Brian Hamilton, co-founder of Sageworks, writes at USA Today:
The arrogance of the tech world (I’m in it) is that we believe we are immune from the basic laws of economics. We are physicists who have created our own world in which we jump off a building and expect not to fall or, if we do fall, we expect someone else to catch us. Moreover, we are enabled by others (like bankers) who ought to know better that we are not worth more simply because we are tech people or “cloud people” or people who wear Steve Jobs smart-guy glasses.
I have never heard a good argument as to why tech companies should be valued more than, say, a dry cleaner or a construction company.
I’ll offer him one. Tech companies are unlikely to see the expense side of their ledgers grow directly with their revenues. The real question is whether they have any prospects for revenues.
And those are precisely the reasons that as a society we shouldn’t be as interested in tech companies as we are. By concentrating wealth they aggravate our problems.
Very sensible. Isn’t the counterargument that for Snapchat (unlike dry cleaning) there exists an untapped market for mobile apps in Africa and elsewhere?
Also apps are standardized uniform objects. They’re formulaic. They’re like Warhol’s Coke–the president, Liz Taylor and a bum are all drinking the same thing. Small businesses are the exact opposite. You don’t know what you are getting.
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There probably is some but I’m not sure how big it is and a lot depends on the definition of the word “market”.
The way a market is usually defined is by the willingness to pay. “Willingness to pay” is a term of art and it means a lot more than just whether you’d like something or not. Here’s an example.
There are probably a lot of people who would like to own a $100 million mansion in Beverley Hills but that’s not the market. The market is defined by:
– the people who would like to own it
– within that group the people who have $100 million to spend on it
– within that group the people who are able to spend $100 million on a house
– within that group the people who are willing to spend $100 million on it
That’s a pretty rarified market. Probably not more than a couple of hundred people worldwide. Maybe fewer.
I’m convinced that most of Apple’s profit comes from replacement earbuds. In our family of four we burn through probably a dozen pairs a year @ $30. $360 annually. The new wireless earbuds are twice as easy to lose and cost twice as much, so if we switch to the iPhone 7 we’ll quadruple our accessory cost.
The thing is, though, that had you bought into Apple’s IPO you’d be very happy with your ROI of 31,590.90%. A three grand investment in Amazon would now be worth a million today. I doubt many dry cleaners see those kinds of return. Had you invested equal amounts in the IPOs of Groupon, Pets.com, Twitter, My Space and Amazon, you’d have come out way, way ahead. You wouldn’t even remember those earlier losses.
It’s the difference between playing a color on roulette (slightly less than 50/50 odds because of zero and double zero) versus playing a number, which has a 35 to 1 pay-out but only a 1 in 37 chance of winning. Some folks gamble, some don’t. If you’ve got money you may not find it fun to play the nickel slots.
Correction: A 1 in 38 chance on a number, if you’re playing American roulette.
I read that Warren buffet’s Berkshire Hathaway has increased investment in Apple in a big way, not because he has changed his mind, but because he has delegated to others, recently.