Pluralistic: Two weak spots in Big Tech economics (06 Mar 2025)


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Two weak spots in Big Tech economics (permalink)

Big Tech's astonishing scale is matched only by its farcical valuations – price-to-earnings ratios that consistently dwarf the capitalization of traditional hard-goods businesses. For example, Amazon's profit-to-earnings ratio is 37.65; Target's is only 13.34. That means that investors value every dollar Amazon brings in at three times the value they place on a dollar spent at Target.

The fact that Big Tech stocks trade at such a premium isn't merely of interest to tech investors, or even to the personal wealth managers who handle the assets of tech executives whose personal portfolios are full of their employers' stock options.

The high valuations of tech stocks don't just reflect an advantage over bricks and mortar firms – they are the advantage. If you're Target and you're hoping to hire someone who's just interviewed at Amazon, you have to beat Amazon's total compensation offer. But when Amazon makes that offer, they can pay some – maybe even most – of the offer in stock, rather than in cash.

This is a huge advantage! After all, to get dollars, both Amazon and Target have to convince you to spend money in their stores (or, in Amazon's case, with its cloud, or as a Prime sub, etc etc). Both Amazon and Target get their dollars from entities outside of the firm's four walls, and the dollars only come in when they convince someone else to do business with them.

But stock comes from inside the firm. Amazon makes new Amazon shares by typing zeroes into a spreadsheet. They don't have to convince you to buy anything in order to issue that new stock. That is their call, and their call alone.

Amazon can buy lots of things with stock – not just the labor of in-demand technical workers who command six-figure salaries. They can even buy whole companies using stock. So if Amazon and Target are bidding against one another for an anticompetitive acquisition of a key supplier or competitor, Amazon can beat Target's bid without having to spend the dollars its shareholders would like them to divert to dividends, stock buybacks, etc.

In other words, a company with a fantastic profit/earning ratio has its own money-printer that produces currency that can be used to buy labor and even acquire companies.

But why do investors value tech stocks so highly? In part, it's just circular reasoning: a company with a high stock price can beat its competitors because it has a high stock price, so I should buy its stock, which will drive up its stock price even further.

But there's more to this than self-fulfilling prophecy. The high price of tech stocks reflects the market's belief that these companies will continue to grow. If you think a company will be ten times bigger in two years, and it's only priced at three times as much as mature rivals that have stopped growing altogether, then that 300% stock premium is a bargain, because the company will have 1,000% growth in just a couple years. Tech companies have proven themselves, time and again, to be capable of posting incredible growth – think of how quickly Google went from a niche competitor to established search engines to the dominant player, with a 90% market share.

That kind of growth is enough to make anyone giddy, but it eventually runs up against the law of large numbers: doubling a small number is easy, doubling a large number is much, much harder. A search engine that's used by 90% of the world can't double its users – there just aren't enough people to sign up. They'd need to breed several billion new humans, raise them to maturity, and then convince them to be Google users.

And here's the thing: the flipside of the huge profits that can be reaped by investors who buy stocks at a premium in anticipation of growth is the certainty that you will be wiped out if you're still holding the stock when the growth halts. When Amazon stops growing, its PE ratio should fall to something like Target's, which means that its stock should decline by two thirds on that day.

Which is why Big Tech investors tend to be twitchy, hair-trigger types, easily stampeded into mass selloffs. That's what happened in 2022, when Facebook admitted to investors that it had grown more slowly than it had projected, and investors staged the largest stock selloff in history (to that point – hi, Nvidia!), wiping a quarter-trillion dollars off Meta's valuation in a day:

https://www.forbes.com/sites/sergeiklebnikov/2022/02/03/stocks-plunge-after-facebooks-massive-sell-off-nasdaq-falls-37/

As Stein's Law has it: "anything that can't go on forever eventually stops." Growth stocks have to stop growing, eventually, and when they do, you'd better beat everyone else to the fire exit, or you're going to get crushed in the stampede.

Which is why tech companies are so obsessed with both actual growth, and stories about growth. Facebook spent tens of billions on bribes to telcos around the world, demanding that they charge extra to access non-Facebook websites and apps, in a bid to sign up "the next billion users":

https://www.eff.org/deeplinks/2019/02/countries-zero-rating-have-more-expensive-wireless-broadband-countries-without-it

That wasn't just about some ideological commitment to growth – it was about the real, material advantages that a growing company has, namely, that it can substitute the stock it creates for free by typing zeroes into a spreadsheet for money that it can only get by convincing you to give your money to it.

"Facebook Zero" (as this bribery program was called) was about actual growth: finding people who weren't Facebook users and turning them into Facebook users, preferably forever (thanks to Facebook's suite of lock-in tactics that make it a digital roach motel that users check into but don't check out of):

https://www.eff.org/deeplinks/2021/08/facebooks-secret-war-switching-costs

But plenty of the things that Big Tech gets up to are about the narrative of growth. That's why Big Tech has pumped every tech bubble of this stupid decade: metaverse, cryptocurrency, AI. These technologies have each been at the forefront of Big Tech marketing and investor communications, but not solely because they represented a market opportunity. Rather, they represented a more-or-less plausible explanation for how these companies that were on the wrong side of the law of large numbers could continue to double in size, without breeding billions of new customers to sign up for their services.

