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FRESH TAKES ON BIG IDEAS

In 2005, the top ten global companies averaged about $250 billion in market cap. They belonged to a very traditional, very old set of industries, such as oil and gas, pharmaceuticals, retailing, and banking. There was just one software company on the list: Microsoft. Today, nine of these companies are no longer on the top ten list, and the companies that replaced them are from a very different set of industries. By 2023, these firms were eight times bigger than those they replaced. Looking back, it seems that something almost magical was happening.

Research by the McKinsey Global Institute shows that these new top industries sprang from a remarkably small number of crucibles, which we call “arenas of competition.” Arenas are where the action is in the business world. Two main characteristics define them: They account for an outsize share of economic growth, and market shares of companies within them change to an outsize degree—a metric we call “dynamism.” 

Using these two main criteria, we first identified 12 arenas of today, which arose between 2005 and 2020. They include industries such as consumer internet, software, semiconductors, and video and audio entertainment. These industries became epicenters of growth, largely driven by digital and silicon innovations that spurred enormous new technology races.

In that 15-year period, arenas grew their revenues at a CAGR of 10 percent, two and a half times faster than nonarenas, which grew at just 4 percent. In addition, the market caps of today’s arenas grew at a 16 percent CAGR, almost three times faster than nonarenas. Arenas also tripled their global GDP share to 9 percent, from 3 percent, in that period. They generated just 9 percent of our sample’s economic profit in 2005, but by 2019, they accounted for 49 percent.  

So the differences between arenas and nonarenas are dramatic. To borrow an analogy from Harry Potter, arenas are like wizards, while normal industries are like muggles. Arenas, like wizards, operate with slightly different rules than muggles and make their own magic.

Arenas improve their capabilities by escalating investment in R&D. So if I check the six Big Tech companies today, they are spending over $400 billion a year on capital expenditures and R&D. To put that in context, the Apollo space program, in today’s dollars, was about $190 billion.

“The 12 arenas of today tripled their share of GDP growth to 9 percent, from 3 percent.”

In arenas, greater spending on R&D also drives industry shakeouts and hyperscaled global structures. Arenas also earn far greater profits than other industries do, spawn a disproportionate number of global giants, and offer unusually strong opportunities for new entrants to become powerhouses.

This is where the wizardry comes in. Technology breakthroughs make possible what we call an “arena-creation potion,” which enables the escalatory mode of competition that characterizes arenas. The potion has three ingredients: a reset of the technology platform, a huge incentive to escalate investments that improve quality and often have increasing returns to scale, and the presence of a large, addressable market. The magic happens when you get these three ingredients right, leading to escalatory competition among companies that make large investments to gain both market share and higher product quality.
 
We used the three elements of the potion to try to peer into the future and spot arenas that could plausibly emerge between now and 2040. We identified 18, which could account for one-third of all economic growth going forward. They include AI, space, obesity drugs, and nuclear fission, to name a few.

Together, they could yield $29 trillion to $48 trillion in revenues and $2 trillion to $6 trillion in profits by 2040. Furthermore, in terms of impact on the economy, we estimate that they could grow from about 4 percent of GDP in 2022 to 10 to 16 percent by 2040. This translates to an 18 to 34 percent share of total GDP growth.

A key takeaway for business leaders and investors is that you’re either competing with an arena, attacked by an arena, or in an arena. Even though arenas are a small part of the economy, they drive so much of its growth and dynamism that their reach is felt everywhere. Amazon, for example, touches cloud, AI, and video—but also advertising and logistics.
 
It’s also important to bear in mind what we call the “shuffle rate,” or the churn of market share within an arena. Back in 2005, one-third of the market cap we have today consisted of tiny competitors or companies that didn’t yet exist. So arenas are places where new competitors will emerge and new players will step in. It’s like winning a gold medal. In these arenas, winning a gold medal really, really, really matters—but it’s not a gold medal for life. The Olympics come around every four years, and companies have to keep earning that gold medal. It’s that incessant competition that drives the rate of innovation.

ABOUT THIS AUTHOR

Chris Bradley is a director of the McKinsey Global Institute and a senior partner in McKinsey’s Sydney office.

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