Bloody TECH GIANTS... all they do is WASTE investors' MONEY The idea that the tech giants are simply going to waste the pots of cash with which they have been entrusted is certainly counter-intuitive, but it wouldn't surprise me at all if they did. For that's pretty much the fate of all investment: to be wasted. It's an odd claim, because there do appear to be successful examples of …
"In a business sense it's an ad business and nothing else, with the structure of the firm meaning that the revenues from that part of it essentially go into a play fund for engineers."
From that perspective Microsoft makes an Office suite, some keyboards and a console. Perhaps the word "Android" escaped your memory Mr Worstall?
Tech business engages in speculative R&D in the hope that some lines of exploration will bear fruit. The richer they are, the bluer the skies they can explore. It's seen in other sectors too: think big pharma or oil exploration, for instance.
At least those of us who invest in VC benefit from some juicy tax breaks. I'd far rather lose my money in innovation than see it misused by our government.
When you try to rationalize everything into economic terms it is when you realize that economics can't model everything about life. Yes, it does not make business sense for entepreneurs to try things that are mostly going to fail. Some of the most rational and experienced actors in the scheme know beforehand that 4 out of 5 will fail. Most of the ones involved in the doomed 4 really think that they can success, change the world and become rich in the process, when they really won't.
The critical fact is, there is no one on earth that can reliable predict which one out of the 5 will succeed and which 4 will fail. If such a genius existed, the world would be already ruled by him/her without resorting to force, cheating or deception. Which are the current ways of ruling the world, not by outsmarting and fair competition.
How about introducing into the model something like "we're all human, not at all rational and sometimes we do things because we either can, want, or can't do them"?
"The critical fact is, there is no one on earth that can reliable predict which one out of the 5 will succeed and which 4 will fail. "
That's not the way it works. It's more about risk assessment - how much are we investing, what do we think we are likely to get from it, and best/worst case estimates. Quentin Tarantino makes a lot more films than Terry Gilliam because Quentin Tarantino generally has hits and Terry Gilliam doesn't. You might lose your shirt on the next QT film, and Gilliam might make another Time Bandits, but the information you have is that QT is probably a better place to put your money.
".... but the information you have is that QT is probably a better place to put your money."
They key word in your argument is "probably" You can make as many estimations and risk analysis as you want, but fact is, you won't know for sure for each individual movie until it is actually released. And you'll always have one-hit wonders and the opposite, solid performers that from time to time make a bad movie.
The macroeconomic view of things does work on the aggregate, but fails on the small scale. And the crux of the problem is that all market changing shifts, by definition, start with some small player moving in some direction that everyone else thinks it is a waste of time and/or money. Be it personal computers, fancy music players, smartphones, search engines, microprocessor, integrated circuits or whatever else.
Once the first success happens, the rest of the sheep -no offense intended- follow after they have the historical evidence that something works. That is the point where you can make all the risk assesments and estimations because you have historical data and trends.
But note that at that point the return on these investiments is exponentially smaller. So at the end it is the classic equation: more uncertainity gives a higher likelyhood of failure, but better returns if it succeeds. "Safe" bets give small returns in exchange for higher confidence. But in real life there is no way of telling how something is 100% "safe" or "risky"
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Not sure if "all they do is waste investors' money" is an accurate characterisation for the tech giants.
For small start-ups is holds true that most will fail, and waste their investors' money, while the one-in-10 hit is the reason why investors / VCs still pour money into companies that are most likely doomed to fail. But in the case of for example Google, it's 1 company funding many projects, so while most projects will fail, the net cash position of the company will improve thanks to the 1 thing that IS a hit.
One other thing is that while an independent business can go bankrupt because it's product weren't what consumers liked/would pay for, they might still have had some interesting technology that might be wasted, or will at lest take some time to be 'recycled' and reused in a more profitable application. With a bigger company, any useful technology developed can be much more quickly applied to more profitable areas, whether the original application was profitable or not.
And that is exactly why Google etc sit on giant piles of cash.
Galileo was funded by patronage of the rulers of Florence. We don't know who paid Archimedes, probably the Tyrant of Syracuse. The idea that large amounts of money get spent to make interesting things happen is echoed in nature, where bower birds create decorative nests and deer grow enormous antlers to broadcast "look at me, I have lots of resources that I can simply waste."
Well, waste is the wrong word because there is no concept of waste in nature. Stars simply pump out energy while converting elements into heavier ones, quite pointlessly, and the energy will ultimately degrade into background heat regardless of whether it goes to make mobile phones or boil some carbon dioxide on Mars.
