Two weak spots in Big Tech economics

I'm on a 20+ city book tour for my new novel PICKS AND SHOVELS. Catch me in AUSTIN on Mar 10. I'm also appearing at SXSW and at many events around town, for Creative Commons, Fediverse House, and EFF-Austin. More tour dates here.

Big Tech's astonishing scale is matched only by its farcical valuations – price-to-earnings ratios that consistently dwarf the capitalization of traditional hard-goods businesses. For example, Amazon's profit-to-earnings ratio is 37.65; Target's is only 13.34. That means that investors value every dollar Amazon brings in at three times the value they place on a dollar spent at Target.

The fact that Big Tech stocks trade at such a premium isn't merely of interest to tech investors, or even to the personal wealth managers who handle the assets of tech executives whose personal portfolios are full of their employers' stock options.

The high valuations of tech stocks don't just reflect an advantage over bricks and mortar firms – they are the advantage. If you're Target and you're hoping to hire someone who's just interviewed at Amazon, you have to beat Amazon's total compensation offer. But when Amazon makes that offer, they can pay some – maybe even most – of the offer in stock, rather than in cash.

This is a huge advantage! After all, to get dollars, both Amazon and Target have to convince you to spend money in their stores (or, in Amazon's case, with its cloud, or as a Prime sub, etc etc). Both Amazon and Target get their dollars from entities outside of the firm's four walls, and the dollars only come in when they convince someone else to do business with them.

But stock comes from inside the firm. Amazon makes new Amazon shares by typing zeroes into a spreadsheet. They don't have to convince you to buy anything in order to issue that new stock. That is their call, and their call alone.

Amazon can buy lots of things with stock – not just the labor of in-demand technical workers who command six-figure salaries. They can even buy whole companies using stock. So if Amazon and Target are bidding against one another for an anticompetitive acquisition of a key supplier or competitor, Amazon can beat Target's bid without having to spend the dollars its shareholders would like them to divert to dividends, stock buybacks, etc.

In other words, a company with a fantastic profit/earning ratio has its own money-printer that produces currency that can be used to buy labor and even acquire companies.

But why do investors value tech stocks so highly? In part, it's just circular reasoning: a company with a high stock price can beat its competitors because it has a high stock price, so I should buy its stock, which will drive up its stock price even further.

But there's more to this than self-fulfilling prophecy. The high price of tech stocks reflects the market's belief that these companies will continue to grow. If you think a company will be ten times bigger in two years, and it's only priced at three times as much as mature rivals that have stopped growing altogether, then that 300% stock premium is a bargain, because the company will have 1,000% growth in just a couple years. Tech companies have proven themselves, time and again, to be capable of posting incredible growth – think of how quickly Google went from a niche competitor to established search engines to the dominant player, with a 90% market share.

That kind of growth is enough to make anyone giddy, but it eventually runs up against the law of large numbers: doubling a small number is easy, doubling a large number is much, much harder. A search engine that's used by 90% of the world can't double its users – there just aren't enough people to sign up. They'd need to breed several billion new humans, raise them to maturity, and then convince them to be Google users.

Brother makes a demon-haunted printer

I'm on a 20+ city book tour for my new novel PICKS AND SHOVELS. Catch me in RICHMOND TOMORROW (Mar 5) and in AUSTIN> on Mar 10. More tour dates here. Mail-order signed copies from LA's Diesel Books.

You guys, I don't want to bum you out or anything, but I think there's a good chance than some self-described capitalists aren't really into capitalism.

Sorry.

Take incentives: Charlie Munger, capitalism's quippiest pitchman, famously said, "Show me the incentive and I’ll show you the outcome." And here's some mindblowing horseshoe theory for ya: Munger agrees with the noted Communist agitator Adam Smith, whose anti-rentier, pro-government-regulation jeremiad "The Wealth of Nations" contains this notorious passage:

Incentives matter – if you design a system that permits abuse, you should expect abuse. Now, I'm not 100% on board with this: every one of us has ways to undetectably cheat the system and enrich ourselves, but most of the time, most of us play by the rules.

