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Financial Myths: ?“The Falcon Cannot Hear the Falconer” — Part III

The main concern is not that Google’s ventures lack promise, but that they are far away from a big score.
Michael McTague, Ph.D., Executive Vice President, Able Global Partners in New York, serves clients in a variety of industries that seek capital for expansion, acquisition, consolidation or re-financing.
Michael McTague, Ph.D., Executive Vice President, Able Global Partners in New York, serves clients in a variety of industries that seek capital for expansion, acquisition, consolidation or re-financing.

This myth uncovers interesting insights into the plight of the tech giants. As admired and essential as they are, their vulnerabilities prove dangerous. The premise is that all giants – even friendly ones – remain at risk of breakup by the government. The first installment looked at Facebook FB, which needs a significant dose of sound management skill. While Facebook’s profits continue to soar, its reputation has sprung a leak. There is no algorithm for common sense. The second installment looked at Microsoft MSFT, the once aggressive, brash software king that has become the wise elder, protecting its cash and avoiding costly competitive conflicts.

Google GOOGL and Apple AAPL belong to this technology giant extended family. If the family has branches, in terms of monopoly, Apple resembles Microsoft, while Google leans toward Facebook. Google, whose reach is greater than Facebook’s, must be petrified by the risky actions of its social media cousin. Here are a few alarming comparisons:

  • Absolute leadership in their area of technology. (No investor would seriously call Yahoo [now listed as AABA] a competitor)
  • Massive worldwide reliance on the service (40,000 searches per second for Google; 1.5 billion logons daily for Facebook)
  • Huge stockpile of cash (Google: $92 billion!)

Google also risks the same mistakes Facebook made although it has generally avoided making so many enemies. Google’s progeny — the Artificial Intelligence robots — do not possess the wherewithal to stir up ugly controversy and hire expensive law firms — yet.

Google’s Odd Configuration

Despite its wealth, investors may not like Google’s peculiar make up. The company is moving into attractive but expensive areas, already acquiring artificial intelligence (AI) companies. Much like Tesla TSLA or a pharmaceutical company with a great idea, they spend billions on research hoping for a breakthrough that will turn into a new cash stockpile. But, when you look at Google’s divisions, they are quite uneven. The cash cow (search engine and its advertising hegemony) pours money into new areas. But, so far the Alphabet family consists of a giant father and a bunch of toddlers (artificial intelligence, cloud, fiber internet service, smart home products, self-driving cars and hardware). The main concern is not that Google’s ventures lack promise, but that they are far away from a big score.

By contrast, Amazon AMZN, which the Myth Buster describes as a retail company masquerading as a high tech giant, generates a reasonable stream of revenue in its additional businesses: film (entertainment), retail grocery (Whole Foods), electronic devices and publishing. Amazon and Microsoft far outpace Google cloud revenue by substantial multiples.

Monopolies and the Justice System

The distinctions are important related to the premise that the fear of monopoly remains a great motivator for the US justice system. Google looks like the singular giant, while Amazon looks like the many-headed hydra or perhaps the high-tech Cerberus (not the hedge fund, which only has three heads). Apple also fails the singular giant test because it offers twenty-seven products and its smartphone dominance is receding. Meanwhile, Microsoft is unrivaled in its particular line of office technology, but the company flies under the radar where harm to consumers is concerned.

All of these comparisons derive from the idea that a true monopoly would be in trouble. However, a huge, wealthy company may look like a bunch of medium-sized businesses or a friendly giant that does not make enemies. This brings us back to Facebook. On top of the ill will from its looseness with personal information and its penchant for fake news linked to advertizing revenue, the boy geniuses sullied their images further by selling large chunks of their own Facebook stock, reaching $500 million in recent weeks. Bloomberg reports that five mutual funds sold off $3 billion of the social media giant’s shares.

Facebook has more enemies than its giant cousins. It can probably get by with its doubtful news feed because it is not a true rival of major news organization. However, client companies fret over ineffective advertizing. Ad’s should run where potential customers can be found and Facebook should show the evidence. Private individuals, whose personal information is protected by banks and the US government, see Facebook as a sieve that profits from secrets.

What Have We Learned?

In the two previous entries on this myth, we delved into several major risks related to the US tech giant darlings. The numbers are impressive spanning market capitalization, revenue and stockpiled cash. Everyone wonders who will emerge the clear leader and why. Google rises as the most formidable of the group. The essential nature of its main service and its dominance stand out. Investors may remember when Mark Cuban was accused of insider trading over a Canadian search engine called Never heard of it? Let’s just say it never rivaled Google. can’t even rival Yahoo. Looking to the future, Google’s biggest weakness is that its newer businesses – artificial intelligence, cloud and hardware, etc. — are not generating much revenue.

This myth has opened an interesting dialogue and allows several strategic observations. First, size matters. The giants command awe inspiring cash hordes. Size also carries risk. A second strategic observation is that appearance matters. The bigger and meaner a company looks, the greater its vulnerability. Fast-growing Facebook has nearly forgotten its purpose in life: the falcon can no longer hear the falconer. It needs to keep people happy with a great vehicle for sharing and enjoying life experiences. No Facebook user should fear having their thoughts and their families exposed to adware peeping toms. As successful as the tech giants are, they need clear strategic direction and careful choices along the road that is proving rockier than they expected. The next entry will begin a new and equally compelling series.

Read the rest of this series:


Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

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