The Political Economy of American Tech Companies Since 2008

American tech companies since 2008 don’t work like the businesses along a busy street. Most businesses try to sell goods or services for more than the cost of production. Google, Facebook, and Apple are all this kind of business. But by 2022, two journalists could list 15 companies which had lost at least USD 3 billion since founding, none of which was less than nine years old and only one of which ever had a profitable quarter. The division of Amazon which runs their Orwellian telescreen Alexa lost USD 3 billion just in the first quarter of 2022! Where do these companies get so much money to lose?

In the 1960s, Richard Viguerie pioneered political fundraising which spends most of the funds raised on itself. Rick Perlstein explained how this works in “The Long Con”:

The Viguerie Company’s marketing genius was that as it continued metastasizing, it remained, in financial terms, a hermetic positive feedback loop. It brought the message of the New Right to the masses, but it kept nearly all the revenue streams locked down in Viguerie’s proprietary control. Here was a key to the hustle: typically, only 10 to 15 percent of the haul went to the intended beneficiaries. The rest went back to Viguerie’s company. In one too-perfect example, Viguerie raised $802,028 for a client seeking to distribute Bibles in Asia—who paid $889,255 for the service.

If you run a company like that, you can make your friends and family rich whether or not the money you process helps its ultimate goal.

In 2008, governments responded to the Global Financial Crisis in ways which made capital cheap for those who already had it. Sometimes in the next 15 years the yield of government bonds was less than inflation. Tax evasion was already fashionable. So since 2008, there have been very rich people looking for ways to invest their money at a profit. If you had a billion dollars, you could borrow more or less as much money as you wanted on a “pay it back whenever, just give the principal plus inflation and we are good” plan. Just like fundraisers evolved to create anxiety in donors so they would give, startup founders evolved to convince venture capitalists to lend them some of that free money. Maciej Ceglowski described how this works in 2014:

advertising is when someone pays you to tell your users they’ll be happy if they buy a product or service.

Yahoo is an example of a company that runs on advertising. Gawker is a company that runs on advertising.

Investor storytime is when someone pays you to tell them how rich they’ll get when you finally put ads on your site.

Pinterest is a site that runs on investor storytime. Most startups run on investor storytime.

Investor storytime is not exactly advertising, but it is related to advertising. Think of it as an advertising future, or perhaps the world’s most targeted ad.

Both business models involve persuasion. In one of them, you’re asking millions of listeners to hand over a little bit of money. In the other, you’re persuading one or two listeners to hand over millions of money.

Maciej Ceglowski, “The Internet with a Human Face” (2014) https://idlewords.com/talks/internet_with_a_human_face.htm

In investor storytime, people say “look at how big Facebook, Apple, Google, and Amazon are now! If you had been wise and invested early you would be even richer and all your friends at the golf club would be impressed. Something will change in the future and we will be rich too but we need lots of money right now to do it.” Uber promises that once they crush the taxi monopolies they can raise prices with monopoly power or cut expenses with self-driving cars. Patreon promises that one day they will collect so many donations that their 5-8% share will be huge. Twitter promised that one day it would be so big and have such good ads and sell so much personal information that it would be profitable. Sometimes it works out like that, but meanwhile the people who run the companies get salaries and benefits and stock, and they keep those things even if the company never makes a profit. And once people have jobs at their company, they want to keep those jobs, and the easiest way is finding a story to tell the next batch of investors. Investor storytime is bad for privacy, because “we will invent new and innovative ways to show ads” is a story for investors. But its also hard for companies which offer services for just a bit more than they cost to compete with companies which pay their costs with venture capital.

Two basic tactics in business are economies of scale (where making a thousand times as many widgets does not cost a thousand times as much) and loss leaders (where you offer a product or service at a loss to hurt competitors or establish a relationship with customers who will buy other things). The surplus of capital since 2008 lets companies use these tactics without having to pay for them in the usual way.

If your company has a lot of money it did not have to earn by selling services, one thing it can spend it on is public relations. If its founders are slick talkers, they are probably good at PR. Have you noticed that these companies get more attention in the news and especially on the Internet than established profitable companies? Or that some of them which got lots of attention turn out to be blatant frauds? The line between saying something useful which might be true in the future, and saying something useful which is just wrong, is subtle. People who know the rich Americans who invest in venture capital firms say that they want the prestige of supporting a company which became famous, or of saying that they got very high returns by investing early. Companies learn that hype helps them borrow money.

