Silicon Valley Has Disrupted Capitalism

I am a longtime Amazon bear. I was even short for a time when it was in the 200s. I lost a decent amount of money, but it could have been worse.

Principally, Amazon doesn’t make any money, or at least any accounting profits. That dissuades only few people from investing in Amazon, though.

Amazon recently announced it was going to build out 300–-400 physical bookstores.

Paul Vigna of the Wall Street Journal tweeted: “So Amazon spends 20 years running bookstores out of business and now wants to open bookstores? That’s playing the long game.”

I tweeted something else:
“So f — — — dirty.”

The 2016 Version of Capitalism

That might sound strange coming from someone who has certainly earned his free-market chops. But this is a new feature of shareholder capitalism. A company that makes no money gets to grow and put other companies — which make money — out of business.

Let’s go back before the Internet and before computers. You have Bookstore Company A and Bookstore Company B. Let’s say they earn the same amount of revenue, approximately.

Bookstore Company A has a smart operations research guy who makes the business more efficient, from handling cash to inventory to distribution.

Because of this, Bookstore Company A is able to lower its prices yet still maintain its margins, and eventually put Bookstore Company B out of business.

That’s capitalism, the social Darwinism aspect of it that people seem to love. The smart fish gobble up the dumb fish.

Here’s what today’s capitalism looks like:
You have Bookstore Company C, a plain vanilla brick-and-mortar bookstore, and Bookstore Company D, an Internet bookstore.

Since people love anything to do with the Internet, they give Bookstore Company D a higher valuation (or an infinite valuation). The cost of capital for Bookstore Company D drops to zero, and it can use its stock to finance acquisitions and grow at stupendous speed.

In the beginning, Bookstore Company D was actually less efficient than Bookstore Company C. But since Wall Street has given Bookstore Company D free capital and time to expand, it wins the race and puts Bookstore Company C out of business.

That’s messed up.

Call me old-fashioned, but shouldn’t you have profits first, then growth? Use the profits to finance growth?

But that’s not how it works anymore.

Snapchat is worth $19 billion, and nobody knows what the point of it is. Uber is $65 billion and is breakeven at best.

Maybe the poor taxi drivers have a point. They got scorned just like Waldenbooks did. Is Uber a better mousetrap? For sure. But Wall Street (and Silicon Valley) gave it thousands of miles of runway before it takes off (if it ever does).

A Question for Brainstorming

People are not stupid. The kids today all want to work at a startup. Why? Because the point of a startup is not to make money.

Making money is hard. The point of the startup is to have a big idea that will attract all kinds of VC money so you get that infinite runway and the ridiculous valuation.

That’s not how business is done, people.

So here is the question: This feature of capitalism where you get the idea first and figure out the execution later (if ever), is this a good or bad feature of capitalism?

Is it a temporary disruption or an inevitable shift in how we do business in the digital age?

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