How Do Tech Firms Survive When They Pull A Loss?
So many tech firms overachieve in many areas but somehow forget to make a profit. So how do these companies survive?
During the internet gold rush of the 1990s, thousands of companies were launched without sufficiently robust business plans. From online retailers like Boo.com and Value America through to service providers including Broadcast and Open.com, many firms followed the “get large or get lost” maxim of the time. And eventually, they all went out of business.
A Losing Game
Recent warnings by social media wunderkind Snapchat that it may never be profitable have raised concerns about the potential for a new wave of high-profile internet failures. No online brand is too big to fail, as the once-mighty AOL and Friends Reunited demonstrate. Rumors abound that social media platforms could be among the next round of high-profile casualties, with Twitter seemingly in a tailspin and Google+ effectively written off as a failed venture.
How Do These Companies Survive?
So how can a company like Snapchat post losses of half a billion dollars in 2016, publicly admitting that profits remain elusive while continuing to spend ever more on advertising and staff? Perhaps surprisingly, there are several reasons why loss-making tech firms survive:
Stock Market Support
When a tech company becomes trendy, some people will take the risk of investing regardless of current turnover or future profit projections. Shazam and Sprint are among high-profile brands attempting to prop up their loss-making operations with stock market flotations and IPOs. Though investors rarely back a company without a sound business model, a degree of hysteria can develop around zeitgeist brands. The $50 billion market valuation being attached to Uber is illogical, since it far exceeds the value of established airlines and car rental firms.
Reinvestment
Despite being worth an estimated $370 billion today, Amazon’s commitment to endlessly plough profits back into its business produced losses in each of its first nine trading years. However, the fruits of this reinvestment are literally paying dividends now. Amazon Prime and its titular streaming media service are hugely successful, while the Amazon Echo home hub is another lucrative sideline. By speculating to accumulate, Amazon can finally deliver the quarterly profits its industry-leading turnover and unparalleled market share would seem to deserve.
Acquisitions
While car manufacturer, Tesla, has reinvested its spare capital internally, other companies have used gross profits to buy up competitors and specialists. Sometimes that works, as with Google’s purchases of YouTube and Android. Conversely, Microsoft’s $7.9 billion purchase of Nokia and Dell’s $67 billion investment in storage specialist EMC wiped established companies off the map, while damaging the profitability and reputations of the parent brands. Yahoo bought 115 firms over a twenty year period, but it’s just been sold to Verizon for $4.4 billion.
‘Too Big To Fail’ Syndrome
Sony reported net losses in five out of six years earlier this decade, but in 2016 it finally returned a $2.7 billion profit after completing a cost-cutting program. No investor or financial institution wanted Sony to fail, so they underwrote losses and put up with disappointing dividend payouts. As is often the case with exciting startup firms, investors in brands like Sony play the long game and hope these companies will eventually begin to deliver healthy returns on investment.