How Profitable Is Technology Really?

Many people believe that the technological advancements in the past decade alone have been truly remarkable, and beyond anything that we could have imagined. However, others, including some high profile figures within the tech industry, beg to differ. Regardless of whether or not technological progress has been relatively fast or slow, it has certainly changed the business landscape for good.

Let’s look at the over-discussed case of Facebook for a second. Approximately 1 in 7 people are on Facebook (NASDAQ: FB) and this company is the only company that competes with Google (NASDAQ: GOOG) when it comes to dominating the internet in any way. However, Facebook’s 2012 revenue is expected to be about $5 billion. It just seems remarkably low when you think that it has one billion users, and especially when you consider that Apple (NASDAQ: AAPL) did $36 billion revenue in the last quarter of 2012 alone.

If we look into the world of apps we also see a mixed picture. I can’t believe how many apps in the Google Play Store, the iTunes Store and PC apps are completely free. But this is what consumers increasingly expect. Developing apps and regular updates is often time and cost intensive, but it’s difficult to identify the moment when developers can start charging for it. As marketer Seth Godin says, there is a huge gulf between charging zero (i.e. free) and charging something.

Is it any coincidence that companies such as Google are trying to control the internet? These open platforms including the Apple and Google app markets are democratizing technology whilst simultaneously wiping out profits. Instead of paying shareholders who got burnt in the last quarter of 2012, perhaps Apple should be using it’s $137 billion cash pile to start buying up small tech companies that will be nicely profitable for years to come. There’s no doubt in my mind that control over innovation equals control over profits, even if these profits are going to decline significantly over time.

Think carefully about which tech shares you buy. Look at where the profits come from, are they sustainable? Personally I’m quite wary of companies where 100% of revenue is produced through advertising. I haven’t clicked a single Facebook ad for at least 18 months. Many tech companies’ share prices tanked in 2012. That being said, after reading an interview with David Richards in the FT, I bought some shares in his company Wandisco (LSE: WAND) at the beginning of this year, and they’re up almost 82% as of February 15th 2013. However, I’m sure the stockmarket is well overvalued at the moment, and I think it has a long way to fall before I buy anything else.

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