Is Simply About Other Tech Bust Coming?
March 07, 2019
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The technology scientific discipline sector (referring to online services, together with to a lesser extent, SaaS, which is somewhat different inward the B2B space) has been 1 of the strongest stock marketplace performers over the yesteryear decade. Growth rates inward users together with top-line have got been incredible, but with a relatively modest handful of exceptions (Facebook, Google, Tencent, Alibaba, Expedia & Priceline, together with a few others), profitability has been vanishingly rare. However, managers with heavy technology scientific discipline exposure - either inward the listed or unlisted infinite - have got nevertheless made a tonne of mark-to-market/capital-raising-valuation profits, as valuations have got escalated amongst galloping go yesteryear line together with user growth.
The received wisdom at introduce is that the lack of profitability reflects heightened investment inward growth together with client acquisition, together with that as these businesses scale, profitability volition eventually mushroom upwards as they did at the likes of Facebook, an inward some cases that may good testify to live the instance (see my postal service on Spotify). However, that this volition come about inward full general is silent an article of faith, together with as I promise to fence inward this article, I believe at that topographic point is a practiced peril those cases volition testify to live much rarer than is currently believed, together with that it is at to the lowest degree as probable that losses genuinely significantly increase in coming years, together with meaning valuation (and economic) carnage after ensues. Indeed, I'm convinced it's possible nosotros could consider a tech bust on par with the 2000 dot.com fallout, as the 2 booms, together with potentially the coming bust, have got a lot of dynamics inward common.
The dot.com bust revealed to investors that piece technology scientific discipline tin dismiss (and has) change(d) society, it doesn't alter the laws of economic science together with line of piece of occupation organisation profitability, or how companies are ultimately valued. From an aggregate manufacture standpoint, the bird of profitability volition - similar whatsoever manufacture - live ultimately determined yesteryear the residue of need together with supply, with some necessary adjustments made for the existence of genuine network effects together with other sources of client lock-in/pricing power, which I believe are probable to testify much rarer than is currently believed.
The yesteryear decade has seen a mushrooming inward need for online services, driven yesteryear the advent of the affordable smartphone (note that inward this post, I'm focusing primarily on B2C, including social media, video streaming, online gaming, online word similar Buzzfeed, e-commerce, together with other B2C services similar locomote booking, ride hailing, nutrient delivery, etc, rather than B2B SaaS, where the dynamics are somewhat different). Unlike the 1995-2007 period, where consumption of online services/media was constrained yesteryear the amount of screen-time people were able to pass inward front end of their PCs, the advent of the smartphone - coupled with increasingly fast together with affordable wireless information networks/services - has directly topographic point a modest figurer enshroud within the pocket of the bulk of human beings on the planet.
This has been transformational on the need side. The full need equation is determined yesteryear the aggregate number of 'eyeball hours', coupled with people's incomes/purchasing power. While consumer purchasing powerfulness has grown relatively slowly, smartphones together with wireless networks have got exploded the amount of available eyeball-hours, yesteryear expanding non only the puddle of connected customers to the bulk of the world, but too the number of available hours people tin dismiss pass interacting with online media/services.
Unlike inward the pre-smartphone era, people tin dismiss directly swallow online media/services piece commuting, waiting inward line at the charabanc halt or inward a store, walking around at the mall, or sitting at their desks at work. All they have got to do is clit their mini figurer screens out of their pockets/bags together with teach online. Furthermore, the addictive nature of many online platforms (notably social media) has too kept people glued to their screens to the maximum extent possible. In combination, these factors have got propelled the eyeball-hours demand-side upward the steep department of the 'S' curve.
However, the whole online/mobile services eco-system is virtually to run into a serious problem: at that topographic point is a finite global population base, together with at that topographic point are only 24 hours inward a day, together with so the amount of humanity's collective eyeball-hours available to tap is too as finite, together with is chop-chop becoming saturated. When this saturation betoken it hit, manufacture growth inward online services/media is going to decease much to a greater extent than zero-sum/cannibalistic, together with morph into a marketplace part struggle for our finite attention.
