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Comment by biggie7 | Hacker News Reader

Airlines are capital-intensive. Software is not. Big difference.

Softwae is capital-intensive as well in that it usually takes a significant amount of labor to build out a product to the point where it can generate revenue. Just because the capital tends to be paid out in salaries instead of purchases doesn't make it capital-cheap.

That's a really insightful comment that has turned my thinking on this area of economics on its head. It sounds like any business is capital intensive if it involves paying lots of people high salaries in order to do it, even if the salaries are the business's main cost.

Of course, software development doesn't have to start out capital intensive. A couple of kids working on their startup in a cheap apartment can work cheaply. They can defer the capital intensive part until they are successful. An airline doesn't have that option.

Capital is not necessarily money paid. If those two kids have the talent to create a successful website they are incurring opportunity costs due to the fact that they could be earning a decent salary with those skills rather than creating a startup.

Yeah, but the 'stair steps' are way smaller. To start an airplane business, you need to go in with some big bucks to get things off the ground. To start a bingo card business or a bug tracking system or a project management system or a lot of other things, you can get by with a lot less, and ramp up as needs be.

But don't you have to pay for servers, electricity, support, lawyers, etc? (I really know nothing big of the social web business, I'm a game developer trying to understand it).

Electricity, support, lawyers, and (with cheap 1u intel servers and ec2) servers are costs which scale with demand. You don't have to spend money on those if you don't have money coming in the door. One airplane is really expensive. If you're an airline you're forced to make bets on future demand which you might lose, and the likelihood that you'll lose is higher when the market for your services is volatile (as in times of high growth).

Thanks, rabidsnail!

Groupon and Facebook just raised some pretty major capital ...

It's all relative. Airplanes are more expensive than servers, but the revenues of airlines are gigantic. United Airlines turned $23 billion revenue in 2010. Southwest did $12 billion. What's Twitter's revenue compared to what they've sunk in servers, development costs, etc.?

Airlines may have pretty big revenues, but their profit margins are tiny, and at the end of the day, net profit is what matters to investors. In 2010, Google only made $30 billion in revenue, which is only a tiny bit more than Delta airlines made. But Google is worth $184 billion, while Delta is only worth $8 billion.

The costs of servers scale extremely well, while the costs of airplanes and jet fuel don't. So web companies have much higher potential profits than airlines, and they're consequently worth a lot more.

net profit is what matters to investor

...that was the point all along.

So web companies have much higher potential profits than airlines, and they're consequently worth a lot more.

This isn't a competition between tech companies and airlines. Airlines merely act as an example an industry which, at least as of 1995 when Buffett first brought them up, had a net loss over the entirety of the industry's existence. What's the net lifetime profit of the tech sector? What will be the lifetime profit of social websites in another ten years?

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