., 2017) 9/30/17 0.86 38.39 2.80 0.65 21.09 11,581,000 16.63 Apple Inc. 9/24/16 9/26/15 9/27/14 9/28/13 0.68 0.54 0.32 0.14 37.73 50.04 37.74 32.31 2.51 2.43 2.08 1.68 0.71 0.90 0.84 0.89 21.19 22.85 21.61 21.67 10,045,000 8,067,000 6,041,000 4,475,000 13.50 12.36 15.52 12.06 1,833,551 1,864,064 2,130,519 1,889,662 2,030,563 Furthermore, Apple’s profit margin has been decreasing for the last five years except in 2015 when the company launched Apple Watch and was able to increase its revenues at a higher pace than its costs. The decrease in profit margin may be justified by the large increase in research and development expenses (R&D). Apple’s R&D increased 159% from 2013 to 2017 (see Table 3). Meanwhile, Apple’s P/E ratio has fluctuated, and showed an inverse relationship with the company’s profit margin. From 2012 to 2017, Apple’s profit margin decreased slightly while its P/E increased by 38% (Apple Inc., 2017). Thus, investors may have positive perspectives for the future. Accordingly, the CEO Tim Cook has been promising innovation to ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 8 investors. Cook referred to the product pipeline as a “chock full of incredible stuff” in 2013, “great innovation” in 2016, and “into the 2020s” in 2018 (Chhatwal, 2018). As industry players increasingly invest in its employees, and employees are key to business success, revenue per employee (RPE) is a key ratio in the industry (Hadad, 2017). Investments in R&D, innovation, and human resource practices represent investments in talent and are important for companies’ intangible assets. Thus, measuring revenue per employee can represent earnings on intangibles (Bryan, 2007). The ratio measures productivity and competitive advantage (Graham, 2016). RPE also indicates the health of technology companies (Carlson, 2015). Figure 1 shows the RPE ratios of Alphabet, Facebook, and Apple compared with those of other technology companies from several different industries. Figure 1: Technology companies’ revenue per employee ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 9 (Pelisson & Smith, 2017) Nevertheless, this ratio is very industry-specific, and a company’s RPE should be compared against those of other companies within the same industry. The average RPE in the internet publishing and broadcasting sub-industry was $438,490 in 2017 (Hadad, 2017). Meanwhile, in the search engines sub-industry, the ratio was of $658,260 (Hadad, 2017a). Furthermore, industry players’ change in RPE have been, for the most part, consistent to the change in the companies’ profit per employee. As Alphabet, Facebook, and Apple are the largest and most successful players in the internet software and services industry, their RPEs are significantly higher than the industry’s average. This difference reflects the importance of intellectual capital and the competition for talent in the industry. Alphabet’s growth in headcount in the last six years can be justified as a good investment by the simultaneous growth in revenue per employee (see Table 4). The increasing RPE ratio indicates Alphabet is growing and efficiently utilizing its employees. Alphabet’s RPE grew from $929,019 in 2012 to $1,249,432 in 2017 (Alphabet Inc., 2017). Alphabet’s stock price and RPE are, for the most part, showing a direct relationship. Both numbers have increased in the last six years. Also, both stock price and RPE decreased from 2013 to 2014. Facebook has also shown a direct relationship between the company’s stock price and RPE. Facebook’s RPE increased by 30% in the last five years while its stock price increased by 223%. The company’s current RPE is $1,619,319 (Facebook Inc., 2017). ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 10 Table 4: Stock Price and Revenue per Employee Comparison 2017 2016 2015 2014 2013 2012 Alphabet Inc. 357.33 Stock Price ($) 1,053.40 771.82 758.88 526.4 566.12 RPE ($) 1,383,785 1,249,432 1,213,139 1,231,362 1,252,722 929,019 Facebook Inc. 26.62 Stock Price ($) 176.46 115.05 104.66 78.02 54.65 RPE ($) 1,619,319 1,616,758 1,412,655 1,355,147 1,242,228 1,098,743 Apple Inc. 95.3 Stock Price ($) 154.12 112.71 114.71 100.75 68.96 RPE ($) 1,833,551 1,864,064 2,130,519 1,889,662 2,030,563 2,023,349 (Alphabet Inc., 2017) (Alphabet Inc., 2017b) (Apple Inc., 2017) (Facebook Inc., 2017) As Apple has reached maturity and has been promising long-term innovation, the company’s RPE has decreased. Nevertheless, the company’s stock price has shown a 62% increase in the last six years. In addition, although decreasing, Apple has the highest RPE of the three companies and has reach up to $2,030,519 per employee in 2015. In 2017, Apple’s RPE was $1,833,551 (Apple Inc., 2017). Accordingly, Apple has the highest market capitalization of the three companies. Evidence of Scale Economies The internet software and services industry is dominated by a few large players. The industry has an oligopolistic nature in which players try to differentiate from one another and compete for consumer attention and long-term relevance. Also, companies cooperate with one another when their interests align (Ghez, 2016). Dominant players have protected intellectual property, strong brand images, lobbyers, and economies of scale advantages that smaller players cannot match (Nutting, 2017). In addition, Apple, Alphabet, and