In the 1960s, the United States experienced a conglomerate boom. Companies such as Ling-Temco-Vought, Gulf and Western Industries, and others capitalized on low interest rates and periodically falling stock prices to acquire smaller companies through borrowed funds and often at temporarily reduced valuations. One distinctive feature of the conglomerate model was that the companies united within a conglomerate could operate in completely different and unrelated industries, ranging from meat packing to aerospace. The primary factors considered when deciding to purchase a new company for the conglomerate were exclusively financial indicators: the profitability and price of the acquired company.
The main goal of this business model was to increase the conglomerate's stock value by growing earnings per share. Investors and the general public were also presented with more enticing ideas underlying the model, such as risk diversification of the conglomerate through the dissimilarity of its constituent businesses, as well as efficient access and redistribution of financial resources within the conglomerate.
By 1968, the conglomerate business reached its peak, with approximately 4,500 companies being acquired in the US market, 26 of which made it into the top 500 American companies ranking. However, the stability of this model proved to be short-lived. In the late 1960s and early 1970s, conglomerate profits began to decline significantly due to rising interest rates. Alongside the decline in profits, market capitalization also fell, and conglomerates were forced to sell their assets to meet the debt obligations they had accumulated during the boom.
If we look at the largest technology companies today (MAAMA), we can identify certain similarities with conglomerates. For instance, under the holding company Alphabet, created in 2015, Google encompasses a large number of companies from various business sectors. These include various internet services, self-driving cars, pharmaceutical and medical companies, and even agricultural technologies. Similarly, Amazon, in addition to its e-commerce business, includes Amazon Web Services — a cloud business, music and video streaming, the gaming streaming platform Twitch, as well as the natural products chain Whole Foods.
Moreover, this phenomenon can be observed not only in the US but worldwide. For example, in China, Alibaba operates fintech, online travel, cloud, messaging, video streaming, gaming, and many other businesses alongside its main operations. And Russia's largest internet company, Yandex, is a leader not only in online search but also in taxi services and video streaming, and it is developing several other areas.
At first glance, it may seem that conglomerates have risen from the ashes like a phoenix in modern technology giants that attempt to engage in everything at once. But is that really the case? Are modern technology corporations truly a new wave of conglomerate models? And are they destined for the inevitable collapse that occurred with conglomerates in the 1970s?
Let's take a closer look at the businesses united under the brands of technology giants. Through analyzing their press releases, media statements, and strategic materials, it becomes evident that the development of specific services is primarily driven by strategic considerations rather than purely financial motives. The companies within these groups are closely integrated with each other, working towards the achievement of specific strategic goals, even if these connections may not be immediately apparent. For instance, Amazon's video streaming service, Amazon Prime Video, doesn't exist in a separate universe from its e-commerce business but functions as part of the broader Amazon Prime subscription, which includes free shipping and other services. Another example is AWS, which originated from Amazon's endeavour to leverage its expertise in building efficient data centres for its own needs. Facebook's acquisition of Oculus similarly goes beyond mere profitability from selling VR/AR devices; it aims to integrate social networks with this technology to create a so-called metaverse.
Thus, the fundamental difference between modern technology corporations and conglomerates lies in the existence of such synergistic relationships between the assets under their management. In contrast to traditional conglomerates that primarily focused on increasing profits through financial leverage, technology companies actively interconnect their businesses to mutually enhance their products and services, delivering an exceptional customer experience. This paradigm shift has given rise to the concept of a 'technology ecosystem' or 'digital ecosystem,' capturing the interconnectedness and collaborative nature of these integrated models.
There can be endless examples of such integration, but the most common ones include:
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Cross-promotion of one product on the platforms of another (e.g., installing Apple Music on all Apple devices or promoting Google services through its search engine).
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Shared logins across different services to ensure a seamless user experience and efficient data exchange between services (Apple ID, Google Account).
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Subscription bundles that allow users to subscribe to a set of ecosystem services simultaneously (Amazon Prime, Yandex Plus).
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Loyalty programs that enable users to accumulate and redeem cash back points within the ecosystem.
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Common umbrella brand name.
