What does this mean? How you envision this happening?
Of course, this is a false distinction. The digital and the physical world are actually one and the same, viewed through different lenses. But eventually the network and services and content and algorithms of the digital realm will become central. Perhaps this is how it happens:
Facebook, Google, Amazon are proto-states. They are centers of power which dispense favors upon their "citizens" (users) in exchange for power over the users (data). At present they're primarily constrained by an environment of competition fostered by government. But over time they assume more and more functions of government. You can already "vote" in these corporations (as shareholders).
Suppose the government that currently constrains the corporations weakens, fractures. The U.S. splits up, for example. Then the boundary-crossing multinational corporations become the unified power centers. Now they are constrained only by each other. A great power struggle occurs in which the digital powers strive for dominance. There is a physical element---cutting fiber connections, etc.---but mostly it's about algorithms. Eventually the virtual space is partitioned into states just as the physical world.
In time, the "users" in each virtual state become discontented. They revolt and demand greater say in their governance. They live in virtual realities governed by the virtual states. Thus they have a great incentive to gain power over the governments. Thus democracy arises.
Anyway, this is all really far-out, weird thinking, and maybe it doesn't hold up. But something like this seems roughly plausible.
Smaller companies do scary things too. Consider Equifax, the zillion adtech companies out there injecting Javascript everywhere, and all the no-name Android vendors that never put out security updates. At least some of the big names invest in improving security and do some policing of the smaller ones.
The Internet's feudal structure comes from specialization due to outsourcing security, often from smaller to larger companies. Cloudflare is largely in the business of providing protection to smaller companies. Or take the whole cloud thing; this makes security much easier than running your own data center.
Even at the individual level, we don't want to run our own spam filters and moderate our own comments. We want a trusted source of security updates. Someone needs to keep the bad guys out so we give others the power to do it for us.