Facebook have almost unlimited capital resources and technical expertise (Kotkin, 2014). Large players’ capital ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 11 resources allow them to increase industry’s dominance by acquiring smaller players that impose a threat to them or offer an innovative technology. Large players can achieve demand-side economies of scale through network effects (Colin, 2017). User networks create a continuous loop in which the increasing number of users cause the network to grow and keep users coming back (Hadad, 2017). The more users using the network, the more users it attracts and the higher is the value of the service (Rethans, 2016). The popularity of services attracts advertisers, increasing revenues. Furthermore, bigger companies can collect more data from users. This data is valuable to companies as it allows them to learn from users’ behaviors. This information is then used to improve services and make platforms more effective through machine learning and personalization of advertisements (Malik, 2016). As large companies become more effective in targeting ads to consumers, networks continue to grow, and companies become even more profitable (Hadad, 2017). The diverse data obtained also contributes for the development of new software and services such as voice-command software (Malik, 2016). According to The Economist, “Facebook not only owns the world’s largest pool of personal data, but also its biggest social graph – the list of its members and how they are connected.” Thus, barriers to entry are rising (The Economist, 2018). Large players’ high profitability also contributes for the acquisition of the best talent available. Given the competitive labor market, the rising cost of workers has become an issue for smaller companies (Malik, 2016). Access to highly skilled workforce is a key success factor to compete in the industry (Hadad, 2017). Another key success factor is to develop a clear niche. Smaller companies have relatively low barriers to enter the industry given the low marginal cost of digital assets and the opportunities risen from the advancements in technology. However, the ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 12 entrants’ ability to differentiate their software and services are extremely important as the industry has high barriers to success (Hadad, 2017). Focusing on market niches allows small companies to avoid competing with the industry’s large players. WorldStarHipHop focuses on users who are interested on hip hop and provides video-content similar to YouTube (owned by Alphabet). Nevertheless, besides its videocontent website, the company has its own channel on YouTube. WorldStartHipHop’s long-term success will depend on its ability to retain its users, continue to generate website traffic, and provide original and distinguished content (Hadad, 2017). Moreover, software and services provided by large companies facilitate competition among smaller companies in the industry. For example, instead of competing with Alphabet’s strong capabilities, small companies may join Google’s AdSense network to generate advertising revenues on their websites. By adopting Alphabet’s services, smaller players are able to acquire more traffic and reach advertisers to their websites. In addition, large companies operate their own data centers, and small companies can rent server space and have their computing power outsourced to these large companies (Hadad, 2017). Investments in data centers are increasingly important as video content, big data, and cloud services gain popularity. Also, as large players are continuously attempting to expand their operations to countries around the globe, these companies need the infrastructure to support their operations (Jhonsa, 2018). Data centers can provide economies of scale to large computing providers (Urquhart, 2010). A data center is the centralization of IT operations and equipment where data is stored, managed, and disseminated. Alphabet, Facebook, and Apple justify their high capital expenditure with the costs of these data centers. Thus, data center efficiency is a priority for these organizations (Palo Alto, n.d.). ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 13 Hossein Fateh, former CEO of DuPont Fabros, advocates that economics favor large scale data centers. He argues that while companies may spend $7-$8 million per megawatt to build massive facilities, smaller enterprise facilities cost over $12 million (Miller, 2013). A study of the economies of scale derived from data centers should compare the costs incurred at data centers of different sizes in order to support one kilowatt (kW) of compute capacity. The study should include the price operators pay for land and property, labor, hardware, memory, energy, and amortization (Facility Executive, 2016). Besides generating more output with less input through efficiency savings, such as Alphabet’s use of green energy sources to reduce its cooling bill by 40%, large data centers also have negotiation power with suppliers (Evans & Gao, 2016). If the average cost to support one kW decreases as data centers’ size increases, economies of scale impact data center costs. Moreover, large players have the know-how that can lead to lower operational costs (Datacenter Hawk, 2016). Nevertheless, the