Editors' pick: Originally published May 19.
There's no meaningful debate that capitalism is about sorting ideas into winners and losers. Although we treat it as a side effect, one of the great functions of the free market is to encourage good ideas and weed out the bad. It's a sign that things are working when pharmaceutical companies get rich curing diseases and Enron goes bankrupt.
It's less encouraging when the inventor of the Snuggie makes a fortune.
The corollary also holds true. If good ideas can predict what will succeed, then financial success stories can help us to understand what our economy values. And that's no small thing. From the internet to derivatives and foreign trade, the 21st Century economy is increasingly taking on a character of its own. What works and what fails can teach us a lot about what that character looks like, and what priorities it rewards.
For example these ten tales that are about a lot more than just who made some money over the past few years...
The little bird that fueled a revolution, Twitter is one of a handful of companies that have arguably defined the modern internet. So much conversation and web traffic is driven on and through the platform that it's almost hard to imagine an internet without it.
Which is why it's such a surprise that the company keeps struggling to make money. In what has shades of the 1990's tech bubble and Pets.com, major tech companies running on the fumes of venture capital have become increasingly common stories.
"The prevalence and magnitude of operating losses is one thing that distinguishes the modern economy from previous eras," said Professor Stephen McKeon with the University of Oregon's Lundquist School of Business. "When firms are experiencing high sales growth rates or pushing the boundaries of technological innovation, investors are now more willing to tolerate extended periods of operating losses."
"We're observing high stock returns and large financial statement losses within the very same firms, which has shifted how the public thinks about financial success," he added.
For many entrepreneurs long-term viability isn't necessarily the point. For developers like the founders of Whatsapp and Instagram, two services acquired by Facebook for enormous sums after just a few years of operation, the profit came from starting something great then getting picked up by a bigger player.
While that idea in and of itself isn't new, countless business owners over the years have hoped to make their real money by selling up, what has changed is how fast this can happen. Online, where an idea can go from genius to Prodigy in the span of a year, buyers want to profit off of an idea while they can. They're willing to pay big to do so.
"The speed at which companies can scale up in the modern economy is unprecedented," McKeon said, "and it's leading to acquisition prices very early in the life cycle that would have been improbable in previous eras."
Whatsapp is a classic example, a Facebook acquisition when it was barely 18 months old for the king's ransom of $1 billion. The question is, can Mark Zuckerberg's empire make that money back?
In the wake of the 2008 crash, ordinary people around America learned a lot more about the world of finance than they ever thought possible, and the more we learn, the more complicated those mechanics seem to get. Paper gets wrapped in paper, which is packaged in what kind of seems like wishful thinking, to produce financial products that somehow make a lot of people very rich. Far from the days when we knew about stocks and that bond from grandma, today the idea of "securities" has meaning to the man on the street.
Enter exchange traded funds.
ETFs are a relatively new financial product, but already they're having a disruptive effect on the marketplace. They act like a combination of mutual funds and stocks, with value that can track groups of assets while being tradable like a common stock. This offers the reduced volatility of a mutual fund or index with the liquidity of a salable commodity.
They have been, in the words of Erik Gordon, a Professor at the University of Michigan's Ross School of Business, "big successes" that have shifted investment away from more traditional, high-fee mutual funds.
Transformers: Age of Extinction was a transcendently terrible film. From its ludicrous plot to the second-worst McGuffin in cinematic history ("transformium," one short step below Avatar's "unobtanium"), this movie embraces the cult terribleness of the Rocky Horror Picture Show without the self awareness. Shoehorned into all of that, somewhere around the time Optimus Prime rides a dinosaur, is the film's sudden transition from 'Murica to Hong Kong. I'm sure that made sense to somebody.
This is not a rare feature of American cinema, because Hollywood is making a fortune off of the truly vast Chinese cinema-going market.
While American theater attendance is slipping in China, it's growing by leaps and bounds, and as a result studios are increasingly writing their films to appeal to that country's audiences and censors. It's why films like Looper set locations in the Middle Kingdom, why the Chinese megastar Fan Bingbing shows up X-Men films and one reason why action movies are increasingly replacing comedies at the box office.
Jokes are culture specific while giant robots whaling on each other know no borders. And that fact will determine many of the movies you see for the foreseeable future.
Securitization is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instrument to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.
Essentially, multiple loans, mortgages or other financial products are "combined" into one general fund that investors can buy piecemeal. They then get a share of the proceeds, both repaid principle and interest as time goes on. The process creates liquidity by creating a market where lenders can sell off debts, making them more likely to loan money by improving the chances of turning a profit.
Securitization has, perhaps more than any other economic trend, defined the economy of the early 21st Century, triggering the Great Recession through over-reliance on mortgage-backed securities.
"Securitization has been a big success," Gordon said. "It lowered the cost of borrowing for buyers of cars and homes and students borrowing tuition money."