Under zero real interest rates, investing in a business that makes a profit now forces you to watch as it takes more and more of your dollars to get a dollar back in profit. But investing in a business that promises it will make a profit one day lets you fantasize how much money you will make when that day arrives.

Google, Facebook, Amazon, and Apple are all conventional businesses which sell goods or services at a profit. But have you noticed that they can throw billions of dollars at a Second Life clone with few users (the Metaverse) or subsidizing YouTube until its competitors go bankrupt? (That link is about vimeo, but Instagram had a YouTube competitor called IGTV which was merged into their main service in March 2022). Its hard to compete with a company with a subsidy like that, and its hard for a decentralized service to offer the same things. Facebook and Google have so much money from their main businesses that they can act like those rich people investing in venture capital.

In 2021, Ceglowski expanded on his thoughts about investor storytime.

When you wonder “why is [NEW FORMAT] suddenly a thing?”, the dynamic is always the same. Early advertising is fantastically lucrative. Once the stampede to the format starts in earnest, the margin drops quickly, and the cycle will have to repeat. It’s driven by novelty. According to this @MarkStenberg3 story, @Kantrowitz is selling ads for $4,000 per week with 9,300 subscribers and a 33% open rate plus some podcasting and site traffic. My calculations suggest it’s probably close to $1,000 CPM (cost per thousand ad impressions). Damn. https://adweek.com/media/as-the-newsletter-advertising-grows-advertisers-opt-for-quality-over-quantity/

The motor on both sides of the ledger is hope. Writers / broadcasters hope they finally found an ad model that pays the bills without being hateful to the audience. Advertisers hope they have found a new model that leads to terrific engagement. But all that’s left is a hangover.

The long term results are more entrenched surveillance (since every new ad model needs a new story about why it’s different and better) and a gold rush culture where nothing gets to put down roots because everyone moves to the next Klondike. Remember when every news site “pivoted to video” a few years back, or when podcast mattress ads took over, or when everything became an app? Same dynamic. The only island of respite and tranquility in this world is (Ceglowski’s one-man bookmarking company) Pinboard.

The reason I want to add newsletter support to the site (ie. Pinboard) is not because I believe in them, but precisely because I don’t. That stuff will disappear without a trace otherwise. Archivists walk behind the elephant parade of the New Economy with shovels, trying to salvage what we can.

Zooming out, the “chasing new formats” pathology in online publishing is another symptom of too much capital with no place to go. The investors get sold on a dream. Other people act rationally, chasing whatever formats those investors are subsidizing at a big loss for the moment. As always, the biggest profit is to be made effectively selling new dreams to the investors. It’s become a highly refined art form and the great creative legacy of our era. But why is all this surplus money bottled up and useless, instead of in my pocket? That part stymies me.

Maciej Ceglowski, 23 April 2021 https://twitter.com/Pinboard/status/1385624473827561474

To Sum Up

Since the Global Financial Crisis of 2008, many rich people have money which they don’t know what to do with. Startup founders appeal to them with a line of patter saying why their company will be as big as Google if they just invest now. Investors give the founders money, and the founders have to spend it to support their story about how their company will grow. A few companies such as Amazon or Twitter use these funds to survive long enough and grow big enough that they become profitable. But until they do, the actions of these companies are not driven by the capitalist logic of cost and revenue, but the court sophist’s logic of finding the right words to get the powerful man to lend you some of his toys. Behaving like a responsible business governed by proffit and loss would make it hard to borrow that money (and the faster they spend the previous loan, the sooner they need to borrow another). If you think of these companies like you think about the local department store, you will never understand them.

(written 20 November 2022 after seeing people confused by the finances of companies like Twitter; the parallels with cryptocurrency I leave as an exercise for the reader)

Edit 2022-11-22: many small changes including adding Alexa as an example and emphasizing that giant ad and hardware companies sponsor white elephants just like rich people sponsor them

Edit 2022-11-23: its also worth studying the term unicorn investment to understand the mindset of these rich Americans who invest in startups (how do you know a company is worth a billion dollars if its not on the stock market and its future is uncertain? handwaving and hype)

Edit 2023-04-14: the following two links show how one of these companies, the blogging platform Substack, uses other people’s money to draw creators: it signs some of them up with a promise to top up their subscription income whenever it is below a threshold. If you offer them high pay, most writers will take it even if they think you are shady or doubt that you will earn as much as you think you will earn. Writing does not pay much and even a few big paychecks can really help.