study should consider the geographical location of data centers as cooling costs are impacted by climate (Hadad, 2017). Evidence of Scope Economies Data centers also allow for economies of scope as industry players offer a wide variety of products and services that can be run on the same data center for a very low marginal cost (Agarwal, Jain, Bajaj, Jain, & Jain, 2012). Many of these products and services complement each other. Products and services include search engines, social media, broadcasting channels, and email platforms that are free to use. However, the traffic generated on these websites are essential to generate advertising revenue. Alphabet’s Google Ads product, for example, provides advertising services to be used on its platforms such as Search, YouTube, Google Play, and Google Maps (Ramaswamy, 2018). ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 14 Moreover, as large industry players acquire companies that pose a threat to them, industry players offer products and services that may substitute each other. Facebook bought Instagram and WhatsApp which are related to its social media and messenger platforms. Apple offers iTunes Store and Apple Music. The first is an on-demand service, and the latter is a subscription-based music service. In addition, the popularity of these services is closely related to Apple’s hardware sales (Hadad, 2017). Furthermore, Apple, Facebook, and YouTube are increasingly investing to create original content. These players have big advantages to enter the content business. According to Apple’s executive Eddy Cue, although the company does not know how to create shows, it knows how to create apps, how to distribute, and how to market. In addition, Apple’s brand name and capital resources are contributing to attract quality producers and stars (Koblin, 2018). According to Dan Reed, Facebook’s head of global sports partnerships, Facebook Watch, a recently launched video-on-demand service, can take advantage of the company’s technology and capabilities with targeted marketing to direct video content to the right audience (Long, 2017). Similarly, Alphabet uses its artificial intelligence and personalization capabilities across platforms by directing advertising, and making videos and news recommendations. The offering of related products and services bring several benefits to industry players. These companies possess the technical expertise that is the basis for the related platforms they have. For example, Alphabet’s search developments are used across its platforms as algorithms are leveraged and used in its content-based and advertising platforms. Thus, the company has cost advantages from producing multiple products and services. In addition, the data collected from users from one platform is more valuable when combined with data from other platforms. ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 15 The information is then used to improve the company’s overall products and services, including the personalization and targeting of ads. Furthermore, companies can achieve economies of scope by offering related products since these products use similar resources. For example, as Alphabet continues to invest heavily in advertising, machine learning and search, the consequent developments can be leveraged and used across several services. Moreover, Alphabet has a single all-access account that users use in all services offered by the company. The expansion of products to other related products also helps Alphabet reach a broader market, retain users, and create a certain user dependency on Alphabet’s services (Pineda, 2016). Also, the offering of a broader variety of services by companies in the industry generates more traffic and makes their advertising services more attractive. In addition, producing related software and services allow companies to take advantage of supply chain competences such as common departments and job specializations that are shared across platforms. Alphabet has recently launched YouTube Music, a music streaming service that is related to its YouTube channel. The new service might eventually replace Google Play Music. One of the main innovative features of the streaming app in comparison to the ones of its competitors is the ability to easily search for songs even when the user does not know the name or the author of the song. Thus, YouTube is leveraging the algorithms used in Google Search Engine. Also, YouTube Music subscribers are also able to access videos related to songs as well as get recommendations from the app. Thus, the new service is using YouTube existing functionalities. In order to study the degree of economies of scope an industry player achieves by launching related services, Alphabet’s YouTube Music, for example, companies should compare the cost of offering each service separately with the cost of offering both services together. The ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 16 degree of economies of scope is this difference in cost as a percentage of the cost of offering both services. Thus, if the cost of offering both services together is lower than the cost of offering each service separately, there are economies of scope in offering both services. Summary As I am highly motivated by intrinsic rewards and am constantly looking for challenges that