Putting internet companies in perspective

In recent days, I have blogged here about regulatory arbitrage and here about the problems with valuations of internet companies. How do we place internet companies in perspective?

Fundamentally, how much of the value of these firms are due to regulatory arbitrage? How much of it is due to monopoly characteristics? How much of it is due to size effect? In total, how much of profits is attributable to rent-seeking dimensions and how much to innovation? 

As a metaphor, one could argue that in their respective spheres, the internet companies are a bit like the runner at the beginning of a marathon who has sprinted away from the rest and is racing ahead and widening the lead, making everyone gush and gasp in awe. Little do we realise that marathons are not about the first few laps.   

In this context, Amazon's logistics chain's efficiency should be placed in perspective. On a comparable basis, the production line of a Toyota is far more technologically complex, automated, and efficient. In terms of brute-force efficiency and productivity, the factory floors of the Taiwanese companies like Foxconn or Feng Tay are hard to match. Similarly the end-to-end design-to-market chain of Inditex. All of them are more complex, with higher granular stakes and much more moving parts.

Much of the aura around internet companies arise from the novelty value of the technology as well as its salience in our daily lives. It is far easier for us to relate to the wonders of digital manipulation and telemetry integration than something associated with hydraulics or civil engineering or molecular biology. It's just that while the latter are fields which are at mature stages of their technological development, the former is only emerging. Its suite of technologies like internet (speed), smartphones, cloud storage, data analytics, and artificial intelligence are all in their growth or nascent stages.

Accordingly, some of these fascinations with efficiency improvements with data analytics that internet companies are known for are purely the way of fads. The small Kaizens in Toyota's production line were once the rage among management consultants.

The internet companies pale when compared in terms of technological complexity and engineering challenge to the Vestas' generator which generates 20 MW of wind power, or Herrenknecht AG's tunnel boring technologies, or TSMC's chip foundries and printers, or Yaskawa Motoman or Fanuc's robots, or the precision tool manufacturing facilities of several deutsch mittelstands, or the several marvels of civil engineering that are being built without any hype.

On a comparative basis, one could argue that the operations and logistics management of the world's largest construction and mining contractors, both operating in far more demanding conditions, and involving far higher stakes (human lives and physical dangers), are far greater achievements. 

Another thing going around for internet companies is the incremental evolution by way of addition of completely new features. So a new App or feature on Facebook immediately gets used by a large number of people. Similarly, a new subscription model with purchasing through Amazon. Or new library additions to Netflix. Or a tweak to the App of Uber or AirBnB. More fundamentally, how much of all these are good-to-have wants which increase conveniences compared to the great industrial companies which service our felt needs and actually improves human condition.

Incidentally, it is a moot point whether Amazon is the best in class in the e-commerce sector. I have yet to see an apple-to-apple comparison with Alibaba, including on commercials (stripped off the AWS cross-subsidy).