Carry on folks. There is no cosmic plan, you aren't part of it, so you might just as well do whatever makes you feel happy. Buffett's observation applies; the human world is better for railways, radio, steam ships, aircraft, the Internet and mobile phones. Even Nepalese goat herders and Indonesian fishermen benefit from mobile phones and, in the latter case, the Diesel engine. The original funders may have lost money but few of them would have lost all of it owing to the wonders of the Stock Market.
Buy a Blackberry Passport - they run most Android apps without issue these days.
Some older Android phones with QWERTY:
http://thedroidguy.com/2014/03/top-7-android-smartphones-physical-qwerty-keyboards-87556
Some Blutooth keyboards for Android Phones:
http://www.geeknaut.com/bluetooth-android-keyboards-07192518.html
If you don't see what you want - and you are that confident that other people will want it too - there is Kickstarter.com
It is the central bankers who are making the wasteful decisions for everyone, including large tech companies like Apple. What has happened is that the central banksters have kept interest rates so low that there is no place to park your money of you have serious quantities of it. Apple is investing in automobile manufacturing because it thinks it wil get a better return from that than it will from the pitiable interest it can get from the bonds issued by the various governments. The stock market is volatile because the p/e ratios are are so high that they don't make good sense. Real estate is, as always, both iffy and spotty. Where else can anyone put significant sums of money?
To earn a return you are obliged to gamble, thanks to the artificially low interest rates that are now curent.
And central banks are keeping interest rates low to let existing debt devalue, allowing everyone who ended up with overvalued assets (predominately houses - either those with mortgages or the banks that ended up with houses through defaults) to let the debts devalue and be repaid or written off when they are at a level that doesn't cause major knock-on effects.
Sure, it hurts those who are saving, but the alternatives aren't necessarilly any better for those with savings as letting the banks fail would take out some of those with savings as collateral damage.
Billy Catringer,
You do realise that it isn't just Central Banks that set interest rates. Sure they have a base rate that's conveniently used as a benchmark. But you can be sure that if there were safe high return investments out there, then money would be pouring into them.
Low interest rates are in fact the cause of the crash, not its symptom.
It was over-saving in the boom that caused interest rates to be so low, when they needed to be higher to stop the asset bubbles and over-consumption. This was by China (trying to boost exports by keeping its currency down), by Russia and OPEC (saving for a rainy day), by other far Eastern nations (saving and protecting their currencies from China) and by large companies (partly as part of international tax-avoidance, partly for other reasons). All this cash sloshed around the world, desperately looking for returns. It forced down global interest rates, and meant it was cheaper to invest in stupid things, like huge property portfolios.
That all went pop in the bust, but the savings were still there. China was still supressing internal demand, and exporting capital. The oil price was still high, so the oil exporters were still living high on the hog (and saving away happily). This is now reversing a bit, as with the oil price collapse they're now spending their savings - so taking some of that capital back.
But the global savings rate is still incredibly high, hence low interest rates. That's why Germany today was able to sell 5 years Bunds at negative interest rates. There's loads of savings out there, but the people with them can't find anywhere safe to put them. So they're willing to pay the German government to look after their cash for 5 years.
In microcosom this is what has caused the Euro crisis too. Too many exports from countries like Germany and Holland. They then had all this cash, but weren't willing to spend it on imports. So instead they invested it in Spain and Greece. Rather badly as happened. Whereas the interest rates were fine for Germany, growing slowly in the mid 2000s, real rates were actually negative in Spain and Ireland (who were growing much faster). Their inflation rate was higher than the rate German banks were willing to lend to them at. Which of course whacked up inflation, and caused the bubble.
Globalisation (and the way people have responded to it) has caused the financial imbalances that made the boom so huge, and therefore the recession so bad. Hopefully we can correct this, without losing the huge poverty reduction that globalisation has caused. But it seems built into the Eurozone design, which suggests that however good their Central Bank is, the euro is still doomed.
Google's search operation is entirely driven by advertising revenue, full stop. The fact that we all get a stupendous search service "for free" is a fringe benefit.
I was talking to one of their research guys recently about ultra-high-speed networking (400Gb/s) inside and between their data centres and why it was needed if the net result was to return search results an unnoticeable fraction of a second faster.
He said it wasn't the data results for users they needed to return faster, it was the ads which appear as a result of the searches, because they charge advertisers according to these delays, so reducing the delays means more money for Google. The fact we might get fractionally faster searches is completely incidental...
Refer to title for the new model tech investors need to follow, if they can keep up.
Examples of such behavior:
- Create a thousand free G-products and hope that one sticks. Dump them quickly when they don't.
