The Benefits of Investing in Infrastructure
Since the time that Harvard’s Michael Porter wrote his groundbreaking work on competitive advantage to James F. Moore’s take on business strategy with his coining the term and concept of business ecosystems, the intellectual pursuit for a clear definition and understanding of economics through analogy has taken many evolutionary turns. Economics can be understood from both the perspectives of physics and biology, and one such topic that can be found in both intellectual bodies is the concept of infrastructure.
What is Infrastructure?
When prompted, most people would say that Thomas Edison’s greatest work was the creation and mass production of the light bulb. Albeit his most famous work, few consider that the more economically impactful act of Edison was not the mass production of light bulbs but of his company, General Electric (NYSE: GE), laying down the electrical infrastructure to deliver power to homes across the United States. Soon after his company started placing the infrastructure to electrically light homes, inventors across the United States began creating electrical appliances (e.g. electric washing machines) that could be used on this new electrical infrastructure.
What was meant for light bulbs turned into the creation of numerous electrical appliances which we still have with us today. It was Edison’s act of supplying power to homes through the creation of an electrical infrastructure that was his greatest achievement, and supplied his company with much more profit than any number of light bulbs he could ever sell.
As demonstrated by Edison with his electrical infrastructure allowing for the creation and growth of the electrical appliance industry, infrastructure in concept is that which facilitates the creation and existence of something else on top or within it and, for the sake of investing, can take the form of a business which allows for transactions to happen through it.
Even in stock trading there wouldn’t be any sort of stock market without there being businesses out there to act as the market infrastructure such as the NASDAQ, NYSE, or any other market. These businesses act as brokers of business dealings and make their profit based on the amount of business that is transacted over their infrastructure. Many infrastructure businesses deal in the business of business.
Advantages of Infrastructure
One of the most potent advantages of being an infrastructure business is that it can easily and quickly apply the advantages of economies of scale. Just like a business that gains the advantages of economies of scale by getting a discount on the per-unit price for making a bulk purchase of its raw materials, when an infrastructure business begins increasing the level of volume of business transacted over its network it too can then make bulk purchases of the necessary raw materials it needs to continue operations for a lower price thereby passing the savings along to the users through lowering transaction costs or by using the additional profit to expand the infrastructure.
Another advantage is that the more users that do business using a particular infrastructure the more valuable it is for each additional business to conduct their own business on that infrastructure. If you are doing business on Infrastructure A, which competes with Infrastructure B, and you find that there is a larger potential base of customers on Infrastructure B then you will most likely shift to doing business on Infrastructure B.
When you shift to Infrastructure B from Infrastructure A, you become a competitor for the other businesses using Infrastructure B which means you will have to lower your price to get customers. By lowering your price you increase the value if Infrastructure B which draws more customers from Infrastructure A. In the midterm this process resembles a positive feedback loop but will eventually slow to an equilibrium point.
Examples of Infrastructure Businesses
One of the most famous infrastructure businesses is Microsoft (NASDAQ: MSFT). Microsoft’s infrastructure product was their MS-DOS operating system which they came out with in 1980’s and allowed them to dominate the operating system market for PCs. Laymen cannot effectively use a computer to conduct their own business without the use of an operating system and Microsoft is the current infrastructure leader in this regard.
Microsoft’s advantage is perpetuated by application developers who want to sell their product to the largest number of potential users. Due to Microsoft providing the operating system of choice by consumers, as opposed to Linux-based operating systems or what’s offered by Apple, a larger majority of application developers will spend their time developing Microsoft applications and not Linux or Apple applications because they can reach the largest number of people in this way.
Most of StockTrading.net’s users find us through another infrastructure business: Google (NASDAQ: GOOG). Despite the discrepancy by different reporting agencies as to how big of a market share Google has for search, they are nonetheless searched on by the majority of people using the internet. If you are a business and you want to be found online then you need to consider being found by companies like Google.
In a recent report Google claims to have helped generate over double its revenue for businesses using its infrastructure for e-commerce and lead generation purposes. The report says that 97% of Americans use their computers and phones to look up local goods and services, and with Google making up well over half of those searches it currently dominates as e-commerce as an infrastructure business.
Infrastructure businesses are in naturally powerful positions and thanks to the basic laws of economics. An infrastructure business’s ability to take advantage of economies of scale is what will lead to their longstanding profitability for stockholders, and being that they are a necessary component for business in general there will be many opportunities to invest in them going into the future.