Eric Schmidt, the executive chairman and former CEO of Google, refers to the "Gang of Four" as the dominant members in the technology sector that provide a unique experience to users that cannot be otherwise obtained. Apple (Nasdaq:AAPL), Amazon.com (Nasdaq:AMZN), Facebook and Google (Nasdaq:GOOG) are the corporate titans that fall into this prestigious category. By examining the growth and business models of these well-established multibillion dollar companies, several powerful lessons can be learned about the factors that constitute a strong business. (While some investors see it as volatile and unreliable, the tech sector can provide fantastic returns with a little know-how in the field. See A Primer On Investing In The Tech Industry.)
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Focus on User Convenience
Amazon, Facebook and Google offer their end users an enhanced level of convenience to their everyday schedules. Amazon allows for an optimized shopping experience, where products are recommended based on previous purchases. Facebook lets users easily stay connected with their friends. And Google's optimized algorithm enables people to instantly and efficiently find exactly what they are searching for online. It's no wonder that Google has captured 65% of searches.
According to Goldman Sachs, e-retail is expected to grow at 500% the rate of offline retail over the next 10 years. Although aggregate online retail shopping only accounts for 8% of total retail sales, by 2020 online shopping will capture an additional 10% of the $4.2 trillion market. Since 2000, web sales have been increasing at a compound annual growth rate of 19%, with Amazon leading the way as its sales increased from $2.76 billion to just over $34 billion within the same period. Since shopping online is typically cheaper and more time efficient compared to the brick-and-mortar alternatives, the trend is not likely to reverse. (For more about buying online, see Shopping Online: Convenience, Bargains And A Few Scams.)
Extend Business from Core Products
Sometimes the best way to expand a business is to first establish a core revenue-generating operation, which can subsequently be used to fund other initially non-profitable satellite segments. Google serves as a prime example for such a model with its search function serving as the core of the business, which helps to support other ventures. Google websites and network websites generate 96% of revenue, while other growing components such as a Android, Google TV and Google Books only account for 4% of the top line. Furthermore, with the regular revenue stream provided by search, Google has the financial capital to invest into such ventures as yeast-based antibody research, genetic analysis labs and educational software.
Allow People to Connect with One Another
Social networking has become an international phenomenon, with Facebook leading the surge. However, despite its popularity and rapid growth, Facebook was not the first such company on the scene. Online social networking was initially introduced in 1985 with THE WELL, which is marketed as a "virtual community". A decade later, other more common sites such as classmates.com and sixdegrees.com began to emerge. Currently social networking/media is a well-established industry, not only enabling users to connect with friends and family, but also with co-workers, potential employers and practically anyone who shares similar interests.
Interestingly, Facebook and Google have adopted a somewhat similar business strategy. While Facebook aims to improve how people connect with one another, Google is focused on "improving the ways people connect with information." A rivalry between these two internet giants is slowly developing, as Google has been attempting to break into social networking, and some rumors suggest that Facebook is considering introducing search functionality to its core business model. (To read more about Google and Facebook, check out Facebook Surpasses Google.)
Create Revolutionary Products
When Steve Jobs introduced the iPad, he referred to it as "a truly magical and revolutionary product". Although many people were originally skeptical of the device, Apple went on to sell 25 million iPads as many eager consumers waited in lines for hours to purchase the tablet. As a point of comparison, estimates suggest that while RIM sold 250,000 playbooks in its first month of sales, about 400,000 iPad 2s were sold on the first day the product was marketed. Apple has had an incredible decade of creating groundbreaking products including the iPod Touch and the iPhone. The wide success of these products should, in part, be attributed to the convenience that they provide to users in terms of easy access to social networking and even online shopping. Unfortunately, creating an evolutionary product is much easier said than done.
Gain Market Share in Related Fields
The "Gang of Four" has carved out individual niches in the technology sector, allowing these firms to offer industry-leading products and services. Yet, as the aforementioned companies continue to grow, competition between them is heating up as they try to steal market share from one another in their respective fields. After successfully penetrating the cell phone market with the Android operating system, Google is trying to get into social networking and shopping platforms. Meanwhile, Amazon and Facebook are experimenting with video, and Apple recently announced its cloud computing services.
The Bottom Line
With the rapid achievements that Apple, Amazon, Facebook and Google have realized at the beginning of the 21st century, many lessons can be learned about what makes a successful business successful. (These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet. See Using Porter's 5 Forces To Analyze Stocks.)