IS THERE any limit to how big a company can get? If Apple’s shares rise by 9% its market value will pass $1trn. It is an astonishing sum, supported by the iPhone-maker’s staggering profits of $60bn a year, or $8 for every person on Earth. Yet it should prompt cold sweats among the firm’s managers and investors. Relative to GDP, Apple’s earnings are now so big that it is entering a danger zone that has been occupied by only a few other corporate colossi, including the East India Company and John D. Rockefeller’s firm, Standard Oil. If history is any guide, Apple will not get bigger and other tech firms in America and China, such as Amazon and Alibaba, are testing the limits, too.
The $1trn mark has been passed once before, by PetroChina, a Chinese state firm, for 15 days in 2007. But that reflected a speculative frenzy on Shanghai’s bourse. And in any case, what matters more than nominal market values is the size of a firm’s profits relative to the economy. There are no iron laws, but common sense suggests that there are limits. Vast profits might reflect products that cannot possibly become any more popular, or a concentration of power that invites a competitive or political backlash.
Six cases of gigantism stand out most, with the firms becoming so big that governments intervened. In 1813 the East India Company, a British private empire involved in opium production, among other things, lost its long-standing legal monopoly over trade with India. In 1911 America’s Supreme Court broke up Standard Oil, and, as a populist wave swept the country, the government also initiated legal action against US Steel, the other giant of the Gilded Age. Trustbusters went after IBM in 1969, and then in 1974 they sought to break AT&T’s grip on telecoms. And the Department of Justice sued to dismember Microsoft in 1998.
Measuring these mammoths is best done using the yardstick of profits relative to GDP. Earnings figures are fairly reliable and capture the size of the bounty these firms could trouser. The Economist has taken the peak figures during or just before each firm’s regulatory showdown and compared that to the GDP of its country of domicile. Some caveats are in order: interpreting old accounts involves guesswork (the East India Company’s books include an entry for “booty”). No official figures exist for GDP before the first world war, only academic estimates. For the East India Company and Standard Oil the sources are historical tomes and court and parliamentary documents, not company reports.
Three conclusions are clear. First, when the six firms got into trouble they had profits of between 0.08% and 0.54% of GDP, with a median of 0.24%. The East India Company is at the top end of that range and IBM and Microsoft at the bottom. Second, today’s American and Chinese tech giants are already near, or within, the lower end of that danger zone, as are several non-tech firms, such as Berkshire Hathaway. Apple is larger than the rest, with profits worth 0.28% of GDP. Third, the dizzying valuations of big tech firms imply that their profits will soar still further. If investors’ expectations are met, by 2027 Amazon, Apple, Alphabet and Microsoft will all have profits above the historical median of 0.24%. Facebook, Tencent and Alibaba will not be far behind.
Tech tycoons have some decent arguments as to why size does not matter any more. Today’s firms are more global than in the past, so comparing their profits to America’s or China’s economy may exaggerate their clout (although by 2027 Amazon’s profits are projected to be twice as big relative to world GDP as the East India Company’s in 1813). Political institutions in America, and perhaps China, are less corrupt than in 19th-century Britain and America, so big firms may be less able to capture governments.
However, today’s tech giants extract profits from customers more consistently than the earlier oligopolists did. Together the seven biggest firms make a 32% return on equity (ROE). Microsoft had high returns in 1998. Standard Oil also had an ROE rivalling today’s tech giants—this was a key plank of the prosecution’s successful case that it was a monopoly that should be broken up. But at their zeniths the East India Company, US Steel and AT&T made ROES of only about 10%, and IBM managed about 20%.
If today’s giants were broken up, would it spell disaster? According to one big shareholder, break-ups sometimes benefit investors. The shares of Standard Oil’s listed subsidiaries, after all, increased in value after the court decision in 1911 to dismember the firm. Yet overall, corporate whoppers had a mixed time of it. The East India Company shrivelled after it lost its monopoly. US Steel won its case and avoided being broken up but, after a brief surge during the first world war, it faded from view. By the 1990s IBM was making losses and today it is a shadow of its former self. The firms that resulted from breaking up Standard Oil, including Exxon and Chevron, have, in total, smaller profits than it did relative to GDP. Two firms have fared better. AT&T’s descendants, Verizon and AT&T, have gobbled up many of their competitors and together now squeeze out similar profits to those their parent did in 1974. And though Microsoft had a rough patch after it escaped being dismembered, it has since almost doubled in size.
The incredible hulks
The past is not regarded as a meaningful guide to the future in Silicon Valley and Chinese tech circles. But at the height of their powers, giant companies make blinkered, unreliable guides to their own futures. In 1974 AT&T’s annual report dismissed the risks of antitrust and advised Americans that “competition breeds a wasteful duplication”. In 1909 Standard Oil told the courts that its founders, with their “infinite skill”, had succeeded as if they had developed “a gold or diamond mine, and abundant revenue legitimately became theirs”—a piece of logic not dissimilar to how today’s tech titans justify themselves. The fallibility of corporate superstars is worth bearing in mind as today’s tech stocks cruise towards valuations that were almost unimaginable only two years ago.