Netflix CEO Reed Hastings latterly noted that 1 of his biggest competitors is the hitting online game Fortnite, together with he is absolutely right. Hastings recognises that at that topographic point are a finite number of eyeball-hours upward for grabs, together with so whatsoever beginning of online media/entertainment that absorbs a bunch of eyeball-hours is necessarily a competitive threat to all other sources of online media. When manufacture eyeball-hour saturation is reached, the success of 1 platform/service is going to have got to come upward at the expense of other platforms/services, rather than via expanding into what was previously a void of underutilised attending (e.g. instead of sitting around the aerodrome with nada to do waiting for a flight, or queuing at the bank, people tin dismiss directly interact with their phones, etc).
The yesteryear decade has been the golden era of the demand-side of the equation, which is chop-chop drawing to a close, together with yet, most online services companies are silent non making much coin (if any). Why is that? Because provide has grown as fast as demand. The exciting growth narrative has drawn a overflowing of majuscule into the industry, from the VC/privately funded tech start-up infinite to Softbank's Vision Fund, to directly too the reinvested cashflows of the modest puddle of giant, highly profitable tech platforms such as Tencent, Baidu, Alibaba, etc. Baidu for instance has funded numerous loss-making businesses over the yesteryear 5 years that have got consumed most of the cash flow its highly-profitable search engine line of piece of occupation organisation has been generating. iQiyi is an example, which piece growing fast, has negative operating margins of nearly -50%, as it fights for marketplace part with Tencent's loss-making streaming service.
Valuations have got nevertheless mushroomed because, much similar inward the late-1990s dot.com bubble, investors are focusing on growth inward active users together with revenues, rather than profitability. Much similar inward the dot.com bubble, multiples of revenue or eyeballs (today, rebranded as 'active users') are existence used, based on faith that as scale is acquired, profitability volition inevitably follow, amongst rise economies of scale. But the laws of economic science together with need & provide - non to cite the dot.com bubble precedent - would warn against making such an automatic supposition of hereafter prosperity.
What is just as probable to occur - if non to a greater extent than together with so - is that rather than profits inflecting upwards, losses genuinely deepen as demand-side attending saturation beckons, together with tech companies starting fourth dimension fighting with each over a finite puddle of eyeball-hours for marketplace share, triggering a massive manufacture fallout together with (eventual) consolidation cycle. As the demand-side moves towards the shallow, right-hand department of the southward curve, piece provide growth continues at its one-time exponential pace, the struggle for users together with eyeballs is only going to intensify, together with aggregate manufacture operating losses are apt to mount.
It is telling indeed that after a decade of hyper-growth inward demand, profits are silent as rare as they are. It stands as a testament to how effective complimentary markets are at stimulating provide to run across growing need (especially inward release majuscule marketplace conditions) together with crushing profits, where sufficient switching costs, network effects, together with other sources of client lock-in capable of thwarting such an outcome are absent. And it raises the enquiry - if these companies haven't been able to build coin during the yesteryear golden-era decade of need growth, what promise is at that topographic point for them inward an surroundings of need saturation which sees aggregate manufacture need radically decelerate?
One matter investors have got forgotten of belatedly - as they did inward the belatedly 1990s - is that the switching costs for consumers of (most) online services is relatively low. E-commerce has removed many of the frictions associated with fourth dimension together with infinite that be inward the existent world, together with this is what has enabled the platforms to grow together with so rapidly, together with capture part off old-world industries. However, this lack of friction cuts both ways. With some of import exceptions, the lack of these frictions way that it is too rattling like shooting fish in a barrel for customers to shift to alternative platforms/apps/services. It takes just a few minutes, for instance, to download together with ready a novel nutrient delivery app.
In the 'real world', frictions exist. In traditional bricks together with mortar retail, for instance, at that topographic point is a existent fourth dimension cost for customers associated with shopping around. If you lot consider an item you lot similar inward the store, you're aware you lot powerfulness live able to uncovering it cheaper elsewhere, but you lot don't necessarily know where to uncovering it, nor have got the fourth dimension or inclination to store around to salve $5-10. These frictions have got been a beginning of turn a profit chance for incumbents, together with fifty-fifty today, B&M retail is vastly more profitable than e-commerce. However, such frictions don't be inward the online world. It is like shooting fish in a barrel for customers to compare prices online together with simply select the cheapest option. One powerfulness purpose Uber for years, but alter to Lyft or another service as shortly as a friend tells you, "use XYZ, it's cheaper".
