Equifax –– Addressing the Facts

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It’s no surprise that hundreds of millions of people are frustrated with Equifax after one of the largest security breaches. And, let’s be honest, many Americans must have saw it coming considering the numerous hacks we have had recently. Hackers found a “vulnerability” in Equifax’s site leading them to retrieve a sufficient amount of Americans most crucial information – social security numbers, credit card data, identity (The Economist, 2017). Because Equifax is amongst one of the largest CRAs, the breach ended up affecting all three of the big players – Equifax, Experian and Trans Union. What goes up, must come down.

The Economist is calling it an “Equifailure” and we could not agree more. Talk about an incredible fall in share prices, taking about a 15% dip after TransUnion, Equifax, and Experian stocks were on a stable, upwards spiral that showed growth in price from January 2017 to May 2017 (The Economist, 2017). Not only are we looking at a huge loss in the market, but a huge risk for millions of Americans. This poses the danger of identity theft and the potential for the government to have to cover the losses. And to make matters even worse, Equifax employees sold shares of the company when they heard about the breach and didn’t even notify the public until weeks later. We don’t like the sound of that.

The big question is why are they still allowed to store people’s data? Wouldn’t you think that after numerous hacks they would be able to re-locate people’s most important data, or at least protect it? As one of the biggest credit holding agencies, Equifax should not be easily hacked. The issue, however, is that it is extremely “central to the American financial system.” That means that nothing can be done to fix the issue and Equifax will just keep going on as if nothing happened in the future and keep storing data even if we don’t know about it. To make matters worse, it is regulated by the Federal Trade Commission and Consumer Financial Protection Bureau, and they aren’t even choosing to halt business (The New York Times, 2017). The real question is why not? Do they not think it is a monetary concern by any means? The employees of Equifax knew what they were doing when they each sold their stake and ended up 2 million dollars richer, while the losses of millions of Americans, frozen credit accounts, and stolen identities leaves them with nothing but fear and financial burden.

Let’s examine a CRA further to understand why our data will continue to live on and potentially, get hacked again. First of all, it is regulated by some of the biggest economic players –– each federal agency regulator is detailed in the photo below (this photo keeps uploading as low-res but the regulators are the OCC, the FRS, the FDIC, and OTS)

There is a lot of power attached to a CRA. If that power wants a CRA to continue, it will, especially if it is helping the economy. Beyond these federal agencies, CNN explains that the market can’t fix this either. “Markets can’t fix this because buyers choose between sellers, and sellers compete for buyers. In case you didn’t notice, you’re not Equifax’s customer. You’re its product.” (CNN, 2017). This hack was the result of millions of Americans valuable information, in which Equifax is in the business of ‘selling’ that valuable information. Our information is out there, and it’s only a matter of time (if not already) until it is completely exposed and stolen. The only solution is government involvement, but to the government this is not a big enough issue, or an issue that they need to take care of because it happens in data security a lot. Beyond that, so many people are choosing to complain to Equifax when the real entity that needs to step in is the government. Currently, though, there is not the proper data to support the government’s involvement in this hack and Equifax, and other CRAs will continue to “collect and sell our data [because] don’t need to keep it secure in order to maintain their market share. They don’t have to answer to us, their products” (CNN, 2017). Let’s continue to be weary of the information we share especially when it comes to CRAs. We never know what can happen.

https://www.economist.com/news/finance-and-economics/21728956-financial-industry-worries-about-who-next-big-data-breach-suffered

http://www.cnn.com/2017/09/11/opinions/dont-complain-to-equifax-demand-government-act-opinion-schneier/index.html

Debt Creates a Double Win-or-Lose Bond Between China and America, Even No Chance to Pay Back

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That “China owns the U.S. National Debt” has become an universal knowledge for American people, being taught from the lower school to the university. How does this debt relationship work? Will America ever pay off its debt? Why is China willing to keep borrowing to the United States?

