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Wednesday, January 4. 2017
I received a link this morning to an article which suggests readers should more or less 'be afraid' of a certain group of technology companies. Over the course of time, many firms have acted in an amoral or immoral fashion. These tech firms have all probably also behaved poorly at various points. But the value they provide is significant. Fearing them is not sensible. There is good reason to not fear them. History indicates they are likely to all be undone or greatly diminished at some point in time. For most of the 1980s, the 'company' I was supposed to fear was the entire nation of Japan. For most of the 2000s, it's been China. Funny how Japan has been in a 20 year funk while China is just now dropping like a stone (apparently, Bitcoin prices are soaring over there - a sure sign of instability).
I consider articles like the above link to be a form of fake news, because it's an emotional appeal based on faulty logic. Articles of this nature appear every 10 years or so about various companies. Aside from China and Japan, I've read articles like this about GM, GE, Exxon, IBM, Cisco, Oracle, Bank of America, Citibank, AT&T, Coca-Cola, ITT, and a host of other large firms who, in total, represented large and innovative firms at various points in time. They were firms which happened to benefit from temporary blips in demand and consumer behavior. Point is, almost all are still fairly large firms, but their dominance has diminished, our fear subsiding as our interests and spending patterns change.
In every case, consumer behaviors shifted, innovation moved in different directions, or smaller more competitive firms caught up with these firms. But in almost every case, the dominant positions they claimed were lost. I see the same thing happening with Alphabet, Facebook, Amazon, Apple and Microsoft at some point. In fact, Microsoft is no longer the dominant company it once was - it, too, was part of the group mentioned above back in the 90's as a potentially dangerous 'monopoly'. I guess being downgraded from 'monopoly' status is just as frightening as being part of a group of large firms which all compete with each other?
The idea that there is something new and different happening with these tech firms is misguided. Railroads dominated the economic scene for many decades in the 1800s, then oil companies, then car manufacturers. Each one was demonized in similar fashion. Tech offers greater opportunity than any of these firms did, as well as great potential for abuse. But you take the good with the bad, and the good usually outweighs the bad in an overwhelming fashion. I'll take my chances with these firms as opposed to any government oversight and regulation, thank you. Their fear and dislike of each other will keep them on a far more even keel than any pinhead politician.
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There is one thing, a very significant thing that is different about these tech firms vs all the other examples. Their value has skyrocketed but yet they have little to nothing of any real value to them. If IBM, AT&T or Exxon went bankrupt tomorrow and you began selling off their assets you would have a fortune from the sale; you could probably bail them out of bankruptcy by selling their physical assets. If Google went bankrupt tomorrow and you sold everything they have of value it would equal a millionth of it's current stock value. With the next sea change in technology internet related high tech companies could experience what Kodak did with the introduction of digital photography.
Those companies may be diminishing or dying, but with their size and impact, they have a significant legacy. Not a good one. They enrich a few amd foist marginally improved products on a foolish public (wrongly insisting on the "latest new thing") and force the practical obsolesence of their recent products. They have no values or morality beyond technology and money. Their employees, other than the exhaulted few at the top, are simply cost centers (not people) to be reduced or eliminated when and where possible. And customers, the ultimate source of all their riches, are to be treated largely with the lowest possible level of customer support (websites that permit only preselected questions to be asked and answered, long wait times for a representative with limited ability to deviate from a company benifiting script for example) to minimize loss of recurring sales.
In short, much, certainly not all, corporate America is chasing current revenues at the expense of corporate longetivity, their employees, and their customers. And, sadly, they seem proud of it.
Google, if it shuttered, has a price to book ratio of 4, which is actually pretty good. By comparison, Exxon is 2, Microsoft is 7, GE is 3.4, Oracle 3.3, Facebook 7, Apple 5, but Amazon is....20!
So only Amazon (which reinvests heavily in R&D to reduce costs and provide value) isn't in as good shape as a standard corporation.
Financial corporations tend to have better price to book ratios, for obvious reasons. Bank of America and Citibank are lower than 1 (as you would hope), while Wells Fargo is 1.5.
GM and Ford, rather mature manufacturers, are at 1.5.
Schlumberger is at 2.5. Procter and Gamble, a large consumer goods firm is at 4, while Merck, a large Pharma, is also around 4.
