NOTE TO SELF: On Katie Martin's "Magnificent Seven" Today
Engines of growth reshaping the world, but then increasingly becoming rent collectors. The fortunes of the “Magnificent Seven”. What happens in the New Reality of Big Tech? And what are the answers...
Engines of growth reshaping the world, but then increasingly becoming rent collectors. The fortunes of the “Magnificent Seven”. What happens in the New Reality of Big Tech? And what are the answers to the natural questions about competition, equity, and the future of innovation?…
We have:
Aiden Reiter & Hakyung Kim: The Magnificent 7 growth slowdown <https://www.ft.com/content/3769fe15-f122-4fb5-874f-5ee48bca2bed>: ‘he market’s three-month recovery has been driven by Big Tech: From a market cap perspective, the Mag 7 is now 31 per cent of the S&P 500, also near an all-time high…. Nvidia[’s]… earnings growth in 2023 and early 2024 is too off the chart…. Tesla[’s]… earnings are all over the place and a clear outlier…. Investors have often punished Mag 7 stocks for earnings results that were great, rather than astounding…. Bank of America predicts the Magnificent 7 is only expected to keep its earnings growth edge over the rest of the S&P 500 for another 18 months: That deceleration is concerning…. Slowing earnings growth, and the high potential for bad guidance on tariffs and capex, will be a challenge…
The “Magnificent Seven”, in the Katie Martin-coined phrase, are: Nvidia (22% of the Mag 7), Microsoft (20%), Apple (17%), Amazon (13%), Google (12%), Facebook (10%), and Tesla (6%).
They are 31% of the S&P 500 with nearly $20 trillion in market capitalization.
Pause and let that sink in.
That is staggering. Their dominance is a testament to the extraordinary value creation (or is it value capture?) as we leave the globalized-value-chain era and enter the era of the attention info-bio tech economy. Scale, platform-construction, network-effect, and technological-moat effects have propelled a bare handful of firms to heights that would have seemed fantastical just a decade ago and are fantastical now. hat a mere seven firms now account for nearly a third of its value is both a marvel of innovation (but what kind of innovation?) and a striking concentration risk.
Over the past five years, they have delivered an astonishing average real annual return of 26%, in stark contrast to the more modest 7% average real annual return posted by the remaining 493 companies in the S&P 500. This yawning performance gap is the central fact of contemporary equity markets, driven as it has been by technological advance, technological disruption, market power, and—especially in the case of Nvidia—a near-monopoly on the infrastructure of the AI revolution. Meanwhile, the broader index has trudged along at a pace more consistent with historical norms. The 26% real annual return for the Magnificent 7 is not simply the result of clever management or product innovation—it is the mathematical outcome of a system in which the spoils of growth accrue disproportionately to those who control the key levers of technology and data.
The sources of value for today’s tech titans—especially the Magnificent 7—can be classified into four interwoven categories:
(i) genuine productivity gains, as these firms deploy cutting-edge technology to automate, optimize, and scale operations;
(ii) rent collection from their platform ecosystems, whereby network effects and user lock-in allow them to extract ongoing economic value from expanding value created by platform participants;
(iii) rent collection by “tightening the screws,” or leveraging their dominant market positions to squeeze suppliers, partners, or customers locked into their platforms—often through pricing power, restrictive contracts, or data control;
and (iv) the “gonzo meme stock” phenomenon, in which valuations are propelled less by underlying fundamentals and more by narrative, speculation, and the collective enthusiasm (or mania) of retail investors.
All four of these elements are present, in varying proportions, across the Magnificent 7, shaping both their current profitability and their future prospects.
To begin, the first source—genuine productivity gains—remains foundational, particularly for firms like Nvidia and Microsoft, whose technological breakthroughs in AI chips and cloud infrastructure have enabled entire new industries and made existing processes vastly more efficient. These productivity gains are quantum leaps in computational power, data processing, and software capabilities, which in turn drive broader economic growth.
However, even as these firms innovate, they also benefit from the second source: platform-based rent collection. Apple’s App Store, for example, extracts a significant share of revenue from every transaction on its platform, while Amazon’s marketplace fees and Google’s advertising auction model similarly skim value from vast digital ecosystems. This rent-collecting dynamic is amplified by network effects: the more users and developers an ecosystem attracts, the harder it becomes for rivals to compete, and the more entrenched the incumbent’s position.
