“Gagamlar was never a dreamer, he was a seller of dreams”

Olivier Bomsel is Professor of Economics and Director of the Department of Media and Brand Economics at Mines ParisTech. He co-wrote with Rémi Devaux The New Western – Who can stop the web giants?Ed. Le Cherche-Midi, March 2022.

THEFIGARO.– In recent weeks, reduction plans have increased among Gafam. Amazon, Microsoft and others are making adjustments to optimize their margins. What do these cuts hide?

Olivier BOSEL.– During the Covid crisis, Amazon profited significantly from the boom in online commerce. But as we returned to normalcy, the American giant experienced a decline in sales and profitability. So he began running budget cuts to compensate, which explains his massive layoff plans. When firms experience a slowdown after a period of significant growth, this translates into maintaining fixed costs and decreasing turnover. Even if the performance is less good, the markets react, which causes the price to fall, especially when they are companies with high growth expectations. Amazon’s business is based on distribution activities on the one hand, and the company is based on wholesale and retail sales on the other market place, that is, third-party sellers come to take a position in the online store by paying a commission to Amazon. The first activity, distribution, has high fixed costs, since reserves must be financed, and the second has fairly low costs, but only brings commissions. Thus, when activity decreases, as it does now, the fixed costs of distribution increase. It is an activity whose profitability is very sensitive to turnover.

As for Meta (formerly Facebook), its profitability is based on the number and dynamism of users. However, this number is starting to decrease, the dynamism is slowing down as the user population ages, with younger generations moving towards competing social networks, including TikTok. Advertising revenue also declines due to inflation. On the one hand, large companies publish less advertising content due to higher prices. On the other hand, they promote ads offlinemore image than advertising and willing to pay a little more online, which refers to external sites, because when users click on the link and see the price increase, the number of purchases decreases. Therefore, inflation has a very negative impact on online advertising revenue.

The CEOs of these firms are not idealists, but giant businessmen who use their growth to sway investors with exceptional expectations.

Olivier Bomsell

Are they paying for a comprehensive diversification strategy with sometimes eccentric or ultra-futuristic projects?

Taking the example of Metaverse, Facebook’s long-term investments have been poorly received by the market. Facebook’s idea was to rejuvenate its customers by adding virtual reality services, but the stock market has never been very fond of these ultra-tech sectors. Moreover, among Google, Amazon and Meta, the latter clearly had the most fragile economic model.

In a way, can we say that the Ghafams have stopped dreaming?

The Gafams were never dreamers, they were dream sellers. The CEOs of these firms are not idealists, but giant businessmen who use their growth to sway investors with exceptional expectations. But when they can no longer sell growth to the markets and their sector stabilizes, they necessarily fall into the stock market.

Could the decline of Facebook change the digital landscape as we know it?

The Internet has historically had three main functions, and these functions have gone hand in hand with three main monopolies. The first feature is topography, which is mainly owned by Google; the second is e-commerce, where Amazon is winning; third and socialization, i.e. giving an individual identity to the Internet user, who at that time was only a number, pioneered by Facebook. Now looking to the future, topography, the first function, will continue because it is still an important tool with many evolutionary possibilities, so Google’s monopoly is out of danger. As for online commerce, this is a sector of the future where Amazon remains invincible, especially thanks to the success of its Prime program, which has gained the loyalty of a large customer base. But for social, after a decade of dominance, Facebook is struggling to maintain its monopoly. When Instagram arrived, Facebook bought it and integrated it, but today it has to face TikTok. This Chinese social network is capturing a new generation of users that Meta has struggled to entice.

As for Amazon, we are far from the end of its hegemony. But for Meta, which has a rather unstable business model, we may be entering a phase of gradual decline.

Olivier Bomsell

There are also social networks like LinkedIn that have very specific functions that Facebook could not anticipate. So Meta remains in the discussion of the Facebook platform, Instagram, WhatsApp, but these three services are really in very strong competition. In this respect, Meta’s monopoly is much weaker than the other two. Thus, in the third function, the socialization sector, the Internet will experience changes in the coming years.

Will tightening restrictions on respecting user data weaken Gafam?

Facebook’s business model is largely based on user data. This data allows to determine the social habits of the internet user and to offer targeted advertising content. However, states and manufacturers like Apple are in the process of introducing more restrictive practices regarding the circulation of personal data. Therefore, advertising in this way will be less profitable than in the past. Both Meta and Google will have to find new strategies.

Is Qafam hegemony in question in the long term?

As for Amazon, we are far from the end of its hegemony. But for Meta, which has a rather unstable business model, we may be entering a phase of gradual decline. If we look at Google, even if the company is dissolved, its market power is such that it will remain extremely strong in online search and mobile phone operating systems.

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