The U.S. National debt exceeded $20 trillion on September 8, 2017, surpassing the American gross GDP. Based on the data as of May 2017, China has cut its American foreign debt holding to $1.102 trillion, no longer holding the largest portion. With $1.111 trillion, Japan now has become the No.1 U.S. debt holding country.

Owning U.S. Treasury notes benefits China by increasing the demand of U.S. dollar and so decreasing the value of RMB (as the Dollar-to-Yuan conversion increases) . Thus. Chinese exports are cheaper than those of America. Consequently, Chinese cheap exports gain global market and produce more jobs opportunity for Chinese people. The strategy of devaluing RMB led Chinese economy to grow 10 percent annually for the past three decades.  On the other side, American people can enjoy lower consuming prices and lower interest rates. American economy also grows.

Will America ever pay off its debt to China? Probably never. There are three paths for America to pay back its debt: cutting spending, raising taxes, and boosting GDP. Unfortunately, there is not much in American budget to cut to save $1.102 trillion. It would terminate any politician’s career to raise tax for paying off Chinese debt. Boosting GDP is far more difficult to execute than to say.

However, such double-win situation might not last longer. Since the Chinese government purposefully decreases the value of RMB, the Chinese businessmen are hurt by the interest rate. They start to take loans in dollars or invest outside, leaving cash flowing out of China. Moreover, the Chinese government has asserts its voice in the global market through this low-value RMB process. The Chinese government ambitiously aims to replace RMB to Dollars as the global reserve. On November 30, 2015, the International Monetary Fund awarded the RMB status as a reserve currency. The IMF added the RMB to its Special Drawing Rights basket on Oct 1, 2016. At last, that the American government allows the value of dollar to drop made the debt China holds less valuable.

As China begins to sell parts of debt out, the situation is shifting to a double-lose. American interest rate would rise, and the economic growth slows. The Chinese exports also loses competitiveness.

The anxiety is not necessary. China would not sell all or large amount of U.S. debt at one time because it will drastically devalue dollars and ruin the international market. The American and Chinese economy will still be bonded together through this tremendous debt for a long time.

Sources:

https://www.thebalance.com/dollar-to-yuan-conversion-and-history-3306089

https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

https://www.thebalance.com/will-the-u-s-debt-ever-be-paid-off-3970473

https://www.thebalance.com/u-s-debt-to-china-how-much-does-it-own-3306355

https://www.thebalance.com/yuan-reserve-currency-to-global-currency-3970465

The Case of the Fed

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The Case of the Fed

The U.S. Federal Reserve is set to announce a multi-year plan tomorrow to shrink its balance sheet of $4.5-trillion of assets, which are amassed from series of Quantitative Easing following the 2008 financial crisis. The process will start gradually, depending on housing arrangement and refinance, according to The Economist.

In the latest issue of The Economist, an article titled “Dangerously Vacant” suggests that Trump should reappoint Janet Yellen to be the Chair of the Board of Governors of the Federal Reserve System. Yellen’s term as Chair will end in February, which means that four of the 12 seats of the FOMC, the Fed’s committee that sets interest rates, will be vacant. The article argued for the reappointment of Yellen because it would provide efficiency for future directions and make the vacant posts easier to fill. The Fed’s future tasks will be tricky, according to the article. The Fed will focus on reversing the effects of quantitative easing and to solve the puzzle of why low unemployment has not juiced up inflation.

 

In the classic Keynesian structure of macroeconomics, monetary policy is the wheel that pushes the economy forward in times of recession. In a Global economy, Keynesian policies seem problematic. The Fed’s policy will send a signal to Central Banks worldwide, leading to simultaneous shrinking.

 

What exactly does this new cycle mean to the Global Economy? To understand this, we must start by looking into the effects of QE. One hypothesis is that QE can bring down long term interest rates, and thus increasing investment. But skeptics argue that it’s a game of managing trader’s expectations for short-term rates and the extension of which produces money, i.e, money producing money. If this scenario is true, then there will be no guarantee of a bright economical future due to the fact that what moves money around is not products but blind optimism. Claudio Borio, an economist in Bank of International Settlements, said on Financial Times that bonds and equity prices are beyond their fundamental values, and thus they could struggle to repay when rates rise. Moreover, amid this huge bubble of pure guesswork and hyperbole of values, companies are less likely to increase investment because of a small margin of error. Thus, Central Banks will have to decide to get rid of QEs, and the time for the Fed is now.

