Why ‘Network Power’ Is the Secret of Success for Apple, Facebook and Amazon
Alfred P. Sloan, chairman and CEO of General Motors (GM) when it topped the inaugural Fortune 500 list in 1955, characterized what awaited American companies in the 20th century as “the Great Opportunity.” He meant the wealth that would accumulate as the nation solved the puzzle of industrial production at unimagined scale.
At the time, it looked as though corporate America was mastering that task. The swiftest tailwinds in the history of the American economy had helped: A famished post-war consumer market, heavy defense spending, near full employment. Up and down the Fortune 500 that year, firms ticked off record profits, even as they competed and ground aggressively against one another. But today’s Fortune 500, and the Fortune Global 500, which will be published this week, mark an ongoing shift. What matters most today is not how much revenue a company has, but how much connection it manages.
For today’s CEOs, the challenge is not merely to produce; it is to connect. And you have to ask: How many CEOs today can really manage massive connected systems? How many want to?
Today four companies can claim billion-customer global businesses: Apple (AAPL), Facebook (FB), Google (GOOGL), and Microsoft (MSFT). Between them, they command nine super-scale services with more than 1 billion users: Facebook and WhatsApp; Microsoft Windows and Office; Apple iOS; and Google’s Android, Chrome, Gmail, and YouTube. Evaluate these companies in terms of “connections per employee,” and you’ll discover that, for instance, WhatsApp has about 20 million users per employee.
You’ll also notice something else: Though Chinese and Indian and Saudi firms have muscled their way into Fortune‘s top 50 in terms of revenue, the billion-user club remains an American affair. One of the immortal lines about Sloan’s GM back in the 1950s was that “What good for General Motors is good for America.” Is the same true for our modern, highly-linked firms? Is what’s good for Facebook good for America?
Capitalizing on ‘network effects’
These giants not only operate at breathtaking scale, but they dominate their categories. Facebook has an 85% share of the social network market. Google controls 65% of search (80% if you exclude China). Microsoft Windows, nearly four decades after launch, still enjoys 90% share of desktop operating systems. Back in 1955, GM had a great year, but so did Ford (F) and Chrysler. Ask yourself, What kind of year is Yahoo (YHOO) having? Myspace? Walmart.com (WMT)?
In our new world, there’s no second place. “The Great Opportunity” of our age is in the creation and ownership of these winner-take-all platforms, in being the first company to two billion users, then three. You can lay down your money now as to how far that number can stretch.
For more on connectivity, watch this Fortune video:
This dominance is possible because our highly linked systems of communication and data, and their users, crave efficiency and speed. As more people post and probe and share their lives on YouTube and Instagram, they attract still more people to do the same. If you had to hunt for your friends not only on Facebook but on Meetup, Myspace, AOL, and Google Plus, the whole system would be slower, less useful. It’s an example of what scientists call network effects: A system of any sort becomes better, faster, and more efficient for everyone as more people use it.
You can see the break from the past here. Just because you drove a Ford didn’t mean your neighbor needed to, or that you would have benefited if he had. But more of our world is migrating to network-style business models. In retail, Amazon (AMZN) far outpaces even its closest competitors in e-commerce—largely because it applies more-is-better network logic to the back end of its business. The more Amazon sells, the more it learns about what we want, and the more we want to use it. You know the joke: “We all work for Google now.” Search by search, we’re making that company more valuable.
Every company on earth craves this sort of ability to sculpt a business in this way. But the merciless dynamics of these markets mean that few will achieve it. When IBM plans a reinvention based on artificial intelligence, investors should to be a bit cold-eyed: What is the company connected to, after all? As good as IBM’s data scientists may be, they will compete against the engineers and access and reach of Google and Facebook, companies that sit on data goldmines that they can use to fuel and fund their own AI engines. The “network effects” will run fast on thinking machines: The smarter Google’s AI gets, the more people will use it, and it will get smarter still. So while IBM may have a wonderful shovel, they’ll never be digging in such rich soil. And Google? It’s as if the more gold they find in their data, the more gold there will be to discover.
It’s become popular recently to label this age as a Fourth Industrial Revolution or a Second Machine Age—but you can see this is a bit silly, like calling your smartphone the Fifth Telegraph Revolution or your car the Sixth Horse Revolution. Frankly, we’re at the start of a whole new era. It’s an age of network power. If the great opportunity for British firms 100 years ago was exploitation, if it was massive production for the companies of Sloane’s era, in our age the great chance ahead is all about connection.
Joshua Cooper Ramo is co-CEO of Kissinger Associates. His most recent book is The Seventh Sense.
A version of this article appears in the August 1, 2016 issue of Fortune with the headline “Fueled by ‘Network Power’.”