Policies to drive antifragility in the tech world?

[Jason]

Allowing these companies to accumulate this much power and money and then attempting to reign them in? I believe that ship has sailed. IThe FCC started this when they let Fox Cable out of its bag. Amazon is the basis for the two largest economies in the world. That's why "anti-tech" BRK is adding shares. It's called a trade war but it's in reality a tech war. An autonomy vs. inter-dependence dance. The best way for each economy to monetize their respective middle-classes slowing killing themselves through a thousand PayPals. If one collapses, the other one goes down with it. When the can-kickers run out of road, it will be something, that's for sure.

[Mister Imperceptible]

Peter Thiel with Eric Weinstein last year, articulating how little road is left.

https://m.youtube.com/watch?v=nHXEjdYwoYE

[shemp]

You guys are greatly overestimating the moats these companies possess. In the case of complex business software like SAP, Oracle, etc, switching cost moat is a big thing. But not for consumer stuff.

Network effect is also overestimated, because while this moat does indeed favor size, it doesn't prevent 3 big networks and that's enough to set off price competition: cartels are seldom long-lasting, even cartels not subject to antitrust law, as with the cartel of oil exporting countries. Look at how that cartel feel apart this past spring and has fallen apart many times before. Profit margins are so high and technological obsolescence so significant with software that incumbents are under extreme pressure to grab profits now before its too late, and that leads to price competition. Or at least that is how things work when the stock market stops rewarding companies with stratospheric PEs and/or zero profits, and normality well eventually return to the stock market, of that I am absolutely certain.

So take away switching cost and network effect moats and what is left is companies that people don't particularly like and which can be easily imitated.

Amazon store will soon face competition from Walmart, etc, and AWS will face competition from all sorts of big computer companies besides Microsoft. AWS is business software, so switching costs is a moat there, but it's commodity business software, so minimal switching cost moat. Amazon store isn't going away, but it has less of a moat than Walmart or Sears, both of which had real estate moats. That moat didn't help Sears. Amazon currently has a shitty user interface for their store, IMO. Easy to beat these guys.

Facebook is not merely disliked but actively hated by many people. Network and switching cost moat no better than those of Compuserve, AOL, MySpace or umpteen other social media giants of the past that are forgotten now. I expect Facebook to stick around but face several competitors. That will lead to a price war for advertising dollars, since essentially zero switching cost moat for advertisers, given the money at stake. So goodbye huge profits.

Airbnb is on the way to being as despised as Facebook. Expect competition, despite strong network moat. Competition will not reduce fees as much as with Facebook however. I think the real danger to Airbnb is simply that they will alienate too many landlord and guest clients, and thus bring on a flood of competition.

Google continues to have a superb user interface for their home page and gmail is also top notch. I assume they don't let smart ass recent graduates touch those crown jewels. Needless to say, the search engine has essentially zero moat. I long ago switched several friends from yahoo mail or hotmail to gmail, and it was easy, so clearly these email systems also have weak switching cost moats. Google (or more precisely Alphabet) owns umpteen other companies besides the search engine and gmail, but I believe advertising is where profits are. As with Facebook, competition and thus a price war for advertising dollars is coming.

Microsoft will eventually face the fate of IBM: bureaucratic sclerosis. In fact, they almost sank already into sclerosis under Balmer's incompetent leadership.

Apple is one big exception to the rule that most of these big tech companies are soon going to face ferocious competition, because they are a brand/cult. So they can afford to fall behind in technology temporarily, same as other brands or fashion names can produce junk but nevertheless get by on their reputation for a while. If this happens, Apple will eventually figure out they have fallen behind and then simply buy outside technology, slap their Apple logo on it, problem solved. Brands can be forever.

PayPal is another exception. As with Visa and MasterCard, network and switching cost moats here are definitely strong enough to sustain non-zero fees. Multiple any non-zero fee by massive volume and you have a money machine. So these guys are around indefinitely.

Bottom line: it always looks darkest just before the dawn. Just because competition hasn't yet arrived doesn't mean it won't ever arrive.

[Jason]

Facebook is not merely disliked but actively hated by many people. use competition hasn't yet arrived doesn't mean it won't ever arrive.

I stopped reading here.

[UK-with-kids]

I appreciated your post on this @shemp.

[Jason]

I went back and read the whole post.

The "everyone hates Facebook" or "no one uses Facebook" trope signifies a complete lack of understanding or research into the basic analytics of the stock. People say a lot of things. Doesn't necessarily mean they act accordingly. Once again, 1 billion users. And growing. Not one social media competitor within sight. And Amazon has less moat than Sears? Are you serious? Eddie Lampert eviscerated the company, drove it into bankruptcy and they closed half their stores. The stock trades for less than twenty-five cents a share. So the company with a trillion dollar valuation and has changed the way the world conducts business, is the conduit between the two largest economies on the planet, has less moat than a brick and mortar retail dinosaur with a stock price of $.17? Yes, Walmart is coming, but the entire on-line market is still in its infancy when you consider world wide usage. And Microsoft is run by Satya Nadella who has positioned it possibly the best equipped company to dominate the next century. Balmer now acts like an idiot at basketball games. In all due respect, the was possibly the most cursory, ill informed, opinion over facts analysis of the state of the current state of the corporate world I have ever read. And I own PYPL its a great company. But have you even heard of Square? Serious crocodiles swimming around PYPL's castle.

