The New Economy and its Implications
Photo Credit: Reuters
By Henry Hing Lee Chan

The New Economy and its Implications

Jun. 16, 2017  |     |  0 comments


The list of the world’s most valuable companies at the end of May 2017 is revealing. Out of the top ten biggest companies by market capitalization, seven belong to the new economy. Except for the third-ranking Microsoft, none of the other six was a household name twenty years ago. These new economic giants are companies based on the internet and/or mobile digital communications revolution. Never in world economic history has so many new global giants replaced the then-existing dominant corporations at such a pace. The relative declining importance of traditional high-tech and industrial names such as GE, IBM, Hewlett Packard, Siemens, and Toyota Motors is amazing.

 

Figure 1. World’s Biggest Company by Market Capitalization at End of May 2017 



Source: Bloomberg

Note: Bold face companies are based in China and the rest are based in the US.

 

There are some characteristics of these new economy giants which differentiate them from the earlier generation of corporate titans:


1.    Two countries dominate the list of the seven most valuable companies from the new economy: The US counts five and China counts two. No other countries’ companies are present in the list. While it is acknowledged that the US pioneered the development of the underlying computer and internet-based digital communications technology behind the current new economy and has been the acknowledged leader since the 1980s on innovations, the ascendancy of China highlights the importance of the scale effect and entrepreneurship. The scale effect refers to both the huge domestic market and the huge readily-available pool of information technology talents, with the huge domestic market working on the demand side of the economy and the huge talent pool working on the supply side of the economy. These two scale advantages and the complementing entrepreneur spirit of industry leaders such as Pony Ma and Jack Ma are the acknowledged elements behind the ascendancy of China in the new economy.

 

2.    The giant companies in the new economy are monopolistic by nature: these companies are operating on non-traditional business models of declining marginal cost of production. Unlike traditional business models that operate on increasing marginal cost of production, the situation in which a dominant player faces the prospect of increasing unit cost once it hit the optimal production level and the subsequent factor input price increase will limit his ability to further slash prices to gain market share. Increasing the marginal cost of production effectively limits the pricing power of the dominant player. The companies in the new economy enjoy a network effect which means the value of the product or service is dependent on the number of people using it. Hence, the dominant player has all the incentive to engage in predatory pricing to gain market share, and does not face the same constraint in using prices to gain market share under the conventional increasing marginal cost situation. Ironically, such predatory pricing strategies often mean cheaper prices for consumers. A recent study by Pivotal Research in April 2017 shows that while the overall US internet industry grew 21.8 percent from USD 59.6 billion to USD 72.5 billion in 2016, Google and Facebook captured a combined 77 percent of gross billing in 2016, an increase from 72 percent in 2015. These two companies captured 99 percent of revenue growth from digital advertising in the US last year.

 

3.    These companies are dominant in their business: Apple is dominant in the handphone sector. While it accounts only for 15 percent of global smart handphone sales, yet it accounts for 80-90 percent of smart handphone market profits. Alphabet dominates the search market, Microsoft dominates the traditional PC operating system and application businesses, Amazon dominates the US e-commerce market and US public cloud service, Facebook dominates global social media except in China, Tencent dominates the Chinese game market and social media with WeChat and Weibo, and Alibaba dominates the Chinese e-commerce market. They have broadened their customer base in their respective businesses and promoted a more inclusive community. However, their speed of decimating many existing business platforms also raise the issue of adjustment. In 2016, advertisers spent USD 72.09 billion on US digital advertising, as compared to TV spending of USD 71.29 billion. This will give digital a 36.8 percent share in media ad spending, slightly higher than TV’s 36.4 percent. In 2016, digital advertising overtook TV advertising as the number one advertising platform for the first time.

 

4.    A new business organization structure emerges: the new economy giants provide the platform for innovation and its vitality depends on numerous creative companies supplying a constant stream of new software. Recently released data from Apple at its annual Worldwide Developers Conference (WWDC) revealed that Apple has over 16 million application developers as of last count. These developers have provided 180 billion downloads and USD 70 billion has been paid to these developers to date. The new distributed form of innovation coming from groups of small and medium size associated companies is a meaningful supplement to traditional in-house research and development units.

 

5.    The number of employees in the new economy companies is much fewer than the most valuable companies of the old economy. The latest available data from 2016 shows that Apple has 116,000 employees, Alphabet (formerly Google) 72,000, Microsoft 120,000, Amazon 341,000, Facebook 17,000, Tencent 38,000, and Alibaba 50,000. While Amazon was the only most valuable company with employees significantly more than 100,000, most of them are part-time employees working in its logistics division on deliveries. Employment by the new economy companies is significantly less than that of the old economy companies that employed several hundred thousand employees each. In the case of Walmart, it employs 2.4 million workers. The nature of jobs in the most valuable new economy companies requires high skills, with mundane and routine jobs replaced by machine labor substitution and automation.

 

What are the implications of the new economy on social and economic policies? The issues of the natural monopolistic business model of the new economy companies; the increasing concentration of business on the hand of a few companies who successfully promoted their products as the de-facto platforms in their business areas; the stress on the old economy companies; the new business model of a strong in-house R&D center supplemented by numerous business partners; and the diminishing job opportunities provided by the most valuable companies, all pose serious challenges on social and economic policies in the new economy for all countries. The concentration of breakthroughs in the US and China, plus a few other countries that occupy meaningful niches in the innovation ecosystem, also raises the issue of the concentration of innovation in a few countries.

Leave a Reply

Your email address will not be published. Required fields are marked *