In addition, client acquisition is to a greater extent than commoditised inward the online space. Anyone tin dismiss pay Google for traffic, or pay Facebook for ads on a click-through basis. There is less do goodness to incumbency, because client acquisition/marketing costs decease variable, on a per-customer basis. This way a lot of the potential turn a profit puddle is competed away inward high client acquisition costs - if you lot tin dismiss build $5 per client on a mobile game, it makes feel to pay non only $1 to Facebook per app download, but too $2, $3, $4, together with fifty-fifty $4.99. The turn a profit puddle tin dismiss so live easily competed away inward the degree of escalating CACs as the provide of available apps/services continues to grow.
These are the existent reasons why profits are together with so rare, despite rattling rapid growth: it's non a lack of scale; it's because these are lousy businesses, with express differentiation or pricing powerfulness - what would traditionally live described as 'commodity businesses'. I don't purchase the argument, for instance, that JD.com, at US$56bn inward revenues, silent has non achieved economical scale (JD silent loses money). Nonsense. US$56bn already makes it 1 of the biggest businesses inward the world. The truth is, it doesn't build whatsoever coin because it's a lousy line of piece of occupation organisation - if it was a practiced line of piece of occupation organisation it would already live making a lot of money. There is a lot of competition, together with express differentiation, with niggling to no frictions with abide by to cost comparisons. When purchasing goods online, customers demonstrate express build loyalty together with just select the cheapest option, just similar they do with airline tickets, which is why airlines have got been lousy investments over the years. This is why it has only been possible to grow together with teach 'scale'/customers/volumes yesteryear offering prices together with so depression as to give away all your profits. As shortly as you lot essay to lift prices, customers decease elsewhere.
As bad as the status quo currently is for many tech companies, however, it could good live virtually to teach much worse, because the bird of competitive intensity is probable to radically intensify from here, driven yesteryear iii factors: (1) increasing eyeball-hour saturation on the need side, which results inward need transitioning from the steep department of the S-curve, towards the far correct plateau; (2) continuing exponential growth inward provide as VC funds proceed to pitiable into tech start-ups; Softbank's Vision Fund (attempts to) lift as much as US$500bn inward seed capital; together with a tape bird of tech IPOs are expected to occur this year; together with (3) old economic scheme companies/industries too race to teach online.
The latter is too a rattling meaning together with under-appreciated development. As the tech manufacture has chop-chop grown, taken marketplace part off traditional businesses, together with garnered an increasing amount of media attention, old soil companies have got started to rush to digitise their businesses together with transition their ain sales channels online as well. Traditional retail, for instance, is investing heavily into 'omni-channel' capability; traditional media companies are investing inward their ain streaming services; together with a plethora of other businesses are too setting upward online storefronts and/or payment systems.
This tendency is directly fairly widespread. I was floored to consider final week, for instance, that Gazprom Neft - the fossil oil subsidiary of the Russian gas giant Gazprom - which is regarded yesteryear investors (somewhat unfairly) to live 1 of the most inefficient together with corrupt state-backed fossil oil companies on the planet, has launched an app that allows its customers - when refueling at 1 of Gazprom Neft's stations - to pay for their gas with their smartphones, without leaving their car.
Now let's yell back virtually that for a second: Even Gazprom is adopting digital payments for its customers. Ask yourself this - how difficult is it, really, to launch all these online services/platforms/payment systems, if fifty-fifty a state-owned fossil oil fellowship inward a developing soil tin dismiss do so? And if everyone tin dismiss do it (and is doing it), the replacement cost is apparently relatively depression (just teach a few smart immature coders inward to write the software), together with why do investors yell back such easily-replicable services/software are together with so immensely valuable?
Now, granted, at that topographic point are some rattling practiced tech businesses out there, which taste genuine network effects together with other sources of customer/supplier lock inward that volition homecoming them relatively immune to these mundane competitive forces of need together with supply. But their number powerfulness live fewer than investors realise. Take the online locomote booking platforms, for instance (e.g. Priceline, Expedia, Webjet), which have got hitherto been rattling profitable - partly due to the frictions associated with getting hotel inventory (which has to live done 1 hotel at a time). Ctrip inward China (which has virtually 50% marketplace part inward China) was making 30% operating margins as latterly as 2011, but profits have got since collapsed to less than a 3rd of that amount, as a marketplace part shit struggle broke out, which resulted inward heavy discounting together with manufacture losses. Supply grew faster than need together with profitability collapsed.
