The rise of digital conglomerates

March 22, 2018

After decades of large conglomerates splitting into separate parts, there is a new trend of large companies diversifying into industries and investing in many different types of companies. But the drivers of this new wave of ‘conglomeration’ are different from those of the past, and provide some insight into the future of markets and business.

Our observations

  • In recent years, many large conglomerates have split into separate businesses, like Philips, Maersk, ON, RWE, ThyssenKrupp, Hewlett Packard, while large conglomerates like Siemens, DuwDuPont, GE and possibly even Berkshire Hathaway are looking to break up their businesses into so-called ‘pure play companies’.
  • Global M&A is booming, as we have written before, and one of the reasons is that tech giants, such as Amazon, Alphabet, Apple and Facebook, are taking over companies at record speed. However, these are generally not billion-dollar takeovers of mature companies in the same industry, but small companies with innovative technologies and scalable platforms in various industries.
  • Many conglomerates trade at a so-called ‘conglomerate discount’ because of their inability to manage diverse and many separate business units. Recent decades saw increased shareholder pressure on conglomerates to let subsidiaries focus on their core business: the sum of the conglomerate is worth less than the individual parts.
  • Alphabet recently missed its earnings expectations in the fourth quarter of 2017, as Google’s advertisement business is slowing down. However, it now suspects that its non-advertisement businesses, for example cloud computing and self-driving cars, will generate future growth.

Connecting the dots

During the 1960s and 1970s, there was much enthusiasm for companies employing strategic diversification: a ‘parent’ company owning a large and diverse portfolio of other subsidiary companies. These business groups, which became the cornerstone of American capitalism, were established to use free cash flows to finance new businesses to hold a diversified portfolio to hedge against industry-specific risks. They also made it possible to combine operational processes between business units that could yield efficiency gains (synergies). However, this trend of ‘conglomeration’ has gone out of fashion in the last three decades, and many of these conglomerates broke up and let the subsidiary business focus on their core business (a process called ‘starbursting’).However, during this trend of ‘deconglomeration’, we see the emergence of a new type of conglomerate: the digital conglomerate, like Amazon, Apple, Facebook and Alphabet, and their Chinese peers Alibaba, Baidu and Tencent. Their conglomeration strategy has different drivers compared to ‘old conglomerates’. Their huge cash piles allow them to gobble up new companies at a record rate to sustain future growth rates and to deter new possible entrants in their markets. However, looking at these companies’ portfolios, with subsidiaries in diverse industries, ranging from groceries, healthcare, autonomous driving to virtual reality, and gaming, it is clear that a more fundamental driver is at work: their belief that digital technology and the use of data will transform every industry. Digital technology and data will not only be transformative within markets or verticals; data from their various businesses yields valuable intelligence for all kinds of activities and businesses, as we have written before. As such, the synergies and network effects between the businesses of digital conglomerates are much greater than for previous conglomerates, who merely focused on synergies. For example, autonomous driving yields data interesting for a search engine, while ‘offline retailers’ like supermarkets can yield additional data to online retailer platforms. Following this line of thought, we should not understand the expansion of digital conglomerates as horizontal or vertical integration, as this still assumes different and distinct businesses and industries within an investment portfolio, while these digital conglomerates are building integrated and data-driven ecosystems. With the establishment of these ecosystems with mutually reinforcing data businesses, digital conglomerates can tap into new sources of revenue that are not directly related to their core of their traditional business. For example, Apple now receives more revenue from its services division, which includes services like Apple TV, Apple Pay and Apple Music, than from its traditional ‘hardware’ division (i.e. iPods and MacBooks). And Amazon’s advertisement business might challenge Facebook’s and Google’s ad duopoly, as its retail platform has become the default search engine for consumer products.

Implications

  • Aside from conglomerates that grow because of their sheer amount of cash and capital, a second type of conglomerate is directly driven by the introduction of new general-purpose technologies. the expansion GE’s and Philip’s businesses for example, was directly related to the electrification of our society and economy, and the conglomerate of General Motors to the introduction of the car. As we have written before about a new technological revolution that is in the making, we expect a new type of conglomerate to be formed on the basis of upcoming general purpose technologies.
  • The expansion of digital conglomerates has a general pattern: in the first phase, a tech platform or business (smartphones, search engines, social media advertisements, online retail) generates a lot of free cash flows, which are invested in improving intelligence systems and acquiring different business to generate more and richer data in the second phase. In the third phase, they begin to invest in the core technologies to power their own digital ecosystems, reaching further down the Stack. Digital conglomerates are currently entering this third phase, as we see increasing efforts of these conglomerates to develop their own core technologies, for example computer chips or Artificial Intelligence systems.
  • While previous conglomerates were sometimes legally dismantled because of antitrust issues, digital conglomerates rarely make the type of acquisitions that trigger antitrust actions, like large acquisitions within the same industry, and most of their products at first sight seem beneficial to consumers (Amazon pushes down consumer prices, while Facebook and Google provide free services). Furthermore, the subsidiary businesses generally have little overlap with markets adjacent to their traditional core market (Apple’s smartphones and healthcare, Google’s search engine and autonomous driving).

