> In the 20th century, U.S. companies put their excess profits into corporate research labs. Basic research in the U.S. was done in at Dupont, Bell Labs, IBM, AT&T, Xerox, Kodak, GE, et al. This changed in 1982, when the Securities and Exchange Commission ruled that it was legal for companies to buy their own stock (reducing the number of shares available to the public and inflating their stock price.) Very quickly Basic Science in corporate research all but disappeared. Companies focused on Applied Research to maximize shareholder value. In its place, Theory and Basic research is now done in research universities.
I'm not seeing how you get from share buybacks to a shift in priorities in corporate research. If there's a fundamental reason why it can't be done now how it was before the 80's it's not that.
Not why it can’t be done so much as why it isn’t done. Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
Before Tim Cook Apple had never done a buyback - Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter. Most CEOs are not going to take such a strong position when they, the stockholders, and every other executive can be guaranteed a financial reward through a buyback.
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
This isn't right but it's adjacent.
Executives don't need buybacks to get whatever compensation. Their compensation is negotiated and you can write the contract to make it whatever.
However, paying dividends is a taxable event, which means shareholders don't like it. You have to pay the tax on the dividend immediately instead of when you sell the shares, even if you just use the money to buy more shares. Buybacks don't work like that unless you're the one who sells your shares in the buyback. Which you can be if you'd rather have the money immediately (and pay the tax) than de facto increase your holdings in the company.
If transferring money to shareholders as dividends forces them to realize taxable gains before they want to then they'd prefer the company keep the money and invest it in something internally instead. Buybacks give them away around that.
But that's not necessarily bad. The shareholders (the ones who sold their shares) get the money instead and then invest it in something else, ideally a different company so that the existing large company doesn't get even bigger.
Also, when the company keeps the money, it doesn't have to use it for R&D at all. Companies often use it to acquire other companies, which is the worst.
You don't really want a tax incentive to make big companies bigger.
I've been reading the Chernow biography of Rockefeller, and this simply isn't true. We've almost never enforced "anti-trust law", and it's basically never been particularly effective.
The Sherman Act was widely considered a failure (even after passage in 1890). It did little/nothing to affect the fate of Standard Oil, which actually grew for a decade after passage, to over 90% control of the market by 1904. This is despite the state of Ohio engaging in a much more successful legal attack, based on technicalities of the trust charter, having nothing to do with the federal law.
The thing that actually brought down Standard Oil was...competition. By the time the company was actually broken up in under the Sherman Act in 1911, it had declined to ~60% market share. The overall story is essentially the same as today: the law ends up being used to punish declining companies for prior bad behavior.
Laws mostly don't work by actually filing cases. They mostly work by deterring malicious activity because people don't want a case brought against them. The cases are only for the ones who fail to be deterred, which is pretty uncommon for large corporations because they can afford lawyers to tell them what not to do.
The problem comes when you erode what was meant to be a strong antitrust law through decades of narrowing interpretations and then it's not deterring them anymore.
> the law ends up being used to punish declining companies for prior bad behavior.
The solution to this one is to take the politicians out of it and allow customers to file antitrust class actions.
Chicago school assholes backed by economic-right postwar "think tanks" managed to radically shift our standard for "harm" in anti trust enforcement, back in the '70s, though a combo of lobbying and positioning their folks in the right places. The result was that it became nearly impossible to take anti-trust action. That's why it seems like we suddenly stopped enforcing it—we did. This was followed shortly by a shift way to the right by Democrats on economic issues (among other things—listen to Clinton in the '90s talk about crime or schools or lots of other topics some time, he sounds exactly like a Republican) after Reagan's landslide, which put any hope of reversing that bad course on hold indefinitely.
The first notable push-back on that state of affairs was Lina Khan under Biden, who ever so slightly course-corrected us back toward healthy market competition in the tiniest of ways, and every business bro reacted like she was committing mass murder. Meanwhile, we need that times ten for at least a decade just to get us back to something resembling functioning markets. At this point I doubt we'll see a shift back toward reasonable market regulation... ever. Plutocrat capture of the levers of power is so complete that the only way I expect the US to see serious anti-trust action ever again is as a tool of corruption.
> However, paying dividends is a taxable event, which means shareholders don't like it.
Shareholders love dividends because it is taxed as capital gains ( long-term capital gains if you own the stock longer than 1 year ). It's why most of the publicly listed stock ( of profitable companies ) pay dividends - because shareholders want dividends. Apple was forced to pay dividends by investors. So was Meta. As was Alphabet. All under shareholder pressure because dividends get tax as capital gains. Any company sitting on a pile of cash will get pressure to pay it out as dividends by shareholders.
Hm. Not quite right. Regular shareholders don't like dividends. It means you have an immediate tax liability so you are paying taxes twice. The company paid taxes, and now you have to pay taxes. Then that money has to be invested elsewhere eventually incurring another tax event.
It's much better to have the company buy shares back. That way the stock price goes up. You then only face the tax event once you sell the stock later in the future. So you just avoided a tax event.
The reason for dividends is that pension funds and the like do like dividends for whatever reasons.
Individual investors and people who have a long term approach like Warren Buffet are against dividends.
I like having a dividend. A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something. It also forces a certain discipline in the company, since shareholders don't like dividends getting cut. It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
> A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something.
All of the whims that go into the market price are still there. If you're a shareholder who doesn't care about the share price you're going to have a bad time.
> It also forces a certain discipline in the company, since shareholders don't like dividends getting cut.
Which usually leads to mismanagement more than anything because the company gets into a situation where they should lower the dividend but is under pressure not to and then starts eating their seed corn so they can still pay the dividend.
> It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price.
To be fair share owners also like the stock price to go higher, they also like dividends (and higher dividends would tend to drive the stock price higher too), but an X% increase in share price caused by buybacks is favoured over an X% dividend because it isn’t immediately taxed.
My understanding is that executives prefer buybacks because they mostly are compensated with stock options, which don't pay dividends (until exercised) but which appreciate disproportionately from buybacks.
Dividends actually directly lower the stock price. Keep an eye on your portfolio when your holdings go ex-div -- the price falls because it no longer includes that cashflow.
It does not lower it in any long-term sense, because, unless it's a one-time dividend, there's another dividend next quarter, and generally assumed to be continuing payments for the foreseeable future if the company is healthy.
This doesn't sound correct. Giving out an expected dividend lowers a stock price since otherwise one could arbitrage it, but this is evidence that the dividend raised the price when it got priced in
No, most dividends are "qualified" and taxed at the long term capital gains rate, assuming you've held the underlying for a decent amount of time.
Still, they're taxed, whereas buybacks allow the shareholders to control exactly when they take income.
Also buybacks will tend to select for frequently traded shares with high cost basis, further reducing total taxes and selecting for longer term shareholders. They really are just better than dividends in every way.
