In 2014, the leading information and communication technology companies achieved all-time high valuations, while the amounts they paid for acquisitions and the capital raised by firms in the sector reached unheard-of levels.
Exorbitant valuations for leading technology companies are nothing new, but 2014 was especially awash with funding and startup acquisitions costing unprecedented sums of money, illustrating the phenomenal growth of the ICT ecosystem. First and foremost this growth highlights the paradigm shift that has been brought about by the digital economy and the awesome power of the sector leaders. The major reason for their success is the new value-creation model, which centres on consumer experience, new ways of working that foster innovation, plus their attraction as an employer for talented young people.
The massive revenues generated by the ‘Big Four’ Internet players Google, Apple, Facebook and Amazon – frequently designated in France by the abbreviation GAFA – which can dwarf the GDP of some sovereign countries (cf the GAFA aggregated turnover of $316 billion versus the $330 billion GDP posted by Denmark) underline their supremacy in the extended digital field. Apple Inc. made estimated profits of $US182 billion in 2014 and, with its stock market valuation of over $600 billion (as a comparison, more than the total value of Russian equities listed on the Moscow Stock Exchange) is now also the biggest company in the world by market capitalisation.
Investing to shape the future
These Internet giants have also shown that they are prepared to make substantial investments in order to continue innovating, maintain strong growth and upset incumbent players. Their strategy appears to be one of relentless acquisition. Through judicious takeovers of promising tech startups they have begun to move away from their initial core businesses and build entire new ecosystems that can create fresh outlets for their products. How should we describe Google or Facebook today? The answer will certainly not be some simple formula such as ‘search engine’ or ‘friends’ online network’ as their activities are now so diverse – as witnessed by Google’s plans to extend Internet connectivity with balloons and drones.
These companies also know when they need to spend money in order to expand their sphere of influence and eliminate dangerous competition. One of the most striking examples of this strategy was Facebook’s acquisition of Whatsapp for $19 billion at the beginning of the year. The instant messaging app has over 450 million active users every month and was beginning to overshadow Facebook’s own equivalent, Messenger. With this takeover, CEO Mark Zuckerberg opened up an additional entry point to his company’s services so perhaps the eye-watering sum he laid out was justified by Whatsapp’s phenomenal growth and user retention rates. This move, together with its recent focus on mobile, clearly demonstrates Facebook’s goal of being the leader in the digital social communication field. However, the world’s most popular social network provider also wants to be part of tomorrow’s platforms as well. To this end Facebook paid $2 billion for Oculus VR, which has developed a virtual reality headset.
Meanwhile Google has also been investing in a variety of sectors, notably e-health – with the Calico project, a R&D biotech company, and artificial intelligence. The Mountain View giant recently bought London-based startup DeepMind Technologies for $400 million. DeepMind specialises in Deep Learning, a relatively new field of artificial intelligence research that aims to enable computers to recognise human faces in videos and words in human speech. Google also led one of the year’s largest funding rounds, on behalf of the augmented reality startup Magic Leap. This Florida-based firm, which is looking to take digital into the real world with its wearables technology ‘Cinematic Reality’ but has so far been keeping its technology under close wraps, secured seed funding amounting to $542 million from highly influential investors such as Qualcomm and Andreessen Horowitz, in addition to Google.
During the year, Apple, which is keen to find a growth channel for its iTunes music platform, paid $3 billion for the subscription streaming music service Beats Music and Beats Electronics, which makes the popular Beats headphones, speakers and audio software. However Facebook and Google failed several times to purchase photo messaging app provider Snapchat, which turned down offers of $3 billion and $4 billion. Just six months after these two offers, Snapchat was valued at $10 billion and now looks set to become the “next YouTube,” claims the company’s young CEO Evan Spiegel. All these acquisitions and gargantuan valuations stem from the huge profits being made by the Internet giants. Moreover, the disruption they are causing has begun to spread to other areas where investors are betting on future growth.
High value placed on disruption and growth
A total of $13.9 billion was invested in the technology ecosystem in Silicon Valley in the second half of 2014 alone. This figure indicates just how super-charged is the market, fuelled by dynamic interaction between investors, entrepreneurs and academic institutions. For example, in a bid to pass on to other startup hopefuls what can be learned from recent successes, iconic Californian incubator Y Combinator has pulled together a group of well-known ecosystem investors and players to create a video-based course from Stanford University called ‘How to start a startup’.
Another online player to join the distinguished ranks of the ‘Unicorn Club’ – a group of investor-friendly US companies valued at over a billion dollars – is app-based transport provider Uber, which has posted remarkable growth recently and is now valued at $40 billion. Uber is said to have raised a total of $3.5 billion in 2014, mainly to fund development of its service in Asia in a drive to compete with local firms. The chauffeur-driven car firm has already revolutionised the transport sector with its alternative taxi service and its funding rounds should enable the firm to continue growing, although its expansion plans have run up against the regulations in a number of places.
In similar vein, ridesharing service provider Blablacar secured $100 million in funding in order to consolidate its business.
Operating in rather different areas of the transport sector, Elon Musk’s two firms Tesla and SpaceX have also achieved spectacular valuations. Tesla recently announced the imminent launch of two new electric car models, plus the planned construction of a ‘Gigafactory’ in the state of Nevada. This facility will manufacture electric storage batteries for Tesla vehicles and, if forecasts prove correct, should help to put 500,000 new electric-powered cars per year on the road.
Tesla is an excellent example of the current disruption of traditional industry. Founded in 2003, the company is today valued at $22 billion, more than Renault (at $21 billion), which was established over a century ago. Commercial space transport services company SpaceX is now valued at $10 billion, though it was set up as recently as 2002, and has signed special agreements with the US National Aeronautics and Space Administration (NASA) to use part of its infrastructure for launching passenger space flights.
Asian firms also came to the fore during 2014. Chinese e-commerce site Alibaba carried off the largest-ever global IPO raising over $25 billion and taking its market cap to over $200 billion. Fellow-Chinese smartphone manufacturer Xiaomi saw its valuation rise to $45 billion.
Not least, the finance sector also saw some disruptive moves last year. The 13.5 million bitcoins circulating on the Bitcoin network give it a value of $4.7 billion, and now there are companies out there working on applications for purposes other than payments that are based on the Bitcoin protocol, which has created a powerful computer storage network. Meanwhile US peer-to-peer lending company Lending Club, whose founder and CEO is French American entrepreneur Renaud Laplanche, raised $870 million on its IPO, which values the company at $5.4 billion. Its philosophy and approach are much closer to that of the Internet giants than the traditional banks.
These valuations bear witness to the phenomenal growth of the digital markets in 2014, showing also that ICTs are capable of invading sectors such as road transport and space flight that have always been seen as basically ‘undisruptable’. As leading tech sector entrepreneur and investor Marc Andreessen memorably put it: “Software is eating the world.”