Exactly what is “faith in the economy” triggers my curiosity. It seems that the economy right now is “the blind led by the blind”—no one knows what’s going on so why not just follow the trend. The cause is that all previous economic models have failed to articulate an efficient model for a global economy, perhaps it’s because no central banks want their respective countries to give way to other country. We don’t even know what does a global economy mean, because there are too many secret deals between different forces and there seem to be no higher authority to regulate people’s greed when one can simply refuse to acknowledge one’s greed and irrationality. The mentality is that in the modern Capitalist society, for one to be successful, one must possess a certain kind of “animal spirit” that can transcend our mortality and justify our dimmed past. This explains why sales of Ayn Rand’s Atlas Shrugged increased dramatically during 2009, once climbing to the top of Amazon’s fiction bestsellers in April, 2009. Alan Greenspan admired the book and even defended the book as “celebration of life and happiness”; popular TV shows such as Mad Men also has significant resemblances to Randian ideals. However, despite its seemingly irresistible attractiveness among all social classes, Randian ideals is never successful when applied to monetary policies. Maybe it’s useful in a modern individualist society for one to build an indifferent and strong attitude to “create”, but I would argue against it. If one recalls the classical Greek way of thinking, it would be easy to dissolve the doubt. Aristotle put it nicely in Politics, “as man is the best animals when perfected, so he is the worst when separated from law and justice. For injustice is most dangerous when it is armed; and man, armed by nature with good sense and virtue, may use them for entirely opposite ends. Therefore, when he is without virtue, man is the most unscrupulous and savage of the animals.”

 

More on the issue: http://fingfx.thomsonreuters.com/gfx/rngs/USA-FED/010050VD1YM/index.html, www.theguardian.com/commentisfree/2013/oct/11/who-responsible-us-shutdown-2008-meltdown-slavoj-zizek, https://www.youtube.com/playlist?list=PL08C0992430469B34, https://youtu.be/9FrHGAd_yto?list=PL023BCE5134243987&t=759

 

Is Amazon the Retail Apocalypse?

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Do you remember where you were on June 12, 2017? I certainly do; I was riding a very delayed 1 train on the New York City Subway Red Line to the 59th Street stop just two blocks from my office. With the fear of being late to work driving my actions, I omitted my morning coffee from Starbucks and ran to the 9th floor of my building. I was greeted by a too-quiet office in which each one of my co-workers’ eyes were glued to the television screens playing CNBC. The bold chyron stating, “Amazon to Acquire Whole Foods” at the bottom of the screen silenced me faster than I could regain my breath.

 

The implied monopoly of Amazon’s takeover of Whole Foods provides a tremendous threat to brick-and-mortar retailers. Following the announcement that Amazon was buying the mega health food chain, stock prices of top grocery stores all declined. Shares of Kroger, the parent company of Ralphs and Food4Less supermarket chains, were down 14.41% to $21.02. Target and Costco shares fell 9.7% to $50.08 and 6.83% to $167.77 respectively.

 

Meanwhile, thousands of Whole Foods employees began to ponder whether Amazon’s inclination for automation would result in their jobs being replaced by robots.  Amazon’s ability to cause such a resounding effect on the stock market after the announcement of a proposed acquisition, while simultaneously intimidating suppliers and competitors, highlight’s their dominance in the economy.

 

Wall Street Investors are placing large wagers that Amazon and the new fast fashion trend will knock out numerous stores in the next months and years to come.

 

Traditionally, the retail industry has been admonished by the stock market. This assertion is supported by Bespoke Investment Group’s stats on the average percentage of shares that investors are shorting, or essentially betting against. Fortunately for investors and unfortunately for retail companies and employees, this retail short sale has been a winning trade.