will make me grow, and, most importantly, have a meaningful purpose in the world, working in the internet software and services industry would be a privilege. The industry has the power to influence billions of lives as it affects both individuals and businesses through its operations. Industry players’ missions are forward looking yet realistic. Their progress toward artificial intelligence and machine learning development, for example, can change the way society lives. Knowing that my job is meaningful for the organization to achieve high-impact goals would motivate me to be the best I can while giving me great pleasure. In the short-term, as a young professional with a recent MBA degree, I believe the fast-changing environment of the industry would accelerate my personal growth. Working with the brightest minds in a culture that fosters creativity and innovation would push me to achieve my highest potential. Considering the industry’s broad operations and investment in human capital, I believe that having a long-term career perspective is more beneficial than a short-term perspective. Companies in the industry are leaders in productivity, and I am passionate to discover the best practices used to run a business in this scale. From my point of view, boredom and stagnation are two of the main factors that incentive ambitious talent to change career paths to another industry. However, the technology business offers a dynamic and engaging environment. Also, I see continuous learning as a condition to succeed in most tech-related occupations, despite if the position is in the technical or operational field. ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 17 Furthermore, as industry players are able to efficiently utilize their employees, I trust I could learn how to best utilize my potential and work with others to help the company achieve its goals. Another reason why I desire to work in the industry is that I perceive companies cherish teamwork, diversity, and hard work, all of which are significant aspects of my life and reflect my personality. Thus, I believe working in the internet software and services industry over the longterm would be a pleasant opportunity for learning and personal growth experience. Regarding owning capital in the industry, I would invest in stocks with both short-term and long-term prospects. The industry is in a favorable financial position. Industry players generate high amounts of cash and continuously invest in acquisitions and research and development to support innovation and service enhancements. Also, the industry showed revenue growth even during the Great Recession. In the short-term, the industry may benefit from improvements related to pricing for mobile advertising (Kessler & Choong, 2018). In addition, the FAANGs stocks, Facebook, Apple, Amazon, Netflix, and Alphabet’s Google, represented half of the stock market’s growth in 2018 (Mason, 2018). Furthermore, CFRA forecasts that in 2019 revenues will grow 17% for Alphabet and 27% for Facebook. Facebook is maintaining healthy profit margin while its P/E ratio decreases. Also, as the company did not meet investor’s expectations and its stock price fell about 20% after the company’s 2018 second quarter results, I think this is a good moment to buy Facebook shares. I believe it is unrealistic to expect Facebook to keep growing at the same pace it has been growing since it went public in 2012. However, Facebook is currently at a low level of monetization as it charges relatively low prices for its social media ads (Carlin, 2018). In addition, in the shortterm, Facebook may increase its revenues as it plans to monetize WhatsApp for business customers (Aycock, 2018). Facebook also seems like a good option in the long-term as it ECONOMICS IN THE INTERNET SOFTWARE AND SERVICES INDUSTRY 18 dominates social media, messaging, and news distribution when people increasingly interact via internet and go on-line for news (Hartung, 2018). In addition, industry players still have room for growth as there are opportunities to expand internationally and social media trends are favorable in the long term (Hartung, 2018). The number of internet users worldwide is expected to grow at a compound annual rate of 3.7% from 2016 to 2021 (Kessler & Choong, 2018). Also, companies in the industry are constantly upgrading the intangible assets that are “integrated into networks and thrive on increasing returns to scale” (Mason, 2018). Moreover, Alphabet, Facebook, and Apple are increasing its operations both vertically and horizontally. The large capital expenditure and investment in infrastructure, such as datacenters, provide them with supply chain control and a big cost advantage over smaller players. In addition, industry players have developed large user networks that lock-in users to keep generating traffic in their several platforms. Also, the companies’ extensive knowledge and capabilities provide them means to diversify its services to reach a broader target market by expanding its operations into other industries. Moreover, as diversification through acquisition is “often more efficient and economical than building from scratch” because of the fast-paced environment, the tendency is that large companies get larger (Mason, 2018). 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