[shemp]

I'm a little older than you. I've seen companies come and go, especially in technology. IBM had deep switching cost, network effect and brand ("nobody gets fired for buying Big Blue") moats and ruled computing in the 1960's and 1970's, but look at them now.

I'm not contesting that Facebook and Amazon will do well for another decade, but they are priced to do well for another century or millennium. To last a century, you need a deep moat. Coke had/has such a moat, Apple maybe as a brand, PayPal definitely, but definitely not Amazon. (Sears was used as an example of a company which appeared to have a strong moat, in the form of real estate which a competitor would lack, but they still got crushed in time. Sears ruled the retail world once. Amazon's moats are trivial by comparison.)

As for Facebook, never forget MySpace, AOL, CompuServe, newsgroups prior to 1995, entire newspaper industry, etc, all of which appeared to have deep moats. Clock is ticking, competition is on the way within a decade, shareholders are receiving none of what profits these companies are making now. You must look 50 years into the future when PEs are high, not just next year.

[Jason]

"I don't use/I hate Facebook" = I will not vote for/I Hate Trump."

I don't understand your point. And I'm supposed to look out a fifty years from now think that because The Big Five might not be around in 2070 I should look elsewhere to invest even those these stocks are providing me tremendous returns during this era? Who gets a 50 year moat? If you require 50 years, there is no such thing as a moat. You couldn't invest if you looked out fifty years. Buy and never sell is descriptive not proscriptive. Everyone knows that. But at this moment, show me one real competitor to FB besides the US government? Will Walmart eat into Amazon profits 2 Trillion dollars too late? I'm sure they will. But I doubt it will make a difference. Of course companies like nations rise and fall. But right now, I would argue their dominance and reach is unprecedented in corporate history and there is no end in site and no existential threat to any of them. Pandemic proved that.

[JamesR]

"Winner-take-all markets are hard to disrupt and suppress the entry of new players"
https://fs.blog/2018/09/mental-model-winner-take-all/

[c4rat0n1a]

From my perspective, there's a very unfortunate and strong "winner take all" or power law effect in the tech world that seems to result in fairly thin long tails. For example in the desktop world, almost everyone is on an x86/intel CPU, almost everyone is using Windows or MacOS, and almost everyone is using Chrome.

Intel is actually a pretty good counter-example to your argument. Twenty years ago, they were a monopoly/ dominant part of a duopoly. Today, they're not the biggest chip company, nor do they have the most advanced manufacturing. Desktop computers are a small (and shrinking) part of the overall CPU market. Intel is absolutely nowhere in mobile and other growth markets. The company currently makes monopoly profits in the server/data center market, but not for long. Not many other tech companies trading on a P/E ratio around 10 over the last few years.

[UK-with-kids]

And anybody remember Nokia? It seemed they were the only company making phones about 15-20 years ago. Almost everybody had one. Now almost nobody does.

[shemp]

Lots of people despise Facebook without hating Trump. Many people also dislike banks, landlords, healthcare industry, etc. Dislike mainly becomes an issue with brands, because ir weakens brand loyalty. Apple users love Apple products, and that adds to their brand moat (BTW, only Apple product I ever bought/used was a nifty NiMH AA battery charger, so I'm hardly an Apple fanboy.) My feeling is Facebook's brand has negative loyalty at this point, and getting worse each year, which is part of why this thread exists. People hate the feeling of being forced to use Facebook because everyone else is using it and will jump on alternatives. Same feeling people had back in mid 1990's when that stupid AOL was the main game in town. So that leaves the network most, which is big for Facebook, but it was also big for AOL, MySpace, etc.

Anyone, you're competely wrong that Facebook has no competition. Vk.com in Russia is a clone and China has its own social networks like Facebook. Plus there's Reddit, forums like the one we are in now, etc, etc. Plus Facebook has an ugly interface. If you had any historical sense, you would realize that Facebook could collapse in a year or two, same as MySpace, AOL, and the others collapsed.

>>Who gets a 50 year moat?

I already mentioned KO (Coca Cola) at over 100 years. Railroads, insurance companies, banks, utilities, other brands also over 100 years. As for technology, IBM was dominant by 1960, so that's 60 years since then, and IBM is actually much older than 1960. If you had bought IBM in 1990 at $30/share, you'd be getting over $6/share dividend now, or 20% yield. With Microsoft and Apple purchased 10 or more years ago, even better. Both of them over 40 years already. 50 years is not much, even for tech, and you MUST look 50 years ahead when PEs are high. PayPal will likely be around 50 or even 100 years from now, and for once a sky high PE might be justified.

