The clouds of major tech stocks are hardware built on software. Specifically, they’re built on the cash flow from software.
Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), and Facebook (NASDAQ:FB), first owned powerful software monopolies before they made their cloud investments.
Apple’s iOS, Microsoft Windows, Amazon Web Services, Google and Facebook continue to deliver billions of dollars each quarter in cash flow, for investment in cloud data centers.
Without the monopoly software there is no cash flow. Without the cash flow there is no cloud. There are no debts on the cloud, no bankers, no bonds. But any threat to the monopoly cash flow is a threat to the cloud czars themselves.
It’s these software monopolies that are now driving the great game of technology.
Apple is facing such an existential challenge from Epic Games.
Epic makes Fortnite, a very popular online game. It’s privately held, although Tencent Holdings (OTCMKTS:TCEHY) holds a big stake. In its latest funding round, valuing it at $17.3 billion, Epic added Sony (NYSE:SNE) and some big investment funds to the mix.
The dispute is over Apple’s App Store. The store requires that vendors give it 30% of anything they collect from users, including in-app purchases. Epic objected, Apple kicked them out of the app store and for now the game is unavailable for iOS.
Epic lacks the cash flow to build its own clouds. Even if it had the cash flow, it can’t succeed in the market without access to iOS, the software monopoly Apple is protecting. Without that cash flow, Apple can’t keep its cloud growing.
Oracle isn’t a cloud czar. It rejected open source, then rejected the cloud. It missed its chance but desperately wants another one. Controlling the data and cash flow of TikTok, created by China’s ByteDance, could let it become the sixth czar.
The Trump administration wants to help. Larry Ellison, Oracle’s chief technology officer, is a fan of the administration. But getting to yes is difficult, because how do you take a multi-billion dollar asset without paying some multiple of those billions? Who owns the company, which may be worth $60 billion, is less important to Ellison than who gets access to the cash flow.
But ownership is the key to Trump’s personal stamp of approval.
Google’s Lawsuit, Facebook’s Boycott
A more direct threat is being proposed by Scott Cleland, president of the Fortune 500 research consultancy Precursor, against Alphabet.
Cleland claims Google was built entirely with stolen technology. He wants these monopolies seized in the name of intellectual property. He cites four legal fights, with Overture, Skyhook Wireless, Apple and Oracle. In each case Google did things their opponents claimed to have done first. Cleland wants these cases re-litigated, and Google taken apart in the name of fairness.
There’s a fourth case here, the attacks of civil critics against Facebook. Rather than attacking Facebook’s monopoly, critics want users to simply stop using its software. They’re doing this to force changes in Facebook policies they say threaten freedom and democracy. They’re doing it by attacking Facebook’s cash flow.
The Bottom Line on These Tech Stocks
Companies are now seeking to use courts and political pressure against the software monopolies that drive the cloud czars. They want the clouds, and the tech stocks, broken up.
Instead of attacking the czars at the competitive edge, opponents attack their soft legal centers. Instead of competing in the market, they call on political pressure to get what they want. When domestic courts won’t act, they call on geopolitics to overturn the board.
The lesson for investors is that the cloud czars’ power is far from absolute. Without the cash flow from a software monopoly, today’s clouds can’t function. Without a global presence, based on this cash flow, their $7 trillion in market cap can’t exist.
On the date of publication, Dana Blankenhorn owned shares in MSFT, AAPL and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.