A book published this month says the internet, once seen as the vehicle for individual empowerment, is now a machine for making a handful very rich and allowing bosses and bureaucrats to keep tabs on the rest.
Andrew Keen’s The Internet Is Not The Answer says it has put bookshops and photographers out of business. Google and Facebook have become among the most valuable businesses on earth while employing almost no-one.
And it’s facilitated abusive rage-mongers that can anonymously drive their victims off-line and, occasionally, to suicide
Keen says this trend will continue, but offers no solutions.
There’s no doubt the internet’s changed everything. A lot for the better.
But there’s also no doubt that there’s something wrong with a system that values Facebook — which made a comparatively modest $1.5 billion net profit in 2013 — at $203bn, based on yesterday’s stock market price.
That’s more than the GDP of Portugal and of Vietnam.
Keen says that one of the big problems is a tendency for the internet to concentrate market power.
“There are just certain structural qualities that mean the internet lends itself to monopolies,” he is quoted as saying today by The Guardian. For those not lucky enough to be employed in a senior position in one of the technology behemoths, the internet is becoming a place where low-income workers with no capital sell themselves by the hour in a casual labour market where the old rules don’t apply.
None of Keen’s observations are that original or that surprising.
But it’s unusual for someone that’s worked with the internet for more than 20 years to express such a comprehensively damning view of what it’s produced and will in due course create.
The problem with Keen’s view is that he focusses attention on technology. An inanimate object like the internet is incapable of doing either right or wrong. It has no conscience and can possess no soul.
It’s people and the way they use technology that matters. And people are never beyond reach.
What’s gone wrong with the internet is that company law, intellectual property codes and accounting rules have been repurposed to facilitate the creation of capital out of nothing.
Companies can conjure up a book value from unproven future income streams.
Facebook has projected forward spectacular rates of revenue growth, based on past trends, and uses these forecasts as a way of valuing the business now. This never used to be allowed when companies were based on tangible capital. But it is now.
This is an approach that could be considered uncontroversial, nevertheless. But it goes horribly wrong when it’s used by Facebook as the basis for issuing shares with a par value of $30 billion.
Most parts of Facebook’s balance sheet are contentious. More than 40 per cent of its assets at the end of 2014 were defined as goodwill: this is the difference between the book value of the business and the amount shareholders valued it at. It could be more accurately said to be a way of measuring the extent to which people have over-paid for their Facebook shares.
A further 27 per cent of the balance sheet is in the form of cash and short-term investments. Facebook can’t invest the money raised from investors. It’s holding it with the bank.
Less than 15 per cent of Facebook’s assets are physical.And this proportion is likely to shrink over time.
And yet, with almost $18 billion in cash at the end of last year, Facebook has the financial capacity to smash the competition and it’s doing it. And that’s before it’s even thought about serious borrowing (its non-equity balance sheet liabilities are only 10 per cent of the total).
The story is repeated with Google and others.
Keen says these companies are taking over and he’s essentially correct.
But there’s nothing inevitable about their overweening power and technology has nothing to do with it.
What’s more important than microchip capacity and bandwidth is the extent to which the rules used to define and value corporate assets have been unrecognisably changed in the past 25 years.
This has been done by accountants, lawyers and legislators and not by geeks.
And it’s allowed internet companies to project the unforeseeable, turn the imaginary into real financial capital and construct new business empires on nothing.
Once that’s understood, the way to deal with the problem Keen charts is comprehensible.
And it’s not that difficult either.