“Has Substack’s Net Revenue Nearly Flatlined?” A Media Operator https://www.amediaoperator.com/newsletter/has-substacks-net-revenue-nearly-flat-lined/

https://www.sec.gov/Archives/edgar/data/1783191/000167025423000297/document_6.pdf

Edit 2023-09-12: journalist Amy Castor has another version of this argument which is even pithier than Ceglowski’s

So why are VCs pouring money into AI?

Venture capital is professional gambling. VCs are looking for a liquidity event. One big winner can pay for a lot of failures.

Finding someone to buy a startup you’ve funded takes marketing and hype. The company doing anything useful, or anything that even works, is optional.

https://amycastor.com/2023/09/12/pivot-to-ai-pay-no-attention-to-the-man-behind-the-curtain/

She is more confident that she knows the future of the today’s chatbot and image-generation tools than I am (some people I know swear that large language models speed up their coding work, others use it to create drafts of writing projects they are stuck on). From her staccato writing style I wonder if she spends time on twitter?

Edit 2023-09-21: see also

“One of the saddest things that happened during the period of loose money was that investors encouraged – sometimes even pushed – a lot of previously self-sufficient studios into expanding their team and budget too much, to the point where budget outpaced market potential and the studios were no longer sustainable without investor support. When money became tight again, investors pulled their support, and the studios had to downsize or even shut down. This damage could have been avoided with the more cautious approach people are starting to adopt now.”

Kowloon Nights content manager Anlu Lui, in James Batchelor, “The current state of games investment,” gamesindustry.biz, 21 September 2023 https://www.gamesindustry.biz/the-current-state-of-games-investment Compare this investors-eye take from Andreesen Horowitz on the horrors (?) of getting “stuck” as executive of a profitable but small business https://a16z.com/the-case-for-the-fat-startup/

Edit 2023-11-01: for a ranty take on a similar phenomenon https://wheresyoured.at/p/the-rot-economy

Edit 2023-11-29: many small changes including an extra paragraph on how with zero real interest, investments in businesses that sell things at a profit will disappoint you now while speculative investments may disappoint in the future

Edit 2024-04-19: see also

At U.S. box offices, by the end of last year, revenue was down 22 percent from 2019. Experts estimate that cable-television revenue has fallen 40 percent since 2015. Streaming has rarely been profitable at all. Until very recently, Netflix was the sole platform to make money; among the other companies with streaming services, only Warner Bros. Discovery’s platforms may have eked out a profit last year. And now the streaming gold rush—the era that made Dickinson—is over. In the spring of 2022, the Federal Reserve began raising interest rates after years of nearly free credit, and at roughly the same time, Wall Street began calling in the streamers’ bets. The stock prices of nearly all the major companies with streaming platforms took precipitous falls, and none have rebounded to their prior valuation.

https://harpers.org/archive/2024/05/the-life-and-death-of-hollywood-daniel-bessner/

Edit 2024-05-07: Business Insider on Reddit’s IPO and valuation at USD 8 billion despite being twenty years old, never having made a profit, and having no plan for profit except ‘show more ads and sponsored content’ and ‘collect and sell more user data after we annoyed our most loyal users’ https://www.businessinsider.com/reddit-stock-ipo-losses-profits-advertising-ai-data-user-economy-2024-3?op=1

Edit 2024-05-10:

You might not believe this if you weren’t there, but one of Google’s main problems, once they got going, was that there just wasn’t that much to see on the web. Having a great search engine is kind of useless if, for example, somebody types in “how to take better landscape photographs,” and nobody online has an answer.

Google Adwords changed all of that. That, as well as free weblog hosting, fuelled the blogging bubble. You wrote a blog using a weblog system that came with decent SEO baked in (semantic structure and cross-linking, that’s all you needed back then). Most of your traffic came from Google’s search results. All of your revenue came from Google’s Adwords.

https://www.baldurbjarnason.com/2021/the-oss-bubble-and-the-blogging-bubble

Cp. Patrick McKenzie in 2006 “if search engines were girls: Google is the bombshell who everyone drools over. She knows this and lords it over everyone. You’ve really got to work to get Google’s trust. She also has a weird fascination with blogging.” https://www.kalzumeus.com/2006/07/29/on-page-seo-for-small-companies/

Edit 2024-08-12: Robert J. Shiller, Irrational Exuberance, second edition (Currency Doubleday: New York, 2005) ch. 4 p. 77 “Amplification Mechanisms” has an example of this pattern from 1998: to paraphrase, “we don’t want to invest a few million in your midsized, profitable company, but call it an Internet company and talk about your big plans for growth and spending and we can find you a few hundred million dollars. Of course once you start spending like that your current business model will no longer work and you don’t know that you can grow your revenues to match that spending.”