Networker: Negative for capitalists
Negative for capitalists
Investment guru Warren Buffet is used to making large sums of money for investors in his Berkshire Hathaway company. At the company's annual meeting at the end of April he announced: "For society, the internet's a wonderful thing but for capitalists, it's probably a net negative". This refreshingly honest distinction between the interests of society and the interests of capitalists reflected the problem that capitalism is having with the internet.
In the first place, the internet was developed (with United States government funding) to solve a military logistics problem, how to keep a war going when military communications centres were destroyed. It then had a lengthy incubation in academia before emerging as a global email and discussion group facilitator in the early 1990s. Business and sales requirements were tacked on later, with the growth of the World Wide Web in the mid-1990s.
Since then huge fortunes have been made in two ways. First, equipment and telephone companies have picked up hundreds of billions of dollars selling services to hopeful internet entrepreneurs and internet end users. Secondly, sharp investors have manufactured huge profits from often worthless internet share scams on the stock market.
In Australia, some of the veterans of the 1980s boom who escaped prosecution by heading overseas were seen returning in the mid-1990s to set up internet ventures. Literally dozens of mining companies made a financial killing by converting themselves into "dot coms", or internet, companies.
The problem for institutional and other major investors has been that while the worthlessness of many of these shares was obvious, they have seen huge market valuations. Despite the use of tricks (such as releasing relatively few shares in highly promoted companies to artificially limit supply and boost price), overall these shares, along with related technology shares such as telephone companies, have had a large role in stock market gains.
Many traditional investors have been hesitant to invest in shares they know are inherently worthless because the companies involved will never make a profit. In doing so they miss out on profits that smarter operators have achieved. So Buffet buys boot and brick manufacturer Justin Industries, rather than chasing an internet start-up.
The other issue that has upset Buffet is the growing practice of internet shoppers using automated processes to compare prices across companies and then buy from the cheapest. Buffet's view is that this will narrow the opportunity for profit by individual companies based on buyers' ignorance of cheaper alternatives. This is a negative spin on the argument that the internet will make capitalism more robust by eliminating inefficiency.
One fact ignored by both views is that very little that is sold on the internet today makes a profit. From books to airline tickets, the great majority of high profile internet companies subsidise the sale of goods in order to gain a share of the market. This is an untenable practice from a capitalist point of view in the medium term, but in the short term the bigger the company turnover, the higher the company's share price.
In the long term, a profitable internet requires it to be converted to something like the television networks, dominated by advertising and a "commercialise everything" principle. That would involve eliminating much of what's currently useful about the internet, and changing internet users' habits to focus on payment and consumption. For the moment this plan isn't working too well.
BY GREG HARRIS