The third source, “tightening the screws,” sees dominant firms use their market power to impose terms that maximize their own profits, sometimes at the expense of suppliers, partners, or even consumers. Nvidia’s recent pricing strategies for AI chips, for example, reflect a recognition that it faces little meaningful competition in the short term; Apple’s relentless negotiation with suppliers and its push to grow “services revenue” are similarly designed to extract every available dollar.
Finally, the fourth source—the gonzo meme stock phenomenon—is a product of the current market zeitgeist. Tesla’s valuation, for instance, has at times seemed detached from traditional metrics, buoyed instead by the cult of personality around Elon Musk and the willingness of retail investors to buy into a narrative of limitless disruption. This speculative fervor can create extraordinary volatility and, at times, disconnect the market price from underlying economic value.
These four sources of value interact and reinforce. And the result is a tech landscape in which profitability and market capitalization are driven as much by structural dynamics—platform lock-in, regulatory arbitrage, and speculative enthusiasm—as by traditional measures of productive contribution.
Nvidia & Apple are primarily a mesh of (i) & (iii): a blend of genuine productivity gains and aggressive rent-collection strategies. For Nvidia, its dominance in the GPU market—particularly as the indispensable supplier of chips for machine learning and large language model (MAMLM) applications—has allowed it to not only drive technological progress but also to extract economic rents from the entire AI ecosystem. Firms across industries now find themselves with little choice but to pay Nvidia’s premium prices if they wish to participate in the AI revolution, cementing Nvidia’s position as both innovator and gatekeeper. Apple, meanwhile, continues to improve the technical sophistication of its hardware, but the company’s corporate strategy has shifted: rather than focusing solely on product excellence, Apple now leverages its market power to squeeze suppliers and maximize the extraction of “services revenue”—from App Store fees to subscription bundles—transforming its ecosystem into a formidable rent-generating machine.
Together, Nvidia and Apple illustrate the duality at the heart of the current tech landscape: genuine innovation and productivity gains are inseparable from the structures of rent extraction and market power. Both companies have built platforms that are indispensable to their respective domains, but the rewards they reap are as much a function of their strategic positioning and ability to control chokepoints as of their technical prowess. For investors, this means that future returns may depend less on the next breakthrough device or algorithm and more on the continued ability of these firms to maintain their bottlenecks and enforce their tolls. For the broader economy, it raises questions about competition, innovation, and the long-term sustainability of such concentrated power.
Microsoft’s principal source of value in the current tech landscape is primarily (ii): its prowess as a creator and provider of the enterprise platform that makes IT easy for businesses, and then rents, particularly through its cloud-compute services, as demands for IT expand with technological progress and general economic growth. The company’s Azure cloud platform has become an essential utility for enterprises and startups alike, offering scalable computing power, storage, and AI tools without the need for firms to build and maintain their own infrastructure. By lowering the barriers to entry for digital transformation and enabling rapid deployment of machine learning and data analytics, Microsoft positions itself as an indispensable intermediary—one whose services are deeply embedded in the workflows of its clients. This strategic positioning allows Microsoft to extract ongoing economic rents from the growing value created by the platform community it hosts, as customers become increasingly locked into its ecosystem of software, cloud, and AI offerings. The rise of Azure is the core here. Microsoft’s cloud-compute services are not just a convenience for customers; they are the linchpin of a new platform-centric mode of value capture in the digital age.
Amazon, Google, and Facebook derive their remarkable profitability primarily from (ii) and (iii): (ii) rent collection from their platform ecosystems and (iii) rent collection by “tightening the screws” on those dependent on their platforms. Each has constructed a digital infrastructure that is not only central to the daily experience of billions but is also designed to capture a portion of the value created by every participant—be they advertisers, merchants, app developers, or content creators. Their platforms are not going anywhere, but also are not changing in terms of what people do on them that can be a source of rent extraction. Thus overall growth continues to enlarge the scale. Plus there is the tightening of the screws—what Cory Doctorow has taught us to call the “enshittification” of their platforms as we have to wade through more and more SEO- and now AI-slop to do what we were initially looking to do. Is anyone having more fun wading through Google or Amazon search results or Facebook ad-ridden feeds these days than trying to find something actually useful on Apple’s IOS app store?
