TMT (technology, media, and telecommunication) companies #1 generation of economic profits over other industry sectors amounts to more than companies in aerospace and defense, automotive components, and food products combined. The profitability behind TMT is a result of advances in digital technology that provide access to new markets and stimulate corresponding growth, creating new leadership positions that capture extraordinary value. Within this industry is a distinctive pattern: a concentration of economic profit and turnover as well as a growing middle tier of value-creating companies.
Questions among investors remain in the consistency behind digitally altered business models. Will old industries continue to be replaced by their technological counterparts such as Amazon (retail), Uber (transportation), and Airbnb (lodging)? Industry research reveals that companies within TMT experienced near hundredfold growth from 2000 to 2014, adding over $200 billion in value to the world economy.
Unsurprisingly perhaps, the TMT captures benefits of scale more efficiently than other sectors; products such as smartphones and social media captured roughly 85% of the economic profit generated by TMT industries from 2010 to 2014. The top 5 percent of companies generated 60%. The network and indirect network effect have helped create concentration of economic profits within the industry. The direct network effect is a characteristic of TMT platforms to become more valuable with the use of various users, and the indirect network effect is the reliance of third parties on established networked products to create complementary services, further improving the viability of an established product.
The latter effect helped spur the leading profit-growth in middle-tier companies (Netflix, WeChat etc.) – economic profits grew three times the amount of technology giants between 2000 and 2014 and tenfold overall. Replacement of physical platforms such as Blockbuster also helped this part of the industry experience growth.
Keith Knutsson of Integrale Advisors commented, “ It’s been relatively obvious that old business models are being replaced by their technological counterparts, but the question remains whether this sort of market creation is sustainable for the industry.”
Within TMT lies one inherent instability; companies at the top are under constant threat by young companies with rapid growth. Less than half of the companies at the top quintile (measured by economic profit) in 2000 remained so in 2015. In other industries, on average, the industry leaders in the top quintile remained in the top quintile fifteen years later 60% of the time.