WeWork may be a particularly egregious example, but even some of the most established and valuable companies are pulling the wool over our eyes, distracting us with shiny objects, and making us believe in value where there is none.
Unless you've been living under a rock, you're probably aware that WeWork has melted down spectacularly in recent weeks. Though there is still some discussion of the possibility of a much smaller IPO, even going public at a reduced valuation seems out of reach now. NYU Professor Scott Galloway, one of the most prominent voices in the outcry over WeWork's proposed IPO, makes it plain that any remaining hopes that the company will IPO are just wishful thinking, thinks that former CEO Adam Neumann might face death threats for scoring $750 million in loans and other pre-IPO compensation based on his ownership of the company while employees who put years into the company thinking that they would be rewarded with lucrative equity shares are now screwed, and suggests that the company is actually probably worse less than nothing, and might even be guilty of fraud. Though there is collateral damage, primarily for its employees (and possibly larger damage to real estate markets), the larger story is one of markets finally coming to their senses, waking up from a long period of mass insanity, and realizing that sound business models and profitability are actually important, which is a good thing. This debacle has caused attitudes about unicorns to undergo a sea change, and the markets will, for some time now, be very skeptical of companies that lose money for years on end but promise eventually to turn it around and make gobs of money (and that build this house of cards on gauzy, cultish appeals to ideals such as consciousness-raising).
Though WeWork is a particularly over-the-top example, I think the same thing is true of a lot of other companies as well, maybe even some profitable companies that have been rewarded by the markets (i.e., companies other than Uber, Lyft, and other 'unicorns'). This moment, when a lot of attention is being paid to bringing corporate valuations back to earth, asking tough questions about business models, and seeing through rhetoric of changing the world, is a good time to ask if WeWork isn't a symptom of a larger set of problems and failures, particularly in Big Tech. After all, it's the Google/Facebook/Alibaba-style narrative (and associated high earnings-multiple valuations) that WeWork was hoping to capitalize on in going public.
This idea is not as radical as it might seem at first. Here's some other mentions of the idea:
- Are Technology Firms Madly Overvalued? (The Economist)
- Goldman Sachs Is Sounding The Alarm: Technology Stocks Are Overvalued (CNBC)
- Tech Stocks Are Overvalued And It's Killing Innovation (TheNextWeb)
The conventional market view is that FAANG stocks are largely seen as a good investment again, after being declared dead more than once during 2018 and early 2019. I take a bigger picture view, and ask whether the current valuation of these companies is consistent with the real social value they produce.
Let's start with Google, a company that has achieved a multi-hundred-billion-dollar valuation and which has been immensely profitable for almost two decades. What's their business model? Advertising. They engineer or acquire intentionally addictive and attention-sucking products (YouTube, Gmail), use these as platforms to constantly show you ads you don't want to see and to mine your personal data, which they monetize by selling you to other companies. In order to do this, they have fundamentally transformed the Internet, and the Web, into surveillance machines which constantly track users wherever they go, and generate and hoard massive amounts of information about their users. Google had one truly phenomenal product, its first (web search). Its decision to base its business on ads quickly poisoned everything that came after. All of its other products have been an attempt to reproduce that initial wizardy, with mixed but mostly unsatisfactory results.
It's not fair to paint Google or any company with too broad of a brush. Web search and maps are truly useful products (though I would gladly pay for them instead of being treated as the product and having my data used for all kinds of purposes beyond my control. Their more recent products have felt like an attempt to recreate or capitalize on that original magic - though they do offer some additional conveniences, very few of them are truly new or bring us things that we never would have had before. Without Gmail, I'd still use email - and my email probably wouldn't be the target of algorithms trying to decide what to sell me. Without Docs and Sheets, my access to my documents wouldn't be as convenient, but I would still write, track my finances, and do the other things I do with GSuite products.