 

Insipid sales stemming from low investor confidence has resulted in hundreds of store closures, bankruptcies, and countless layoffs. On average, 15.6% of shares among retailers are being shorted, which, by the Street’s standards, is very high.

 

The investors of Wall Street are not the only demographic to blame, as many Americans favor the ease and hassle-free experience of online shopping as opposed to taking trips to local malls. Meanwhile, the brick-and-mortar stores that have survived are struggling to compete with fast fashion-modeled stores like H&M and Zara. Due to this blatant shift in consumer behavior, Wall Street experts have grown exceptionally bearish when it comes to investing in multiline retailers, including general merchandise chains like Kohls and department stores like Macy’s.

 

The impending apocalypse for the brick-and-mortar stores isn’t here just yet, though. Some retail giants have maintained their dominance in the industry; take Best Buy, for example. Many consumers and investors alike feared the Technology and Electronics chain would be quickly overpowered by Amazon; however, Best Buy’s stock is up 37% and is actually outperforming the online shopping megastore.

Economics of Refugees – The Numbers That May Benefit America?

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President Trump was elected into office a little over 10 months ago. At which time, his political platform differed vastly from the rest of the conservative candidates, for he was the only one to call for a radical, even extreme, stance against immigration and refugees. The reason for this, in his words, was to “bring jobs back to America”, a phrase that hints at the competition immigrant and refugee workers bring with them. However, a recent New York Times article respectfully disagrees, at least partially to the entire idea of that incoming workers may hurt the country’s economy.

The truth is, studies have shown that refugees do have a positive side to their hosting country. The article notes that, while the Trump Administration rejects this finding, the refugees will be “paying more in taxes than they consume in public benefits, and filling jobs in service industries that others will not.” In other words, the refugees may not create such a burden as widely imagined by the Americans upon the American economy, and will likely not cause tension within the already competitive industries.

Still, the rejection of this finding does not come as surprising, as anti-immigration is a core pillar supporting the Trump political platform. It is not uncommon for politicians to “selectively accept” findings that are convenient to them and deny the rest. The climate change debate that has been going on within the American politics for years, which has long become a laughingstock of the United States in other countries, only showcases this further.

Disregarding the debate of terrorism associated with refugees and looking at the matter purely from an economic perspective, the economic gain of cheap labor combined with a solidifying of the working force demographics could only benefit the United States. The States, like Canada, are both immigration countries whose very foundations were made up by immigrants from the 17th and 18th centuries. Unlike China and India, the United States never had a substantial domestic population to support its economy, and to turn away from immigration is to undoubtedly a move away from the foundation of this fine nation.

Perhaps, if President Trump truly intended to “Make America Great Again”, he should reconsider the basis of some of his policies.

Naw, this Evan kid is just fake news. Don’t listen to him. We’re good. We’re great. America’s great. America’s gonna be great.

 

Ubernomics

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Learning economics is a difficult undertaking for students like myself. Unlike biology or mathematics, economics is not tangible or easy to visualize. Even its definition–the study of scarcity–leaves me puzzled about the nature of economics as a field of study.

However, Uber, a global ridehailing service, is an economics student’s saving grace. Uber’s market is an ideal for what we want the economy to look like. It has characteristics of a competitive market: low barriers for entry, many buyers and sellers, and somewhat homogenous services. Most importantly, the prices riders pay are a direct response to supply and demand. Uber is an excellent example with which to apply numerous economic terms and theories.

Take, for example, consumer surplus. According to Britannica, consumer surplus is “the difference between the price a consumer pays for an item, and the price he would be willing to pay rather than do without it.” It’s a number that has been impossible to estimate in the real world (unless you are a fan of the Infinite Universe theory) until now. Steven Levitt, an economist at the University of Chicago, was able to estimate a consumer surplus measurement using Uber’s data, which collects information about completed trips and those that were considered (user opened the app) but never taken.

