Technology companies boost their dominance with AI

The digital revolution has resulted in our lives becoming dominated by technology.

Many people have an Apple iPhone or iPad. We depend on Microsoft software, discover information from Google, store photos and data through Amazon Web Services and communicate through Meta Platform’s apps such as WhatsApp, Facebook and Instagram.

The world of businesses is now increasingly driven by technology and companies respond to requests and queries through technology such as smartphones. As individuals, our lives have been transformed by digital transactions, online activities and social media.

These companies have grown mightily – and they all share similar characteristics. They are all American and generate revenue from a mixture of direct subscriptions, payments, advertising and sponsorships. Importantly, they all have a global reach as the internet has allowed easy expansion outside their domestic marketplace.

America’s geopolitical rival China has its own technology giants which do similar things in their large home market. The benchmark MSCI World Index reflects the new reality of equity markets today – it is dominated by US technology giants.

As a result, the MSCI World Index, which tracks developed market equities, is led by the following companies. The weighting of the companies in the index – and therefore their influence on its movement, is as follows:

Source: MSCI

There have been various concentrations of top shares over the years and the winners come and go as fashions change and economies grow. Indeed, just after this snapshot was taken Nvidia sold off and returned to second place in terms of market valuation.

What is unusual is that all the top seven should come from the US and all should be in the same broad sector. Today, Microsoft is more valuable than the total value of all stocks on most national stock markets.

US technology powers the bull market

These shares suffered in the downturn in markets in 2022. The falls that year were mainly driven by the decisions at the main Western central banks – led by the US Federal Reserve – to put up interest rates to stop a runaway inflation.

Professional investors said these technology companies were vulnerable to a big rise in the cost of borrowing, as they were busily investing large sums in the future. It would cost them more to invest and investors expected a bigger return from riskier investments at a time when the return on cash and low-risk investments was rising sharply.

By the end of 2022 it was becoming clear that the business models of these companies were robust. They were able to generate a lot of cash from trading and had found ways of growing their businesses despite the more hostile economic environment. Since then, a great bull market in technology shares has led markets higher – with US indices such as the S&P 500 and Nasdaq Composite reaching record highs.

Developing complex chips from a computer games base, it has advanced into large language models and into artificial intelligence (AI), showing people just how much modern semiconductors can achieve in big data centres. They have allowed an explosion of storage and data processing capacity in the Cloud, a series of large warehouses holding the computers.

Nvidia’s technology has got ahead of the rest of the market – and it has queues of businesses lining up to buy its chips. It is scaling up output and increasing prices and margins to reflect its strong market position. The share-price advances have been underpinned so far by large leaps forward in profits and cash generation.

The main question is whether the companies can sustain this growth in profits and cashflow to maintain and extend their high share prices?

When AI first became more widely discussed there were sceptics. They argued that it would take time to find commercial applications for the more powerful applications. There were suggestions that launching free AI services meant it would prove difficult to start to charge in the future.

If providers introduced the advertising model already being used to pay for basic services from the likes of Alphabet and Meta, AI would merely stretch the advertising revenue over a wider base of free services. Eighteen months on there have been successful launches of services including successful paid-for premium services.

The technology giants have found several ways to charge and to generate substantial cash

1. The advertising model

Google, Facebook Meta and Amazon – plus Chinese groups Alibaba and Bytedance – took 46% of the global advertising spend in 2020. Online advertising has taken over from traditional TV and newspaper advertising as the most common form, with many companies now adopting online advertising and social-media campaigns.

2. The upfront payment model

When you buy a new computer or phone it often comes with a software package which you pay for at the time of the purchase of the hardware.

3. The service contract model

The business user – and in some cases personal users – enter contracts to pay for software or apps on a continuing basis. There are an increasing number of enhanced services, including those branded as AI, that offer more than the free version but require a regular contract payment.

4. The business-to-consumer model

The consumer may be protected from a direct charge or contract from the technology provider. They enter an electronic transaction with a business that pays for the computer activity and the cost is part of the final product or service charge they make to the consumer.

5. The contractor model

Amazon allows other vendors to sell through its online sales platform but makes a charge for use of the service to the businesses offering their product. As a result, we consumers are directly or indirectly paying substantial sums to the technology giants. Commerce now has significant costs in providing hardware and software to ensure they have the right computing capacity and solutions to be able to conduct modern business.

Banks are keen to divert us from branch banking to online. Retailers are persuaded to offer an online as well as in-store option. Entertainment businesses offer more downloads and internet-based content. Government wants to conduct more of its interactions with taxpayers and claimants electronically. The technology industry has the rest of the economy acting as salespeople for its products.

What does AI bring to the party?

AI in its assistance form offers businesses the opportunity to speed, support and improve a wide range of functions. In the investment world, it allows large data banks to be scanned and interrogated quickly to try to hunt the better investments everyone is looking for. It can undertake many of the administrative tasks of running an account for someone, keeping the records and sending out client information.

In the world of sales and marketing, it can help produce a good and timely presentation, suggest ways to get messages across and help with drafting articles and copy. In the computing world itself it is now being used by non-experts to commission new software solutions to business problems, as AI is well versed in computer code and can accept instructions in English.

In one sense it is a much-improved search system. You can ask AI a question and it will give you an answer. In another sense it is enhanced data processing, where the extra storage and speed of handling opens better possibilities to yield good business information.

In people’s personal lives, AI can help choose restaurants, plays, travel routes and the other diversions of life. The more you tell it about your preferences the more likely it is to be useful in finding the right hotel or the right flight.

Markets will continue to like these great businesses all the time they deliver growth of revenue and profits – and find more ways to get us to depend upon them. Businesses and people all round the world are now sending cash to these giants, though they do not always know they are doing it.