The digital subversion of classical capitalism won’t last
Byju’s, once the darling of India’s digital economy with a valuation of $22 billion in late 2022, is attempting to raise money at a valuation that’s a small fraction of that today. Through its roller-coaster ride, one thing has remained constant: in its 13-year history, it appears to never have been profitable. This is standard for internet companies.
Amazon did not make profits in its first 6 years. How have we arrived at this model of ‘digital capitalism,’ a system where valuations are independent of firm profitability for long periods of time? Many would ascribe the phenomenon to the internet being characterized by network economies, the phenomenon of benefits to users increasing with the addition of new subscribers. For instance, a social network such as Facebook becomes more valuable for each user with an increase in the number of users on account of the increasing number of people that can be reached.
Therefore, the argument goes, competition on the internet must inevitably resemble winner-takes-all contests, with each firm trying to achieve a critical mass of subscribers in the earliest possible time. But social networks and e-commerce platforms are not the first examples of industries with network externalities. The plain old telephone service also became more valuable for each subscriber with every new connection.
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