So I don't think most of the tech firms are in any 'worse' shape than your standard large corporation. You could argue Facebook, Microsoft and certainly Amazon are in less than beneficial shape. Apple was, at one time, famous for having more cash in the bank than the company was valued at (a point in time at which I purchased its stock, and wish I'd held til today).
As for their legacy, I'm not sure it's a bad one. They enrich all who purchase and use their products. If you purchase and don't use their products, that's your fault and your lack of enrichment. I know my iPhone has more than paid me back in its usefulness. I've used it to increase my productivity, lower my costs, and entertain myself. The same is true with Microsoft Windows.
I'd argue Amazon has also enriched me. I saved tremendous time and money by buying almost exclusively online this year. I think people believe that just because they send their money to a company, that company is somehow "taking" from them. That's incorrect. You are exchanging a slip of paper, or an electronic credit of some kind for a product or service which you need or desire. It is a win-win exchange, and if you make that exchange wisely, you may even consider it a bigger win for yourself.
I won't disagree that they are constantly upgrading and making old products and software obsolescent. But when HASN'T that happened? When I bought my first car in 1987, it was worth half what I paid when I drove it off the lot, and by 1990, I was jealous of the newest models which I couldn't touch because I needed to milk at least 5 more years out of my 3 year old beauty. I don't see how tech companies are any different.
Too often, as consumers, we fail to see the forest for the trees. We see our money leaving our pocket and think "I needed that money, but now that company has it, they are SO GREEDY." But that's not what happens, usually, is it?
We also tend to see different industries and think there are different rules to them. There aren't really. Tech is slightly different, because software (technically) doesn't "get old" the way a manufactured car does. But it does get upgraded and improved. Which is basically the same thing. Software firms work on a concept of "increasing returns to scale" - meaning you write the code, and you can keep selling the hell out of it without having to increase your productivity. HOWEVER, if you don't provide upgrades, your competition will make a better product, swoop in, and take over your market. So while your initial software has increasing returns, you have to start working on its upgrades almost immediately - and that's where it becomes a version of manufacturing's "decreasing returns." It doesn't look exactly the same, so people get confused.
The idea that corporate America is chasing revenue at the expense of longevity, employees and customers? I don't know. I'd say that's very much an "it depends" statement. Broadly speaking, very few firms have cared much about their rank and file employees over the years. That's changing for the better in recent years. But it's marginal improvement.
They've never much cared for corporate longevity (except maybe in a few cases like Wells Fargo, GE or IBM) - but I'd argue if they didn't care about their customers, they'd ALL be out of business. There's too much choice to not care.
By way of example, I recently purchased a new Dyson vacuum. My old one died. My old one was GREAT - best vacuum I'd ever had. Sturdy, strong, easy to break apart and clean, etc. The new one? Expensive and horrible. Lousy product. So I wrote to them (I always write if I have something good OR bad to say to a firm) and I got a horrible response back. So, basically, I'm done with Dyson. I will never buy their products again. And that is how you go out of business.
THis is not an issue with the companies, or with the tech. The problem is with the founders/owners who are attempting to leverage their companies into political relevance. I think all corporations try in some way to foil competitors, but the latest group has approached this as a way of life - eg the agreement among the techs not to poach each others employees and to seek to use the power of the state to gain contract slaves who can be abused with the blessing of government.
Facebook will fall out of favor (to some extent already has with the younger set - now the province of old folks trying to maintain ties with the grandchildren). This sort of rotation is normal, but currently taking place at a faster pace than usual. See Kondratief curves for additional info.
Agree with this 100%, though I'd argue it's mixture of politicians seeking to insert themselves into technology for their own power management purposes (see the whole "Fake News" brouhaha, which is really nothing but politicians seeking a means to censor stories they don't like), rather than companies seeking rents by gaining political favor. Rent-seeking is always a corporate goal (that's why there are so many lobbyists), but it's never really benefited them in the tech world because it moves too fast.
Agreed on Facebook and similar technology. My sons no longer use Facebook at all. They have shifted to SnapChat, and that's about it, when it comes to social media. Facebook, Twitter and all those sites will always have a 'place' - it's just not going to be as dominant as it is/was.