Over the past 15 years, clever digital ideas have captured
imaginations, transformed habits and reshaped industries and economies.
It might seem surprising, then, that so many great digital
products in this generation have come from bad businesses.
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Spotify has reshaped music, but the company is still figuring
out how to turn a consistent profit. Uber has altered cities and become a way
of life for some riders and drivers. The company has also spent far more cash
than it has brought in over its 13-year life.
App companies like DoorDash, Instacart and Gopuff have hooked
some Americans on deliveries of restaurant meals, groceries or convenience
items, but hardly any company that brings fresh food to our doors has made it work
financially. Robinhood helped make investing accessible and fun, but it hasn’t
made free stock trades profitable. Twitter is a cultural force, but it’s never
been a good company.
There are some tech stars that are also (arguably) great
businesses, including Facebook, Airbnb and Zoom Video. But how did so many
companies with transformative technologies break the rule that a business dies
if it can’t balance its checkbook?
The optimistic view is that we want companies like Uber and
Robinhood to have time and money to hone their products, grab as many customers
as possible and work out the money kinks later. And some of these digital stars
are profitable, depending on how you define “profits.”
The bummer view is that we may be living in a technology mirage
and the persistence of businesses that shouldn’t survive has robbed us of true,
lasting innovation. Let’s hash it out:
Perhaps this is what a revolution looks like.
Last year, Uber spent nearly half a billion dollars more cash
than it generated — and that was a big improvement. If Uber were a family
business, it would probably be long gone. Faith that technology disruption is
just getting started, and investors’ hopes to cash in from that, has kept Uber
going.
The company’s supporters say that Uber is a leaky canoe by
choice. Uber expanded into many cities and countries at once rather than going
slowly and capitalized on its popularity by expanding into a hub for
transportation and delivering meals, groceries, booze and other goods to our
door.
The hope is that this is Step 1 on Uber’s journey to something
grander, better for everyone and profitable. A similar transformation is
happening at Spotify, which is trying to overcome the ugly math of music
streaming by expanding into potentially lucrative podcasts. Instacart wants to
pivot from being a grocery-delivery go-between to also selling software to
supermarkets to manage their businesses. (Software tends to be very profitable.
Grocery delivery is not.)
In many ways, this is exactly what we should want. Because
investors have believed in their business plans, companies with good ideas have
the time and the money to dream big, expand and figure out how to give
customers what they want — and eventually generate real profits, too.
Amazon is a famous example of a company that spent more cash
than it brought in for a few of its early years — a temporary condition until
it had both a good product and a great business. Until the past couple of
years, Netflix also needed to keep borrowing money to stay afloat. And some
companies, including DoorDash and Spotify, are unprofitable under conventional
accounting measures but do bring in more cash than they spend.
Or perhaps hope has obscured common sense.
The other possibility is that these digital ideas never made
economic sense in the first place and they’ve been propped up by investors’
misplaced hopes. In that view, this generation of “Profits? What profits?”
digital companies is like a homeowner trying to enlarge a house with a rotten
foundation.
In the Margins newsletter, the financial writer Ranjan Roy and
his collaborator Can Duruk have repeatedly argued that the winning digital
ideas of the past decade have not necessarily been the smartest ones, but the
ones with the most money to try (and keep trying).
“When there is that much capital focused on the wrong idea, we
might never collectively find the right idea,” Roy told me. “It is a perversion
of capitalism.”
What opportunities are we missing, Roy has asked, to explore
alternative restaurant-delivery business models that could work better for
diners, restaurant owners, couriers and delivery companies? Maybe Uber has both
burned a bunch of other people’s money and erased the chance for other
businesses and governments to improve transportation. Instead of Spotify’s
ingraining a pay model that hasn’t worked for most musicians, alternative
approaches might have thrived.
Those companies, which haven’t found a way to make their
products work financially, have become like a forest that hasn’t been culled of
dead trees and undergrowth. New life doesn’t have the oxygen to flourish.
I find it disorienting that more than a decade into a profound
period of digital change, it’s still not clear how history books will reflect
on this moment. Are we at the beginning of lasting tech-turbocharged
alterations to the world around us? Or has this all been a well-funded dream?
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