Sunday, November 20, 2011

Public Utilities

There has been some attention drawn to the recent state of some very popular Internet companies. On one hand, there is a talk about a new technology bubble on grounds of immense evaluation of some of these companies versus their actual ability to turn profits. On the other hand there seems to be recognition how fundamental these enterprises have become to the fabric of the Internet, and how people interact.

We have companies like Twitter, Yelp, Angies List, Facebook, Groupon, Salesforce and the list just goes on. With perhaps the exception of Facebook, these companies have not found a revenue model that is able to turn profits. Some of these companies have grown immensely, to meet the requirements to become intrinsic part of the Internet. But, what ever growth in income they get is consumed by their growth of work force, required to fuel the increasing demand for these services. The yield ratio is very close to 1 to 1, no matter what size the company.

To turn a profit, these companies would have to hire far fewer people, and in fact, not service the public at large. In other words, some of these companies make sense as a $10 million per year companies, but not as $100 million or something like that. The money is just not there to support profits.

Yet, these companies hire and support thousands of workers. They are being funded by venture capitalists in hopes that a business model is found that can turn a profit. But for right now, the evaluations of these companies is solely based on their mere volume of people they are servicing. Customers seem to indicate value, perhaps not now, but some day.

Perhaps, at least for now, you can call these companies public utilities. They are non-profits, funded by a sustainable model, and the growth is often funded by private money, and they service the public at large. They have become an intrinsic part of the fabric of the Internet. Apart from their basic services they often provide a value added interfaces that allow other enterprises to utilize their data in ways that they perhaps did not anticipate. These companies, perhaps, are something you can't control or buy in the traditional sense; you would fail to turn profit for your investment with high probability. In fact, you'd likely lose all value of your acquisition if you tried to change any part of their business with a profit motive in mind. Yahoo tried this with so many ways, and always failed - hence they are in the rut that they are in now. You see, the fortunes of these enterprises rests only on the approval of their users - one wrong move and you are done. Profit motives stink to high heaven with their loyal following.

These companies provide jobs. The jobs pay rather well. These people and companies pay taxes, and the government, hopefully, builds infrastructure to support the structures that make these kinds of services possible. There's probably not that much public money involved in creation of these companies but if the environment is set right, public money does support all this after all. It's a really good feedback loop to have and there are many benefits. The investors and Wall Street types may frown upon this on the long run, but capitalism should not support "finance" or "stock holders", but rather the society and public at large. Profit motives are only sustainable as long as that money goes to investments.

It is interesting that the Internet actually sustains models like these and keeps a kind of a honor system in place. People vote with their attention and time for all kinds of services that they deem useful. The bad ones die away. Tie some kind of "rip-off" mentality to your service and you will die a quick death.