Amazon’s e-commerce platform, for instance, charges third-party sellers a variety of fees for access to its marketplace, fulfillment services, and advertising tools, effectively taxing the commercial activity it enables. Google, through its dominance in search and digital advertising, has built an auction-based system where advertisers must outbid one another for visibility, with Google extracting a margin from every transaction. Meta, as the custodian of the world’s largest social networks, monetizes user attention and data, leveraging its platform’s reach to command ever-higher prices from advertisers while simultaneously altering algorithms and policies in ways that reinforce its own power and profitability.
And Tesla.
I should stop there.
Tesla is now selling 15% fewer vehicles than it was a year ago, and Elon Musk claims that future profits will not come from Tesla as an auto-producer but as an “AI” company—that the future of Tesla is robotaxis, and then, beyond that, humanoid robots. But how much of the profits from Elon Musk’s ventures into humanoid robots, robotaxis, and, indeed, natural-language interfaces and actually working self-driving for cars will go to the 60% Musk-owned xAI rather than the 13% Musk-owned Tesla? Back in The Day, the Big Four of the publicly-held Central Pacific Railroad Company of California—Leland Stanford, Collis Huntington, Mark Hopkins, and Charles Crocker—were also the four owners of the privately-held Charles Crocker & Co. construction firm. What company did the Central Pacific pay to actually build the railroad? Crocker& Co. Who decided on the price? The Big Four. How much of the value committed by the investors in the Central Pacific was tunneled out to the Big Four by their setting a high price for construction services? How much do you think?
Maybe Elon Musk will be generous to the outside shareholders of Tesla. Maybe it will be Tesla and not xAI that is the corporate form that profits most from Musk’s humanoid robots and robotaxis. If there are profits. Maybe.
But at least as I see it, the story of Tesla is of a meme-stock company. And the meme-stock aura surrounding Tesla is a double-edged sword. While it has enabled the company to raise capital cheaply, attract top engineering talent, and command a level of media attention unmatched by peers, it also introduces risks. The disconnect between valuation and fundamentals makes the stock susceptible to sharp corrections. Moreover, the focus on narrative over execution can obscure operational challenges.
Now, do not get me wrong about the Magnificent 7: the creation of their respective technology platforms—Apple’s iOS ecosystem, Microsoft’s Windows and Azure cloud, Google’s search and advertising infrastructure, Amazon’s e-commerce and AWS, Facebook’s social networks, Nvidia’s AI hardware stack, and, ahem, Tesla—are truly extraordinary leaps in wealth creation. They have delivered enormous societal benefit. These platforms fundamentally reshaped the digital landscape, enabling new industries, business models, and forms of communication, while driving productivity gains and consumer surplus on a scale rarely seen in economic history. The rise of the smartphone, the democratization of cloud computing, the global reach of social media, and the explosion of AI capabilities can all be traced back to the foundational work done by these companies in building and scaling their platforms.
But over the past five years, and looking forward:
The increased profits and soaring valuations of the Magnificent 7 are less a direct reflection of their own productive innovation and more an indicator of two intertwined forces: (a) the prosperity generated by real economic growth elsewhere in the economy, and (b) their enhanced ability to collect, scale, and extract economic rents from their dominant positions. As the broader economy has expanded—driven by consumer demand, capital investment, and global trade—these platform firms have positioned themselves at critical chokepoints, enabling them to capture a disproportionate share of the value created by others. Their business models increasingly rely on leveraging network effects, data control, and platform lock-in to extract recurring fees, commissions, and advertising rents, rather than on delivering ever-greater leaps in genuine productivity or consumer surplus. This shift is evident in the way Apple’s services revenue has outpaced hardware growth, Google’s ad auctions have become ever more lucrative, Amazon’s marketplace fees have multiplied, and Microsoft’s cloud subscriptions have locked in enterprise customers.
Plus, at present, the Magnificent 7 are deeply engaged in the build-out of massive artificial intelligence and machine learning model (MAMLM) infrastructure, a technological transformation that promises to generate enormous user surplus for those individuals and organizations who can effectively harness the capabilities of advanced GPT LLMs and similar AI tools. The productive potential here is vast: AI models can automate complex tasks, generate creative content, accelerate scientific discovery, and unlock new business models across industries. However, the economic gains from this transformation are likely to be distributed unevenly. While users who master these tools may reap significant benefits, the lion’s share of profits is poised to accrue to infrastructure providers—most notably Nvidia, whose GPUs and specialized chips are the indispensable hardware backbone of modern AI. The costs of building, training, and operating these models—especially the massive electricity bills for data centers—will further erode margins for most players, meaning that, for investors, the return on capital in the broader AI ecosystem may be modest, with only, cough, Nvidia, able to capture increasing profits at scale.
