What other analysts call “big tech” I refer to as “Cloud Czars.”
I do it for a reason.
What distinguishes Apple, Microsoft, Amazon, Google, and Facebook isn’t their managements’ “ruthlessness.” It’s their heavy investment, over many years, in cloud computing centers.
Even early in the 2010s, it took $1 billion of capital each quarter to get into the cloud market. That has only increased with time. Now it averages $4 billion each quarter.
The money must come from somewhere. Cloud is a capital-intensive business. If you’re handing out dividends, it’s because you don’t know what else to do with the shareholders’ cash.
A generation ago, you would either borrow money or sell stock. Dividends are a way to keep the stock price up. The genius of the last 20 years has been the discovery that there’s another route toward this goal, cash flow. By investing cash flow, prioritizing growth, Amazon has come from 1994 start-up to 2020 dominance. Google learned this after its 1998 founding. Facebook turns 16 this year. Only Apple and Microsoft, both “mature” but founded in the 1970s, followed this Clue.
Everyone else fell away.
Just as investment requirements are constantly increasing, so is complexity.
I have re-written my book about Moore’s Law twice in the last decade. Each time I focused on Intel. As important as Moore’s Law may be, Moore’s Second Law is even more important. Moore’s Second Law holds that, as chip complexity increases, so does the investment needed to make a chip. That’s why there are only four companies scaling the production of general-purpose microprocessors today – Intel, Taiwan Semiconductor, Samsung, and Global Foundries. Everyone else is “fabless.” Nvidia and AMD need other companies to produce their chips. They just design them.
After two decades of management stupidity, Intel has now fallen off the train. They admitted in their latest quarterly report that they can’t make the 7 nm chips which are the next iteration of Moore’s Law. For now, they must buy production from Taiwan Semi.
This made me realize that there is a third dimension to Moore’s Law, just as important as Moore’s Second Law.
Let’s call it Moore’s Third Law. Change is constantly accelerating, and it can be managed only at the center.
This means that no company is safe, not even Intel, the company Gordon Moore co-founded. Management requirements increase exponentially with Moore’s Law, and everything it touches. And management must be centralized in the hands of one person in order to react.
Intel failed because it thought it was a mature company in 1998. When Andy Grove retired, it passed the torch to corporate politicians, to marketing and then finance people. It’s why Intel failed in mobile during the 2000s, and why it eventually failed to even keep up with Moore’s Law.
You can’t just throw money at the problem of chip production, or the problems of the cloud. You must throw management intelligence at them. You must both scale that intelligence and focus it, as the devices used to make chips must be scaled and focused.
I’m a great believer in democracy. I believe in one man one vote, in one share one vote. But the best tech companies can’t run that way. They can’t be political. In order to focus they must have one person at the top, who has total power. They must be Empires.
This, as much as their investments in cloud, are what distinguish the Cloud Czars. Each is led by an engineer-entrepreneur. Each has someone at the top with total power, but who must earn that power every year against their peers, and against upstarts in the market.
Today the Cloud Czars rule supreme. But in March 2001, the 5 largest companies by market cap were, in order, General Electric, Microsoft, Exxon Mobil, Pfizer, and Citigroup.
Uneasy lies the head that wears the crown.
Empires have a natural sell-by date. The Emperor dies. The problem of succession eventually destroys empires when it’s repeated over generations. You can have a “system” designed to make sure the next emperor is the “best man” for the job. But, eventually, you’ll make a mistake.
Look at that list again. General Electric had a system for choosing leaders that worked for over a century. Then, six months after leading the pack, that system coughed up Jeff Immelt. Today GE is worth barely one-tenth what it was. IBM was number 11 on that 2001 list. Then it coughed up Virginia Rometty. Today, while the Cloud Czars have gone to glory, IBM is worth less than 1/10th what they are. Even mighty Intel eventually coughed up Brian Krzanich. A complete failure, as an executive and as a human being, he tossed out a generation of leaders to rule and ran Intel into the ground.
Even entrepreneurs screw up. The history of technology is littered with leaders destroyed by their own hubris. Lewis Platt of Hewlett-Packard turned that great engineering company into a staid and self-destructive PC company. Ken Olsen of Digital Equipment missed the PC revolution. An Wang of Wang Labs. The list goes on.
Government can’t fix this. Government can’t change this. Government can only muck this up. Government tried to control AT&T, IBM, and Microsoft. Microsoft returned to power as a Cloud Czar only after it got government off its back. Government only accelerates the fall of Empires.
The same is true of Wall Street. Wall Street only cares about current profits. Hedge funds don’t look over the horizon. They can only destroy value and extract it. They can’t create. Companies that let themselves be taken out by hedge funds are being recycled. Paul Singer of Elliott Management is a junk man. Hedge funds are not creating value.
The only way to control empires, and empire builders, is through the market. This seems to contradict what I just wrote, because Wall Street is supposed to be the market.
Only it isn’t anymore. Tech rules the market. Visa is worth more than JPMorgan Chase. Trading is done through transaction processing servers. Fintechs are nothing more than cloud-based alternatives to this, lower-cost options that replace both people and machines.
Everything today is tech. Everything is the tech market.
Just because Tim Cook, Satya Nadella, Jeff Bezos, Sundar Pichai and Mark Zuckerberg seem to rule today doesn’t mean they will rule tomorrow. The leading companies tomorrow will be those whose leaders best manage a world of increased complexity and are best able to see over the horizon.
America’s genius has been in allowing this natural process to play out. We demand that the market discipline corporate leaders. We let them fall as well as watch them rise. Our economy is large enough so that we don’t worry where these people come from, or even where market leaders are based.
This is how it must be. The real challenge for policymakers in the age of the cloud is to let economic nature take its course.