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Utilization of shared infrastructure and architecture to save costs.
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And more.
By establishing such close relationships between products within the ecosystem, they can act as instruments in an orchestra, playing different parts on the path to achieving the strategic goals of the entire group. For instance, Amazon Video doesn't necessarily have to be profitable on its own as long as it brings new users and keeps them engaged on the e-commerce platform. It is impossible to imagine such a case outside the ecosystem model. This fact significantly transforms the product landscape and offers users services that would never have existed without the ecosystem model.
Products within ecosystems, based on their functional purpose (although sometimes one product can serve multiple functions simultaneously), can be divided into four groups:
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Customer Acquisition
Products whose primary goal is to attract new users to the ecosystem. Examples of such products could be online retail for Amazon or a search portal for Google. Typically, these are core products of the ecosystem, with the highest visibility and user benefits.
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Customer Retention
Products with a high frequency of use and a high cost of switching to a competing service for users. Thanks to decision inertia, these products help retain customers within the ecosystem. Examples include loyalty programs within the ecosystem that create the illusion for users that it is better to stay within the ecosystem and spend accumulated points rather than switch to a more advantageous competitor's product. Another example is Amazon Video, whose unique content is not available on other video platforms. Consequently, a user who has already started watching a series will want to finish it, thereby continuing to pay for the Amazon Prime subscription. And with the added benefit of free shipping included in Amazon Prime, why not make another purchase or two on the Amazon marketplace?
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Monetization
The most obvious functional load. After attracting and retaining users within the ecosystem, it is necessary to monetize them. A prime example of products in this category can be highly-margin goods that users would never purchase without being part of the ecosystem (think about Apple's chargers and cables and their prices).
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Moon Shots
Products that do not fit into any of the three aforementioned categories but have the potential to create new growth opportunities or prevent disruption in the company's industry. Examples include voice assistants, developments in autonomous technologies, and more.
How successful can this model be considering the drawbacks inherently associated with conglomerates and similar structures? Specifically, the need to create an additional layer of bureaucracy to manage a large group of businesses, management defocus, and the development of a large number of culturally different businesses within the same corporate standards of the ecosystem.
Answering this question based on data and numerical metrics is quite challenging. Firstly, it is very difficult for companies to accurately measure and quantify the positive effects of the synergies between products within their ecosystems described above. Secondly, companies often do not disclose detailed information regarding such effects in their financial reports or public statements.
Taking the example of Amazon Video, various assessments and comments indicate that Amazon Prime users consider the presence of the video streaming service as the second reason for subscribing, with only ‘free 1-day shipping’ ranking higher. It is reported that Prime Video generates approximately 20-30% of new trial users for the subscription. Furthermore, compared to regular users, Amazon Prime users make purchases on the marketplace 2.3 times more frequently and spend 2.5 times more. However, assessing the extent to which these positive effects compensate for Amazon's massive multi-billion-dollar expenses in creating new content remains a complex challenge.
Assessing the success of the ecosystem model from a different perspective, we can examine the ranking of the world's largest technology companies by market capitalization. Notably, the top four positions are predominantly occupied by ecosystem-driven companies (Apple, Amazon, Microsoft, and Alphabet), while monoline companies like Nvidia and Tesla appear further down the list at the fifth and sixth spots, respectively. Even Netflix, a company focused on a single business model, has recently dropped out of the acronym for the most prominent technology companies in the world, FAANG, and now faces significant pressure from ecosystem players like Amazon Video.
In conclusion, modern technology giants demonstrate distinct differences from the conglomerates of the past. Their approach to launching or acquiring new businesses is not driven solely by financial engineering but by the intention to create a synergistic set of products that complement each other and deliver enhanced value collectively. Within these ecosystems, products may serve different functional purposes and prioritize factors beyond immediate profit extraction. This transformative concept reshapes the business landscape, offering users an array of products and services that would not exist without the presence of these ecosystems. While it is still too early to definitively determine the long-term success of ecosystems from an economic history perspective, indirect indicators suggest the viability and advantages of this business model compared to companies focused solely on a single model of development.
