Which Tech Giant Has The Best Plan For Global Domination?

In most businesses, there are a number of companies waging pitched battles to eke out a few points of share. It’s a game of inches and even a small triumph a big deal. You celebrate the win and then go back to duking it out.

Yet technology is different.  If you’re early, like IBM in mainframes, Microsoft with operating systems or Google in search, you can dominate the competition and exploit monopoly power to earn outsize margins for years to come.

So, not surprisingly, every tech company is looking to build the “next big thing.”   IBM has Watson.  Google is focusing on things like autonomous cars at its secret Google X lab. Microsoft is building the operating system for the cloud with Azure and Apple always seems to have something in the works.  So who has the best plan for global domination?

Apple – The People’s Choice

Certainly, Apple has been the dominant technology company in the 21st century.  Starting with the iPod and iTunes, the company revolutionized—and probably saved—the music industry.  Then came the iPhone and the iPad, which together created a completely new paradigm for computing.

Yet lately, Apple’s future seems uncertain, losing share in tablets, its profit recently fell for the first time in a decade.  It also hasn’t had any impressive new launches over the past few years and there is good reason to question its continued ability to innovate.  Activist investor Carl Icahn has been calling for the company to buy back shares.

Still, it’s important to remember that Apple remains a very impressive company.  Tim Cook and the bulk of the management team remains intact and the business remains very strong, returning 32% on equity, putting up operating margins of 29% and throwing off $50 billion of free cash flow per year.  So, despite its problems, I wouldn’t count Apple out.

Microsoft – The Resurgent Death Star

Back in the 90’s, Microsoft was so feared that many in the tech world referred to it as the “Death Star.”  Then came a crippling antitrust suit, a foolish misstep in mobile and before you knew it, Microsoft became more punchline than paragon.

Lately, however, Microsoft appears resurgent, recently reporting yet another quarter of strong revenues and earnings growth.  Despite rumors of their demise, the Windows and Office businesses still do well and rake in cash, while the company enjoys operating margins of over 34%.

But Microsoft’s plans for global domination surely rest in the cloud, where the bulk of its massive research budget reportedly goes.  Most of these products were grouped in the company’s former Servers and Tools division that nobody ever seemed to talk about, but now they are spread throughout the company.

So after a decade in the doghouse, Microsoft appears to be coming back strong and is looking to achieve the same dominance over the cloud that it once had over the desktop.

Google – The X Factor

Up till now, Google has primarily been a search company and they still make a ton of money doing that.   While Microsoft’s Bing has been gaining some ground, Google still commands about two thirds of the global search market (which includes strong local players like China’s Baidu and Russia’s Yandex).  That’s true dominance.

But what clearly excites CEO Larry Page is moonshots—new technologies that can create products and services that are 10x better, rather than incremental improvements of 10% or so.  At the center of it all is the super-secret Google X lab which puts out things like driverless cars, the economic impact of which could be in the trillions.

Yet, even without moonshots, Google appears to be quietly taking over the Web through a subtle software layer that underlies just about every digital activity you can think of—from mobile to video to even productivity.  It’s a good thing these guys aren’t evil, because if they were we’d be in real trouble.

IBM – Corporate America’s Secret Weapon

One company you almost never hear about is IBM, primarily because they aren’t paying much attention to the rest of us.  Most of the time, they are spending time with corporate CIO’s, CTO’s and increasingly, CMO’s—helping them develop the technology to compete in an increasingly digital world.

The exception, of course, is Watson, the super-intelligent computer system that beat the best human players on the game show Jeopardy!  Now IBM is putting Watson’s big brain to work in medicine, finance and soon, the company’s executives tell me, retail solutions. If there ever was a machine capable of world domination, this is it!

Alas, IBM just doesn’t seem that excited about conquering the world.  Mainly, the company is focused on solving its customers’ problems, improving performance and lowering costs.  It’s hard to find anybody at IBM who even slightly resembles an evil genius, or even a big ego for that matter.  For the most part, they just seem like a bunch of nice guys.

The Best Kept Secret In Tech

The truth is that none of these companies are ever likely to rule the world.  As soon as one comes out with a breakthrough technology, it has to contend with the others, not to mention thousands of VC-fueled startups.  While this makes us all winners, it keeps the tech giants themselves in check.

The really startling thing about these companies, in fact, is that for all the world-beating technology they produce, investors don’t seem very excited about them. While some are warning of a new tech bubble, the true giants of tech are selling cheap. (Disclosure: I indirectly own Google and Apple stock through a fund.)
 

Generally, we think of tech stocks as high fliers who get outsized valuations based on high expectations.  Yet, now it seems that the opposite is true.  All of these companies, with the exception of Google, are sold at a discount to what you would pay for any random widget-maker on the S&P 500 (and Google trades at only a slight premium).

It seems that the “smart money” on Wall Street believes that not only will none of these firms achieve world domination, but that as a group they won’t even produce average future returns.

It boggles the mind…

– Greg