How big tech makes money … Alphabet, Amazon, Apple, Facebook, Microsoft … Are you the customer, or the product?
March 1, 2019
They have changed the world with their technology, harnessing the power of data and networks, some charging for your access to their content, and others charging others for access to you.
For all of their similarities, it seems that there is not one model for how these tech giants end up generating cashflow. Visual Capitalist recently brought together a deep understanding of these 5 mega companies, to try to figure out how tech makes money.
Starting with the reported performance of each company, they look vastly different in current performance, despite having similar market valuations. Market value of course, is more a projection of future income levels, rather than just today (2018 figures).
- Apple generates $265.6 billion revenue, with $59.5 billion profit, that’s 22.4% margin
- Amazon generates $232.9 billion revenue, with $10.1 billion profit, that’s 4.3% margin
- Alphabet generates $136.8 billion revenue, with $30.7 billion profit, that’s 22.4% margin
- Microsoft generates $110.4 billion revenue, with $16.6 billion profit, that’s 15.0% margin
- Facebook generates $55.8 billion revenue, with $22.1 billion profit, that’s 39.6% margin
In total, that’s $801.5 billion revenues in 2018, with 17.3% profit margin. Together they would be among the world’s 20 largest countries in terms of GDP. More precisely, they would just edge out Saudi Arabia ($684 billion GDP) in terms of size.
Apple is the biggest revenue earner, far ahead of Facebook, however profit margins become quite a different story. Facebook’s profitability booms, whilst Amazon’s is relatively slight.
Interestingly, Microsoft has the highest market capitalisation of all 5, at the end of 2018.
Going a little deeper to explore how these companies generate their revenue, we learn much more:
You buy from them … You are the customer
In the broadest sense, three of the tech giants make money in the same way: you pay them money, and they give you a product or service.
Apple (Revenue in 2018: $265.6 billion)
- Apple generates a staggering 62.8% of its revenue from the iPhone
- The iPad and Mac are good for 7.1% and 9.6% of revenues, respectively
- All other products and services – including Apple TV, Apple Watch, Beats products, Apple Pay, AppleCare, etc. – combine to just 20.6% of revenues
Amazon (Revenue in 2018: $232.9 billion)
- Amazon gets the most from its online stores (52.8%) as well as third-party seller services (18.4%)
- Amazon’s fastest-growing segment is offline sales in physical stores
- Offline sales generate $17.2 billion in current revenue, growing 197% year-over-year
- Amazon Web Services (AWS) is well-known for being Amazon’s most profitable segment, and it counts for 11.0% of revenue
- Amazon’s “Other” segment is also rising fast – it mainly includes ad sales
Microsoft (Revenue in 2018: $110.4 billion)
- Microsoft has the most diversified revenue of any of the tech giants
- This is part of the reason it currently has the largest market capitalization ($901 billion) of the Big Five
- Microsoft has eight different segments that generate ~5% or more of revenue
- The biggest three are “Office products and cloud services” (25.7%), “Server products and cloud services” (23.7%), and Windows (17.7%)
The remaining tech giants charge you nothing as a consumer, so how are they worth so much?
They sell you … You are the product
Both Alphabet and Facebook also generate billions of dollars of revenue, but they make this money from advertising. Their platforms allow advertisers to target you at scale with incredible precision, which is why they dominate the online ad industry. Here’s how their revenues break down:
Alphabet (Revenue in 2018: $136.8 billion)
- Despite having a wider umbrella name, ad revenue (via Google, YouTube, Google Maps, Google Ads, etc.) still drives 85% of revenue for the company
- Other Google products and services, like Google Play or the Google Pixel phone, help to generate 14.5% of total revenue
- Other Bets count to 0.4% of revenue – these are Alphabet’s moonshot attempts to find the “next Google” for its shareholders
Facebook (Revenue in 2018: $55.8 billion)
- Facebook generates almost all revenue (98.5%) from ads
- Meanwhile, 1.5% comes from payments and other fees
- Despite Facebook being a free service for users, the company generated more revenue per user than Netflix, which charges for its service
- In 2018 Q4, for example, Facebook made $35 per user. Netflix made $30.
So while the tech giants may have many similarities, how they generate their billions can vary considerably. Some are marketing products to you, while others are marketing you as the product.