But you knew that.*
From The Economist, May 26:
The upheaval brought by AI and Trump favours corporate giants—for now
For all the unwieldiness it entails, scale has always brought enormous benefits in business. Fixed costs are set against more revenue, raising profits and supporting investment. Heft brings greater bargaining power with suppliers and financiers. From the early 2000s, the advantages of scale became even more pronounced. Intangible assets, including software and intellectual property, gave the upper hand to companies that could afford to invest in them. Globalisation provided big companies with more room to grow, as well as access to larger—and cheaper—pools of labour. In America, the gap in profitability between big and small firms widened (see chart 1). Economists began to speak of “superstar” firms racing ahead of the competition.
Now size is conferring advantages in new ways. Artificial intelligence (AI) is reinforcing the dominance of big firms over small ones. So is the presidency of Donald Trump, which has raised the importance of resilience and political sway. Yet these same disruptions could spell danger for America’s corporate giants. Already companies from Apple to Walmart are discovering how their size can make them a target of Mr Trump’s wrath.
Start with AI. You might imagine that lumbering leviathans would be too tied up in bureaucracy to make use of the technology. In fact, their scale allows them to invest far more in it than smaller rivals. According to a survey in December by Bain, a consultancy, American companies with more than $5bn in revenue had an average annual budget for generative-AI projects of $27m, five times the level in the preceding February. Those with between $500m and $5bn in revenue, by contrast, had set aside $9m, up by two-thirds over the same period (see chart 2). JPMorgan Chase, America’s biggest bank, says it has rolled out AI tools to most of its 320,000 employees. UnitedHealth, the country’s biggest health insurer, claims to have 1,000 different applications for the technology.
Sanjin Bicanic of Bain notes that getting AI to work well is proving more expensive than for other types of digital technology, as it requires companies to organise their data and tinker with models. Big firms have the added advantage of larger data sets that can be used to refine the AI systems they build.
It is not only technology, but politics, too, that is making it even better to be big. Although many of Mr Trump’s tariffs now face legal uncertainty, those that remain will hammer sales and profits for businesses. Big firms, though, tend to be more resilient to such shocks. Among listed American firms, those in the top quintile by revenue have fatter operating margins and a healthier ratio of debt to operating profits (before depreciation and amortisation) than the average, and hold a lot more cash, too.
That means they are less likely to get into financial trouble during a downturn. It also allows them to bounce back more quickly, as happened following the covid-19 pandemic. We examined the profitability of listed American companies, as measured by their return on invested capital, in nine non-financial sectors before and after the pandemic. For seven of the nine, the biggest firms—those in the top quintile by revenue—were, on average, more profitable across 2023 and 2024 than they were across 2018 and 2019. The bottom quintile, by contrast, became less profitable in the same number of sectors.
Just to reiterate, every incremental advantage that a company can afford does not affect income production in isolation. They accrete in sometimes unforeseeable combinations:
How to Think About Companies: "Advantage Flywheels"
A very handy conceptual framework first posted after the start of the U.S. lockdowns, April 2020. Schools were closed so it seemed natural to link to a superb mini-MBA module.Eat your heat out HBR....
- Competitive Advantage and Feedback Loops
- How to Think About Companies: "Advantage Flywheels"
- Flywheel Effect: Why Positive Feedback Loops are a Meta-Competitive Advantage
- "Analyzing the deepening divide in learning capabilities between a few corporate giants and the rest of the world." (plus advantage flywheels)
- "America's Biggest Firms' Moat Is Becoming Impregnable" (TSLA; NVDA; GOOG)
And related, now that we see what is happening, what, if anything, should society do about it?
- FHI: Who Gets The Benefits Of Artificial Intelligence?
- "AI Designs Computer Chips for More Powerful AI" (GOOG)
- "Inside big tech’s high-stakes race for quantum supremacy"
- Not into quantum computers? Then you've made the decision to be a peasant, working for those who are.
And the rich get richer.
- "The concentration of economic power has led to spectacular investment returns"
- "An AI payout? Should companies remunerate society for lost jobs?"
- How Amazon Rebuilt Itself Around Artificial Intelligence
- A Very Smart Look at Income Inequality: The Claremont Institute Book Review of "Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned its Back on the Middle Class"
- "Facebook, Google And Amazon Wield Power Over Us All, And Everyone Should Be Worried" (AMZN; FB; GOOG)
- HBR: Corporations in the Age of Inequality — Inequality isn’t just about individuals — it’s risen between companies, too.
- "Why Do the Biggest Companies Keep Getting Bigger? It’s How They Spend on Tech"
...Much more important than the direct monetization of big data is the strategic advantage it can bestow over time.
In a winner-take-all economy, as in a horse race, small differences in superiority are rewarded all out of proportion to the actual advantage. A top thoroughbred may only be a couple fifths of a second faster than the field but those two lengths over the course of a season can mean triple the earnings for #1 vs. #2.
In commerce the results can be even more dramatic because rather than the 60%/20%/10% purse structure of the racetrack the winning vendor will often get 100% of a customer's business.....