Facebook - don't even get me started. I think most of us can agree that Facebook is a cesspool of fake news, unnecessary apps, and notifications. The small amount of value this product has generated for me (allowing me to get in touch with a few high school and college friends that I otherwise wouldn't have had contact info for) has been vastly outweighed by the costs imposed on me (time lost, bad information provided, anxiety over my data being misused or compromised, etc.). Facebook has rocketed past simply being an annoyance and a time suck, and ascended to the lofty realm of actually threatening the integrity of our democracy. Fake news, driven largely by social media's inscrutable algorithms, is poisoning the well with false information, much of which is designed to be intentionally misleading in order to trigger partisan outrage or, even worse, make people distrust politics and other people altogether. Alarmingly, as part of a plan for world domination, it has exported this apparatus to billions of people, who are now potentially subject to misinformation and interference in their domestic politics. We cannot have a healthy democratic society on this basis. By this measure, the negative externality losses from Facebook are incalculable - how do you put a price on the existence of free and open society?
Amazon - Jeff Bezos likes to motivate Amazon employees by telling them that they are building something to tell their grandchildren about. This is true, but for reasons other than the ones he has in mind. We will probably have to have this conversation with our grandchildren, because they will demand answers as to why we built a society in which consumption and maximal convenience were elevated to the highest level of importance, while the environment, people's health and well-being, interpersonal relationships, and other core human values, were relegated to afterthoughts. Amazon exploits its workers (even the high-paid ones) and the environment and destroys social value by refusing to pay its fair share of taxes, relying on third-party arrangements which free Amazon of responsibilities to ensure safety and provide benefits (such as with the network of delivery companies it has helped build to make next-day shipping a reality).
Amazon is a master at reaping all the benefits while shifting costs to the environment, independent contractors, municipalities, and others (in other words, onto all of us). It has permanently transformed publishing and other industries as part of its plan to take over all of commerce (is there anyone, other than Jeff Bezos, that thinks this is a good idea?). And it is doubling down on the fossil-fuel economy that threatens our very existence on this planet. Bezos has taken billions of our dollars and is building a space company so that he can be one of the first people to go to space. And to top it all off, he has the gall to say that we have to go to space because we're destroying the planet. This is the real tech business model - make a handful of people filthy rich so that they can escape the planet they made uninhabitable and make themselves immortal (not even joking). Leaving the rest of us to fend for ourselves on a dying planet and defying mortality itself make Adam Neumann's delusions of grandeur (be president of the world, solve the problem of orphaned children) look decidedly parochial (though he was on board with the immortality thing).
Without Amazon, e-commerce would still exist. You might not get your stuff delivered quite as fast, or have such an overwhelming number of choices, but how important are those things, really? Most of us could use less stuff and more time.
For years, these companies were given a pass to portray themselves as a new way of doing business that was better for its employees and the environment. We now know that that's not true. But the market has priced in all the benefits and high expectations, while largely failing, so far, to price in a lot of costs and risks (which have mostly been externalized by tax-avoidance, effective lobbying, etc.)
It's long past time for an honest accounting of the value of these companies. When negative externalities like rampant gentrification and unaffordable housing, environmental damage, monopolisation of people's attention, loss of data and other autonomy, are taken into account, it's possible that these companies are worth much less than the markets says they are (or even, perhaps, nothing or less than nothing).
This is not just an academic question, and it could have serious repercussions in the markets, particularly now that the economy is softening, and might get rapidly worse due to the trade war, antitrust action, and other factors. As Goldman analysts point out in the article above, stocks with the highest EV/sales ratios typically underperform peers over the long term. And unfortunately stock markets tend to amplify changed in sentiment. Now that we are at the end of the business cycle and things are starting to turn down, these valuations could be severely tested. This chart shows that software company valuations (which typically have some of the highest EV multiples) are significantly higher than their historical averages (worryingly, they are near their all-time high at the peak of the dot-com boom) :
The antitrust probe of Big Tech is a sign that attitudes are changing, and there is now a growing discussion that these companies have gotten too big for their, and our, own good. There are real questions of (the destruction of) social value here - at one time in the US, there was consensus around the idea that too much concentration of power and money was dangerous and harmful, and needed to be actively controlled. Perhaps we can find common ground in this belief once again.