It’s the dirty little secret of modern capitalism: many of the world’s most powerful and influential technology companies are either massively in debt or barely making a profit.
Stranger still, it’s part of their business plan.
Losing vast amounts of money and failing to make a profit year in, year out would once have been an unequivocal sign of failure.
In 21st-century Silicon Valley, it’s seen as the path to success.
Are we witnessing a bubble about to burst, or a new phase of capitalism in which growth has superseded the need for profit?
Huge ambitions and massive debts
The list of loss-making or barely profitable giants is extensive.
Twitter and Tesla, for example, are wildly successful, but only just profitable, while Uber loses billions each year.
In 2018 the company was valued at around $US120 billion, despite operating in the red to the tune of $US3 billion. In its ten years of operation, Uber has never come close to breaking even.
Ride-hailing rival, Lyft, is also unprofitable. In 2018 it lost around $US1 billion.
Last September Netflix recorded a total debt of almost $US12 billion, while Spotify, despite its more than 180 million active monthly users, announced a net loss of $US461.4 million.
Even Amazon, the behemoth of online retailing, barely made a profit for the first 14 years of its operation, and the profit it now turns over is relatively small.
What all these companies have in common is a growth-before-profit ideology — and it’s one that seems to be spreading.
Kathleen Thelen from the Massachusetts Institute of Technology calls companies like Amazon or Uber “platform capitalists”.
She says they use the competitive advantage of “network effects” and vast amounts of data to dominate a market or sector.
“The whole name of the game is to scale-up quickly and to really vanquish competitors,” Professor Thelen tells RN’s Future Tense.
It’s a “winner-take-all” strategy, underpinned by a ready supply of venture capital and a unique relationship with a user base, she says.
“The services that these companies offer us are really part of the infrastructure of our lives.”
That, she says, is “an enormous source of power and support for these firms”, because they can “weaponise” their loyal consumer base against any restrictions authorities might seek to impose on them.
Silicon Valley gets its way
Professor Thelen says the rise of platform capitalism reflects a peculiarly American approach to regulation, where powers are spread between levels of government.
Such decentralisation makes it easy for tech firms to move between jurisdictions and into “grey areas”, allowing them to avoid regulation.
The end result, says Professor Thelen, means fewer players and ultimately less choice in the future for consumers.
John Colley from the Warwick Business School also points the finger at US competition law.
“Traditionally if you had a strong position in any market, and that was anything over 25 per cent, and definitely over 40 per cent of the market, you were held to be dominant.
“For some reason or other technology giants seem to have been able to avoid these laws. No one seems to be applying them in Silicon Valley,” says Professor Colley.
Unprofitability is the new black
Investors are still keen to give money to loss-making companies in part because there is simply so much cash floating around in financial markets.
“Everybody can raise money easily at the moment if you are any kind of investor,” says Professor Colley.
“There is really no point in putting your money in the bank, because the interest rates you’re going to earn on it are going to be very low. So, people are willing to invest in quite large sums in these sort of things.
“The world is awash with cash at the moment and that’s driving this. Everyone wants to have the next Facebook, Amazon, Google where investors made huge sums of money.”
Finance professor Jay Ritter, who has been examining corporate profitability for decades, says around 84 per cent of the private tech companies that went public in the United States last year were unprofitable.
He says that contrasts sharply with the pre-digital era.
“In the 1980s most of the companies that went public in the US, even though they were younger and smaller, were profitable.”
But the prioritisation of growth at all costs is not unprecedented.
“During the internet bubble 20 years ago, most of the companies were unprofitable. The mantra then was ‘first mover advantage’, and now people have the same idea, they just call it ‘winner-take-all’.”
‘Will it ever be profitable?’
While Professor Ritter says he’s personally comfortable with the highly speculative nature of modern capitalism, he concedes that it carries risk.
He says some firms may be wildly overvalued because making a valuation assessment based on future potential alone will always be difficult and problematic.
“Sometimes the company that isn’t profitable, you do have to raise a question — will it ever be profitable?”
And that’s a question that’s long been asked about the likes of Twitter, Tesla and Uber.
Uber’s dominance in the ride-hail market, for instance, is based on its willingness to heavily discount fares, in the hope that eventually it will be able to eliminate labour costs through the use of driverless cars.
But if, and when, autonomous transport will be capable of displacing drivers is an arguable point.
And while companies like Google and Facebook have been able to achieve market dominance and huge profits, the past is littered with unsuccessful attempts to do the same.
Think MySpace, Yahoo and Nokia.
Professor Colley is pessimistic about where the winner-take-all mentality may be heading.
“Strangely in the dotcom boom, the crash, although it did in fact encompass most equities, in truth it was the technology equities which really collapsed.
“It did foreclose investment in technology at the time. It substantially reduced investments, and it took many years to really get going again.”
And the fear of another tech crash, he says, is one of the reasons many technology companies are now seeking to go public; that is, to list on the stock exchange and allow outsiders to buy shares.
Venture capitalists who financially back these tech companies are increasingly worried about losing their money if the US economy starts to sour.
So, going public allows them to recoup their initial investment while offloading any potential risks to starry-eyed shareholders.
“These [venture capitalists] are not sentimental people. These are people who basically just want a profit. If they can see the way to one with an exit, fine. If they can’t, then they won’t invest.”
Professor Colley also sees a risk of “investment fatigue” setting in, because the value of many of these tech companies has plummeted after listing on the stock exchange.
Uber’s valuation, for example, sank to its lowest level since 2015. Snap fell by 30 per cent and Lyft by 16.
“There will be a crash. Possibly not this year, but my feeling is that this market will come to an end.”