Amazon. Apple. Facebook. Google. Born in the tech industry, they’ve evolved to become dominant digital platform companies, and their actions have a ripple effect on countless other companies. As their power has grown, so has government scrutiny, including the July 2019 announcement by the US Justice Department of a broad antitrust review into the platforms.
While still considered “big tech” by many, these platforms are actually “market makers” that are making investments and causing disruption elsewhere. Their pursuit of growth beyond tech could accelerate if the companies face government regulations that aim to address competitive concerns. Exactly where the platforms will go next is a common guessing game. A new measurement from PwC, the Industry Gini Index, has answers.
The Industry Gini Index shows which industries are ruled by a few dominant players, based on the consolidation of value among leading companies. Technology hardware, storage and peripherals tops the 2019 index, reflecting the dominance of the digital platforms. As explained in Platform Revolution, these platforms capture two-sided network effects because they combine supply economies of scale with demand economies of scale, enabling value-creating interactions between external producers and consumers. That means that more businesses contributing to a platform attract more customers, who then attract more contributors, and so on.
As they’ve invested in various technology, intellectual property and other assets, these platforms have evolved in such a way that they can work in multiple environments – making their own markets. PwC has found that as industries see investment from new entrants capable of disruption, the Industry Gini Index score initially drops, then increases at a greater rate, forming a J-curve. The decline happens as valuations for previous market leaders fall. The index score then begins to rise as the strongest competitors start taking over.
Consider the personal computer industry, which saw its index score fall throughout the 2000s, bottoming out in 2008. New investments and innovations included Apple’s introduction of the iPhone, disrupting the industry after the company had suffered setbacks in the 1990s. The popularity of the iPhone and related devices ultimately propelled Apple’s value upward, establishing it as the new industry leader.
The combination of size and agility has led to much speculation about which industries the platforms will conquer next. Shipping and logistics? Banking and finance? Insurance? Hospitality and travel? Amid all the possibilities, a PwC analysis found two sectors in particular where market makers were investing significantly and where the sectors’ Industry Gini Index scores have fallen in the past year. Both illustrate the platforms’ desire to connect with customers on more personal levels and help people better manage their lives.
With market makers looking beyond their native sectors for business growth, it raises important considerations for companies in industries that could see more investment from new entrants. Those companies should consult advisors with expertise in digitization, analytics, valuation and other key areas to help answer critical questions:
Understanding how market makers work and reviewing the Industry Gini Index are starting points for answering these questions. Companies that recognize the new competitive dynamics and make strategic investments will have a clearer path to winning in the years ahead.
The Industry Gini Index is based on the Gini Coefficient, a measure of inequality across a group that is best known for economic studies of income inequality within nations. PwC calculates the Industry Gini Index using enterprise value data for the top 10 publicly-traded companies in each US industry from Capital IQ. Enterprise value is the value of a company’s operations calculated as the market value of equity plus debt minus cash and equivalents – in effect, how much a buyer would have to pay for those operations. As fewer companies dominate an industry, there’s more inequality in enterprise value, and the index score is higher.
The index’s Gini Coefficient calculations use an analytic equation developed by Nobel Prize winning economist Angus Deaton. The original coefficient value ranges from 0 to 1 have been scaled to 0 to 100.