Since the start of 2022, the big tech companies collectively known as BigTech or even GAFAM from their initials (Google, Amazon, Facebook, Apple, Microsoft) have collectively lost more than $3 trillion in market capitalization. Amazon’s market value is down about 80%, Google is down 60%, and Meta (formerly Facebook) is close to 70%. What exactly is going on?

Let’s start from the very beginning. Starting from different starting points – e-commerce, social media, search engines, advertising, or even cloud computing services – these companies converged on a (shared) platform business model based on digital ecosystems of interconnected services. Their unique position (size, network, data, profitability, customer base) allowed them not only to grow in just a few years, but also to establish themselves among the most valuable companies in the world (by capitalization), displacing traditional names such as General Electric, Shell or IBM. Even after the aforementioned $3 trillion loss, four out of five big tech companies (excluding the meta) are in the top ten global companies.

GAFAM especially prospered during the pandemic, when many other companies around the world used public funds to avoid bankruptcy: collectively, they increased their profits by more than 55% in 2021, surpassing $1.4 trillion in revenue. If it were a country, it would be ranked 13th in terms of GDP, just behind Brazil and ahead of Australia (World Bank sources, Market Watch).

However, today’s macroeconomic environment has drastically changed the rules of the game even for businesses of this size: record inflation, rising interest rates, the energy crisis, war in Europe and fears of a recession have had a huge impact on their results: based on the recent third quarter (2022), Alphabet’s net income ( Google) is down 27% year-over-year, while Amazon posted disappointing fourth-quarter guidance. On the other hand, Meta, which is the worst of the lot, reported that profits halved during the third quarter (from $9.2 billion to $4.4 billion).

In addition to financial performance and a negative business climate, two factors are of particular importance in this development:

Amazon’s market value is down about 80%, Google is down 60%, and Meta (formerly Facebook) is close to 70%.

“After years of ever-increasing valuations based primarily on wild growth and overly optimistic ideas, investors are looking for sound business plans, profitability and sustainability. Bets like the Metaverse’s decision to invest several billion dollars (36 billion as of 2019) in the metaverse didn’t convince investors even before the crisis. It is significant that Meta is no longer included even in the top 20 companies in the world (by capitalization).

The $300 billion digital advertising monopoly of Google (through search engines) and Meta (on social media) is under unprecedented pressure as companies around the world cut digital marketing budgets for the first time. Now that most advertising has moved online, the seemingly unshakable business model seems to be fizzling out. In addition, new players like TikTok are claiming (and getting) an increasing share of the ever-shrinking pie. According to Omdia research, TikTok ad revenue will grow from $13 billion in 2022 to $44 billion by 2027, and TikTok Douyin (an app in China) will grow from $28 billion this year to $76 billion in 2027. This means that in 2027, TikTok will account for 37% — about $120 billion — of the total estimated digital advertising market ($331 billion), far more than YouTube and Meta combined, which are estimated to own 24 % or about 77 billion dollars.

Apple is the one exception that seems to be weathering the storm (although its market cap is down about 27% since the start of 2022). The reason is twofold. On the one hand, he has managed to create an ecosystem with complete control over both the value chain and his entire product range. In addition, it is in the extremely rare position of managing both hardware and software. These characteristics have allowed it to maintain an overall profit margin of an impressive 42.3% in recent years! On the other hand, as the mobile phone segment has reached growth maturity with 1.8 billion devices in circulation worldwide, Apple is looking to diversify revenue and growth through digital advertising. The introduction of data privacy (application tracking transparency) rules back in the spring of 2021 not only made life difficult for its competitors (Meta, Snap, Twitter), but also allowed it to enter the digital advertising space with an estimated annual income. according to Bloomberg, at $4-5 billion (roughly the size of Twitter).

We are in an unprecedented situation where, for the first time in recent history, tech giants are feeling the limits of their business model—despite their size, resources, and economies of scale. No one wants to suffer the fate of Nokia or Yahoo, who once seemed (too) invincible. However, a shake-up of the establishment seems imminent. Jeff Bezos’ famous phrase, “Your margin is my opportunity,” still holds true, but this time (ironically) Amazon and the rest of the big tech companies are on the defensive.

Mr. Panagiotis Criaris is a Business Leader in Financial Services and FinTech.