Maybe some of these 2-brain cell executives should consider that their "buybacks" will be worthless when US throughput starts to be equally worthless compared to the rest of the world...
Of course, I'm being a bit pejorative, they aren't thinking big picture at all, just concerned with what happens tomorrow not the day after...
However, they are in part responsible for the nonsense happening at the moment wrt to American policy, it seems like a game who can light cash on fire the fastest ..
I don't think they do know. Nor do I think most of the shareholders know. If they did they would know that they can make way more money with forward thinking and planning beyond a quarter. The lack of that is the clearest indication I can imagine that they do not know.
See, this is the thing. An investor isn't tied to the fortunes of any one company. An investor can bail when things go south, and investors who care enough to be writing to executives or the board are also the ones most sensitive to signals things are going badly.
This is why 'activist' investing works - you can take on debt, or drive a debt-funded acquisition so that the immediate value of a share goes up, bail while people are buying the inflated price, and be running the con again while the debt kills the company. The execs are bound by the board, and don't feel empowered to fight these kinds of changes - often, they're replaced if they do (or as part of the board takeover).
Long-run, this is bad for the companies this happens to, and the overall economy, but it's good short-run for investors, and savvy investors don't need to worry about long run, because at worst they can liquidate their position before the market catches up and sit in treasuries if there's no other good poaching target.
The failure of anti-trust enforcement, of anyone to sue for long-term over short-term gains, the tax-advantaged position of stock-centered comp, and the acceptance of even debt-funded buybacks all work together to reinforce this failure state.
Most large investors are actually big groups like pension funds that do need to think longer term though. This is really just a combination of laziness and ignorance. Not a factor of evil individual investors. Those do exist but I really don't think they have as much impact as people think they do.
Most investors today are basically stock printer go brrr....
If one looks at US money printing in the past two decades, they'll find that the S&P's gains are basically just a mirror to the increased injection of dollars, a facade made to prop up the market. There really has been no actual growth compared to like Japan in the 1980s or China and India in the early 2000s, or Vietnam today. Just a few companies, mostly in tech, which are propping up the rest of the market.
> pushed the company's market capitalization to $72.13 billion
This, on annual revenue of ~$19B.
Apple today is closing in on 2x that revenue every month now. Quarterly net profit exceeds annual revenue in 2006. The Apple Watch group is roughly half the size of the whole company in 2006.
At some point, it became clear that the business throws off vastly more cash than can be productively used in R&D (here I will note that Apple's recent profit gusher is already net of investments in things like the Titan car project, Vision, and all the other stuff they work on but never release).
Share buybacks are are at least nominally a financially neutral exercise - it generally does not benefit either shareholders or executives.
They can however signal 'strength' in stock price by creating more demand and signalling to the market that the company itself which has 'insider information' believes the stock price is worth less than the price they're bought for.
It's a fair point about Jobs - but - Jobs was never sitting on more money than the economies of most nations.
Jobs Apple was a consumer product company, Tim Cook Apple is a Private Equity Operating Entity in a way. Their financial operations dictate as much about their valuation as anything else.
> Jobs was always thinking Apple could do better with the money in R&D
> Jobs wasn’t one to listen to anybody, so it did not matter.
It did matter. Jobs was wrong. Apple indeed couldn't do better. It's not even that Apple couldn't produce R&D results worth all this money. Apple couldn't even manage to spend at that pace. Steve Jobs' projects could and did use a lot of money but nowhere near that pace. And the pace of earnings got better still after Jobs.
Jobs was right on another aspect which was that this pile of money provided Apple solid, safe ground. Apple was safe from any risk of a few years of bad earnings. That was very costly safety.
It took a different CEO to finally work to reverse the damage. That project has taken many years and (arguably) isn't finished yet. And that's in parallel to massive increases in R&D.
It doesn't do a lot of basic science - I expect. But it does or funds a lot of engineering and applied science. that's the point of the article, that in the up-to-recently US system, corporations even with lots of earnings didn't have to.
That's the key phrase, they benefit all shareholders. Buybacks on the other hand only benefit the following shareholders:
1. those with regularly vesting stock options and stock grants - basically employees. For non-tech companies especially, this only means high-ranking employees
2. those who intend to sell - that is, soon-to-be-ex shareholders
3. those who borrow against their stock - typically high-net-worth individuals who own a lot of the stock
Stock buybacks are thus a non-egalitarian way to return profits. To reward all shareholders equally, pay dividends.
It seems like your assumption is that a stock buyback is a short term gain.
One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation, and decreasing that amount will “artificially” raise the stock price, making the options more valuable. I agree that higher stock price benefits those with options, and I would even agree that it is possible that when those strike prices were valued, the valuation did not take into account the possible global change in the amount of stock (although a market would have included this valuation).
I suppose the other part of the argument could be that R&D is good for the stock in the long term in a way that stock buybacks are not… the buybacks pumping up the price of the stock before it is driven into the dirt by competitors who do invest in R&D.
There, I’ve done my best for your argument but I still don’t really believe that increased stock prices for everyone is not benefiting everyone more or less equally.
> It seems like your assumption is that a stock buyback is a short term gain.
My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor. Unless
a) they sell some of the stock or
b) it pays dividends
they don't see the benefit of a higher stock price or reduced share count.
Qualified dividends and long term capital gains are taxed at the same rate. So anyone who says "buybacks are more tax-advantaged" is leaving out the second part: "because you can borrow against a higher stock price without paying taxes". Since most (non-rich) people don't do that stock buybacks have the same tax (dis)advantage as dividends. If you know of a way to get tax-free money out of a higher stock price other than borrowing on margin, please tell me. I'd love to learn.
> decreasing that amount will “artificially” raise the stock price
It isn't "artificial". There are fewer shares in circulation/more demand for the shares. That legitimately translates into a higher price. But stock options and grants are generally given to employees and especially executives. So a reduced share count and higher share price is particularly good for them.
> One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation
My argument was more that when employees are paid a significant portion of their compensation in stock they tend to sell much of it upon vest (sensibly) in order to diversify or even just to pay their bills. Ergo, being frequent sellers, they benefit from the higher stock price more than they would from regular dividend payments. A higher stock price directly translates into higher compensation. Wouldn't this be a powerful incentive for company management to prefer buybacks over dividends?
> I suppose the other part of the argument could be that R&D is good for the stock in the long term
I didn't say anything about R&D spending. A company should return as much profit to shareholders as it sees fit.
I was rebutting the common, I believe simple-minded, argument that buybacks and dividends are completely equivalent. Even though the company spends the same amount of money, I think they are different in some very significant ways.
I think I'm mostly agreeing. Anyway here's my story.
Buybacks can be good or bad for shareholders, depending on the buyback price.