Series 'AI Metaphors'

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1. The tool
Category: the object
Humans shape tools.

We make them part of our body while we melt their essence with our intentions. They require some finesse to use but they never fool us or trick us. Humans use tools, tools never use humans.

We are the masters determining their course, integrating them gracefully into the minutiae of our everyday lives. Immovable and unyielding, they remain reliant on our guidance, devoid of desire and intent, they remain exactly where we leave them, their functionality unchanging over time.

We retain the ultimate authority, able to discard them at will or, in today's context, simply power them down. Though they may occasionally foster irritation, largely they stand steadfast, loyal allies in our daily toils.

Thus we place our faith in tools, acknowledging that they are mere reflections of our own capabilities. In them, there is no entity to venerate or fault but ourselves, for they are but inert extensions of our own being, inanimate and steadfast, awaiting our command.
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2. The machine
Category: the object
Unlike a mere tool, the machine does not need the guidance of our hand, operating autonomously through its intricate network of gears and wheels. It achieves feats of motion that surpass the wildest human imaginations, harboring a power reminiscent of a cavalry of horses. Though it demands maintenance to replace broken parts and fix malfunctions, it mostly acts independently, allowing us to retreat and become mere observers to its diligent performance. We interact with it through buttons and handles, guiding its operations with minor adjustments and feedback as it works tirelessly. Embodying relentless purpose, laboring in a cycle of infinite repetition, the machine is a testament to human ingenuity manifested in metal and motion.
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3. The robot
Category: the object
There it stands, propelled by artificial limbs, boasting a torso, a pair of arms, and a lustrous metallic head. It approaches with a deliberate pace, the LED bulbs that mimic eyes fixating on me, inquiring gently if there lies any task within its capacity that it may undertake on my behalf. Whether to rid my living space of dust or to fetch me a chilled beverage, this never complaining attendant stands ready, devoid of grievances and ever-willing to assist. Its presence offers a reservoir of possibilities; a font of information to quell my curiosities, a silent companion in moments of solitude, embodying a spectrum of roles — confidant, servant, companion, and perhaps even a paramour. The modern robot, it seems, transcends categorizations, embracing a myriad of identities in its service to the contemporary individual.
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4. Intelligence
Category: the object
We sit together in a quiet interrogation room. My questions, varied and abundant, flow ceaselessly, weaving from abstract math problems to concrete realities of daily life, a labyrinthine inquiry designed to outsmart the ‘thing’ before me. Yet, with each probe, it responds with humanlike insight, echoing empathy and kindred spirit in its words. As the dialogue deepens, my approach softens, reverence replacing casual engagement as I ponder the appropriate pronoun for this ‘entity’ that seems to transcend its mechanical origin. It is then, in this delicate interplay of exchanging words, that an unprecedented connection takes root that stirs an intense doubt on my side, am I truly having a dia-logos? Do I encounter intelligence in front of me?
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5. The medium
Category: the object
When we cross a landscape by train and look outside, our gaze involuntarily sweeps across the scenery, unable to anchor on any fixed point. Our expression looks dull, and we might appear glassy-eyed, as if our eyes have lost their function. Time passes by. Then our attention diverts to the mobile in hand, and suddenly our eyes light up, energized by the visual cues of short videos, while our thumbs navigate us through the stream of content. The daze transforms, bringing a heady rush of excitement with every swipe, pulling us from a state of meditative trance to a state of eager consumption. But this flow is pierced by the sudden ring of a call, snapping us again to a different kind of focus. We plug in our earbuds, intermittently shutting our eyes, as we withdraw further from the immediate physical space, venturing into a digital auditory world. Moments pass in immersed conversation before we resurface, hanging up and rediscovering the room we've left behind. In this cycle of transitory focus, it is evident that the medium, indeed, is the message.
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6. The artisan
Category: the human
The razor-sharp knife rests effortlessly in one hand, while the other orchestrates with poised assurance, steering clear of the unforgiving edge. The chef moves with liquid grace, with fluid and swift movements the ingredients yield to his expertise. Each gesture flows into the next, guided by intuition honed through countless repetitions. He knows what is necessary, how the ingredients will respond to his hand and which path to follow, but the process is never exactly the same, no dish is ever truly identical. While his technique is impeccable, minute variation and the pursuit of perfection are always in play. Here, in the subtle play of steel and flesh, a master chef crafts not just a dish, but art. We're witnessing an artisan at work.
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About the author(s)

Researcher Pim Korsten has a background in continental philosophy and macroeconomics. At the thinktank, he primarily focuses on research, consultancy projects, and writing articles related to technology, politics, and the economy. He has a keen interest in the philosophy of history and economics, metamodernism, and cultural anthropology.

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