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By | Tim Worstall 25th February 2015 07:04

Bloody TECH GIANTS... all they do is WASTE investors' MONEY

... and thank heavens they do

Worstall on Wednesday 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 capital investment – that's how the giants got their cash piles in the first place. But there's a good argument to be made that the real reason for capitalism's success is that capital just doesn't do well out of it.

The claim about the tech giants can be found here:

Yet the reality is completely different – and far more interesting. What is actually happening is that the tech giants have started blowing money on an epic scale. From challenging the car industry, to virtual reality glasses and watches that double up as computers, or TV series that don’t even have a script, the tech barons have embarked on a colossal spending spree from which the returns are likely to be meagre.

For consumers, that’s great. We’ll get a lot of cool new stuff paid for by the likes of Sergey Brin, Jeff Bezos and Mark Zuckerberg. Much of it will even be free. But for shareholders, and the founders themselves, that will be terrible – and it may well end up costing them their dominance of the industry.

I'm ambivalent at best about claims surrounding Apple's automotive aspirations, but the one point that really does make sense to me is that they don't need to buy Tesla. Even including the Gigafactory, that company has cost about $7bn to develop. Sure, that's real money, but it's the sort of sum Apple could handle without blinking.

The point is also made that Google is “investing” $10bn a year in R&D and doesn't really have all that much to show for it. But then we almost certainly shouldn't really be thinking of Google as an economic entity anyway. 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. To the people who actually control the company, that's the point – to have a vast pot of money for engineers to use for cool things. That's not a normal economic motivation.

However, there's something a little deeper here, too. You may or may not know of Warren Buffett's little folksy point, where he suggests that commercial aerospace has never, collectively, shown a profit. It has obviously massively improved all of our lives, but collectively it is highly likely that the investors in all of the various businesses have never actually made any money.

Having made such an extraordinary claim, I must immediately begin backing away from it and qualifying it. I am referring to entrepreneurial capitalism: the process of trying to set up a new organisation, or to do a new thing. It is very definitely true that the modal outcome for such adventures is complete and total failure. The median outcome is also thus: the standard statistic is that four out of five new businesses do not survive their first 5 years. The fact that the winners make fortunes (see the intro about tech company cash piles) is what leads to the mean result being positive overall.

The capitalists just don't make all that much from the deployment of their capital. The VC industry has of course long acknowledged this in their internal thinking. Nine out of 10 investments will go kablooie in some manner, but it's the tenth that becomes a 20-bagger and makes the entire process worthwhile. That is what I mean about why capitalism succeeds.

That the same process of experimentation is being done by very bright people working inside extant tech companies doesn't change this basic rule about new lines of business. Almost all of them fail. So, yes, I think it highly likely that they will piss away those mountains of cash. And yes, it will also be to the huge benefit of us as consumers.

But not because we'll get lots of goods and or services for free, as described. Google Plus may well be free, but there's still no-one there. Facebook is free, but there's billions there. The defining point about whether either we consumers benefit or the producers of it do isn't if the service is free or not. Rather, the benefit to us consumers is that these people are off exploring the possible space for us, at their own cost.

The possible space being, well, given current levels of technology and the likely advances we can make in it if we try, what are the goods and or services that can be produced that people might like? That model, and the median outcome of exploring that space, obviously means that there's more things that can be produced than we consumers want to use at the prices that they can be produced. Someone therefore has to pick up the cost of exploring that space. And in the system we've got, it's those capitalists. Most of whom lose money on most of the things that they invest in.

So, yes, those piles of wonga will indeed be wasted. It will be wasted on finding out what can be made that we're not very interested in. Or, as we might more optimistically put it, not wasted at all from the point of view of the consumer. ®

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