(Bloomberg) -- One trend was clear this week: It is incredibly costly to stay ahead in the technology industry.
During the quarter ended in March, four U.S. tech superpowers -- Alphabet, Amazon, Microsoft and Facebook -- collectively spent $16.2 billion on capital projects, including real estate; warehouses to stow and ship packages; and data centers to fuel their cloud-computing businesses and internet hangouts. That figure, which includes assets that the tech giants effectively lease rather than own, was 68 percent higher than the companies' combined capital spending in the March quarter of 2017. The rate of growth is far higher than the companies’ pace of revenue.
Alphabet on its own had capital spending of $7.3 billion in the quarter, including a $2.4 billion purchase of a piece of commercial real estate in New York City. Even excluding that big acquisition, Alphabet's capital spending was about the same as the capex of Exxon Mobil in the same period -- a company that does the pricey work of digging oil and gas out of the ground. Virtual data is as expensive to produce as oil.
In one sense, the booming spending on big-ticket projects defies economic logic. In principle, once companies achieve gigantic scale, it should become cheaper for them to operate their businesses rather than more expensive. But that’s not necessarily how technology works. The four technology giants want to grab more market share in their existing businesses or expand into new areas. And that means even if they’re getting more efficient at running their internet services or package logistics operations, the tech giants need to keep spending to keep up with their customers' demand and with other rich tech giants.
Alphabet Inc., the parent company of Google, made it clear that it is investing in real estate and a global network of computers to run its web properties and cloud-computing services for other companies, plus huge projects including undersea cables that give Google an edge in internet speed. Amazon.com Inc. and Microsoft Corp. are bulking up their cloud computing and -- in Amazon’s case --its package and shipping operations. Facebook Inc.’s capex is growing at the fastest rate of the four, and it’s not entirely clear what the company is doing with its planned splurge.
Having the money to invest in big-ticket projects is among the biggest strategic advantages of the tech industry’s haves compared with the have-nots (or have-less). The ability to spend on major physical assets allows the tech superpowers to consolidate their leads. Few companies are able to spend $10 billion or more annually on computer equipment or other assets.
Investors are occasionally nervous about the tech giants' spending splurges, but for the most part they're happy to see the capital spending tabs go up if it means tech giants are investing in the future. As one Microsoft investor told Bloomberg News about that company's capital costs: "If you say it’s for building out cloud services, investors shut their piehole because they want them to invest in that." (Bonus points for use of the word "piehole.")
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