IIRC, in the biography I read about him, he had the opportunity to invest in pre-IPO Intel, but turned it down because it was a market he didn't get, so he definitely does "lose some" from time to time, but on the whole, it seems to have worked out "ok" for him.
When we're talking about the kinds of companies BRK gets involved in, they are all businesses that you can reasonably expect to be around in 50 years. It's not just a "buy low, sell high, time the markets" strategy. To a certain, hyperbolic, extent, might not the difference between timing INTC and IPET just be granularity of time scale?
Remember the part about the airline industry talk? I can't help but see parallels in quite a lot of tech companies.
In 2008, he said:
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice. (http://www.berkshirehathaway.com/letters/2007ltr.pdf)
There're similarities, but also quite a few differences as well. Airlines are a commodity business: the service Southwest sells is essentially the service United sells. Tech at the micro scale is very much differentiated: the service DropBox sells is very different from the service that AirBnB sells, which is very different from the service Google sells.
Tech is also weird in that software development has significant diseconomies of scale, while software operations has significant economies of scale. Small teams can develop a product faster, but once the product exists and has been proven in the marketplace, it's cheaper to scale from 100 servers to 100,000 servers than it was to go from 1 server to 100 servers. This has historically fueled the cycle of small tech startups being founded, gaining traction, getting bought, and then the founders quitting to found other small startups. It's economically rational for them to do so, because they can develop a product faster with a small team than inside a big organization.
I'm curious how the existence of cloud-hosting like Amazon EC2 will change this market. That's had the effect of splitting software development and software operations into separate markets: before, it used to be cheaper to integrate them into one firm, but now a commodity product exists that makes it feasible for the development firm to remain independent and simply pay a fee for all the operations support.
I suspect it's actually bad for startups in the long run, much like the power loom was bad for textile manufacturers. Since there're economies of scale to operations, that side of the market will tend to a few big players (right now Amazon has a virtually monopoly, and only a couple others even have the capability to offer something like that), while the startup side will tend towards many small firms. In a situation like that, the big firms have all the bargaining power, and so most of the profits will accrue to them.
Softwae is capital-intensive as well in that it usually takes a significant amount of labor to build out a product to the point where it can generate revenue. Just because the capital tends to be paid out in salaries instead of purchases doesn't make it capital-cheap.
That's a really insightful comment that has turned my thinking on this area of economics on its head. It sounds like any business is capital intensive if it involves paying lots of people high salaries in order to do it, even if the salaries are the business's main cost.
Of course, software development doesn't have to start out capital intensive. A couple of kids working on their startup in a cheap apartment can work cheaply. They can defer the capital intensive part until they are successful. An airline doesn't have that option.
Capital is not necessarily money paid. If those two kids have the talent to create a successful website they are incurring opportunity costs due to the fact that they could be earning a decent salary with those skills rather than creating a startup.
Yeah, but the 'stair steps' are way smaller. To start an airplane business, you need to go in with some big bucks to get things off the ground. To start a bingo card business or a bug tracking system or a project management system or a lot of other things, you can get by with a lot less, and ramp up as needs be.
But don't you have to pay for servers, electricity, support, lawyers, etc? (I really know nothing big of the social web business, I'm a game developer trying to understand it).
Electricity, support, lawyers, and (with cheap 1u intel servers and ec2) servers are costs which scale with demand. You don't have to spend money on those if you don't have money coming in the door. One airplane is really expensive. If you're an airline you're forced to make bets on future demand which you might lose, and the likelihood that you'll lose is higher when the market for your services is volatile (as in times of high growth).
It's all relative. Airplanes are more expensive than servers, but the revenues of airlines are gigantic. United Airlines turned $23 billion revenue in 2010. Southwest did $12 billion. What's Twitter's revenue compared to what they've sunk in servers, development costs, etc.?
Airlines may have pretty big revenues, but their profit margins are tiny, and at the end of the day, net profit is what matters to investors. In 2010, Google only made $30 billion in revenue, which is only a tiny bit more than Delta airlines made. But Google is worth $184 billion, while Delta is only worth $8 billion.
The costs of servers scale extremely well, while the costs of airplanes and jet fuel don't. So web companies have much higher potential profits than airlines, and they're consequently worth a lot more.
So web companies have much higher potential profits than airlines, and they're consequently worth a lot more.
This isn't a competition between tech companies and airlines. Airlines merely act as an example an industry which, at least as of 1995 when Buffett first brought them up, had a net loss over the entirety of the industry's existence. What's the net lifetime profit of the tech sector? What will be the lifetime profit of social websites in another ten years?