The marketplace has consolidated downwards some inward the yesteryear few years, but Ctrip's profitability silent remains depressed. It is possible it recovers (and the stock is for sure priced that way), but online giants such as Alibaba are competing rattling aggressively inward this space, together with have got a structural wages inward terms of client acquisition costs. China's airlines are too launching their ain online booking services together with are attempting to disintermediate the OTAs. So at that topographic point are silent express constraints on supply, together with the reality is, customers volition select the platform offering the lowest prices, together with suppliers of hotel or airline topographic point inventory volition purpose the platforms that offering them the best prices (and lowest accept rate). It is so only possible the manufacture remains highly competitive together with relatively unprofitable indefinitely, reflecting the fact that many aspects of these platforms are niggling to a greater extent than than figurer code, that tin dismiss live easily replicated yesteryear armies of smart coders.
As need growth slows down, tech companies of all stripes - accustomed to rapid growth - are probable going to starting fourth dimension competing with each other aggressively for marketplace part - non to the lowest degree because growth has e'er been their marching beat, together with is what their investors (and stock prices) demand. And they are going to live doing together with so inward an surroundings where aggregate provide is starting to far outgrow aggregate demand. Traditional economic science would advise that it is difficult to consider how mushrooming losses are non an inevitable outcome, and this is precisely what happened inward the dot.com smash together with bust.
Markets are non probable to accept these developments well. Tech valuations are extremely elevated, together with bake inward an expectation of both continuing rapid go yesteryear line together with user growth, and sharply rise profitability as scale is built. Instead, they powerfulness teach slowing user growth/revenues (or fifty-fifty falling revenues inward some instances), together with mushrooming losses. The de-ratings are apt to live severe, together with at some betoken the narrative volition 'flip', together with investors volition starting fourth dimension to aspect at these businesses inward a rattling different light. They won't consider sexy growth stories, but instead businesses going ex-growth inward commodified industries, with extremely uncertain revenue together with earnings outlooks.
The fact that this outcome is on the horizon is in all probability 1 argue why VC funds are currently rushing to IPO their privately-funded, loss-making investees at introduce (2019 is expected to live a tape yr for tech IPOs). There is a window to monetise these loss-making businesses on the cusp of a rapid slowdown inward user/revenue growth at nosebleed valuations at present, but it is unlikely to stay opened upward for rattling long, because at some betoken investors are going to wake upward together with realise the emperor has no clothes. Investors are shortly going to realise companies similar Dropbox (IPOed final year) are probable to stay unprofitable, together with in all probability won't hold upward long term.
A tech bust could too have got a negative behaviour upon on the economic scheme - specially the USA economy. The tech smash has been positive for the economic scheme as it has acted as a way to redistribute excess savings held yesteryear sovereign wealth funds, high cyberspace worth individuals together with endowments, etc, into millennial salaries, as the majuscule raisings have got funded mushrooming Unicorn losses which have got been channeled primarily into the high incomes of 20-something coders. The largess has too flora its mode into high existent estate prices inward the Valley (amongst other things), together with this stimulus could come upward to an sudden end.
A tech bust could too damage the advertising giant Facebook (and too Google, to a lesser extent). How much of Facebook's mushrooming advertising revenue comes from loss making tech businesses desperate to teach novel customers, who have got been willing to pay through the olfactory organ for click-throughs? If advertising budgets teach curtailed, it powerfulness non only deadening Facebook's advertising growth, but fifty-fifty (gulp) sweat it to decline, amidst a backdrop of chop-chop rise costs (associated with growing platform monitoring/compliance issues). And as the eyeball-hour attending marketplace is saturated, all hereafter innovations inward online media/games/services volition have got to come upward at the expense of the eyeball-hours currently existence captured yesteryear existing incumbents. Increasingly, if people are spending to a greater extent than fourth dimension (for e.g.) playing Fortnite, they volition live spending less fourth dimension on Facebook, as the attending marketplace is laid to imminently decease a zero-sum game.