On Freakonomics’ podcast from September 7, 2016, Levitt explains that even though Uber has an algorithm to come up with the ideal prices of surged rides, the company instead only multiplies the cost by tenths (1.1, 1.2, 1.3) for customer convenience. This series of minute discontinuities allows for the estimation of the price-sensitivity of Uber riders.

Now, what is price sensitivity? In Greg Ip’s The Undercover Economist, he explains the concept: “when I raise the price, how much do my sales fall? And when I cut the price, how much do my sales rise?” So, it’s the extent to which the price of something affects if a person will buy it.

Levitt examined Uber’s database of many similar consumers facing incrementally different prices to examine the price sensitivity of the riders (at what price will they leave the app instead of booking a ride). Levitt also used this data to estimate Uber’s consumer surplus. He extrapolated that in 2015 the consumer surplus in the United States was $7 billion, which means that riders were willing to spend $11 billion on rides, but in reality only paid $4 billion.

The “Regression Discontinuity Analysis” that Levitt used to estimate consumer surplus can also be used to illustrate a real-life example of the demand curve. Britannica explains that the Demand Curve is a graph illustrating the relationship between price and quantity. The curve slopes downward from left to right because price and quantity are inversely related. It’s an artificial construct that economists use to examine real-world situations. But once again, Uber can be of assistance. Uber’s price surging data, all of the small jumps in price faced by similar consumers, can be added together to discover an instantaneous demand curve. When there is no surge, the price of rides is average and so is the amount of drivers. As an oversimplification it can be noted that demand is at equilibrium. When surges occur, prices go up and and the amount of drivers available declines, so demand is high.

Uber has been in the news a hundred times over for all of its scandals and controversies. But Uber deserves more positive press–it led me to pass my econ quiz!

 

 

 

 

The Effects of Hurricane Harvey on the National Economy

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The devastation of Hurricane Harvey on Houston, the 4th largest city in the United States, has been predicted to negatively impact national activity and employment, according to Chad Moutray, chief economist for the National Association of Manufacturers.

The damaging effects of Hurricane Harvey left physical scars on Texas, and to an extent, a few bruises to the national economy. While some can argue that huge widespread events actually spur economic re-structuring, the Federal Reserve reported that industrial production decreased by nearly 1% In August from July. To put this number to scale—this decline was akin to that during the 2008 recession. This decrease in production was attributed to less oil drilling and petroleum refining.

Due to a decreased supply of oil, gas prices rose, and as a result, consumers have less money in their pockets to spend on other things. This accounts for the “C” component in the GDP equation.

At a rudimentary level, economists expect overall output to decrease in short run because of storm-related job losses, but note that it will ultimately increase in future quarters when jobs and structure start to come back. In the long run, however, the Harvey won’t drastically affect the big economic indicators: GDP, unemployment, and inflation.

The Wall Street Journal forecasted that Hurricane Harvey will “reduce the pace of job gains by about 27,000 jobs a month” in Q3. By Q1 of 2018, forecasters predict a boost of 13,000 jobs. Economists also predict GDP will fall by 0.3% in the third quarter.

To add salt to the wound, most homeowners and business-owners did not have flooding insurance, which additionally decreases their ability to spend and invest. It’s almost analogous to the effects of a stock market crash, says Constance Hunter, chief economist at KPMG.

Although the commerce department could not completely isolate the effects of Harvey on brick and mortar retailers, the weeks following the storm saw a mix of sales drops and increases. Necessity goods sales increased, including home furnishing supplies and grocery stores, while sales of non-necessity goods decreased. For instance, gas-station sales rose 2.5% in a month, due to higher oil prices. Internet sales fell a percent, the largest decline since Q2 2014. Another uptick to the equation is a 0.2% increase in auto sales, due to the loss of automobiles (a necessary good) from the storm.

Overall, a small dip in productivity will be seen for a quarter, due to rising oil prices, lost assets, and decreased consumer spending. Though only a short-term scale, consumer spending, which accounts for two-thirds of GDP, will still have a profound effect on the surrounding economic and regional locus.