But it's different for corporations: the myth of "shareholder supremacy" has reached pandemic levels among the artificial lifeforms we call corporate persons, and it's impossible to rise through the corporate ranks without repeating and believing the catechism that there is a law that requires executives to lie, cheat and steal if it results in an extra dollar for the investors, in the name of "fiduciary duty":

https://pluralistic.net/2024/09/18/falsifiability/#figleaves-not-rubrics

And this attitude has leaked out into politics and everyday life, so that many of our neighbors have been brainwashed into thinking that a successful cheat is a success in life, that pulling a fast one "makes you smart":

https://pluralistic.net/2024/12/04/its-not-a-lie/#its-a-premature-truth

In a world dominated by a belief in the moral virtue and legal necessity of ripping off anyone you can get away with cheating, then, sure, any system that permits cheating is a system in which cheating will occur.

This shouldn't be controversial, but if so, how are we to explain the whole concept of the Internet of Things? Installing networked computers into our appliances, office equipment, vehicles and homes is an invitation of mischief: the software in those computers can be remotely altered after you purchase them, taking away the features you paid for and then selling them back to you.

Now, an advocate for market-based solutions has a ready-made response to this: if a company downgrades a device you own, this merely invites another company to step in with a disenshittifying plug-in that makes things better. If the company that made your garage-door opener pushes an over-the-air update that blocks you from using an ad-free, well-designed app and forces you to use an enshittified app that forces you to look at ads before you can open the garage, well, that's an opportunity for a rival company to sell you a better software update for your garage-door opener, one that restores the lost functionality:

https://pluralistic.net/2023/11/09/lead-me-not-into-temptation/#chamberlain

I'm no hayekpilled market truefan, but I'm pretty sure that would work.

However.

The problem is that since 1998, that kind of reverse-engineering has been a felony under Section 1201 of the Digital Millennium Copyright Act, which bans bypassing "an effective access control"

https://locusmag.com/2020/09/cory-doctorow-ip/

There's a pretty obvious incentive at play when companies have the ability to unilaterally alter how their products work after you buy them and you are legally prohibited to change how the product works after you buy them. This is the first lesson of the Darth Vader MBA: "I am altering the deal. Pray I don't alter it any further":

https://pluralistic.net/2023/10/26/hit-with-a-brick/#graceful-failure

Incentives are the key.

At a fundamental level I think we suffer from psychopathic corporations because game theory, so widely adopted in economic models, can be 'gamed' by psychopathic behaviour - so it selects for psychopathy.

Incentivise 'good' behaviour - to get good behaviour. And don't expect to 'get it right' first time by any means. Karl Popper describes the incremental approach, useful iteration.

To say - It's not just about creating a policy, its also building in review and improvement in that legislation/ policy. Establishing the aim - putting measures in place- tracking impact over time - making provision to adjust measures - The OODA loop by another name

But to get these moves into the system we need collective action, collective pressure and to keep it directed at our representatives, relentlessley.

and isn't that just at the heart of everything wrong with the USA - and modern capitalism in general

Acceptable in the ‘80s: Bretonnian Knights from White Dwarf 136. 

http://realmofchaos80s.blogspot.co.uk/2015/03/acceptable-in-80s-bretonnian-knights.html

April 1991, with Michael Perry’s back cover painting and Alan Perry’s illustration on the final page. The uncredited article is a good introduction to basic heraldry rules, sufficient for painting at this scale. The twin-tailed mermaid apparently derives from an old Norse design, also the inspiration for a well-known coffee shop logo.

Nudie Ice Cubes, 1965

Security Funding in Redding, California

About my last few months.

Source details and larger version.

Vintage Native American art.

Virginia Welles, 1956

Two weak spots in Big Tech economics

I'm on a 20+ city book tour for my new novel PICKS AND SHOVELS. Catch me in AUSTIN on Mar 10. I'm also appearing at SXSW and at many events around town, for Creative Commons, Fediverse House, and EFF-Austin. More tour dates here.

Big Tech's astonishing scale is matched only by its farcical valuations – price-to-earnings ratios that consistently dwarf the capitalization of traditional hard-goods businesses. For example, Amazon's profit-to-earnings ratio is 37.65; Target's is only 13.34. That means that investors value every dollar Amazon brings in at three times the value they place on a dollar spent at Target.

The fact that Big Tech stocks trade at such a premium isn't merely of interest to tech investors, or even to the personal wealth managers who handle the assets of tech executives whose personal portfolios are full of their employers' stock options.