I could live wrong. Perhaps I'm old hat. I've sat almost the entire tech smash out, together with silent have got null exposure. I've for sure been incorrect to date. But it looks to me similar a demand/supply imbalance is brewing, together with investor optimism has been carried away. Time volition tell.
Comments welcome.
LT3000
The received wisdom at introduce is that the lack of profitability reflects heightened investment inward growth together with client acquisition, together with that as these businesses scale, profitability volition eventually mushroom upwards as they did at the likes of Facebook, an inward some cases that may good testify to live the instance (see my postal service on Spotify). However, that this volition come about inward full general is silent an article of faith, together with as I promise to fence inward this article, I believe at that topographic point is a practiced peril those cases volition testify to live much rarer than is currently believed, together with that it is at to the lowest degree as probable that losses genuinely significantly increase in coming years, together with meaning valuation (and economic) carnage after ensues. Indeed, I'm convinced it's possible nosotros could consider a tech bust on par with the 2000 dot.com fallout, as the 2 booms, together with potentially the coming bust, have got a lot of dynamics inward common.
The dot.com bust revealed to investors that piece technology scientific discipline tin dismiss (and has) change(d) society, it doesn't alter the laws of economic science together with line of piece of occupation organisation profitability, or how companies are ultimately valued. From an aggregate manufacture standpoint, the bird of profitability volition - similar whatsoever manufacture - live ultimately determined yesteryear the residue of need together with supply, with some necessary adjustments made for the existence of genuine network effects together with other sources of client lock-in/pricing power, which I believe are probable to testify much rarer than is currently believed.
The yesteryear decade has seen a mushrooming inward need for online services, driven yesteryear the advent of the affordable smartphone (note that inward this post, I'm focusing primarily on B2C, including social media, video streaming, online gaming, online word similar Buzzfeed, e-commerce, together with other B2C services similar locomote booking, ride hailing, nutrient delivery, etc, rather than B2B SaaS, where the dynamics are somewhat different). Unlike the 1995-2007 period, where consumption of online services/media was constrained yesteryear the amount of screen-time people were able to pass inward front end of their PCs, the advent of the smartphone - coupled with increasingly fast together with affordable wireless information networks/services - has directly topographic point a modest figurer enshroud within the pocket of the bulk of human beings on the planet.
This has been transformational on the need side. The full need equation is determined yesteryear the aggregate number of 'eyeball hours', coupled with people's incomes/purchasing power. While consumer purchasing powerfulness has grown relatively slowly, smartphones together with wireless networks have got exploded the amount of available eyeball-hours, yesteryear expanding non only the puddle of connected customers to the bulk of the world, but too the number of available hours people tin dismiss pass interacting with online media/services.
Unlike inward the pre-smartphone era, people tin dismiss directly swallow online media/services piece commuting, waiting inward line at the charabanc halt or inward a store, walking around at the mall, or sitting at their desks at work. All they have got to do is clit their mini figurer screens out of their pockets/bags together with teach online. Furthermore, the addictive nature of many online platforms (notably social media) has too kept people glued to their screens to the maximum extent possible. In combination, these factors have got propelled the eyeball-hours demand-side upward the steep department of the 'S' curve.
However, the whole online/mobile services eco-system is virtually to run into a serious problem: at that topographic point is a finite global population base, together with at that topographic point are only 24 hours inward a day, together with so the amount of humanity's collective eyeball-hours available to tap is too as finite, together with is chop-chop becoming saturated. When this saturation betoken it hit, manufacture growth inward online services/media is going to decease much to a greater extent than zero-sum/cannibalistic, together with morph into a marketplace part struggle for our finite attention.
Netflix CEO Reed Hastings latterly noted that 1 of his biggest competitors is the hitting online game Fortnite, together with he is absolutely right. Hastings recognises that at that topographic point are a finite number of eyeball-hours upward for grabs, together with so whatsoever beginning of online media/entertainment that absorbs a bunch of eyeball-hours is necessarily a competitive threat to all other sources of online media. When manufacture eyeball-hour saturation is reached, the success of 1 platform/service is going to have got to come upward at the expense of other platforms/services, rather than via expanding into what was previously a void of underutilised attending (e.g. instead of sitting around the aerodrome with nada to do waiting for a flight, or queuing at the bank, people tin dismiss directly interact with their phones, etc).
