The Stalwart submits: Every time Google (NASD: GOOG) comes out with another blistering earnings report, Paul Kedrosky is quick to note the company's equally blistering capex growth. All this spending shouldn't be too much of a surprise, of course, since they're building a freakin' power plant in Oregon, among other things. Whether they know exactly how they're going to use the giant supercomputer or not, it's likely (if not certain) that they'll be offering more and more hosted services for businesses and individuals. Those two free gigabytes that you get with your Gmail? Just the beginning.
Now there's another half to this equation, which Vinnie Marchandani points out. As companies like Google rapidly up their capex, other companies get to reduce theirs. Instead of making major IT infrastructure investments, they can just rent out Google's (for example) as they need it. Now we're not interested in discussing the technical or theoretical arguments on whether software and hardware are just becoming services or whatnot, but it is interesting from a financial standpoint.
A company that rents out its IT on the basis of need should be able to reduce volatility. During the winter shopping season, it can up its needed computing power, and during the following lull, it can scale back. This should, in theory, reduce earnings volatility and risk, if only marginally.
But this risk doesn't disappear. A bunch of companies reducing risk on slight or marginal basis can add up to major risk for the companies making all of these capital expenditures for assets to be rented out. For example, though it doesn't get as much attention as Google, Microsoft (MSFT) is building its own computer power plants. But what if nobody comes? Or what if Google's Velcro method of adhesing computers turns out to be inferior to a rubber-band based approach? Or what if Google goes with Dell boxes and they all explode? Or what if it's not Google but Salesforce.com that builds the true web OS?
The business model for these capex builders will increasingly come to resemble those of the VC industry, Hollywood and big pharma, all of which are characterized by extreme randomness and volatility stemming from their big initial financial layouts and uncertain path to recoup.
As for the winners of this game. We expect they'll be the companies that build capex when their peers outsource, and outsource capex when their peers are building it out.
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