Example. I take $1000 and securitize it as 1000 shares. The company sells the shares for $1 each. This is a no-fee closed fund, whatever. I'm the "CEO". I personally buy 1 share.
Anyway, one day the stock trades at $0.90 and the company buys back 500 shares at that price. (How $0.90? Maybe the largest shareholder was distressed and needed cash, maybe somebody didn't read the SEC filings. Maybe "the ticker tells the whole story" and the ticker told $0.90 for a few days. It doesn't matter.) Now the company holds $550 and has 500 shares outstanding. Each share owns $1.10 of USD. Expenses are zero. I kindly volunteer my services as CEO and sole employee.
Pretty soon the stock might trade around $1.10. (Why $1.10? wHo knows?) The people who sold for $0.90 might regret that decision now. Continuing shareholders make money if they sell now. Was this "good for shareholders"? Depends on which shareholder.
Now I (the CEO) decide the company will do a buyback. The company offers $2 a share. I sell my own share for $2. To make it simple, say the company buys back 275 shares at $2. Now it's broke. The remaining shares trade for ... whatever. Somewhere between $3 and $0? ($3 because growth rate!)
I personally doubled my investment. Anybody who sold at $2 also did well.
That's not a valid example of things that can happen in the market. You're making up ridiculously unrealistic numbers and clearly don't understand the basics of how the process works.
Share buybacks are always executed at the current market price. The company doesn't offer a higher price. A large buyback order might move the share price up a tiny bit but triggering an increase from $1 to $2 is impossible for any company traded on a major US exchange.
Well there you go again, lying and making things up. No stock buyback has ever caused a doubling in share prices. Going through intermediate prices is irrelevant.
Yes, it was a made-up example. I feel that was obvious.
If your point [about share price jumping suddenly] was irrelevant, then maybe you shouldn't have mentioned it. How is this my problem?
I see that you edited your previous comment before replying. Very clever. Now (12:03 Pacific) you have a company worth $1000 trading on a major stock exchange. Ok.
Maybe you can make a spreadsheet similar to what I described in words, but using more believable numbers. If so, you can see the kind of effects I'm talking about. Buybacks are good for some shareholders and bad for others. Buybacks can be used to reward management, though others will be affected (+ or -) at the same time.
Or maybe you won't/can't make that spreadsheet. Again not my problem.
Buybacks in theory do not cause share price to rise like your example though. Investors already price in that cash will be either reinvested at a high rate or returned to shareholders. You are reducing share count of a company that now has less cash which nets out in share price.
Demand tends to push price up. Investors don't really know who's buying until later.
But yes, of course it's a toy example. I should probably have made the buybacks drive the price from $1.10 to $1.20 or something, with a much smaller reward for the founder & CEO. I got bored and kept it simple. (Or I got greedy for that $1 profit, maybe.)
All the working parts of the example are on display. You can make other examples that seem better to you.
Well there you go again, lying and making things up. The trades are executed in compliance with Rule 10b-18. If you want anyone to take you seriously then at least come up with a realistic example.
I'm talking about how equity works at the most basic level, in a vehicle worth 1000 USD. It's an ice cream stand, capisce?
You may well be offended because we were rude to each other. That's fair. But you're not telling me to stop being a dick. You're telling me my ice cream stand has to be listed on a major US stock exchange. That's not a strong argument, and it's not really on topic.
This is a nonsensical example because companies aren't just barrels of cash, stock buybacks do not occur above market price, and companies never spend themselves broke to buyback shares because that would be retarded. You might try learning how corporate finance actually works before posting like you are an expert on it.
I worked in finance for years before I went into SWE and studied it in university before that. Your example would be found in no textbook (because it is complete idiocy) and you would know it if you ever cracked one, which you obviously haven't. You are just another bitter loser peddling conspiracy theories of how the financial system is rigged against you because you are envious of the money that people who actually understand it make.
You've been crossing repeatedly into personal attack. We ban accounts that do that. I don't want to ban you, so please don't do that.
If you know more than someone else, that's great, and if you want to share some of what you know so the rest of us can learn, so much the better. But please be careful to do it without putting others down, no matter how ignorant they are or you feel they are.
You've been crossing repeatedly into personal attack. We ban accounts that do that. I don't want to ban you, so please don't do that.
If you know more than someone else, that's great, and if you want to share some of what you know so the rest of us can learn, so much the better. But please be careful to do it without putting others down, no matter how ignorant they are or you feel they are.
> My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor.
It's better for me as a long term investor because I can better control my tax liability. It also allows for long term growth without a tax drag until I'm ready to switch out of my accumulation phase.
If a buyback gives stockholders the choice of selling or holding, realizing the gain now or later, and a dividend does not, why not prefer the buyback?
Hard to say for sure. I don't know either of them.
But I'm not casting aspersions on the commenter. I'm responding directly to his implication that if he doesn't understand X then X is false. That's not a thing.
4. Those who intend to re-invest all returns in to the stock, who avoid a taxable event when their ownership of the company goes up without having to first pay tax for the dividend.
A stock buyback rewards all stockholders equally. Those who sell, get their reward in cash. Those who do not sell, get their reward in the proportion of their ownership of the company going up.
> Those who do not sell, get their reward in the proportion of their ownership of the company going up.
This is incorrect. If the company buys back say $100m worth of its stock, it's true that the individual shares remaining represent a larger fraction of the company, BUT the company itself is worth $100m less after the transaction (because it has spent that $100m on purchase of something that can't be added to the balance sheet - basically incinerated that money from company's point of view, similarly to how paying out dividends is "destroying" money). These two factors cancel out perfectly, and the book value per share remains unchanged.
You're right, I missed that! But, essentially this makes the case for buybacks even worse - paying over book value for shares means that the company is reducing its book value via the buyback. So, it's worth less after the buyback.
Yes. Book value is just one metric for value, but let's keep using it. I could also say that paying less than book value is increasing the book value, so the company is worth more after the buyback. As you say, it depends on the purchase price.
There is supply and demand to consider. Buybacks create a tendency toward higher share prices, but only while they continue. That demand cuts off when the buybacks stop.
If the buybacks are at a discount to whatever the stock turns out to have been worth at the time, then that benefits all the shareholders. That can be a great use of money for all shareholders.
But buybacks at inflated prices benefit only exiting shareholders. Exiting shareholders tend to include hired management. Of course nobody really knows the valuation that well, so obviously there's a guessing game.
This is pretty hard to argue against for anybody who agrees that valuation is a thing at all.
> Buybacks create a tendency toward higher share prices, but only while they continue.
Buybacks increase the share price because you have a company that is worth (for sake of argument) the same as it was worth before, except now there are fewer shares available.
A fixed market cap divided by fewer shares equals a higher share price.
In the limit case imagine buying back all but 1 share. Now that 1 share represents the entire value of the company, so the share price would equal the market cap.