The yesteryear decade has been the golden era of the demand-side of the equation, which is chop-chop drawing to a close, together with yet, most online services companies are silent non making much coin (if any). Why is that? Because provide has grown as fast as demand. The exciting growth narrative has drawn a overflowing of majuscule into the industry, from the VC/privately funded tech start-up infinite to Softbank's Vision Fund, to directly too the reinvested cashflows of the modest puddle of giant, highly profitable tech platforms such as Tencent, Baidu, Alibaba, etc. Baidu for instance has funded numerous loss-making businesses over the yesteryear 5 years that have got consumed most of the cash flow its highly-profitable search engine line of piece of occupation organisation has been generating. iQiyi is an example, which piece growing fast, has negative operating margins of nearly -50%, as it fights for marketplace part with Tencent's loss-making streaming service.
Valuations have got nevertheless mushroomed because, much similar inward the late-1990s dot.com bubble, investors are focusing on growth inward active users together with revenues, rather than profitability. Much similar inward the dot.com bubble, multiples of revenue or eyeballs (today, rebranded as 'active users') are existence used, based on faith that as scale is acquired, profitability volition inevitably follow, amongst rise economies of scale. But the laws of economic science together with need & provide - non to cite the dot.com bubble precedent - would warn against making such an automatic supposition of hereafter prosperity.
What is just as probable to occur - if non to a greater extent than together with so - is that rather than profits inflecting upwards, losses genuinely deepen as demand-side attending saturation beckons, together with tech companies starting fourth dimension fighting with each over a finite puddle of eyeball-hours for marketplace share, triggering a massive manufacture fallout together with (eventual) consolidation cycle. As the demand-side moves towards the shallow, right-hand department of the southward curve, piece provide growth continues at its one-time exponential pace, the struggle for users together with eyeballs is only going to intensify, together with aggregate manufacture operating losses are apt to mount.
It is telling indeed that after a decade of hyper-growth inward demand, profits are silent as rare as they are. It stands as a testament to how effective complimentary markets are at stimulating provide to run across growing need (especially inward release majuscule marketplace conditions) together with crushing profits, where sufficient switching costs, network effects, together with other sources of client lock-in capable of thwarting such an outcome are absent. And it raises the enquiry - if these companies haven't been able to build coin during the yesteryear golden-era decade of need growth, what promise is at that topographic point for them inward an surroundings of need saturation which sees aggregate manufacture need radically decelerate?
One matter investors have got forgotten of belatedly - as they did inward the belatedly 1990s - is that the switching costs for consumers of (most) online services is relatively low. E-commerce has removed many of the frictions associated with fourth dimension together with infinite that be inward the existent world, together with this is what has enabled the platforms to grow together with so rapidly, together with capture part off old-world industries. However, this lack of friction cuts both ways. With some of import exceptions, the lack of these frictions way that it is too rattling like shooting fish in a barrel for customers to shift to alternative platforms/apps/services. It takes just a few minutes, for instance, to download together with ready a novel nutrient delivery app.
In the 'real world', frictions exist. In traditional bricks together with mortar retail, for instance, at that topographic point is a existent fourth dimension cost for customers associated with shopping around. If you lot consider an item you lot similar inward the store, you're aware you lot powerfulness live able to uncovering it cheaper elsewhere, but you lot don't necessarily know where to uncovering it, nor have got the fourth dimension or inclination to store around to salve $5-10. These frictions have got been a beginning of turn a profit chance for incumbents, together with fifty-fifty today, B&M retail is vastly more profitable than e-commerce. However, such frictions don't be inward the online world. It is like shooting fish in a barrel for customers to compare prices online together with simply select the cheapest option. One powerfulness purpose Uber for years, but alter to Lyft or another service as shortly as a friend tells you, "use XYZ, it's cheaper".