There's a long history of these tech companies that shoot up and then collapse without ever paying any dividends. Read up on the fallen minicomputer giants. All shareholders get is a little stub of compensation at the end when the customer list gets sold to some rising competitor. I suspect that's what may happen with Facebook. Maybe you've done well so far, but then Beanie Babies also did well for a while.

Amazon is more likely to stick around forever, but zero moat means ruthless competition will decimate online profits. So Amazon will have to buy Target or whatever in order to match Walmart on the ground. Just another big box store, in other words, with zero customer loyalty. One false step and even the mightiest retailer goes the way of Sears, Kmart, Montgomery Ward, A&P ( super duper food store in the 1930's) and umpteen other big chains that have long since disappeared.

Stocks are valued as streams of dividends (possibly retained as with BRK). If you don't evaluate businesses that way, you're no better than those fools trading Beanie Babies.

[UK-with-kids]

Are there any good strategies to reduce the human/mob tendency to pile up on a few winners?

Any ideas on how to encourage fat tails in any market?

If it requires government intervention/policy, then what's the minimum that could trigger this change?

Just returning to the original questions in the first post, I think new taxes on internet giants are inevitable, and that will obviously hit their value.

If I look at the UK, for a long time it's been obviously unfair that a massive company like Starbucks can avoid paying the same taxes that smaller coffee shop chains have to pay (e.g. corporation tax) while at the same time already having a huge advantage from economies of scale. We actually used to have a lower rate of tax for small companies but now it's a flat rate.

Even worse, the likes of Amazon have huge warehouses in cheap areas of the UK to deliver to everywhere else (we are, after all, a small country) and compete against smaller physical stores which have to pay expensive rent, rates (a type of property tax), again corporation tax and so on.

For a few years the UK government (despite being a fairly right wing one) has been trying to introduce an online sales tax. They've only held back due to the implied threat of a trade war type retaliation with the US. But it makes total sense to find a new tax base when the old one is disappearing.

With Coronavirus you have the perfect excuse. Government debt is soaring above 100% of GDP, millions are losing jobs, companies are going bust... But then you have a few companies raking in billions from the whole pandemic situation. Who could possibly argue against raiding some of those profits to help fund the NHS for example? (For overseas readers, the NHS is the national health service, free at the point of use, and the main national religion in the UK - for 10 weeks almost everyone in the country recently stood outside their homes clapping to support it).

So, how's a digital services tax going to go down at Facebook? Charged per user - was that 1 billion users you said?

[shemp]

One thing I will concede is that I might have too casually lumped Alphabet/Google with Facebook, because both currently get most profits from advertising. Alphabet has some very deep moats that I didn't mention, so that even if the search engine and gmail disappear, they can reconfigure and recover from some other angle. I'd rank Alphabet's moats as slightly weaker than Apple's, but better than Microsoft's.

[nomadscientist]

Amazon is more likely to stick around forever, but zero moat means ruthless competition will decimate online profits. So Amazon will have to buy Target or whatever in order to match Walmart on the ground. Just another big box store, in other words, with zero customer loyalty.

I saw an Amazon brick and mortar store a couple of weeks ago. Beginning of the end.

[Jason]

If you look at anti-fragility from a stock evaluation standpoint i.e. optionality, low customer concentration, no debt, wads of cash, original ownership all of these companies pass with flying colors all things considered. They are not what they once were, and most likely, not what people think they are. But they are in practice dominating in the area in which they set out. Amazon redefined the consumer. FB redefined community. Each one can try 10 ideas, and stick with the one that works (FB is now taking on Tik Tok). Each one can buy whatever they want and not be impacted if it doesn't work out. I honestly don't see how anyone can bet against any of them. Saying Alphabet's moats are slightly weaker than Apple but better than Microsoft is a trillionaire company bar stool debate.

Edit:

Anyone, you're competely wrong that Facebook has no competition. Vk.com in Russia is a clone and China has its own social networks like Facebook. Plus there's Reddit, forums like the one we are in now, etc, etc. Plus Facebook has an ugly interface. If you had any historical sense, you would realize that Facebook could collapse in a year or two, same as MySpace, AOL, and the others collapsed.

Are you serious in using Russian and Chinese companies to argue that there are competitors to Facebook? Social media companies in autocratic nations are going to pose a threat to Facebook? I mean, at least use Pinterest or something. And Facebook is sixteen years old, worth 700 billion dollars, and now owns Instagram and is much more than a social media company. To compare it to AOL, MySpace, Redditt, ERE whatever at this point shows not only a lack of historical sense but common sense. I don't know Shemp, maybe you spent too much time drinking carbonated beverages in front of main frames with Moe and Larry back in the day.