The Death of Big Bank Power and the Rise of Tech Hegemony
We need to stop worrying about another Lehman moment and start thinking about what it means for Google and its kin to rule the world.
One of the most fascinating economic history books I've read is The Pursuit of Power, a look at 1,000 years of world history and how changes in technology, military technology in particular, altered the dynamics of power relationships throughout the world. Developments as wide-ranging as the discovery of gunpowder, the introduction of military drilling, and the invention of the internal combustion engine have had profound impacts on society that are often visible only with the benefit of decades or hundreds of years of hindsight.
Similarly, we see that as society changes, the institutions that dominate the organization of production and human interaction have tended to wield unchecked power and collect monopolistic profits. Think of the pharaohs, emperors, and kings of the ancient world, or the church in the Middle Ages.
Since the dawn of the Industrial Revolution, this power transfer has led to the rise of a new set of institutions. At first we saw governments and factories play this role. As capital accrued to factory owners, advancements in energy and technology occurred, and large-scale consumption came of age, factories morphed into corporations and banks, which gradually co-opted governments thanks to political donations and their economic interests. The peak of this era was in the early 1990s, after the fall of the Soviet Union reduced the influence of military interests and before the development of the commercial internet began empowering individuals.
This era ended on September 15, 2008, the day Lehman Brothers filed for bankruptcy. Some banks failed, others needed government bailouts, and public blame for the crisis landed on the largest firms in the industry and their enablers in Washington. Many bears have continued to focus on the aftermath of this crisis and have underestimated the rising institutions that promise to dominate the economy and will see their influence in government soar over the next 50 years.
In short, we've traded Lloyd Blankfein and Jamie Dimon for Larry Page and Mark Zuckerberg.
Yes, tech companies are on their way to ruling the world in the way that financial and industrial firms did before them. We the people even helped them score their first major political victory.
Tech companies have been in the business world for so long -- Intel (INTC) was founded in 1968, and IBM (IBM) decades before that -- that it's easy to miss what's changed over the past decade. Starting with Intel in the late 1960s, we had a 30- to 35-year period where tech innovation was about creating the hardware, software, and networking foundation that supports the modern data-centric internet world. For the most part tech companies came and went, getting disrupted as they became commoditized and new innovations occurred. Ask your 18-year-olds if they've heard of Silicon Graphics, 3Com, Bay Networks, or Iomega.
That changed in the mid to late 1990s. Companies like Amazon (AMZN), eBay (EBAY), Google (GOOG), and Craigslist created Internet platforms that enabled many-to-many communication and commerce. They set rules about what type of communication and commerce was acceptable, and collected revenue for hosting these platforms. They resemble governments more than what we think of as tech companies.
This trend has accelerated over the past decade. Facebook, Twitter, and LinkedIn (LNKD) have created platforms indispensable for many of their users, limited at first to communication but increasingly important commercially. Apple (AAPL) created a software and media ecosystem that has allowed it to capture high margins on hardware sales. Airbnb has created a billion dollar company being the eBay of housing and apartment rentals. Zillow (Z) and Trulia have enabled consumers to empower themselves in the home buying and selling process. We'll have to see if growing companies like Tumblr, Pinterest, and Instagram can come up with business models that match their popularity. And there's still a huge opportunity for companies to play a similar role in health care and education.
These companies will be much more difficult to disrupt than people think. We had search engines before Google, and social networking sites before Facebook, but now that these industries have matured, the economic clout of the dominant players has increased even if they're no longer at the cutting edge. Craigslist has 30 employees, hasn't innovated in a decade, and has a platform that is woefully antiquated, yet remains among the most popular sites in the US.
Think about how the nature of life has changed in the past 30 years. We used to be at the mercy of big companies to hire us, multinational corporations for what products and media we'd consume, and a handful of big banks to make the wheels of commerce turn. Increasingly we have become empowered to live our lives and conduct our affairs without this mass-marketed, mass-produced, centralized infrastructure.
Now we rely on a different infrastructure dominated by new firms and governed by different rules. I can come up with a product or service on my own, host my storefront or media hub online, use search engine optimization and social media to market myself, and transact via PayPal or Square. The old guard can still survive in this world, but now they have to be the best, and not just get by on high barriers to entry.
This power shift has occurred in valuations as well. At the end of 2007 the combined market cap of the five "too big to fail" banks along with Wells Fargo (WFC) and US Bancorp (USB) was $780 billion. By the end of 2011, this had shrunk to $530 billion. Meanwhile, the combined market cap of Google, Apple, eBay, and Amazon at the end of 2007 was $470 billion. By the end of 2011, $700 billion. And that doesn't count Facebook, LinkedIn, Twitter, and a whole host of soon-to-be multibillion-dollar companies.
So the era of bank hegemony is over, despite the proclamations of those continuing to scream about it in order to attract your attention and money. There won't be another Lehman moment, and even if there were, it wouldn't be as bad as people think. Instead, we need to think more about what it means for Google and its kin to rule the world. Rather than worrying about leverage, derivatives, and systemic risk, we're going to have to worry about privacy, data ownership, and content filtering. One set of problems for another. But I, for one, welcome our new "tech" overlords.
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