The company is worth a bit less after the buyback, because it's given away some of its money, which was part of its valuation. But the effect should still be positive on the share price.
Buybacks do not necessarily create an increase in stock price. Economically no value has been created. Cash on a balance sheet has simply been exchanged for shares. The people selling their shares in the buyout get the "value" of the company at that moment. The remaining shareholders now own a larger percentage of a smaller company i.e. a company that no longer has the cash used for the buyout.
Markets tend to reward companies that use buybacks as there is a belief the buybacks are a demonstration of discipline by the management team. Conceptually COMPANIES SHOULD BUY BACK STOCK IF THEY DO NOT HAVE BETTER ROI PROJECTS IN THE PIPELINE. This frequently happens in mature industries.
As noted above, buybacks are another means to return cash to investors. Today, in the US, the tax rate on qualified dividends and long-term capital gains are equivalent for most shareholders. This has not always been the case. When tax rates for capital gains are lower than dividends, buybacks are a more efficient means to return capital to investors.
Buybacks also allow for more tax planning. When dividends are issued, the investors have to pay taxes on them at that time. Stock buybacks allow investors to choose when they want to pay taxes. They can sell into the buyback and pay taxes now or hold the stock and pay taxes at a later time.
Buybacks are can be part of normal corporate capitalization decisions - what is the appropriate debt to equity ratio for the company.
Finally, changing dividend levels has its own impact on stock price. If a company increases its dividend, them market expects it to remain increased. In this case the stock price goes up as investors expect more dividends in the future. When a company cuts its dividend (rare event), the stock price drops dramatically as the market punishes company not only for the reduced expectation of future dividends but also because companies only cut dividends when they are having severe problems. Some companines issue a special dividend related to a one-time event such as selling a division. The stock price does not do much in these events.
All of this is to say that stock buybacks are not why corporations reduced basic research investment. I was at GE watching the famous research centers getting cut. The bottom line was the research coming out of the centers was not creating a meaningful ROI. At one point the researchers went to the various GE businesses looking for projects where their expertise could add value - an internal consulting group. They gave up after a year as there was so little success. Corporate research centers are expensive. They need to earn their keep.
That only works if the stock buyback increases the price permanently. Intel stock buybacks at $50 don't look so great now, but the dividends you got are still worth the same.
Buybacks of overpriced stocks also do not benefit investors.
> Those who intend to re-invest all returns in to the stock
Sell the stock then use the gains to buy the stock? I'm very confused by this.
> without having to first pay tax for the dividend
Long term capital gains and dividends are taxed at the same rate. The only tax-free way to benefit from a higher share price (that I know of) is to borrow against it.
> get their reward in the proportion of their ownership of the company going up.
Which only matters if the company pays dividends, or the shareholders eventually sell.
The company has some money. They choose to return it to shareholders. There are two legal ways to do so: Buy back some stock, or issue a dividend.
Now assume I am a long-term investor, who invested money into a company, and wants to keep all that money in the company, instead of taking money out.
If the company pays a dividend, I can put the money they paid me back into the company, but I have to pay capital income tax on the money in between. If they buy back some stock, I have essentially fully reinvested my money to grow my share of ownership in that company, but I have not paid any tax on this, and will only have to do so at the end. As I get to grow compound interest on my money, I will come out much better in the long term.
> As I get to grow compound interest on my money, I will come out much better in the long term.
You will pay the capital gains tax rate either way. Either when you buy 15% less additional shares, or when you sell them at the end and pay the 15% then.
If you start with 15% less and compound it, you still end with 15% less.
(15% is just an example)
You might be placing a bet that at some point in the future there will be a reduction the capital gains rate, but, as far as I can see, you are not earning more due to compounding.
Actually no, they have the same benefits as a dividend except they don't create a forced tax liability.
Stock grants can actually include dividends.
Even if you don't sell or borrow against it you benefit because you don't have that tax liability, and the money you woulda paid in taxes can continue to be invested.
Yes. This is correct. Share buybacks are financially equivalent to a dividend from the company's perspective, and slightly better from the shareholder's perspective because they can choose when to take the dividend and pay capital gains tax instead of income tax on it.
That only reinforces my viewpoint that buybacks advantage rich shareholders.
> your cap gains rate can vary substantially over time
It is 0% (up to like $100k for a couple filing jointly), 15% (up to about $580k), and 20% above that. Income tax has many more brackets than that and they kick in at way lower incomes.
It's true that your income can vary substantially over time. It might be nice to do earn all your capital gains and dividends in retirement. You will likely need less income then to live on and can incur $100k/year in gains and dividends tax-free. On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify.
And finally, if we want companies to improve productivity (read: fewer employees) then we can't solely tax labor to fund everything. We have to tax the part of the pie that's actually growing: this is represented by stock prices and dividends.
> On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify.
This really undercuts your previous argument that only certain classes of shareholders benefit from buybacks. Now you are assuming that everyone falls into one of the classes anyway.
So we're back where we started: Buybacks benefit all shareholders equally.
If I'm reading it right, group #2 plan to sell 100% of their holdings during times of heavy buybacks. I think they intend to benefit as much as possible from whatever price increase might be driven by the buyback demand.
That is US-specific tax policy, but many international companies are listed on US exchanges and purchased by international investors. As a Canadian, my retirement savings in my TFSA are subject to 15% taxes on dividends and 0% taxes on capital gains (for US-listed stocks).
The tax advantage of stock buybacks is that investors aren't forced to immediately realize gains. They have the freedom to time sales to minimize overall income tax liability, for example by harvesting losses in other investments in a future year.
This is true. I'd still file tax-loss harvesting under "advanced maneuvers employed by high net worth people".
At a societal level, and I understand this is a completely different point, I also question whether it's prudent to allow tax dodging this way. We already tax labor heavily and at the same time we incentivize companies to improve productivity (read: use less labor). How do we pay for society without taxing some of the productivity (read: profits) or taxing labor even more? You can only cut so many services.
Even folks who are just saving for retirement benefit, since they need not take any income on top of their normal employment income. They may be in a lower bracket when they sell.
Also the reality is that its somewhat rare for retirees to spend down their entire portfolios.
Because if I don't intend to sell right now, and the company is otherwise a healthy, going concern that can pay sustainable dividends, the actual share price is irrelevant to me. If anything, given my belief in the company, a lower share price is better. I can buy more shares!
But you now own a larger percentage of the company because you own the same number of a smaller total number of shares outstanding, so you benefit whether you are a seller or a holder. If you intend to buy more it is neutral because the price per share goes up, but each share represents proportionally more.
If you ever want to sell, getting in the limit nothing for the shares might matter, no? There are other things: for example, share based M&A or compensation or other investors with different preferences - no relevance or interaction?
All fair points. Share-based M&A can be good for investors. But if the stock price is going up because the company spent money on buybacks, then the company could also just pay cash for M&A and skip the buybacks.
