Speech given (in French) on the occasion of the Xerfi conference "Transformation digitale et frénésie financière : l’entreprise, le travail et le capitalisme à l’ère numérique" on 5 April 2018.
The past fifteen years have witnessed a phenomenon that has had genuinely extraordinary consequences: the convergence of the world of finance and the world of global digital firms whose main economic feature is that they enjoy increasing returns (margins increase with volumes)...
Let's start with the facts. The seven biggest market capitalizations in the world are all firms that share these characteristics: Apple: $850 billion, Google (Alphabet): $720billion, Amazon: $700 billion, Microsoft: $680 billion, TenCent: $520 billion, Alibaba: $470 billion, Facebook: $460 billion.
Take the example of Amazon. The e-commerce giant currently has a market valuation of $700 billion, representing roughly 240 times its annual profits and four times its revenues.
In the world of conventional finance (i.e. that applying to firms experiencing decreasing returns), a company generating a profit of $3 billion could, depending on its growth prospects, be worth somewhere between $40 and $90 billion. But Amazon is valued at $700 billion.
This valuation is not a sign of irrational exuberance. On the contrary, nothing could be more rational in this convergence of finance and global firms enjoying increasing returns.
At the same time, the "disproportionate" valuations of these firms provide them with a currency (their own stock) which enables them to buy up their competitors, themselves often overvalued, without it costing them anything. For example, Instagram was bought by Facebook in 2012 for $1 billion when it had existed for only two years and had 13 employees. These valuations also
provide them with extraordinary power in their commercial relations. These two phenomena also contribute, of course, to establishing the monopoly they are targeting.
Economists call someone who establishes or promotes the establishment of a monopoly a "monopolist". It is clear that, in this convergence of finance and the world of companies with increasing returns, the financier-investor becomes a monopolist: by his action he creates monopolies which tomorrow will provide him with quite extraordinary opportunities of capital gains or profits.
However, although this way of expanding is rational for the companies in question and for their financiers, it is not without consequences for the rest of the economy.
Let us go back to the example of Amazon:
The development of a monopoly is considered harmful for the functioning of an economy based on competition. This, as we know, is why the anti-trust authorities monitor the establishment of monopolies, oligopolies and cartels, and regularly intervene by means of sanctions or, at least in the past, went as far as dismantling firms that had become monopolistic.
The key question, in this specific case, is therefore to consider whether Amazon benefits consumers or not. And the answer to this question depends on the person you ask:
So the dilemma is as follows:
In short, Amazon's share price tells us two things:
But while the debate on the detrimental effects of monopolies generally focuses on consumers, the real economy is already suffering from the development of these monopolies due to the resultant stifling of innovation.
For example, it has now become extremely difficult to raise venture capital funding for an e-commerce initiative because the place has already been taken by Amazon, or by Alibaba in the Asia-Pacific region. In light of current trends, future e-commerce companies will be doomed to be stifled or, in the best of cases, subjugated by becoming subcontracting members of the Amazon or Alibaba platforms and, in so doing, sharing their data. This, in a context where, as we know, data is the main source of value in the digital world.
By its spin-off effects, it is clear that the inflated valuation of the digital giants is already crushing competition, innovation and entrepreneurship, and that it will be detrimental to consumers in the future.
When he invests in a firm with increasing returns, the financier becomes a monopolist and this adversely affects the proper functioning of the economy.
The anti-trust authorities should perhaps listen to what share prices are telling them.