Big is the new black. Or maybe it’s the new oil. Regardless of the euphuism, for corporations, big is definitely the way to go. And that realization is changing everything.
This week, Google Cloud casually announced a huge investment in cloud infrastructure. During the past three years, such spending reached $30 billion. And Google is a distant third in the category.
Get big fast, or die trying.
The new investment involves three submarine cable systems, and five additional global cloud regions.
Beginning in the first quarter of 2018, Google Cloud will open facilities in the Netherlands, Montreal, Los Angles, Finland and Hong Kong.
Then in 2019, three cables — Curie, Havfrue and HK-G — will be commissioned. New links are planned for Chile to Los Angeles … the U.S. to Denmark and Ireland … and between major Asian hubs, respectively.
Despite all the hype surrounding the cloud, the backbone of the modern internet is still a mess of 350 extraordinary underwater cables. These fiber optic lines crisscross the globe, linking data centers on every continent except Antarctica.
In the past, projects of this cost and scale were left to telecommunications companies. They had expertise and deep pockets, thanks to their regulated status.
That is changing. Alphabet (GOOGL), Microsoft (MSFT), Amazon.com (AMZN) and Facebook (FB) have all made noteworthy investments in the past 10 years.
And owning the infrastructure of the always-on, connected world has its merits …
Big tech companies are expanding their reach. Access to inexpensive, uninterrupted bandwidth is a valuable commodity …
Amazon.com is adding retail distribution points to augment its dominant e-commerce platform.
Microsoft is forging strategic partnerships in the banking world to remake the financial transaction framework, using Blockchain.
- Facebook and Alphabet are continuously gathering data of all types about people, things and interactions. Today they are selling ads. In the future, that data will be useful to develop smart cities, cars and general product design.
This means the biggest information technology companies are getting bigger by the minute. It’s all by design. And they’re leveraging their scale to push their way into many other parts of the global economy.
Stock market investors know this. At the end of 2017, the Information Technology group, the collection of stocks that includes all of big tech, accounted for 23.8% of the total value of the Standard and Poor’s 500 index. By way of comparison, IT was 15% in 2006, and 10% in 2000.
Joshua Brown, in his recent essay, “Breaking Up Tech: Indexes doing what the economy won’t,” asserts the growth of big tech is untenable. Rising stock valuations have given the leading companies unprecedented access to cheap capital.
They are taking full advantage. They’re now so big … so pervasive … they have monopolistic. It’s bad for the economy, and it’s bad for markets.
S&P Dow Jones Indices and MSCI Inc., a leading analytics provider, plan to change the trajectory.
The broader S&P 500 gained almost 20% last year. Meanwhile the Technology SPDR (XLK) rose 32% in calendar 2017.
It begins with a simple reorganization of the sub-indexes …
The Telecommunications Services sector will get a name change to Communication Services. It will also get some new stocks. Netflix (NFLX), Alphabet and Facebook will now keep company with slow growers like Comcast (CMCSA). The big idea is to surround fast growers with laggards, to mute gains.
It is like the Chi Chi Rodriguez principle. The Hall of Fame golfer used to say: “If you hang around with losers, you become a loser.”
I’m not sure investors are going to fall for it. But that does not matter. The keepers of the index want to mask the growth of big tech. If they pair winners with losers, the likelihood is weaker average gains for the sub-indexes. That is what they want.
Investors should be aware that none of this is an accident. Many people are starting to characterize big tech firms as utilities. There are growing cries to break up, or at least slow the influence of, these dynasties.
This implies regulation, and eventually slower growth.
Nearer term, I believe that is not likely.
I have been telling my members to buy big tech stocks, and their suppliers, into every decline. They companies are uniquely positioned to benefit as technology touches every part of the global economy. Their appetite to acquire disruptive technologies ensures strong operating margins. But most of all, they have the scale to keep nimble competitors out of their core businesses.
That’s a powerful combination. One worth investing in during 2018 and beyond.