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The rise of the superstars
A small group of giant companies—some old, some new—are once again dominating the global economy, says Adrian Wooldridge. Is that a good or a bad thing?
Sep 17th 2016 | From the print edition
ON AUGUST 31ST 1910 Theodore Roosevelt delivered a fiery speech in Osawatomie, Kansas. The former president celebrated America's extraordinary new commercial power but also gave warning that America's industrial economy had been taken over by a handful of corporate giants that were generating unparalleled wealth for a small number of people and exercising growing control over American politics. Roosevelt cautioned that a country founded on the principle of equality of opportunity was in danger of becoming a land of corporate privilege, and pledged to do whatever he could to bring the new giants under control.
Roosevelt's speech sounds as fresh today as on the day he made it. A small number of giant companies are once again on the march, tightening their grip on global markets, merging with each other to get even bigger, and enjoying vast profits. As a proportion of GDP, American corporate profits are higher than they have been at any time since 1929. Apple, Google, Amazon and their peers dominate today's economy just as surely as US Steel, Standard Oil and Sears, Roebuck and Company dominated the economy of Roosevelt's day. Some of these modern giants are long-established stars that have reinvented themselves many times over. Some are brash newcomers from the emerging world. Some are high-tech wizards that are conjuring business empires out of noughts and ones. But all of them have learned how to combine the advantages of size with the virtues of entrepreneurialism. They are pulling ahead of their rivals in one area after another and building up powerful defences against competition, including enormous cash piles equivalent to 10% of GDP in America and as much as 47% in Japan.
In the 1980s and 1990s management gurus pointed to the “demise of size” as big companies seemed to be giving way to a much more entrepreneurial economy. Giants such as AT&T were broken up and state-owned firms were privatised. High-tech companies emerged from nowhere. Peter Drucker, a veteran management thinker, announced that “the Fortune 500 [list of the biggest American companies] is over.” That chimed with the ideas of Ronald Coase, an academic who had argued in “The Nature of the Firm” (1937) that companies make sense only when they can provide the services concerned more cheaply than the market can.
But now size seems to matter again. The McKinsey Global Institute, the consultancy's research arm, calculates that 10% of the world's public companies generate 80% of all profits. Firms with more than 1 billion dollars in annual revenue account for nearly 60% of total global revenues and 65% of market capitalisation.
The quest for size is producing a global bull market in mergers and acquisitions. In 1990 there were 11,500 M&A deals with a combined value equivalent to 2% of global GDP. In the years since 2008 the number has risen to 30,000 a year, worth about 3% of global GDP. America's antitrust authorities have recently given Anheuser-Busch InBev, one of the world's biggest drinks companies, the all-clear to buy SABMiller, another global drinks firm, for 107 billion dollars.
The superstar effect is most visible in America, the world's most advanced economy. The share of nominal GDP generated by the Fortune 100 biggest American companies rose from about 33% of GDP in 1994 to 46% in 2013, and the Fortune 100's share of the revenues generated by the Fortune 500 went up from 57% to 63% over the same period. The number of listed companies in America nearly halved between 1997 and 2013, from 6,797 to 3,485, according to Gustavo Grullon of Rice University and two colleagues, reflecting the trend towards consolidation and growing size. Sales by the median listed public company are almost three times as big as they were 20 years ago. Profit margins have increased in direct proportion to the concentration of the market.
Startups, meanwhile, have found it harder to get off the ground. Robert Litan, of the Council on Foreign Relations, and Ian Hathaway, of the Brookings Institution, note that the number of startups is lower than at any time since the late 1970s, and that more companies die than are born, pushing up their average age. American workers are also changing jobs and moving across state borders less often than at any time since the 1970s.
Competition is for losers
The superstar effect is particularly marked in the knowledge economy. In Silicon Valley a handful of giants are enjoying market shares and profit margins not seen since the robber barons in the late 19th century. “Competition is for losers,” says Peter Thiel, a co-founder of PayPal, a payments system, and the first outside investor in Facebook. On Wall Street the five largest banks have increased their share of America's banking assets from 25% in 2000 to 45% today.
The picture in other rich countries is more varied. Whereas in Britain and South Korea the scale of consolidation has been similar to that in America, in continental Europe it has been much less pronounced. In a list of the world's top 100 companies by market capitalisation compiled by PwC, an accountancy firm, the number of continental European firms has declined from 19 in 2009 to 17 now. Still, in most of the world some consolidation is the rule. The OECD, a club of mostly rich countries, notes that firms with more than 250 employees account for the biggest share of value added in every country it monitors.
There are good reasons for thinking that the superstar effect will gather strength. Big and powerful companies force their rivals to bulk up in order to compete with them. They also oblige large numbers of lawyers, consultancies and other professional-services firms to become global to supply their needs. Digitisation reinforces the trend because digital companies can exploit network effects and operate across borders.
James Manyika, of the McKinsey Global Institute, points out that today's superstar companies are big in different ways from their predecessors. In the old days companies with large revenues and global footprints almost always had lots of assets and employees. Some superstar companies, such as Walmart and Exxon, still do. But digital companies with huge market valuations and market shares typically have few assets. In 1990 the top three carmakers in Detroit between them had nominal revenues of 250 billion dollars, a market capitalisation of 36 billion dollars and 1.2m employees. In 2014 the top three companies in Silicon Valley had revenues of 247 billion dollars and a market capitalisation of over 1 trillion dollars but just 137,000 employees.
Yet even “old” big companies employ far fewer people than they used to. Exxon, the world's most successful oil company, has cut back its workforce from 150,000 in the 1960s to less than half that today, despite having merged with a giant rival, Mobil. At the same time “new” big companies are becoming more like the corporations of yore. High-tech companies often give senior jobs to former Washington insiders and employ armies of lobbyists. Many modern superstar companies park their money in offshore hideaways and devote considerable efforts to keeping down their tax bills. Superstar companies tend to excel at everything they do—including squeezing as much as they can out of government while paying the lowest possible taxes.
This special report will explain why the age of entrepreneurialism, ushered in by Britain's Margaret Thatcher and America's Ronald Reagan, is giving way to an age of corporate consolidation even as most companies are becoming more virtual. It will examine the forces behind the rise of the superstars and reveal their managerial secrets. And it will attempt to answer the question that Roosevelt raised in Osawatomie: are such corporate giants a cause for concern or for celebration?
From the print edition: Special report
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