I like simple explanations, and the business models that some tech companies (especially those that offer an online service only) operate under baffle me. I vaguely understand it, but it’s certainly not simple, and often borders on the irrationally optimistic. And yet, they are making it work…
For example, Sony’s electronics division has lost $8.5 billion in the past decade. Where do most of its profit come from? Selling insurance in Japan. Sony has made a profit of $9 billion in the past decade on just selling people the best term life insurance for seniors over 60.
This seems to be a common theme in the tech industry among the giants. It often times may seem crazy and irresponsible, but at the same time it’s admirable. Amazon is another great example of that. They are willing to operate some of their divisions at a loss for many years based on a prediction of where future long-term profits will come from. Basically, they are investing in innovation, at great risk and cost.
Economics is much easier to understand when you are talking about a lemonade stand. You buy the ingredients, make lemonade, and sell it. A simple equations will help you predict the kind of profit you’ll be making. The moment you start selling that lemonade for less money than it takes to make it, the business model no longer has a common sense explanation. Worse, many companies today give away the lemonade, funding their efforts solely on advertising. Google, for example, made $8.85 billion on advertising in 2012.
We live in a magical new world where our personal information pays for the services we use.