5 reasons why tech brands are so powerful
Tech companies dominate the top 10 of the world’s top 500 brands. But where has this prepotency come from? Paul Snell finds out
For the first time, tech brands occupy the top five places in Brand Finance’s global ranking of the world’s top 500 brands (if you count electronics manufacturer Samsung and the telecoms firms AT&T and Verizon as tech brands, that dominance extends to the top eight places).
But why are they so dominant? At yesterday’s Brand Finance Global Forum in London, professor Patrick Barwise of London Business School (and a speaker at last year’s B2B Leaders Forum) gave his view on why these brands continue to rule the roost.
Of course, there’s a variety of factors at play. “Don’t look for a single reason,” he says. “There are multiple mutually reinforcing reasons why tech markets are winner-take-all.” Leaving aside the sheer size of their market capitalisation and that many of these are ‘experience’ businesses. He identified five reasons in his presentation why these brands – and in particular the GAFA companies – Google, Amazon, Facebook and Apple – have such a hold over the market.
The five factors that reinforce tech brand dominance
- The first is “economics 101” Patrick says – high-fixed costs, low variable costs and classical economies of scale, scope and learning, driven by very low marginal costs.
- Network effects – essentially where the volume of participants improve the value of a product – are also at play. Barwise says there are two types of network effects, direct and multi-sided. An example of direct would be the more people with the same product, the more valuable it is. Hotmail’s an example of this: “Being able to do email isn’t useful if no-one else you want to communicate with is on email. Hotmail was able to say recruit your friends, it’s free.”
- Multi-sided (sometimes known as platform economics) is the concept exemplified by Airbnb. “The more people who’ve got properties to make available to people on short breaks, the better it is for people who want to go on the system and vice versa, the more properties that are on there, the more valuable it is to go on Airbnb,” Patrick says.
“This platform effect applies to all these big businesses as they’re all platform businesses,” he adds.
Jeff Bezos, founder, Amazon
"Your brand is what other people say about you when you're not in the room"
- They’ve also benefitted from advancements in big data and machine learning. “In the world of tech the key word is ‘big’,” says Barwise. “All those wonderful services offered by Google, one very big reason is with big data, more is more. And once you’re setting your algorithms off, the more data they have to play with and the more powerful the results will be. In terms of regulation, we aren’t even at the races in terms of being able to handle that.”
- The professor also urges not to underestimate the importance of geographic clustering, with many of the same firms based in the same location on the West coast of the US. It’s not just the human capital advantage in terms of talent and the labour market, but the gains from social capital such as interaction and competition between people. It’s this geographic clustering that explains the success of the city of London and why the world’s best ceramic tiles come from a small area of northern Italy.
- In addition to being consumer brands, Barwise says these firms are talent brands too. Individuals want to work for them because they’re a great addition to the CV, and are even willing to be paid less to do so because of the reputational boost from being associated with the brand. The cult of the founder, and the appreciation entrepreneurs such as Steve Jobs and Jeff Bezos for the power of their brands, is another crucial element.
In truth, once tech brands such as these are established they can be eclipsed, but not displaced, from the market. IBM was the dominant provider of mainframes in the sixties – and still is today – but was eclipsed by Microsoft and Intel in the PC market, who in turn were overshadowed by new players in search, ecommerce, social networking, and mobile internet.
And it’s unlikely they’ll be knocked off the top tier anytime soon. “A brand is like a kind of flywheel for your business,” Patrick says. “It takes a lot of energy to build up a strong brand. Fortunately, it’s actually quite difficult even for the stupidest brand manager to do much damage to a very well established brand as they exist in people’s heads.”
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