Attention Economy Is a Malthusian Trap

It will be tougher for Amazon to squash grocery stories than it was to squash Sears.<p>Grocery stores are highly competitive because people go to the grocery store every week. For the grocery store it is a game much like &quot;the iterated prisoner&#x27;s dilemma&quot;. Every week they have a chance to uphold their brand image or make a quick profit. Every week they have a chance to lose big and make you switch to another grocery store.<p>So they choose to uphold their brand images.<p>Stores and brands in other areas where transactions are less frequent have more incentive to harvest. For instance, nearly all makers of major appliances have given up on upholding brand image and source their appliances from the same factories in the far east. They break down in a few years but they might not be in business again, or maybe they bought the brand that you&#x27;re going to try next.<p>Grocery stores, from ALDI to Wegmans, are excellent in their own way, unlike mall stores.

Tech companies are valued based on future potential and as future becomes present, that potential is replaced by a reality that is often much less grand.<p>Netflix is a great example. It went from having a large library because the producers were its friends, to entering production itself, and alienating its former partners. Now, they have to offset investment into production with higher subscription fees which in turn reduces future potential. Netflix in 2015 is significantly more disruptive than that of 2019, which is just another HBO, and increasingly will be valued like HBO (Time Warner).<p>&quot;Tech&quot; here is actually just infrastructure; it&#x27;s table stakes and not interesting at all.

&quot;But if Netflix and Walt Disney both use technology to stream video, why is only Netflix trading at infinity-times earnings? And if Tesla and BMW “both use battery technology to power luxury cars,” Deluard writes, “why should the former trade at 42 times forward earnings when the latter fetches 5.6 times trailing earnings?” Good question.&quot;<p>Incredibly flawed argument. BMW&#x27;s earnings come from a huge variety of products and services. Not purely battery-powered electric cars. Tesla&#x27;s entire business model is producing battery-powered vehicles.<p>So to compare each company&#x27;s P&#x2F;E directly under the assumption that they are both making identical products would be wrong. Instead you would need to somehow isolate the P&#x2F;E ratio of BMW&#x27;s battery-powered car business in order to draw a meaningful comparison.<p>In general, this article is trying to group all of tech into one basket and draw conclusions which apply universally. A company has a high P&#x2F;E ratio for a very simple reason: investors believe its earnings growth will outpace the market. That will seemingly always be true for companies which are focusing on growth over profit.

I find these passages thought-provoking and persuasive. They ring <i>True</i>:<p><i>&gt; ...Tech died by conquering the world. Netflix is leading a global transition from linear to streaming television. Tesla accelerated an electric awakening among auto companies. But if Netflix and Walt Disney both use technology to stream video, why is only Netflix trading at infinity-times earnings? And if Tesla and BMW “both use battery technology to power luxury cars,” Deluard writes, “why should the former trade at 42 times forward earnings when the latter fetches 5.6 times trailing earnings?” Good question.</i><p><i>&gt; ...Some of the largest tech companies have exhausted their main markets. Apple and Samsung may have reached the smartphone plateau, as phone sales seem to have peaked. Facebook and Google have grown to dominate digital advertising. But in the U.S., overall ad spending has historically averaged no more than 3 percent of GDP. How do you grow [faster than the economy] in a sector that isn’t growing [faster]? That’s easy: You don’t. There may be a Malthusian trap in the attention economy. Eventually, revenue growth bumps up against the natural limitations of population and waking hours.</i><p><i>&gt; ...Tech stocks have fallen, because the media mountain has been scaled. Now the largest tech companies aren’t standing at a pinnacle; they’re plotting on a plateau. The challenge of owning the entire life cycle of our spending habits—that’s the real summit. And it’s just up ahead.</i><p>The implication for investors is obvious. If &quot;tech&quot; is no longer really a separate fast-growing sector, but rather something that has become pervasive and cannot grow for much longer at a faster rate than the rest of the economy, then &quot;tech&quot; valuation multiples will converge with &quot;non-tech&quot; valuation multiples, and there will no longer be a clear-cut distinction between the two groups.

I&#x27;m a big fan of the argument that there is significantly less to differentiate companies like TSLA from their traditional competitors. Which is basically the take from the first half of the article (which I think the author is arguing is wrong), but using evidence like P&#x2F;E change in the last two years is quite frankly bollocks. There has been a big dip in the stock market in the last few months and there&#x27;s very likely a slow down in China occuring - Apple&#x27;s stock alone is down 30% from peak.<p>But moving on to the interesting second half: what this guy is describing - yet somehow not noticing - is a trend towards massive mergers to form monopolies. That&#x27;s nothing to do with Tech. In fact what this article is suggesting is basically what we&#x27;re going to do is re-create all these destructive monopolies and rather than protecting consumers like we used to, we&#x27;re going to just label it &#x27;tech&#x27; and bend over for it.

