Internet Scale Businesses | The Acquirer's Multiple®

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Internet Scale Businesses. If you are also managing an online business, you may consider working with online reputation management companies to help improve your brand reputation.

Here’s an excerpt from the episode:

Bill: Going back to the base rate discussion, if the new method of business is basically underprice things and just go crazy to get all these network effects going and then– I guess the thing that I get thinking about is, if all these valuations are justified, what does that mean for competition in capitalism? It seems to me, that you’re going to end up with a lot of winner take all. If that’s the case, what happens to labor? I don’t know.

Tobias: It looks to me there’s a lot of competition out there, though. You can start one of these things up and get a massive valuation, raise money on it. That’s competition.

Bill: Well, you can’t [crosstalk] because once they hit scale, then you’ve got to go pitch. We’re going to be underscaled and we’re going to have to build out secondary infrastructure, and they’re going to cut their price–

Tobias: Has anything hit scale yet?

Bill: Well, no.

Tobias: It’s all in the future.

Bill: Yeah, but that’s the whole point. That’s the ethos that everybody’s okay investing under. That does change the game and the strategy that you run.

Tobias: Does that make you want to pay super high multiples for it? This is the conundrum that I have. All of these things are unprofitable because we’re pricing them on where they’re going to get to once they lock in in the future. Everything is–

Bill: Let’s be somewhat generous, they’re overspending on SG&A because they’re expanding.

Tobias: Plus acquisitions.

Bill: Yeah, I agree. I’m just saying, let’s just– we’ll be charitable– [crosstalk]

Tobias: They’re overspending, you don’t have to specify where it’s going.

Bill: Okay.

Jake: Plus, [crosstalk] -compensation.

Bill: Yeah. Okay. I didn’t mean to cut you off, Toby. I’m sorry.

Tobias: No, no, you’re fine. I think I probably cut you off.

Bill: No, you didn’t. I cut you off.

Tobias: I insist. I insist.

Bill: That’s why I like you, guys.

Jake: Well, let’s think about a little bit like some other revolution–

Bill: No, wait. Toby had a thought. You said you don’t want to– [crosstalk]

Tobias: No, no. Go. JT, go.

Bill: Oh, son of a bitch.

[laughter]

Jake: You’ve ruined it again, Bill. Just thinking about other revolutions, let’s just take railroads for instance. Talk about changing the world in a way that how– your competition before that was putting it on a wagon and a horse pulling it across the country. And now, you can move it at a scale that was just like the energy required per pound of movement and distance was just a complete phase change. That’s become ho-hum eventually.

Bill: That was a terrible industry for a long, long time [crosstalk] had some regulation in there.

[crosstalk]

Tobias: But to be fair, it’s still the most efficient way of doing it. We haven’t got any better than that.

Jake: Let’s say airplanes as a thing of moving freight now. Okay, not as energy efficient, but all of a sudden, the world just gets incredibly smaller. That is a phase change of amazing proportions to changing the world of humanity and how do we exist. I don’t feel the same like awe, at like– [crosstalk]

Bill: Oh, you being a Luddite.

Jake: Hold on. Now I can sell my [crosstalk] on it or something.

Bill: Oh, you’re such a hater.

Jake: I could buy a partial interest in an old Camaro. This is fucking changing the world.

Bill: You such a hater, bro. What about– [crosstalk] the Michael Jordan card, man. It’s scarce. There never will be another card printed on-

Tobias: They’ll never print another one.

Bill: -cardboard that people value. You need fractional interest in that card.

Jake: Okay. All these other things were so amazing and became humdrum. Why is it so hard to imagine that these amazing things also don’t become humdrum at some scale?

Bill: It’s not. Where I think there’s some legitimacy in the argument. First thing you touched on is airplanes. A sufficient condition is not that there is a duopoly, because if that was a sufficient condition, Boeing and Airbus would print cash all day, and they don’t. That does not guarantee economic profits that are outsized. So then, I get to Dorsey’s, well, it’s really like a relative scale advantage that you need to look at. If the first player is way bigger than the second and third, that’s where the economics can accrue. That’s where I do understand some of this like really go nuts and build scale today because if you can shower people in the stock comp, and you can get all the best engineers, then maybe you can actually create this network effect where you are truly the biggest and no one can penetrate. I guess that can work. I just don’t have the skills to know when and where and how much to pay.

Jake: Back to our base rates. I think it’s totally possible that there’s lots of those in there but it’s not all of these, and they’re priced as if they’re all going to get it and win. That I think is going against the base rate that you could probably expect.

Bill: You think it’s going to be like DC versus Avengers when the TAMs collide?

[chuckles]

Tobias: Gee, I hope there’s some more [crosstalk] superhero movies this year. I haven’t seen enough of those.

Jake: Yeah, right.

Bill: You’ll get them. Disney is going to crank them out. Don’t you worry.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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