Posted Thursday, May 31, 2012, at 10:56 AM
The Amazon.com of the pizza sector
Pascal-Emannuel Gobry did a provocative piece yesterday titled, "It's Official: Everybody Hates Tech," pivoting off Facebook's post-IPO slump, Apple's low P/E ratio, Kayak's decision to delay its IPO, and persistent nonsensical buzzing about a tech bubble.
Here's what I think is official. There's no such thing as a "tech" company and there is no high-tech sector.
I had this epiphany when listening to a podcast recently where software patents were being discussed. Someone was talking about the early days of patenting in America when they were used for things like steam engines, and steam engines were contrasted to the "technology industry." But since when do steam engines not count as technology? I think the pioneers of the industrial revolution would be very surprised to learn that they weren't involved in any high-tech innovation. The point of course is that "technology" doesn't mean technology, it means computers and the Internet. But while we certainly have a utilities sector in the United States we don't have an "electricity sector" composed of all the firms that use electricity as part of their core business strategy.
Here in D.C. I sometimes like to go to the Takorean Truck for Korean tacos for lunch. How do I know where it's going to be? By subscribing to their Twitter feed. Computers and the Internet, in other words, are integral elements of the business model of the modern gourmet food-truck industry. But are these trucks part of the tech sector?
The way Amazon works is that users visit their website, select stuff to buy, and then Amazon delivers it to your house. Papa John's website also does this.
Facebook runs a website that people read, and then it sells ads to firms looking to market products to Facebook's audience. The New York Times also has this business model.
So what's tech got to do with it? Shouldn't companies that attract an audience and then sell the audience to advertisers (i.e., Facebook, Google, NBC Universal, the New York Times Co.) be compared to one another rather than to companies that make consumer goods (i.e., Apple and Ford) or intermediaries between goods-producers and consumers (Amazon and Target)? These firms all use computers and the Internet as core elements of their business strategy. If you think there's a tech industry, then P/E ratios among successful tech companies are strangely varied. If you drop that pretense, then it's still not obvious to me why the market gives Amazon a much more aggressive valuation than Apple, but you perhaps have the beginning of an answer—they're in different lines of business, so there's no ex ante reason to expect them to valued in a similar way.