Sources:

https://www.wsj.com/articles/u-s-retail-sales-fell-in-august-1505478885

https://www.wsj.com/articles/u-s-industrial-production-fell-in-august-as-hurricane-harvey-hit-gulf-coast-1505481802

https://www.wsj.com/articles/how-hurricane-harvey-will-ripple-through-the-u-s-economy-1504792802

Equifax Doesn’t Ring a Bell? Well it Should Because It Probably Affects You

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Equifax Inc., one of three major U.S. credit reporting agencies, or in other words, a company who has access to your most personal information from social security number, driver’s license, to credit cards.

The company receives all of this personal data most likely from your bank provider, and their “data breach it discovered on July 29” (Wired), is one of the most high-profile security breaches in its’ history. In fact, Equifax stated that 143 million customers—almost half of America—were affected by this breach, and from that number, 209,000 of the U.S. consumers had their credit card numbers exposed.

So why does all this matter? Equifax has most likely put your personal information at risk of being available online. And this data “packaged together sells for upwards of $30 per identity on online black markets, according to Mark Nunnikhoven, head of cloud research for cybersecurity firm Trend Micro.” He adds, “it’s enough to allow cyberthieves to take over you online” (qtd. in CNN).

If this isn’t still clear to you, it means you probably won’t pass a credit check, thus, making it impossible for you to take out any loans. And on top of that, for example, “[if] someone gets a driver’s license in your name and runs a red light or gets a speeding ticket, you’re on the hook,” according to CNN. CNN adds, that “[recovering] from identity theft isn’t easy,” to say the least, and “you could have to provide months or years of information to clear your name.”

The potential for economic disaster is detrimental. So if you’re poor, you’re basically screwed. The worst part is, since “Equifax still hasn’t given reliable information on who exactly was affected,” according to Quartz, that means everyone has to play victim and take responsibility on minimizing potential damages—damages, again, ranging from “thieves using stolen identities to file taxes, obtain drivers’ licenses, run up medical bills or commit crimes” (Quartz)—this not only takes up time, but money.

In a 2016 survey by the Identity theft Resource Center, out of 300 participants who were victims of identity theft, “52% earned household incomes below $50,000 per year, and 33% earned less than $25,000,” as well as an average of “$1,343 in stolen assets” for the average victim for identity theft costs—and on top of that, “31% lost their home” (Quartz).

Now imagine if half the United States was affected, which is what Equifax put us in risk of. Sounds like another depression just waiting to happen. Basically, this Equifax breach can affect you in the most difficult of ways messing up your life in so many countless ways.

On top of its affect on us, who matters, Equifax’s “shares [dropped] more than 8 percent in after-hours trading,” according to Bloomberg. And following the massive security breach, Equifax executives sold “nearly $2 million in shares of credit bureau Equifax Inc,” actions compared to “insider trading,” said Reuters. These stock sales are currently being investigates by the U.S. Department of Justice, the Securities and Exchange Commission, as well as the Federal Trade Commission.

On September 15th of 2017, the Equifax released a statement on their site, announcing the retirement of their CIO and CSO, as well as offering “free credit monitoring and identity theft protection to all U.S. consumers.” If you haven’t already, it’s time to start taking some precautions.

Hurricane Harvey’s effect on the Economy

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It is obvious that the tragic event of Hurricane Harvey has left thousands of families devastated, as it has destroyed billions of dollars’ worth of homes and properties. What is not so obvious, however, is the effect it will have on the U.S. economy. Although it is extremely difficult to accurately predict the impact a hurricane such as Harvey will have on the economy, economists are breaking down the impact by economic indicators.

According to the Commerce Department’s Bureau of Economic Analysis, Texas accounted for 8% of the total U.S. economic output with a GDP of $1.5 trillion in 2016. The cost of the hurricane is estimated to be somewhere between $70 to $100 billion.

