The Silicon valley model
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There seems to be a model of business in Silicon Valley. Silicon Valley is, of course, the main IT hub in the world. Home to such IT giants such as Intel, Google, Yahoo, Cisco and many more, the Valley certainly knows how to make money.
But then there is another model: a business model that delivers a great service, but one that is unprofitable or at least not likely to make much money.
This is a business model that develops a service, doesn't make money but claims potential and then is overbought by an IT giant such as, say, Microsoft.
This model can be seen in many IT start-ups. Take the case of Finland's Skype, an online phone service that allows for free Skype-to-Skype calls. eBay bought Skype for $4.1 billion, but several years later has yet to decide how to make money off it and is starting to lament such a generous buyout. This question is how to make money off a service that attracts customers due to being free? The whole reason d'etre of Skype is that it is free.
YouTube is another example. Bought up Google for $1.65 billion, YouTube has yet to turn a profit and may end up instead costing Google money in copyright infringement lawsuits.
This is the Silicon Valley model that is destroying capital. Instead of investing money in R&D, firms are foolishly pouring capital in exciting but unprofitable ventures.
There is now talk of Tweeter repeating this model: grow big and then wait to be bought out. The recession may dampen an buyout deal.
What IT giants need to understand is that they do not need to own every new service. Just because Tweeter is cool does not mean Microsoft has to own it. Google does not have to grow through acquisitions. A path of growth that means eating up unprofitable companies is no growth path at all.