Higher compensation is good for employees who get paid stock and for upper management, who are nearly always paid largely in stock. There's an argument that's good for shareholders because of better retention. But if that were the case, why not just pay employees more cash?
Are there many investors that are never sellers (that is different from selling soon-ish)?
Paying cash could be quite different than paying in shares for M&A.
If owning/using shares makes no difference to cash (whether to employees or in M&A situations), why not do buybacks then if there is no difference between cash and shares anyway?
This is simply untrue in every detail. All common stock is pari passu. A buyback of common benefits all common stock holders pro rata with their holdings. Similarly, vesting grants without buybacks harms the common holders by dilution. A buyback of the amount of vested is the least that is required to keep the common holders whole.
The person you're responding to's argument is incoherent and not worth engaging in. The crux of it is that long term shareholders aren't benefited by buybacks because share price doesn't matter to them because they will never sell. Somehow however, dividends are good for them because they will not reinvest them for some reason? It doesn't make any sense.
This is just nonsense. Anyone can sell the stock if they wish, there is no privilege for the high-net worth. Additionally, shareholders benefit from reduced share count because it increases their claim on future profits thereby increasing compounding.
Buybacks are still better if you want to hold forever and don't care about share price. With a dividend distribution you must pay taxes and reinvest the diminished proceeds. You end up with a smaller share of the company than in the buyback scenario. Example:
A: Hold $10 of stock. Buyback of 1$ per share. You're left with $10 of stock.
B: Hold $10 of stock. Dividend of 1$ per share. You're left with 9$ of stock and $1 cash - taxes payed. Once reinvested you have $9 + (1 * tax rate) in stock.
You're making two mistakes: One is thinking that dividends are magic money that do not cause share prices to fall in exact accordance with the distribution and the other is that buybacks lift the share price somehow (they do not, see Modigliani-Miller).
Actually, normal people can do the borrowing thing. It's not really as necessary since you have normal employment income but you can do it and it can work. If you continually add more principle to your pile-o-stock than your monthly spending the growth will outpace your interest and you won't accumulate an unbounded amount of leverage.
At least if your broker offers decent margin rates or you sell boxes.
Well, also, your 401k and IRAs are probably superior to this strategy and can't be used as collateral as they're protected in bankruptcy. So it's not worth it until you fill those up.
The reality seems to be that only the genius founder is allowed to do any unorthodox moves as the CEO. Once he's out, the board selects a CEO that will basically continue business as usual without rocking the boat. The new CEO essentially won't have a mandate to use any controversial or original approach.
Companies are controlled by shareholders who appoint the board who appoint the CEO. If the CEO decides to pay employees more, the board will change him because shareholder put money to get money out, not to give to employees.
Companies can give "shares" to employees, which means excess profits can be made dividends out of which employees "touch a bit".
If you would have your own company (privately own and full control) you are of course free to share the excess profit as you see fit.
Edit: and of course, share buy back avoids some taxes that you must pay, which in other schemes would have to be paid.
an unexpected but welcome change is that real wages of low-income workers increased too during the recent years, but the historic trend obviously shows the enormous disparity (check figure C 1979-2019)
and for context on the context, the size of the active population also increased - so fewer people age out of the workforce than how many started working
> Why couldn’t the companies with excess profits just pay they employees more in salaries?
They could, but why should they? Which advantage get the shareholders from this?
The only reason why a company with excess profits "should" pay the employees more is if
i) for a given role, the expected results of potential applicants varies a lot (i.e. the company has an incentive "to hire the best of the best")
ii) the market for these exceptional talents is tough (i.e. if the company does not hire the best, someone else will; additionally, if the company does not pay the employees really well, they will be poached)
Different markets. Companies are created to allow investors to create profits selling something (things, services, etc). Companies compete with other companies to attract capital. Companies which offer higher expected returns for comparable levels of risk will attract more capital. This reflects supply and demand for capital.
Employees are part of a labor market. Supply and demand in the labor market drives compensation levels. When you have a rare skill that is perceived to be valuable, you can get higher compensation - e.g. Meta AI researchers getting $100M contracts or Juan Soto getting a $750M baseball contract.
As mentioned elsewhere, some companies give stock to employees. In my experience this is for one of two reasons. 1) Employee retention - stock grants tend to have multiyear vesting periods designed to keep the employee at the company. 2) Start up companies that do not have the cash to pay employees.
None of these explanations would lead to simply paying employees more with excess cash (unless the cash was created by a group of employees that you were trying to retain).
Have you ever been a c-staff? C-staff are employees as well. Usually more expensive employees. Well run companies are trying to figure out how to win in the marketplace. To do this they hire the employees they need to win. Investors do this with CEOs.
I agree that it is much more difficult for a CEO to get fired than a line employee as CEOs have significant influence in picking their boarda. However, the consequences to a company of replacing a CEO are generally more significant as well.
1. They don't have to
2. If employees want to be exposed to excess profit (and loss) they can buy shares like everyone else. (Not a super strong argument tbh)
3. It's impossible to measure how much any given employee/department really contributed and they don't want to create a culture of chasing fat bonus checks.
4. To some extent they do tend to. Profit sharing plans and ESOPs aren't that uncommon
> 2. If employees want to be exposed to excess profit (and loss)
It's funny that people tell me they want this because they'll see some of the sales outliers. But then I explain that 1/2 or more of their salary will be dependent on some type of performance metric and most clam up.
> couldn’t the companies with excess profits just pay they employees more
Would that improve productivity (for that company)? Do most people refuse to work for Apple because it doesn't pay enough? Is apple limited by lack of productivity? Is Apple limited by lack of R&D budget? Would Apple release on the world more, better stuff if it paid 10% more?
Then too, most US Apple employees own a lot of Apple shares - they do get paid more when Apple pays dividends, buys back, increases the share price (/ shrinks the number of shares - same thing). Even recent Apple employees who did buy/ get the shares they could really did very well! They are shareholders.
As it is, Apple has a large number of employees in the most expensive areas of the world. It's not exactly that it's desperately skimping on employee compensation.
My impression is that Apple, still now, has a hard time finding worthwhile things to do with its profit. It generates a lot of cash, uses everything it can manage, and releases the rest productively.
The same reason you don't give a store $2 for something priced at $1 or write anything other than a zero in the box on your tax form that lets you pay more if you like.
That would not make the share price number go up, which in turn means it doesn't make the leadership's net worth number go up, which means the leadership won't make that choice.
The leadership’s net worth is going up based on their compensation plan including stock options, regardless. If you are more explicit about your assumptions it might be easier to believe or refute the argument.
Having an industrial policy has been disastrous for most countries that have tried it. Works fine for a few years and then everything falls apart as the grifting builds up and disruptive innovations destroy the underlying reasons for the original policy goals.