This article is using its terms in a specific way. By &quot;tech sector,&quot; it sounds like he&#x27;s talking about large technology companies that have been valued by the market at higher multiples than the older &quot;blue chips,&quot; big stable companies.<p>By Malthusian, he means &quot;large and mature enough to be limited by the size of the market.&quot;<p>The trigger for the thought seems to be that some newer &quot;tech&quot; companies are operationally more similar to traditional blue chips. Tesla is more like BMW and netflix is like hbo.<p>So, anyway idk....<p>Tech is valued so highly for a bunch of reasons. But, those aside, there are factors unrelated to sector.<p>Tesla, netflix and such are new companies. Coca Cola, GM &amp; BMW are old. They run gradualist, conservative starters.<p>Netflix and Tesla are far more likely to pull a rabbit out of a hat. It&#x27;s in their culture. The whole company was in the hat 5 minutes ago. Assuming that Tesla and BMW have similar future potential is (perhaps) academic, because they&#x27;d never pursue them anyway. Netflix might attempt a pivot to being a game company, if the opportunity was attractive. HBO probably couldn&#x27;t.<p>Even IBM is a good example, the one tech company that&#x27;s old-ish and has a &quot;blue chip&quot; persona. They managed to pivot into consulting. Would coca cola have successfully pivoted into fresh food delivery?<p>There&#x27;s a flexibility in tech that doesn&#x27;t exist elsewhere.<p>Also, I suspect, the way most large companies are growing is overly risk averse. Tech can&#x27;t be derisked to that extent, so the companies pursue the higher value, higher risk strategies.<p>The best example to sum this up is Amazon and their 2nd act Aws twist. You might compare amazon of 2016 to other retailers. Walmart never had the potential to launch an Aws.<p>When tech is everywhere, the article thinks the tech sector doesn&#x27;t exist. The opposite is possible too. When everything is tech, the tech sector owns everything.<p>Ultimately, coca cola is a legacy company.

Tech has been synonymous with growth. That is why it was trading at a premium and that is why high growth tech companies continue to be priced at a premium while non-growth tech companies do not.<p>As a professional investor, I only care about three things: - Long-term stabilized return on capital - Pricing (P&#x2F;E; EB&#x2F;EBITDA) - Long-term growth.<p>The list of companies that check all of those boxes are extremely small

This is one of those articles that feels like it’d be unthinkable a few years ago - now there’s a lot to nod along to like this is almost common knowledge. It’s a big deal! This is the “crunch” in the tech sector - expect a fair amount of qualified engineers in the streets competing for work in the next few years. Not out of some downturn, but as investors demand cost cutting instead of investment to get their returns.<p>The only good news is that the “surviving” companies from old industries will continue to need to grow their tech platforms.

&gt; Now it has to gnaw through the harder, crunchier parts of the global economy. Software eating life sciences? Software eating elderly care? Software eating household construction? Software eating money? Good luck.<p>Wow, so much pessimism. Tech has still loong way to make inroads into these sectors, and i don&#x27;t see anything stopping it. In some cases it is harsh regulation and established interests that prevent people from innovating (e.g. money), but it <i>is</i> happening. &quot;Good luck&quot;? this won&#x27;t age well. Anyone who thinks that tech is just for &quot;selling ads&quot; is , hm, short-sighted.<p>It is easy to cherrypick the high tech that has large p&#x2F;e s such as tesla and netflix, but these are companies that disrupt existing markets, not create new ones. Apple (which does that often) has a tiny p&#x2F;e. So maybe, it is a good thing that the fangs are being deinvested. Plus 2019 is the airbnb and uber IPO...

It&#x27;s the way of innovation that the new sector if successful grows rapidly and then plateaus when everyone has the new whatever. The web&#x2F;mobile tech companies are not the first. The early motor car tech boom in the early 1900s looked similar, then the electrical tech boom I think around the 1920s and so on. I imaging the early industrial revolution and textile companies in England went the same way and I guess maybe AI is next? I&#x27;m a bit of a skeptic on blockchain being the next big thing.

I wonder why the author does not include Cloud services in his analysis. Cloud is just getting started, has massive potential (business IT spending), can be delivered online (duh) and can be shown to be done effectively. Which is why you see lots of big tech co&#x27;s investing massively there.<p>To borrow author&#x27;s words, I believe for the next round, profitable tech companies will be Cloud providers (along with a Mall too), which will justify rich premiums.

I agree that tech companies depending on attention will devalue. However the value of companies is also based on expected future value and the FANG companies are well positioned to profit from advances in AI, new energy technologies, life extension tech, etc., etc. I think there is a lot of profit to be made in emerging tech.

Yep, the article is dead on.

Malthus was wrong! Spectacularly so. Is the title a joke?<p>&gt; If technology is everywhere, the tech sector no longer exists<p>Funny, because tech is everywhere and the tech sector is the biggest it has been in history.

Strange title. The connection to Malthus is tenuous at best.