"Securitization has been a big failure," he continued. "It created an illusion of safety. It packaged trash and labeled it 'credit-worthy.'"
But for a while there, people made a fortune.
Out in Vietnam a young coder had an idea. Over the span of two days in 2013, the 29-year-old Dong Nguyen coded a game about guiding a bird through a field of moving, Mario-Brothers style pipes. He released it that May.
It became a sensation. Although the app lingered in obscurity for several months, when users eventually did discover it in the winter of 2013/14 the game took off. In less than a month, Nguyen went from obscurity to making over $50,000 a day from the in-game advertising. Then he pulled a Howard Hughes and pulled it from the App Store.
It's the kind of success story that the modern economy allows.
"Technology has made it easier, and in most cases cheaper, to start and scale a business," said McKeon. "This is certainly true for software companies, but it really extends to all corners of the economy. Manufacturers, service providers, commodity buyers, and many others can now reach and transact with their customers with fewer frictions than ever, allowing them to scale quickly when they get the product and business model right."
Nguyen certainly got the product and business model right, and scaled plenty quickly after that.
Depending on whom you ask, the concept of shareholder value is either the worst cancer plaguing our economy these days or a good way to promote a business's core function: generating wealth for its owners. Occasionally bad buys, like Martin "Pharma Bro" Shkreli, become the public face of that.
Shkreli became famous after his company bought an obscure drug and elevated the price by 750%. It's an example of the "shareholder value above all else" philosophy that has dominated boardrooms for the last 30 years, as the young man did incalculable harm to countless sick people in an effort to boost the bottom line.
"My shareholders expect me to make the most profit," he said in an interview. "That's the dirty, ugly truth."
Shkreli may be the face of this issue, but whether its his front page antics or subtler issues like the Tribune Company leveraged buyout, the concept of shareholder value has profoundly altered the relationship between executives and the companies they run. They are often encouraged no longer to think of their company as a provider of goods and services but as a piggy bank from which investors have the right to expect the maximum of cash.
During the Recession a new type of infomercial seemed to take over late night TV. Cash-for-gold services were suddenly promising oodles of money for all of that unused jewelry that, apparently, the average American insomniac had just lying around. Those same signs and stores began to pop up, particularly in hard-hit neighborhoods, serving the same economic footprint as pawn shops and payday lenders.
For a few minutes there, it seemed like the cash-for-gold model was here to stay.
In reality the cash-for-gold boom was the result of an alignment between economic hardship and booming gold prices. Between 2009 and 2013 the price of gold soared as high as $1,800 an ounce at the same time as millions of Americans were desperate for extra cash in their pockets. The result was virtually inevitable, as is the ebb tide today. With the economy in better shape and the price of gold normalizing, these businesses are slowly fading out from their Recession-fueled heyday.
You can stop binge-watching Anthony Bourdain long enough to pay attention to this entry, because Netflix, Hulu, Amazon Prime and all the rest of their streaming ilk have profoundly changed the way we purchase and consume entertainment.
It almost goes without saying that Netflix has been an enormous success, so much so that it is currently (tepidly) trying its hand at producing movies. It devoured Blockbuster with almost comical ease, a loss for those of us who like first-run films without having to wait for shipping, and has replaced "watching" with "binging." Most importantly, on-demand services like Netflix have completely changed consumers' expectations, not just of what they will and won't wait for but for what they will and won't pay.
"Online, on-demand entertainment has been a success and will be even bigger," Gordon said. "Cable TV, with its forced bundles of channels, most of which most consumers don't want, and its tricky pricing plans, will fail. That's why they are trying to merge and buy other businesses."
The question is what the entertainment field will look like in an a la carte world. Much like newspapers have historically depended on the Lifestyle section to subsidize foreign correspondents, many cable channels depend on bundled packages to keep the lights on. It may be a different media world when SyFy has to survive on viewership alone.
No, this is not the story of how we do business. Or, it is to the extent that Amazon and other online retailers have completely changed the retail experience, but there's more to the shopping than just that. There's the idea of physical spaces.
Historically our towns and communities have been built around the places in which we do business. Old village squares were built around the market green, American towns radiate out from Main Street and in the modern suburb all roads lead to the local shopping mall. These places aren't just where we buy the latest Chumbawumba CD (they'll be back), but where we gather and socialize. We bump into neighbors at the Gap and have awkward first dates at the food court. We linger over produce when we're sick of sitting at home and just need a place to be.
One click shopping is making those shared spaces an increasingly endangered species.
"Online retailing has been a big success," Gordon said. "It brought undreamed of variety to consumers, including consumers in small towns. It is rendering regional malls obsolete except as a place where high schoolers lounge and seniors take their daily walk or Tai Chi class."
This is not to say that Amazon will be the end of all things but that the American community will probably need a redesign over the next 50 years. We are increasingly phasing out the need for local hardware stores, but not that urge to share a space with friends and neighbors.
On the other hand, perhaps that explains the almost concurrent success of Starbucks.