The high valuations of tech stocks don't just reflect an advantage over bricks and mortar firms – they are the advantage. If you're Target and you're hoping to hire someone who's just interviewed at Amazon, you have to beat Amazon's total compensation offer. But when Amazon makes that offer, they can pay some – maybe even most – of the offer in stock, rather than in cash.

This is a huge advantage! After all, to get dollars, both Amazon and Target have to convince you to spend money in their stores (or, in Amazon's case, with its cloud, or as a Prime sub, etc etc). Both Amazon and Target get their dollars from entities outside of the firm's four walls, and the dollars only come in when they convince someone else to do business with them.

But stock comes from inside the firm. Amazon makes new Amazon shares by typing zeroes into a spreadsheet. They don't have to convince you to buy anything in order to issue that new stock. That is their call, and their call alone.

Amazon can buy lots of things with stock – not just the labor of in-demand technical workers who command six-figure salaries. They can even buy whole companies using stock. So if Amazon and Target are bidding against one another for an anticompetitive acquisition of a key supplier or competitor, Amazon can beat Target's bid without having to spend the dollars its shareholders would like them to divert to dividends, stock buybacks, etc.

In other words, a company with a fantastic profit/earning ratio has its own money-printer that produces currency that can be used to buy labor and even acquire companies.

But why do investors value tech stocks so highly? In part, it's just circular reasoning: a company with a high stock price can beat its competitors because it has a high stock price, so I should buy its stock, which will drive up its stock price even further.

But there's more to this than self-fulfilling prophecy. The high price of tech stocks reflects the market's belief that these companies will continue to grow. If you think a company will be ten times bigger in two years, and it's only priced at three times as much as mature rivals that have stopped growing altogether, then that 300% stock premium is a bargain, because the company will have 1,000% growth in just a couple years. Tech companies have proven themselves, time and again, to be capable of posting incredible growth – think of how quickly Google went from a niche competitor to established search engines to the dominant player, with a 90% market share.

That kind of growth is enough to make anyone giddy, but it eventually runs up against the law of large numbers: doubling a small number is easy, doubling a large number is much, much harder. A search engine that's used by 90% of the world can't double its users – there just aren't enough people to sign up. They'd need to breed several billion new humans, raise them to maturity, and then convince them to be Google users.

Two weak spots in Big Tech economics

I'm on a 20+ city book tour for my new novel PICKS AND SHOVELS. Catch me in AUSTIN on Mar 10. I'm also appearing at SXSW and at many events around town, for Creative Commons, Fediverse House, and EFF-Austin. More tour dates here.

Big Tech's astonishing scale is matched only by its farcical valuations – price-to-earnings ratios that consistently dwarf the capitalization of traditional hard-goods businesses. For example, Amazon's profit-to-earnings ratio is 37.65; Target's is only 13.34. That means that investors value every dollar Amazon brings in at three times the value they place on a dollar spent at Target.

The fact that Big Tech stocks trade at such a premium isn't merely of interest to tech investors, or even to the personal wealth managers who handle the assets of tech executives whose personal portfolios are full of their employers' stock options.

The high valuations of tech stocks don't just reflect an advantage over bricks and mortar firms – they are the advantage. If you're Target and you're hoping to hire someone who's just interviewed at Amazon, you have to beat Amazon's total compensation offer. But when Amazon makes that offer, they can pay some – maybe even most – of the offer in stock, rather than in cash.

This is a huge advantage! After all, to get dollars, both Amazon and Target have to convince you to spend money in their stores (or, in Amazon's case, with its cloud, or as a Prime sub, etc etc). Both Amazon and Target get their dollars from entities outside of the firm's four walls, and the dollars only come in when they convince someone else to do business with them.

But stock comes from inside the firm. Amazon makes new Amazon shares by typing zeroes into a spreadsheet. They don't have to convince you to buy anything in order to issue that new stock. That is their call, and their call alone.

Amazon can buy lots of things with stock – not just the labor of in-demand technical workers who command six-figure salaries. They can even buy whole companies using stock. So if Amazon and Target are bidding against one another for an anticompetitive acquisition of a key supplier or competitor, Amazon can beat Target's bid without having to spend the dollars its shareholders would like them to divert to dividends, stock buybacks, etc.

In other words, a company with a fantastic profit/earning ratio has its own money-printer that produces currency that can be used to buy labor and even acquire companies.

