The dilemma of the supercompany

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Ethan Wu (0:36)

Thank Pushkin. Rob, how do you feel about Meta?

Robert Armstrong (0:41)

Well, I'm not on Facebook. I am on Instagram. It's a palace of vanity. It's slightly spooky, but I visit every day.

Ethan Wu (0:48)

What about Walmart?

Robert Armstrong (0:50)

Well, I don't like what it's done to American small towns necessarily, but man, I like going in there.

Ethan Wu (0:56)

And how about Apple?

Robert Armstrong (0:58)

I love my iPhone. I wish I could invent a world in which my daughter didn't have one.

Ethan Wu (1:05)

Listeners, big companies like these, they generate mixed feelings and incredible investor returns. Today on the show, the dilemma of the super company.

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined by super company analyst, Robert Armstrong.

Robert Armstrong (1:25)

I think of myself as a super company, period.

Super company Rob Armstrong. I have a monopoly position among Rob Armstrongs.

Ethan Wu (1:35)

Or you could be the super space company analyst. You're the top dog among the company analysts. Well, Rob, on this show, we have talked ceaselessly about the Mag-7, the big tech stocks, blah, blah, blah, blah, but I think we wanted to zoom out a little bit. We've been writing about this in the Unhedged newsletter. You know, the American economy feels like, and it's certainly from an investor perspective, it feels like it operates in a different way than maybe economies of the past did. And to be clear, there have always been big companies, right? Standard Oil existed. Sears was once a dominant retailer. What we're talking about is companies where as they get bigger, they actually get better at producing the underlying product. They're not just benefiting from scale.

They're actually getting more competent, more effective. And size is supposed to be in kind of a traditional Econ 101 model, actually kind of a bit of a problem in a lot of cases.

Robert Armstrong (2:22)

And competition, more important, competition was supposed to stop this. That if you had a great business and you were really printing it, somebody would copy you or compete with you or try to take your stuff. And so eventually your returns would be forced down over time just by the mere fact of your success.

Ethan Wu (2:39)

And a lot of people will have the experience of, I'm an iPhone user. I do like my iPhone. I've got some issues with it. Maybe I have some issues with Apple as a company.

And then when I go to buy a new phone, do I consider getting a Samsung? No, I don't. Not for a second.

Robert Armstrong (2:54)

Not for one second. In general, there's a set of mixed feelings.

We feel that there is something slightly creepy about the fact that all of us get all our online stuff from Amazon. But man, that stuff works well.

I order stuff from there like twice a week. So does everybody. When we're shopping, in a lot of parts of the country, we're going to Walmart. When we're calling a ride, we go to Uber. We do our taxes on Intuit Software. We get our financial data from Bloomberg. It's like certain companies, they provide these services we all use. But there's also a feeling like, is this real consumer choice? Do I feel good about this? Do I like an economy that is not necessarily as competitive as I think it ought to be?

Ethan Wu (3:42)

Think of social media, right? Everyone has opinions on Meta, on Facebook and Twitter, on Mark Zuckerberg personally, on Elon Musk personally.

And yet we just go back, you keep using it one way or another. So in a recent edition of the Unhedged newsletter, we had a look at a recent paper from Morgan Stanley, kind of looking at the economics behind these sort of businesses that create these tremendous, tremendous lock-in effects that are able to scale seemingly to infinity. Why does this happen? And it comes down to a key economic concept, which is increasing returns to scale.

Robert Armstrong (4:19)

Yes. So the one we all understand is the idea that in some businesses, the more customers they have, the better the product gets. This is the famous network effect.