The only people who matter are shareholders. Employees are a means to the end of making money for the owners of the company whether through stocks or other kinds of ownership.
the purpose of a company is to deliver maximum return to shareholders; if they're not doing that, then they're failing their fiduciary duty and the shareholders might try to force the company to change its ways
the shareholders want the money coming to them, not to the employees
(this is why the Public Benefit Corporation, "B-Corp" structure was invented, so that the company's stated purpose can be something other than simply generating value for its shareholders)
They could, but then they'd have to report lower profits by the same amount. I want to actually defend this though: Corporate profit is a very narrow measure, by design. It was never intended to capture how well the nation is doing.
The train of thought here is that product people innovate and launch companies, but operations & finance people have no idea how to innovate or create new products.
Putting in a finance/ops person as the CEO will stagnate a company from a product standpoint.
And yet when Jobs returned to Apple he blew up ATG (the Advanced Technology Group) that gave us Quicktime, etc. He also shutdown Apple's research library (and gave all the books to Stanford, I believe).
He seemed to have little patience for "scientists" — preferred engineers that shipped shit.
I think that at best he saw research as expensive, at worst he saw it as elitist.
Apple was giving away the Keys to the Kingdom by way of licensing Macintosh clones, among other things. If ATG were responsible for hemorrhaging cash I am not sure why they did not re-appear then when Apple was firing on all cylinders. Only Jony was crowned.
And there's no way the library and its books were a cost — unless perhaps it was attracting snooty engineers who were reading Foley and van Dam when they should have been fixing bugs. ;-) (That actually might have been me.)
I could be putting too fine a point on it, but my impression was that he was kind of jealous of "academia". Not only did he not graduate from but even seemed to eschew higher learning. And to be sure he would have had a harder time bullshitting an expert in a given domain. They had a kind of power of knowledge that he lacked.
At the same time he was clearly enamored with Avadis, very much the academic — appeared to be grooming him for role of Apple CEO. He must have been very disappointed when Avadis left the fold.
> They said a Unix weenie was code for software engineers who hated what we were doing to Unix (the operating system we licensed)—putting a graphical user interface on it to dumb it down for grandmothers. They heckled Steve about his efforts to destroy it. His nightmare would be to speak to a crowd of them.
The value proposition NeXT found on UNIX, was the same as Microsoft (after they let go of Xenix, thanks to MS-DOS golden goose deal with IBM), a means to an end, the market of companies and universities that wanted something with UNIX in the box.
If companies want to reward executives directly they can cut out shareholders entirely and pay salaries and bonuses. If companies want to reward shareholders (including executives) they can pay dividends (which Apple did do under Jobs). Nothing about the priorities of companies changed with share buybacks.
As others have mentioned that isn't comparable because salaries are taxed. The tax rate on unrealized gains in the US is zero percent from what I understand.
Not correct. Capital Gains taxes depend on the holding period. Short term capital gains (stock held less than a year) are taxed at the same rate as salaries (ordinary income rate). Long term capital gains (stock held at least a year), are taxed on a reduced level that peaks out at 20% (depends on total taxable income) with a possible additional 3.8% Obama Net Investment Tax.
Here's what you said:
"If companies want to reward executives directly they can cut out shareholders entirely and pay salaries and bonuses. If companies want to reward shareholders (including executives) they can pay dividends (which Apple did do under Jobs). Nothing about the priorities of companies changed with share buybacks."
My response (and the whole thread) is pointing out that buybacks are another way to reward executives who have received shares as compensation. Buybacks are not reported as an expense. They are reported as an investment.
This is all boilerplate, very far from "what does that even mean?" territory.
The whole point of owning shares is to share in a company’s profits. In simple terms, you make money through dividends or buybacks. Without that, there’s really no reason to own the stock. Sure, prices go up and down, and you can try to profit from that, but if a company never plans to return money to shareholders, there’s nothing real behind the price. Eventually you’d just be holding on until the company fades away or goes bankrupt.
Buybacks are just another way of giving profits back to shareholders—an alternative to dividends with different tax implications. Their purpose isn't to "allow companies to reward executives directly", they are just an alternative way for shareholders to share in the profits.
A company could tie executives compensation to the amount of dividend if it wanted. That might be a good idea.
Unfortunately CEOs have to do buybacks at every opportunity, because otherwise shareholders will sue them for failing to maximize shareholder value.
> Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter.
(Head spins) wait what?! No! You’re not supposed to do that! If you fail to always maximize short term profits, people might start thinking CEOs actually have agency, and they won’t be able to hide behind the “maximizing shareholder value” excuse!
I don't think it's typically this explicit or direct, but it can definitely flow more like 1. company is not doing buybacks, 2. performance is judged against comparables in the short (quarterly) term using metrics that prioritize the affects of buybacks, 3. major stakeholders (big stock holders, institutions, funds, etc) put pressure on the board, 4. CEO pushes back and is dismissed for performance or "not hitting targets". Functionally a lot of players in power positions prefer buy backs, optics are better for a surging stock vs. modest increase in dividends, and it favours short-term metrics.
A lot of this comes back to Dodge v Ford. The Dodge brothers sued the Ford Motor Company because Ford wanted to cut prices and invest in the company while removing dividends to shareholders. The Dodges disagreed with this and sued. The courts found in favor of them.
Ford was an egregious case though. The court's judgement was surely correct but it also hardly matters for the real world. CEOs usually don't publicly announce they plan to literally and deliberately burn all their profits, even if it in reality they absolutely plan to spend it on vanity projects or whatever.
The article doesn't mention that Bayh-Dole made it legal for a university to exclusively license a patent generated by a government-financed researcher to a corporation.
Prior to this, if a corporation wanted to have exclusive rights to basic patents, they'd have to run their own private research labs to generate those patents. Prior to Bayh-Dole, university inventions were patented but there were no exclusive licensing deals. This means no competitive advantage; anyone can use license the patents (I believe any US citizen) before Bayh-Dole.
So corporations largely stopped funding private research labs like Bell and instead entered into public-private partnerships; on the academic side we saw the rise of the shady enterpreneurial researcher whose business plan was to use government funds to generate patents (not uncommonly based on fraudulent research) which formed the basis of a start-up which was sold to a major corporation.
The fix is simple: patents generated with taxpayer dollars at American universities should be available to any American citizen for a small licensing fee; if people want exclusive rights to patents, they need to put up the capital for the research institution themselves, as was the case with Bell Labs. Practically, this starts with a repeal of Bayh-Dole.
The obvious retort would be, if the situation were so favorable for corporations before Bayh-Dole, why were so few licensing deals in place before the passage of Bayh-Dole (fewer than 5% of technologies were licensed)?