In addition, client acquisition is to a greater extent than commoditised inward the online space. Anyone tin dismiss pay Google for traffic, or pay Facebook for ads on a click-through basis. There is less do goodness to incumbency, because client acquisition/marketing costs decease variable, on a per-customer basis. This way a lot of the potential turn a profit puddle is competed away inward high client acquisition costs - if you lot tin dismiss build $5 per client on a mobile game, it makes feel to pay non only $1 to Facebook per app download, but too $2, $3, $4, together with fifty-fifty $4.99. The turn a profit puddle tin dismiss so live easily competed away inward the degree of escalating CACs as the provide of available apps/services continues to grow.
These are the existent reasons why profits are together with so rare, despite rattling rapid growth: it's non a lack of scale; it's because these are lousy businesses, with express differentiation or pricing powerfulness - what would traditionally live described as 'commodity businesses'. I don't purchase the argument, for instance, that JD.com, at US$56bn inward revenues, silent has non achieved economical scale (JD silent loses money). Nonsense. US$56bn already makes it 1 of the biggest businesses inward the world. The truth is, it doesn't build whatsoever coin because it's a lousy line of piece of occupation organisation - if it was a practiced line of piece of occupation organisation it would already live making a lot of money. There is a lot of competition, together with express differentiation, with niggling to no frictions with abide by to cost comparisons. When purchasing goods online, customers demonstrate express build loyalty together with just select the cheapest option, just similar they do with airline tickets, which is why airlines have got been lousy investments over the years. This is why it has only been possible to grow together with teach 'scale'/customers/volumes yesteryear offering prices together with so depression as to give away all your profits. As shortly as you lot essay to lift prices, customers decease elsewhere.
As bad as the status quo currently is for many tech companies, however, it could good live virtually to teach much worse, because the bird of competitive intensity is probable to radically intensify from here, driven yesteryear iii factors: (1) increasing eyeball-hour saturation on the need side, which results inward need transitioning from the steep department of the S-curve, towards the far correct plateau; (2) continuing exponential growth inward provide as VC funds proceed to pitiable into tech start-ups; Softbank's Vision Fund (attempts to) lift as much as US$500bn inward seed capital; together with a tape bird of tech IPOs are expected to occur this year; together with (3) old economic scheme companies/industries too race to teach online.
The latter is too a rattling meaning together with under-appreciated development. As the tech manufacture has chop-chop grown, taken marketplace part off traditional businesses, together with garnered an increasing amount of media attention, old soil companies have got started to rush to digitise their businesses together with transition their ain sales channels online as well. Traditional retail, for instance, is investing heavily into 'omni-channel' capability; traditional media companies are investing inward their ain streaming services; together with a plethora of other businesses are too setting upward online storefronts and/or payment systems.
This tendency is directly fairly widespread. I was floored to consider final week, for instance, that Gazprom Neft - the fossil oil subsidiary of the Russian gas giant Gazprom - which is regarded yesteryear investors (somewhat unfairly) to live 1 of the most inefficient together with corrupt state-backed fossil oil companies on the planet, has launched an app that allows its customers - when refueling at 1 of Gazprom Neft's stations - to pay for their gas with their smartphones, without leaving their car.
Now let's yell back virtually that for a second: Even Gazprom is adopting digital payments for its customers. Ask yourself this - how difficult is it, really, to launch all these online services/platforms/payment systems, if fifty-fifty a state-owned fossil oil fellowship inward a developing soil tin dismiss do so? And if everyone tin dismiss do it (and is doing it), the replacement cost is apparently relatively depression (just teach a few smart immature coders inward to write the software), together with why do investors yell back such easily-replicable services/software are together with so immensely valuable?
Now, granted, at that topographic point are some rattling practiced tech businesses out there, which taste genuine network effects together with other sources of customer/supplier lock inward that volition homecoming them relatively immune to these mundane competitive forces of need together with supply. But their number powerfulness live fewer than investors realise. Take the online locomote booking platforms, for instance (e.g. Priceline, Expedia, Webjet), which have got hitherto been rattling profitable - partly due to the frictions associated with getting hotel inventory (which has to live done 1 hotel at a time). Ctrip inward China (which has virtually 50% marketplace part inward China) was making 30% operating margins as latterly as 2011, but profits have got since collapsed to less than a 3rd of that amount, as a marketplace part shit struggle broke out, which resulted inward heavy discounting together with manufacture losses. Supply grew faster than need together with profitability collapsed.