The tell – as always – comes in the way that these companies refute their critics. When critics point out that Facebook spent $1.2 billion on a metaverse product that only has 32 users:

https://futurism.com/the-byte/metaverse-decentraland-report-active-users

Or that practically no one buys anything with cryptocurrency:

https://www.mollywhite.net/annotations/latecomers-guide-to-crypto/

Not even when the government gives them free crypto and passes a law forcing merchants to accept crypto:

https://bitcoinblog.de/2024/09/02/weak-bitcoin-adoption-in-el-salvador-disappoints-the-president/

Or that hardly anyone uses AI, and what uses it does have are often low-value:

https://www.wheresyoured.at/oai-business/

The "narrative entrepreneurs" behind the claims of infinite growth from these technologies all have the same response: "That's what they said about the web, and yet it grew really fast! People who lacked the vision to understand the web's potential missed out. Buy [crypto|metaverse|AI] or have fun being poor!"

It's true – there were a lot of people who were blithely dismissive of the web, and they were wrong. But the fact that the web's skeptics were wrong doesn't mean that skepticism itself is foolish. People were also skeptical of Qibi, Beanie Babies, and the Segway – all of which were predicted to continue to increase in value forever and become permanently installed as significant facts in the economy. The fact that lots of people think something is stupid is not a reliable indicator that it is actually great.

So it's not just that capitalism adopts "the ideology of a tumor" in insisting that infinite growth is possible. The value in corporate claims to eternal growth is not aesthetic, it is material. If the market believes a company will grow, then that company gets to print its own money, which lets it outcompete mature rivals, which lets it grow some more.

But! When the company runs out of growth potential, the process runs in reverse. Not only do executives – whose portfolios are stuffed full of their own company's shares – stand to lose most of their net worth overnight, but once a company's stock starts to decline, it can expect to see an exodus of the key personnel who are compensated in now-worthless stock. That means that once a company hits a bad bump in the road that sets it off course, it needs to worry about losing all the skilled employees who can get it back on the road.

So growth is important, not for its own sake, but for how it affects the cost basis of companies, and thus determines their competitive outlook. But not all growth is created equal.

Remember when Facebook pissed away billions in a bid to capture "the next billion users"? Those users – people from poor countries in the global south – were not as valuable to Facebook as its US customers. The news that sparked a $250 billion, one-day selloff of Facebook shares wasn't merely about anemic growth – it was specifically about anemic growth in the USA.

American customers are worth more than other users to Big Tech – that's true even of users from other populous countries, and of users from other wealthy countries. Norway is rich as hell, but each Norwegian Facebook user is worth pennies on the kroner compared to American users. And there are brazilians of people in South America, but they're worth even less per capita than Norwegians are. Even the whole EU, with its 500m+ relatively wealthy consumers, is only worth a fraction of the US market.

Why is the American market so prized by Big Tech? Because it the only country in the world at the center of a Venn diagram with three overlapping circles. America is the only country in the world that is:

a) populous;

b) wealthy; and

c) totally lacking in legal privacy protections.

The US Congress last updated American consumer privacy law in 1988, when the Video Privacy Protection Act was passed to protect Americans from the high-tech threat of…video store clerks leaking your rental history to the newspapers. Despite the bewildering, obvious, serious privacy risks that have emerged since Die Hard was in theaters, Congress has done nothing to extend Americans' consumer privacy rights.

There are other rich countries where privacy law sucks, but they are small countries with few people. There are extremely populous poor countries with shitty privacy laws, but they're poor. Tech has to steal the private data of dozens of those people to make as much money as they can get from selling the data of just one American. And there are other rich, populous countries – like Germany, say – but those countries actually defend the privacy of the people who live there, and so the revenue tech gets from each of those users is even lower than the RPU for the undefended poor people of the global south.

America is exceptional in that it represents the one place where there are lots of wealthy people who are totally defenseless. We're an all-you-can-eat buffet for the privacy-annihilating voyeurs of Silicon Valley.

These are the two dirty secrets of Big Tech's economics. These companies are reliant on the fragile narrative of infinite growth, and that narrative isn't merely about global growth, but it is particularly and especially about growth in the USA.

Tech's power comes from an implausible story of discovering an endless stream of Americans to sign up and screw over. That story is extremely load-bearing – so much so that by the instant at which the first crack appears, collapse is only moments away. And boy, are there cracks:

https://www.wheresyoured.at/power-cut/

(Image: Cryteria, CC BY 3.0, modified)

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Upcoming appearances (permalink)

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Recent appearances (permalink)


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Latest books (permalink)


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Upcoming books (permalink)

  • Enshittification: Why Everything Suddenly Got Worse and What to Do About It, Farrar, Straus, Giroux, October 7 2025
    https://us.macmillan.com/books/9780374619329/enshittification/

  • Unauthorized Bread: a middle-grades graphic novel adapted from my novella about refugees, toasters and DRM, FirstSecond, 2026

  • Enshittification, Why Everything Suddenly Got Worse and What to Do About It (the graphic novel), Firstsecond, 2026

  • The Memex Method, Farrar, Straus, Giroux, 2026


Colophon (permalink)

Today's top sources:

Currently writing:

  • Enshittification: a nonfiction book about platform decay for Farrar, Straus, Giroux. Status: second pass edit underway (readaloud)

  • A Little Brother short story about DIY insulin PLANNING

  • Picks and Shovels, a Martin Hench noir thriller about the heroic era of the PC. FORTHCOMING TOR BOOKS FEB 2025

Latest podcast: With Great Power Came No Responsibility: How Enshittification Conquered the 21st Century and How We Can Overthrow It https://craphound.com/news/2025/02/26/with-great-power-came-no-responsibility-how-enshittification-conquered-the-21st-century-and-how-we-can-overthrow-it/

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