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Economies of scale, pt. 1

May 31, 2012

Tech bubble? Is there a tech bubble?

After the failed facebook IPO two weeks ago. It sounded reasonable, but now I’m not so sure (though this guy’s analysis is rather slippery–he equivocates between revenue and profits, among other things). This article concludes no, there’s no tech bubble, and everyone thinks so only because “everyone hates tech.” I don’t know about investors, but that does just about explain why “there’s a new tech bubble” has become such a popular narrative for people (like me) who aren’t particularly a part of that world. People hate tech for three main reasons:

  1. We instinctively distrust monopolies. Like Ma Bell in the 80s, facebook is a monopoly. Everyone’s on facebook, so everyone “must” be on facebook, and it doesn’t seem likely that this will change any time soon.
  2. We’re scared of the power we’ve already given up. Also unlike Ma Bell, facebook doesn’t just provide roads we travel on, it provides a place we live in. We’ve given facebook our entire lives, and now, when we wish we could take our lives back, we can’t.
  3. We don’t understand where the money comes in. Unlike, Ma Bell, we never give facebook money, and never click on any ads (I have an ad blocker installed!); so how is facebook worth $60 billion market cap / 900 million users = $67 per user?

Of course, (3) can be easily answered; advertising is just more effective than anyone on the receiving end realizes. I “know” this, but I’m still only half-convinced, and that’s part of the point. And because advertising works, Facebook has an incentive to make (2) true–the more it knows about us, the better targeted its ads will be–and because we give it our entire lives, (1) no one can ever leave. This isn’t new logic; but every time I remember it I feel like I’m living in a William Gibson cyberpunk dystopia. It’s things like this that tempt one to become a distributist. Then monopolies will be impossible! (he said naively).

What I find fascinating is how this article, meant to make us not “fear” tech in one sense, actually gives us reason to fear it in another, because in showing how tech companies can be profitable, it assumes that the only profitable model, for most, is advertising; and is even willing to admit that given this model, monopolies are the natural result.

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