- Write 60 losing apps until you create an Angry Birds and hit the jackpot.
- Find a tired, over regulated industry like taxi transport and hotellery with expensive start up costs and barriers to entry. Create a mobile app like Uber or AirBnB to leverage peoples' under-used private resources and compete on the newly levelled playing field.
Build a platform where everyone supplies free content and you charge for the advertising.
Ker-ching!
Traditional large OEMs and IT business models will have trouble thriving in this new environment unless they change too. The current strategy for them seems to become smaller and divest.
The thing to be noticed here is not how badly people bet on tech investments. People always bet badly on tech investments, it just took longer to separate the dogs from the winners. Probably because things were slower back then, as were the economic/business models, development methods and CEOs.
I am old enough to remember when it used to be very, very expensive to write monolithic apps and create compute systems that sold for gazillions.
Much easier to hire a zero-hour web developer, some java programmers and rent a bit of CPU, RAM and disk space on Azure. Then become a startup software company and try out your idea(s).
If you are lucky, smart and time it correctly, you might even get rich!
As in "at the margin"
What else are they going to do with their money, put in a post office savings account and borrow it back? Invest in each others' shares and profit from each others' growth. If anyone can see how this works they've probably got a patent on a perpetual motion machine too.
Speculative R&D is an essential part of a portfolio investment strategy. They've got to stop it all becoming a zero sum game by finding new areas of economic activity from which they find new sources of return on capital.
It's not difficult.
Yes, no doubt they could give it all to developing countries and no doubt all of it would be usefully and efficiently deployed on schools hospitals, clean water and sewage systems (and none of it would end up Swiss bank accounts and other syphoning activties)
However in the real world, villages in Africa are getting all this stuff through earlier examples of speculative R&D, e.g., mobile phones, solar power and, earlier, bicycles
Well the tech companies could give their excess cash back to their shareholders. Who own it. Certainly Apple should do, as they've got far more cash than they could possibly need. Unless they're planning on buying Google anyway...
Admittedly there are tax issues with that, but it's the idea. Company sell shares to get cash. Company make loadsa' money. Company pay big fat dividends. Yippee!
Now Google have got a reason to lots of lovely R&D. Probably not as much as they actually do - as I suspect that Tim W is right, and the founders have basically created a playground for engineers.
But it would be interesting to know when (if?) they broke even on Android. I doubt they've made huge amounts from it, certainly compared the to the billions they've poured into it. But on the other hand, it's contributed hugely to local search, mapping and all the other things that Google can sell adverts on.
Things like Google+ are pretty cheap, so trying lots of those is probably pretty low cost.
I'm not sure I buy the idea of them moving out of their comfort zone of data gathering/organising in order to target ads though. Google Glass fits nicely with the phone business, and makes sense. But I struggle to imagine them being able to suddenly become a car company. I don't think they can do what they did to the mobile industry with cars. Partly because the timescales are just so much longer. But on the other hand, they may be building some very useful machine-learning technology doing it, and as they've got such huge amounts of data to deal with, they may not care about the car bit anyway.
In the end, we pay for it.
That money has to come from somewhere, and that is from the end user / customer. Either directly (subscriptions to services or buying something outright) or through advertising. The more a product is advertised, the more expensive it will be, in order to recoup those marketing dollars.
Which means that we pay for it. Whether that money then goes into the founders pockets, the investors pockets, the company's bank balance or it is frittered away on "stuff" is irrelevant, we've already paid.
So, no, we don't get the stuff for free.
Agreed It's a method whereby large chunks of company profits return to the economy in a nice scatter-gun approach instead of sitting somewhere doing very little. R&D staff jobs,wages spent, money paid for equipment etc etc. It's all one big merry-go-round.
First do no harm. Killing a girl in a crosswalk is not a "cool thing". Creepy, bleepy aspies walking around taking ubiquitous film footage of the people around them is not a "cool thing". I don't agree with the framing of this piece in terms of the tech giants and the investors, two crowds of rich people. Other people, like workers and bystanders in the big cities where the speculative pilot projects are run, can suffer. It's time that we started making formulations about how the VC world operates that incorporates their callous indifference to human costs that happen two or three hops downstream. I might blame Muazzafar for Sofia Liu's death, I might even say Kalanick is responsible, but these two layers of people are a buffer against taking the complicity up to the VC's doorstep (in the Menlo hills, placid and calm,) where it belongs. Kalanick and his legal department get to play games with plausible deniability, but nobody plays games with plausible deniability better than the VC.
You ought to incorporate these harms into the chess board you describe where "the consumer gets cool stuff cheap or free." Not always - sometimes they get run over or assaulted.
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