Dr Arturo Bris, Professor of Finance & Director of IMD World Competitiveness Center, opened the second day of the Sovereign Investment Circle in Singapore with a presentation on why digital platforms have grown globally and what investors can expect from them in the future.
Key takeaways included:
- We are living in a changing paradigm where digital giants increase their influence, drive stock market returns, and create corporate inequality;
- Digital platforms continue to be successful because they have created a new concept of what a company is;
- Digital platforms have developed monopoly power in some of the areas they operate in and create disadvantages for both new entrants in their sectors and companies in more traditional sectors;
- Given their positions, digital platforms have a strong outlook, but they could be disrupted by regulatory and tax policies imposed by governments, typical business cycles where the platforms fail to reinvent or reinvigorate their businesses in the face of competition, or by the development of alternative blockchain-driven business models.
The importance of corporate inequality
Dr Bris started the session by explaining that we live in a world where inequality is rising. Typically, inequality is defined in terms of income both within and across countries, but these measures omit an important factor, namely corporate inequality.
Dr Bris showed that in the past few years corporate inequality has been on the rise, and this has been driven by the rapid emergence of 'digital giants' across the world. There are seven main digital giants, including Microsoft and Apple, that occupy approximately 15% of the overall S&P 500 index1.
In historical terms, Dr Bris pointed out that digital giants are not that huge. Looking at shares of the total S&P 500 over time, other companies, like Exxon Mobil, General Electric, Dupont and General Motors, have had larger shares of the total market at different points in time than digital giants have had recently2.
Digital giants have driven market gains in recent years
But Dr Bris pointed out that digital companies have been responsible for a big part of recent market gains. Since November 2016, seven digital giants were responsible for 34% of the total market gain of the S&P 500 measured at the end of June 20183 . Measured as of today, the gain is lower but still significant at 20% of total gains in the S&P 500 since November 20164.
Digital companies dominate because they have introduced innovative and disruptive business models. Taking Twitter for example, there is a crucial definition of who the customer is at the heart of their business. Twitter users are not customers in the traditional sense, they are the source of information and data which Twitter monetizes to sell to advertising companies.
Dr Bris continued by saying that digital platforms succeed because the marginal cost of acquiring their key product, i.e. user data, is low, if not zero. Once digital platforms are established and widely adopted by users, their costs of acquiring additional data drops dramatically and the value of the products they sell, i.e. to advertisers, increases – and this is one of the key competitive advantages that digital platforms have.
Data platforms as monopolists – preserving their position
Dr Bris also pointed out that, once established, digital platforms can exert monopoly power on their markets, which can deter competitors. By moving quickly in fast-growing sectors, like online search and social media, digital giants establish large user bases and grow profitability, which not only impacts potential new entrants in their sectors, but also affects companies in other sectors.
That's because investors then look to companies in other sectors and demand the same level of returns that digital giants deliver, which can reduce the amount of capital available to them. Additionally, digital giants aggressively acquire other competitors, thus sealing advantages in terms of innovation and developing their monopoly power.
Dr Bris showed that other factors come into play too, like the extension of tax privileges to tech companies in order for them to relocate to particular cities or countries. Policies like these reinforce corporate inequality because they alter the playing field and boost the competitive advantage of digital platforms over competitors and other more traditional sectors.
The outlook for digital platforms
Summing up his presentation, Dr Bris concluded by saying that, given their positions, the outlook for digital platforms is strong, but not necessarily certain.
Potential disruptions could come from increased regulation and punitive taxes, with recent judgements made by the European Competition Commission against some digital companies being an example.
Other disruptions to the dominant digital giants could come from business cycles. Though some digital companies have been able to reinvent themselves, it is by no means certain that all of the dominant platforms will be able to continually innovate and adapt to new competition, technology or demands of users.
Ending on the topic of innovation, Dr Bris also raised the possibility that new entrants and business models, like blockchain-driven search engines or social networks, may end up disrupting the digital platforms so prominent today and changing the digital industry with new innovations.
Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© UBS 2019 The key symbol and UBS are among the registered and unregistered trademarks of UBS.