A recent column in The Economist suggested that Apple is testing the natural limits of company size. It’s not a new idea. It seems natural to expect that something would happen eventually after a company gets so big and dominant – something like market saturation, competition, backlash, missteps, or product obsolescence.
Every age has had its mega-companies. There was the age of General Electric, the age of IBM, etc. But how big can a company get before it stops growing and starts shrinking?
It’s a question in play not just for Apple, but also the likes of Alibaba and Amazon. In the words of The Economist, “There are no iron laws, but common sense suggests that there are limits. Vast profits might reflect products that cannot possibly become any more popular, or a concentration of power that invites a competitive or political backlash.”
The Economist looks at six giants from the past to put Apple’s size in historical context. One is the East India Company, which started in 1600 and was formally dissolved in 1874. The others are Standard Oil and U.S. Steel in the beginning of the 20th century, AT&T and IBM in the late 1970s and early 1980s, and Microsoft in the late 1990s.
At their peaks, each of the six companies had profits between 0.08% and 0.54% of GDP. At the top is the East India Company, and near the bottom are Microsoft and IBM. Today, Apple’s profits are at 0.28% of GDP, which puts the company well into the danger zone. If history has a say, Apple won’t go on like this too much longer.
Perhaps more surprising is that Apple’s return on equity (ROE), according to Bloomberg, is now 41%. That is absurdly high. The average ROE for the S&P 500 today is 14%, and it’s been 12 - 14% the last five years. Keep in mind, though, that we are in a time of high profitability, and that ROE for big corporates is expected to grow in the near future.
But that brings up another worry. Bloomberg’s forecast for the S&P 500’s ROE is 19.8% in 2019. That’s a level never seen the last two decades. For purposes of comparison, average ROE for the S&P 500 was 18.6% in 1999, at the height of the internet boom. It was 2.9% in 2002, 17.7% in 2006, and 4.3% in 2008. Just how is it that the big companies in the S&P 500 can be so profitable relative to the past?
The suspicion is that profitability has increased because there are fewer companies, and they’re larger. The big have been crowding out the small, and there are real concerns about growing industry concentration and monopoly power – though there is some disagreement about this.
The Economist suggests there could be legitimate reasons for not worrying about Apple’s big share of GDP. One is that today’s giants are more global than ever, so perhaps comparing corporate profits to the GDP of a single country doesn’t make sense. But then again, the magazine also notes that Amazon’s profits as a share of world GDP in 2027 are expected to be twice as big as the East India Company’s at its peak in the early 1800s. That’s domination.