> So corporations largely stopped funding private research labs like Bell and instead entered into public-private partnerships
They didn't though. Bayh-Dole was 1980. All the big tech firms have invested massively in R&D since then, and I think it's also true for many non-tech industries or tech-adjacent (e.g. chip manufacturing, oil and gas).
Repealing Bayh-Dole is a terrible idea. A lot of research produces enough to get a patent but still requires a lot more development to get a product. Drugs are probably the best example.
Wouldn't a company still be able to patent the additional development they did to turn the original research into a product? E.g. delivery method patents are very common.
I don't see why they need to own the original research.
All else being equal, it's most straightforward to demonstrate infringement of a composition of matter claim (which tends to be the earliest for pharma) and so these are more valuable. Also, they tend to be the earliest to issue and possibly litigate over, which also increases value.
What's missing from this explanation is that the corporate tax rate was also much higher, but R&D dramatically cut down profit that would be taxed and was taxed lower. So large corporations like Bell Labs and co would basically say "do we give the government X in taxes, or do we spend X on research?". They chose research, so we got the technology that powers our world.
That, combined with stock buybacks and the general take over of Friedman-economics resulted in a far more focused short term thinking and outsourcing research as much as possible due to uncertain horizon risks.
These days you're better off giving it to a university with strings attached. Sure, they might piss a bunch of it away, but when you account for the dollars on the subject you care about after taxes are leeched out it's still more efficient than building out research within the confines of a for-profit entity that gets taxed at such.
This is why we no longer have corporate research labs and damn near every university is bristling with BigCo funded stuff.
Nothing against research universities as good stuff does occur there, but it just seems like it was such a a huge loss seeing those corporate labs disappear. I think it helps to have scientists and engineers closer to the problem and who don't have to spend a huge amount of their time writing grants and training grad students.
Having worked in corporate labs they really were great and it's a shame they're disappearing.
It's not only share buybacks, I would include offshoring, DEI, and a consolidation of management power as major factors in the destruction these labs. The pipeline has been so bad for so long now that it would take a miracle to get things started again.
The last org I worked at offshored the most promising work to China. Due to some high up international agreement the company had to spend $X on offshored workers so not only were they considered cheap they were considered free because the money had to be spent anyway and was coming out of someone else's budget.
I was working at a Research Org when the DEI push came through and it was a absolute disaster. A lot of projects ended their internship programs and avoided hiring in order to minimize the exposure. The bargain was always, you can have 6 seats but 50% need to be women and 50% need to be minorities, and since everyone got the push at the same time it meant that due to the intense competition for the same people you'd end up really having to scrape the bottom of the barrel. That made a lot of initiatives unviable.
I wasn't working at Yahoo Research but as I heard it was canned following a management rift. They were already bleeding talent for a while but had retained some good people that stayed out of comfort and inertia. The smart people cultivated in research orgs tend to be a competing source of power and management hates that.
I'm not really seeing how the blacks and women ruined corporate research, can you expand on that more? Are you saying they were all retarded and without enough white, Asian, and Indian men nothing could be accomplished?
Since they don't make up 50% of the pipeline the enforced restriction necessitates hiring further down the ability rank even if you are to assume that all races and all sexes have the same ability / aptitude. And it also means for every non-minority male you need a minority female and those are very hard to get.
If for instance higher ups from all companies require you to hire only whites with straight blond hair, a certain weight/size and with green eyes, you will quickly need to hire the bottom of the barrel of this group to expand your teams.
Numbers were not invented, they were tied to management bonuses, numbers lower than that negatively impacted bonuses. Inhouse counsel were much more worried about disparate impact lawsuits than race quota lawsuits. There are many reasons why I, and others like me, can't post personal anecdotes publicly.
Not absolutely everything was great before DEI, and DEI is not the only problem. I gave a number of other problems that have diminished the efficacy of research orgs.
Corporate labs have now gotten so bad that I can outcompete them as an individual which would have been much more difficult in the past.
And you can have a career track that normal people will actually want. The whole phd -> postdoc -> (maybe) tenured professor thing is such misery that I never even gave it a thought as a career.
Yeah if you go check almost any major scientific breakthrough of the past century it usually starts with "some guy was working in a corporate lab with an unlimited budget". We're stagnating as a species a lot more, but at least the shareholders got a payout for their hard work of doing literally nothing. Rent seeking at its worst.
Silly argument. Everything in gravitational physics goes back to Newton? Who cares about Convex Optimization if you do not undertand gravity? Math goes back to Euclid and the Greeks?
Mankind has consistently built upon existing knowledge. "If I have seen further, it is by standing on the shoulders of giants. (Newton)"
IMHO, what we are seeing is the US was generating 50% of the world's GDP at the end of World War II. In that era it could afford to many non-economical things - Marshall Plan, funding research at universities, etc. The US is no longer the dominant economic engine. It actually has to prioritize its spending. Money spent on research is money not spent on food stamps, housing the homeless, defense.
What is never mentioned in these discussions is how much money has been spent on research that did nothing. Advanced nothing. When that is factored in, what is the ROI of university-based research?
this is silly money spent on research is always going to be better spent than the numerous misuse of tax payer dollars spent. ICE has a bigger budget than NASA and NSF combined consider this how little is science being valued. We have gained tremendously from NSF and NASA and now we are seeing that only SpaceX and maybe Rocketlab could hold a candle to China's CNSA and their private industry which is quickly going to be catching up because they have the ability to produce it in scale.
Oh no! I wonder what the US could have achieved if instead of spending 10s of billions of dollars per year, it could instead have used those to fund more trillion-dollar wars!!
What kind of person sees a claim like "No, not all major breakthroughs were done at private companies. Like the internet, for example" and immediately feels the need to tell them private companies are doing stuff?
Are you not reading the reply chains before commenting? What motivates you to interject with information that is meaningless?
The only thing I can think of is that you've voted for the people who are currently slashing the funding and have to continuously try to convince yourself it's okay.
OP said "almost any major scientific breakthrough of the past century" was done at private companies. Which is objectively not true. They transmitted that message using technology that was created by the government. That's ironic.
Your reply
> Basically all of the internet is powered by software, standards, computers, networks and storage created by companies.
Is meaningless. It's someone jumping out of the woodwork to white knight the private sector. It's weird. It doesn't change what I said or what OP said.
It doesn't make it less ironic to say "all major things were done by private companies" using a technology that wasn't invented by a private company. It's irrelevant.
> it was such a a huge loss seeing those corporate labs disappear.
A loss for whom? Society? Of course, and that's exactly why they don't happen anymore -- because while they were a boon for society they were a terrible bet for the company. And when a company has a choice between doing good for their bottom line or doing good for society, 100% of the time they choose their bottom line.
I mean, look at the legacy of Xerox Parc from Xerox's perspective. They invited this guy in, Steve Jobs, and he commercialized their ideas. Today Xerox is worth pennies on the dollar compared to their height, doing none of what Xerox Parc researched. Apple ate their lunch. The ROI for Xerox Parc was terrible for Xerox.