Inflation is an important indicator of Harvey’s impact, exemplifies through the increase of gas prices in Houston. According to the AAA, the average gas price has increased from $2.35 to $2.66 a gallon. This number is expected to continue to increase more before settling down. The increase in inflation will have its own impact on consumer spending, forcing people to spend less money on secondary items.

Hurricane Harvey is expected to have an impact on initial jobless claims, or people filing for unemployment for the first time. Historically, we have seen an increase in claims about 2 weeks after a massive hurricane, such as Katrina in 2005 and Sandy in 2012. This could account for all the people who lost their jobs because of companies shutting down or working part time due to weather conditions.

However, at a more macro level, Harvey’s impact on the economy may not be as bad as it sounds. According to Goldman Sachs, the rebuilding of homes and properties in the future could possibly offset the damage done to the overall economy. Although in the short run it may seem harmful, in the long run, properties are going to require rebuilding. This will motivate construction companies and their workers to migrate to Houston for job opportunities.

It has only been a few weeks since the hurricane struck Houston, therefore only allowing room for predictions about the future of its economy. It will be interesting to see how the impact of this hurricane will compare to other historical hurricanes in the past. Will Harvey be the costliest? Will it have a larger negative impact on the economy, or will rebuilding efforts balance it out? We have yet to find out.

References:

http://www.foxbusiness.com/features/2017/09/07/how-hurricane-harvey-will-ripple-through-u-s-economy.html

http://www.businessinsider.com/hurricane-harvey-economic-impact-2017-8/#the-cost-of-harvey-1

 

 

 

Social Tech: Intangible Product and Unimaginable Scale

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One of the most amazing concepts about social media is that as a business, it operates at an unimaginable scale with what is essentially an intangible product. By “intangible product” I mean that a company like Snapchat, Twitter, Instagram or Facebook doesn’t actually have a product that uses traditional distribution methods since it’s online, and you can’t physically touch what arises from it (contrary to Amazon).

Thus, the use of servers end up becoming the company’s main cost if the product successfully scales to thousands, or in the best case, millions. 

One of the best examples of the one-of-a-kind scaling nature of social media is the rise of Instagram. It launched in October 2010, and within three months, had 1 million users. In February 2011, the company received $7 million in Series A funding from Benchmark Capital. About a year later in April 2012, Instagram was valued at $500 million after securing an even bigger round of funding, $50 million, from Sequoia Capital.

All Instagram allowed you to do was share photographs with your friends and other people you know. It doesn’t sound like anything revolutionary, but when it exists within a instantaneous medium, it ultimately changes how people communicate. So at first, even if the idea doesn’t seem world altering, its value is actually greater than one would expect. Similar to how the telephone and telegram revolutionized mass communication, new age companies like Instagram, Twitter and Facebook have certainly restyled the way in which people interact.

The real issue for these businesses is making legitimate revenue. Since their product isn’t actually built to sell, the main way they make money is through striking advertising deals. So in the early stages when these companies don’t have ads running, investors bet massive sums of money based on user growth. The logic is, once ads sell to a huge user base, the company will then be worth all those dollar bills.

According to TechCrunch, Snap Inc. was projected to amass near $1 billion in revenue in 2017, but through Q1, it notched only $149.6 million, and at the Q2 close, it hit $181.6 million. These numbers have steadily increased over the years, as you can see from the graph below of the 2015 quarterly revenues. From $4 million of revenue in Q1 to $33 million in Q4, the growth of revenue was obvious in 2015 because the user growth was still flying high.

Since user growth has slowed in 2017 for Snap, the revenues haven’t been going up at such quick of a rate. With this trend happening, it appears Snap is trying its best to convince advertisers to use the app, releasing an Ad Manager platform in June that helps to optimize ads for appearance on the app.

Fifty years ago, most of what I’m talking about in relation to technology didn’t exist. And people would’ve thought building a billion dollar company, while making little to no revenue, was impossible. But now, the ever increasing use of mobile technology has opened up a market for intangible products, whether or not the actual money being earned measures up to the product’s hype.