But why do investors value tech stocks so highly? In part, it's just circular reasoning: a company with a high stock price can beat its competitors because it has a high stock price, so I should buy its stock, which will drive up its stock price even further.

But there's more to this than self-fulfilling prophecy. The high price of tech stocks reflects the market's belief that these companies will continue to grow. If you think a company will be ten times bigger in two years, and it's only priced at three times as much as mature rivals that have stopped growing altogether, then that 300% stock premium is a bargain, because the company will have 1,000% growth in just a couple years. Tech companies have proven themselves, time and again, to be capable of posting incredible growth – think of how quickly Google went from a niche competitor to established search engines to the dominant player, with a 90% market share.

That kind of growth is enough to make anyone giddy, but it eventually runs up against the law of large numbers: doubling a small number is easy, doubling a large number is much, much harder. A search engine that's used by 90% of the world can't double its users – there just aren't enough people to sign up. They'd need to breed several billion new humans, raise them to maturity, and then convince them to be Google users.

Two weak spots in Big Tech economics

I'm on a 20+ city book tour for my new novel PICKS AND SHOVELS. Catch me in AUSTIN on Mar 10. I'm also appearing at SXSW and at many events around town, for Creative Commons, Fediverse House, and EFF-Austin. More tour dates here.

Big Tech's astonishing scale is matched only by its farcical valuations – price-to-earnings ratios that consistently dwarf the capitalization of traditional hard-goods businesses. For example, Amazon's profit-to-earnings ratio is 37.65; Target's is only 13.34. That means that investors value every dollar Amazon brings in at three times the value they place on a dollar spent at Target.

The fact that Big Tech stocks trade at such a premium isn't merely of interest to tech investors, or even to the personal wealth managers who handle the assets of tech executives whose personal portfolios are full of their employers' stock options.

The high valuations of tech stocks don't just reflect an advantage over bricks and mortar firms – they are the advantage. If you're Target and you're hoping to hire someone who's just interviewed at Amazon, you have to beat Amazon's total compensation offer. But when Amazon makes that offer, they can pay some – maybe even most – of the offer in stock, rather than in cash.

This is a huge advantage! After all, to get dollars, both Amazon and Target have to convince you to spend money in their stores (or, in Amazon's case, with its cloud, or as a Prime sub, etc etc). Both Amazon and Target get their dollars from entities outside of the firm's four walls, and the dollars only come in when they convince someone else to do business with them.

But stock comes from inside the firm. Amazon makes new Amazon shares by typing zeroes into a spreadsheet. They don't have to convince you to buy anything in order to issue that new stock. That is their call, and their call alone.

Amazon can buy lots of things with stock – not just the labor of in-demand technical workers who command six-figure salaries. They can even buy whole companies using stock. So if Amazon and Target are bidding against one another for an anticompetitive acquisition of a key supplier or competitor, Amazon can beat Target's bid without having to spend the dollars its shareholders would like them to divert to dividends, stock buybacks, etc.

In other words, a company with a fantastic profit/earning ratio has its own money-printer that produces currency that can be used to buy labor and even acquire companies.

But why do investors value tech stocks so highly? In part, it's just circular reasoning: a company with a high stock price can beat its competitors because it has a high stock price, so I should buy its stock, which will drive up its stock price even further.

But there's more to this than self-fulfilling prophecy. The high price of tech stocks reflects the market's belief that these companies will continue to grow. If you think a company will be ten times bigger in two years, and it's only priced at three times as much as mature rivals that have stopped growing altogether, then that 300% stock premium is a bargain, because the company will have 1,000% growth in just a couple years. Tech companies have proven themselves, time and again, to be capable of posting incredible growth – think of how quickly Google went from a niche competitor to established search engines to the dominant player, with a 90% market share.

That kind of growth is enough to make anyone giddy, but it eventually runs up against the law of large numbers: doubling a small number is easy, doubling a large number is much, much harder. A search engine that's used by 90% of the world can't double its users – there just aren't enough people to sign up. They'd need to breed several billion new humans, raise them to maturity, and then convince them to be Google users.

Andrey Sokolov

Baldegg Convent (1968-72) in Hochdorf, Switzerland, by Marcel Breuer, Robert F. Gatje & Beat Jordi