As Mark Twain pointed out to us it’s not what we don’t know that poses the danger, it’s what we’re sure is but ain’t that causes the problems. So it is with The Guardian and their ideas about business. Here they manage to get one thing about right but then go completely off the edge in their second belief about how it all works:
Gadgets: the hardest thing to make now is a profit
Well, yes, that’s always been true. As many - near every perhaps - attempt at business proves, four out of five such attempts not surviving the first five years. Adding value, the same thing as making a profit, is difficult. They do get this part correct as well:
That’s the challenge for many consumer electronics firms. Not how to make things, or how to distribute them and get them in front of potential buyers. It’s how to make a profit.
The only correction we’d make is that this is difficult for all forms of organisation attempting to produce anything - it’s not limited to capitalist firms trying to make consumer electronics. Actually, 12% of British businesses fail this test every year for that’s the rate of business deaths.
But then what The Guardian believes goes off the rails:By contrast, in software, all the significant costs are in development; reproduction and distribution are trivial – a digital copy is perfect, and the internet will transport 0s and 1s anywhere, effectively for free. If your product is free and ad-supported, you don’t even need anti-piracy measures; you want people to copy it and use it. Software companies typically have gross margins of around 80%, and operating profits of 40% or so.
No. If this were true than absolutely all of the capital in the world would be in software in pursuit of those profits and none would be in hardware or anything else. They’re measuring the profit margins of successful software companies, not the universe of all software companies. This is the equivalent of observing Apple’s 40% margins and concluding that phone making’s a really great business to enter. Entirely missing that Samsung and Apple between them often enough account for more than 100% of the industry’s profits. Meaning that everyone else in the industry is, in aggregate, making a loss.
Yes, this is important, for we’ll never be able to make sense of capitalism itself unless we understand how difficult it is to make a profit and how few manage to do so. It’s only once we do grasp that that the system’s rewards to those who achieve that most difficult task make sense.