Moreover, what is good for the Magnificent 7 is increasingly no longer good for the broader economy. Once heralded as engines of innovation and productivity, these firms are now more frequently encountered by other businesses and sectors as collectors of costly economic rents rather than as providers of ever-more-valuable services. As their dominance has grown, the Mag 7’s interests have diverged from those of the wider marketplace: their business models rely on extracting value from their privileged positions atop digital platforms, supply chains, and data networks, often at the expense of smaller competitors, suppliers, and even consumers. This shift is evident in rising platform fees, more restrictive contractual terms, and the growing use of proprietary ecosystems to lock in customers and partners, all of which serve to transfer wealth from the rest of the economy to the tech giants’ balance sheets.
The Magnificent 7—once the undisputed engines of market returns and the very symbol of American technological dynamism—have become a study in contrasts. Their performance and narratives are now sharply differentiated, shaped by a mix of sector-specific challenges, competitive pressures, and the rapid pace of technological change. Some, like Nvidia and Microsoft, are riding the wave of artificial intelligence and cloud computing, while others, such as Apple and Tesla, are grappling with slowing growth, regulatory headwinds, or shifting consumer demand.
This divergence signals the end of an era when these companies could be treated as a single, unified trade or story. Investors and policymakers must now move beyond simplistic narratives. Instead, they need a more nuanced, case-by-case analysis that carefully weighs the true sources of value—distinguishing between genuine innovation and the extraction of economic rents. It is also crucial to assess the risks that come with market concentration and to evaluate the prospects for continued productivity growth in a landscape where the easy gains of platform dominance are fading.
References:
Barrett, Claer, & Katie Martin. 2024. “Transcript: The Five Minute Investor — Magnificent Seven.” Financial Times, April 23. <https://www.ft.com/content/6c9a99d6-b1ae-4d60-a682-438985986637>.
Reiter, Aiden & Hakyung Kim. 2025. “The Magnificent 7 Growth Slowdown.” Financial Times, July 22. <https://www.ft.com/content/3769fe15-f122-4fb5-874f-5ee48bca2bed>.
Rosen, Phil. 2025. “Magnificent 7 Outlook: Wall Street’s Favorite Big Tech Trade Is Splintering.” Opening Bell Daily, July 23. <https://www.openingbelldailynews.com/p/earnings-outlook-magnificent-big-tech-investors-trump-nvidia-microsoft-tesla-apple-goog>.
As usual a lot of insight here. I was a little surprised though at the prominence of Azure in your MSFT story alongside the short shrift given to cloud at AMZN and GOOG. Amazon, not Microsoft, created the cloud infrastructure industry and remains its dominant leader. This is not controversial. Google's cloud unit is growing faster than either of the other two in the big 3, and faster than the rest of Google's business. (Also, as an aside, Alphabet happens to have a really expansive quantity of random innovation stuff happening outside its moneymachine ads business.)
Meanwhile, in contrast to the other two cloud units, Microsoft's Azure revenues/profits include a very high volume of screw turning in the form of licenses (esp SQL Server) that are now rolled up into "cloud" revenue for no real reason other than wanting to show growth in that unit. And MSFT still rests its dominance in software (and no small part of its Azure sales) on network effects of Windows and Office compatibility. I would submit that MSFT is at least as much, if not more, a rent-extraction enterprise as either of those two.
Brilliant. Insightful. But it ain't just the Mag 7. Everyone is taxing the choke points. Forget the name of the current occupant at 1600 Penn Ave. Do we believe the next Dem there will lower any of the tariffs? All up and down supply chains, there is more rent extraction at every node. Walmart used to get pilloried for squeezing its suppliers, now everyone does it. Firms find creative ways to use new tech to extract rent. Customers in every store happily scan and bag their own items while seeing no efficiency-induced reduced prices; they are now just unpaid employees. Universities now charge additional fees for things that used to be in tuition and bundle courses and outreach seminars to make fee-based "digital certificates" students and non-students can add to LinkedIn to signal some value that used to just be part of a transcript. DMV charges a convenience fee to register your car online even though a paper check is costlier to process. Rent is being extracted by everybody. It's actually quite astounding how this silent revolution came about, and Brad is dead-on...for investors , are you looking at valuations correctly?