The marketplace has consolidated downwards some inward the yesteryear few years, but Ctrip's profitability silent remains depressed. It is possible it recovers (and the stock is for sure priced that way), but online giants such as Alibaba are competing rattling aggressively inward this space, together with have got a structural wages inward terms of client acquisition costs. China's airlines are too launching their ain online booking services together with are attempting to disintermediate the OTAs. So at that topographic point are silent express constraints on supply, together with the reality is, customers volition select the platform offering the lowest prices, together with suppliers of hotel or airline topographic point inventory volition purpose the platforms that offering them the best prices (and lowest accept rate). It is so only possible the manufacture remains highly competitive together with relatively unprofitable indefinitely, reflecting the fact that many aspects of these platforms are niggling to a greater extent than than figurer code, that tin dismiss live easily replicated yesteryear armies of smart coders.
As need growth slows down, tech companies of all stripes - accustomed to rapid growth - are probable going to starting fourth dimension competing with each other aggressively for marketplace part - non to the lowest degree because growth has e'er been their marching beat, together with is what their investors (and stock prices) demand. And they are going to live doing together with so inward an surroundings where aggregate provide is starting to far outgrow aggregate demand. Traditional economic science would advise that it is difficult to consider how mushrooming losses are non an inevitable outcome, and this is precisely what happened inward the dot.com smash together with bust.
Markets are non probable to accept these developments well. Tech valuations are extremely elevated, together with bake inward an expectation of both continuing rapid go yesteryear line together with user growth, and sharply rise profitability as scale is built. Instead, they powerfulness teach slowing user growth/revenues (or fifty-fifty falling revenues inward some instances), together with mushrooming losses. The de-ratings are apt to live severe, together with at some betoken the narrative volition 'flip', together with investors volition starting fourth dimension to aspect at these businesses inward a rattling different light. They won't consider sexy growth stories, but instead businesses going ex-growth inward commodified industries, with extremely uncertain revenue together with earnings outlooks.
The fact that this outcome is on the horizon is in all probability 1 argue why VC funds are currently rushing to IPO their privately-funded, loss-making investees at introduce (2019 is expected to live a tape yr for tech IPOs). There is a window to monetise these loss-making businesses on the cusp of a rapid slowdown inward user/revenue growth at nosebleed valuations at present, but it is unlikely to stay opened upward for rattling long, because at some betoken investors are going to wake upward together with realise the emperor has no clothes. Investors are shortly going to realise companies similar Dropbox (IPOed final year) are probable to stay unprofitable, together with in all probability won't hold upward long term.
A tech bust could too have got a negative behaviour upon on the economic scheme - specially the USA economy. The tech smash has been positive for the economic scheme as it has acted as a way to redistribute excess savings held yesteryear sovereign wealth funds, high cyberspace worth individuals together with endowments, etc, into millennial salaries, as the majuscule raisings have got funded mushrooming Unicorn losses which have got been channeled primarily into the high incomes of 20-something coders. The largess has too flora its mode into high existent estate prices inward the Valley (amongst other things), together with this stimulus could come upward to an sudden end.
A tech bust could too damage the advertising giant Facebook (and too Google, to a lesser extent). How much of Facebook's mushrooming advertising revenue comes from loss making tech businesses desperate to teach novel customers, who have got been willing to pay through the olfactory organ for click-throughs? If advertising budgets teach curtailed, it powerfulness non only deadening Facebook's advertising growth, but fifty-fifty (gulp) sweat it to decline, amidst a backdrop of chop-chop rise costs (associated with growing platform monitoring/compliance issues). And as the eyeball-hour attending marketplace is saturated, all hereafter innovations inward online media/games/services volition have got to come upward at the expense of the eyeball-hours currently existence captured yesteryear existing incumbents. Increasingly, if people are spending to a greater extent than fourth dimension (for e.g.) playing Fortnite, they volition live spending less fourth dimension on Facebook, as the attending marketplace is laid to imminently decease a zero-sum game.
I could live wrong. Perhaps I'm old hat. I've sat almost the entire tech smash out, together with silent have got null exposure. I've for sure been incorrect to date. But it looks to me similar a demand/supply imbalance is brewing, together with investor optimism has been carried away. Time volition tell.
Comments welcome.
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