Alphabet and Meta Platforms, the world’s biggest digital advertising platforms, once again raked in astonishing amounts of money in 2021. “So what else is new?” you’re probably wondering. Almost every year for the past decade, the companies also known as Google and Facebook set profit records.

But this week marked a troubling difference. Facebook’s announcement that user numbers had dropped for the first time laid bare a long-neglected vulnerability: digital advertising accounts for 98% of Meta’s revenue, and it also accounts for 81% of Alphabet’s. Of the world’s five biggest tech companies, including Amazon.com, Apple and Microsoft, Facebook and Google are the least diversified.

Though conventional wisdom says that conglomerates shouldn’t put all their eggs in one basket, it is hard to knock a business model that has been so successful. After all, people were calling Google a one-trick pony back in the early 2000s because of its bet on ads, and that bet has paid off handsomely two decades later. “Through most of the first decade the concept that Google would make US$10-billion was inconceivable to people inside the company,” says Sridhar Ramaswamy, who ran Google’s ad business for about five years until he left in 2018.

The difference now is that the world around Google and Facebook is changing in ways that look very different than the 2000s or even the 2010s, making their overreliance on the ad business a potential problem down the line. Facebook’s revelation on Wednesday that its daily active users numbers had dropped for the first time in 18 years — news that sent its shares plunging 20% — is just one sign of those changes.

Technologists, for one, are also talking about a radical shift to Web3, where large online platforms will be replaced by systems underpinned by blockchain, a move that would require rethinking the companies’ revenue model. Regulators, meanwhile, are targeting Google and Facebook’s dominance of the digital ad space; and young people’s gravitation to gaming, messaging and TikTok has already threatened Facebook’s all-important engagement metrics with advertisers.

When might any of this hurt bottom lines? Probably not in the next two or three years. But in five years? A lot can change in that span of time. Put another way: Amazon and Microsoft look far more likely to be in their current dominant positions in the next half decade — thanks to their diversified positions — than Facebook or, to a lesser extent, Google.

Microsoft the model

Microsoft has become a model for the diversified Big Tech conglomerate. The company moved into the cloud business under Satya Nadella in 2014, as it saw declines in PC shipments on the horizon. It now has 20% of the global cloud computing market, second after Amazon, and its share price has soared under his tenure. In addition to its huge software business, Microsoft has tentacles in gaming and social media, which made up 8% and 7% of sales in the first quarter of fiscal 2022, respectively.

Amazon’s pivot to cloud was a little easier to pull off. It was already using vast data centres to operate its e-commerce business and, from very early on, started making that computing power available to other companies. That business, thanks to its having margins that are much higher than e-commerce, now makes up more than 60% of Amazon’s operating income.

Google, to its credit, has been trying for well over a decade to run a successful cloud business, too. But it was hard, culturally, to make that shift to a new business when managers had become spoiled on the sky-high metrics of the ad business, according to Ramaswamy. “The kind of metrics that one could get with ads … could not be matched,” he says.

Today, Google Cloud trails Amazon and Microsoft, with 9% of global market share. Cloud made up 7.5% of Alphabet’s revenue in 2021, up from 7.2% in 2020. In the face of a major threat to its ad-market business, the company has something to fall back on, but it’s relatively small.

Facebook still has nothing to show for its efforts. Its recently abandoned cryptocurrency project followed a string of other side hustles that flamed out, including video player Facebook Watch and a digital assistant in Messenger that was meant to become a flourishing hub for e-commerce, but didn’t.

Now it is chasing a radical prediction that we will all be talking to one another via virtual reality headsets. How CEO Mark Zuckerberg plans to make money in the metaverse is still unclear. The fact that Facebook has said it could take 10 years to build the metaverse is all the more concerning now that Facebook’s user growth has started to decline.

For now, the billions are rolling in for the digital ad business, which was resilient through the pandemic. It grew by 12.7% in 2020 and then by an astonishing 20% in 2021, according to eMarketer, which tracks the advertising market.

But while Google and Facebook combined make up more than half the global digital ad market, competition is brewing from e-commerce heavyweights like Amazon, Alibaba Group and JD.com, whose share is growing (the trio combined made up approximately 16% of the global digital ad market in 2021).

The market will settle down to get the kinds of 1% or 2% levels of growth normally associated with GDP

It is telling that Google has been tinkering with the mechanics of its advertising business, in what looks like an attempt to protect its golden goose from a pile-on by regulators and privacy advocates. Chrome, its browser used by almost two-thirds of Internet users, will stop using third-party cookies from the end of 2023 even though the digital tools are critical for advertisers. In one way, the company may be laying the groundwork for a time when the display and search ads business won’t be so straightforward or lucrative.

“The digital ad industry will grow but at slower rates, and it’s logical,” says Ramaswamy, who left Google to start another search engine which, funnily enough, doesn’t make money from ads. The market will settle down to get the kinds of 1% or 2% levels of growth normally associated with GDP, he adds. “The days of 20% growth will get harder and harder.”