For all the amazing stuff they did, they were not rewarded by the marketplace for it, they didn't produce better products for themselves, they just did other companies' R&D.
That's where universities come in, and where they are vital. If you take them out, their role will not be filled by corporations, because corpos can't stomach the kind of dollars needed to do fundamental research. Only the government can stomach that, and if somehow the voters are convinced all this isn't worth funding, it just won't happen at any level.
This implies Xerox got no return on their research, and simply let Apple take their research, which isn't true. Rather, it was part of the investment deal they made with Apple [1]:
> Apple was already one of the hottest tech firms in the country. Everyone in the Valley wanted a piece of it. So Jobs proposed a deal: he would allow Xerox to buy a hundred thousand shares of his company for a million dollars—its highly anticipated I.P.O. was just a year away—if PARC would “open its kimono.”
Xerox clearly undervalued the research they were producing, but it wasn't like they just gave it away entirely. Per [2] the valuation of those shares in 2018 would be $1.2 billion had they not sold them - undervalued in hindsight, but not nothing.
Xerox's lack of capitalisation was a problem of their own making, not something inherent about investing in basic research.
What I said was that it worked out a lot better for Jobs than it did Xerox, not that they didn't get anything. It certainly didn't work out how they'd hoped. And that hasn't gone unnoticed by would-be funders of future Xerox PARCs.
> Xerox's lack of capitalisation was a problem of their own making, not something inherent about investing in basic research.
I dunno, to me it feels like the people who are good at doing and investing in basic research are not the same kind of people who are good at building and investing in applications. Yes you can present a counterfactual where if only Xerox had Jobs' vision and execution everything could have been different... but chalking it up to just "they could have done it better and been successful" misses the fact that they were doing the best they could with the smartest people they could find, and still couldn't capitalize.
The corps won't stomach it anymore at the scale they formerly did, but at one point they did. It could happen again some day...just a lot would have to change.
Parc just didn't capitalize on what they had. I know the Alto was expensive, but still seems like a huge shame.
Yeah, no, the ROI on Xerox Parc was excellent for Xerox, because of the technology they _did_ successfully commercialize on their own: the laser printer. It helped Xerox to $8 billion in revenue in 1984, a level Apple didn't beat until 2006. Even Microsoft didn't beat Xerox in revenue until the year 2000, where Xerox had $19 billion in revenue. Apple didn't reach that level until 2010. So you could say that it took the iPhone to beat laser printers; the Machintosh wasn't enough.
Even if we accept that premise, it still doesn't follow that PARC-like research centers are the only or best way to achieve that outcome. PARC's remit was to invent the office of the future, not to do the typical R&D thing which would be to make incremental improvements on their current products. Laser printers are exactly an incremental improvement on their current products.
So what you're saying here is that the best thing to come out of PARC for Xerox was an incremental improvement to their existing product line that could have been proposed by a typical R&D team.
Again, not a great selling point for the ROI of PARC from Xerox's perspective.
No, the laser printer was revolutionary. Xerox' previous business was photocopiers that could only make copies of existing physical documents you'd already typed out or pasted together. The laser printer was connected directly to your mainframe and allowed customized mass printing at a speed and quality not seen before. Before the laser printer, the alternatives were dot-matrix printers, plotters, automated typewriters, all at least an order of magnitude slower than the first laser printers and only the plotter had any chance of looking nice.
Laser printers were a central part of the computerized mass-customized printing of things like insurance policies and bank statements that happened in the 70's and were definitely a revolutionary change in what kind of problem Xerox was solving for their customers.
> Xerox' previous business was photocopiers that could only make copies of existing physical documents you'd already typed out or pasted together. The laser printer was connected directly to your mainframe and allowed customized mass printing at a speed and quality not seen before.
But I'm not saying laser printers weren't a great thing, I'm saying it doesn't take setting up a research playground like PARC to get that kind of result.
Laser printers are the kind of improvement typical R&D comes up with. Xerox's customers wanted more speed and quality out of their printers, laser printers got them that. It's not exactly clear that a typical R&D wouldn't/couldn't have come up with that. Apple for instance does this kind of R&D all the time, and they're very good at it.
Xerox PARC wasn't about getting the next incremental improvement in speed and quality for printers, it was about inventing the office of the future. But the office of the future doesn't require laser printers or printers of any kind. PARC's vision was that Xerox's core business would be eliminated, and that's precisely why Xerox couldn't be the one to actually capitalize on PARC research.
> were definitely a revolutionary change
I would say going from dot matrix printers to laser printers is an incremental change; whereas something more revolutionary would be going from dot matrix printers to no printers at all because you don't need them since you have e-mail and the Internet.
It's not even clear that the premise is true. There's lots of 'research' done in the big tech companies.
The biggest reason why companies don't seek to emulate "Dupont, Bell Labs, IBM, AT&T, Xerox, Kodak, GE", is probably that it reads like a list of textbox examples of "companies that failed to execute on their research findings", so clearly there was something wrong with this approach.
GE (under Jack Welch specifically) is a textbook example of how financialization and focusing on numbers at the expense of products destroys companies.
Kodak is a textbook example of disruption. Yes they failed to capitalize on digital cameras specifically, but their research in all other areas was very much acted upon.
My mental model as an outsider, is the vibe out of Google is that they push the most talented folks out via process / politics. Not intentionally, just the reality of squeezing the creative type employee / work. Replacing creative smarts which is difficult or impossible to measure, with operational smarts, more easily measured. Those creative smart people mostly go on to start up other companies.
Its worked out ok for Google and others, because there's little teeth to anti monopoly, so all the big tech players can just buy the successes, which is safer than trying to grow them (esp. once the talent left). I really have no idea if this is an accurate take as its mostly vibes, sans for a few of said smart Google folks I've met in startup land(s). Yet Google is so big, they could bleed all kinds of employees telling all kinds of stories and it could all be simply random. Yet at the same time I can't help but think about every aging tech companies biggest / best products being via acquisition.
While I think monopoly is bad, I don't know if ^ otherwise is so bad. Maybe its just creative type folks _should_ avoid big tech, and build their own labs. Capital and compute are readily available to people who can demonstrate success, and its easier than ever to build and experiment in some fields. i.e. if we had stricter capital accumulation associated taxes, maybe the ills of this process wouldn't be so bad.
Bureaucrat-ification isn't a phenomenon unique to Google - it happens at every company eventually.
It's really hard to describe why it's inevitable (there are a lot of factors).
But it's self-evident really. All of the major tech players started with a single innovation that afforded them enough revenue to acquire almost everything else in their portfolio.
Aside from search, the only major product Alphabet built-in house that meaningfully moves the needle revenue-wise is their cloud segment. Youtube was acquired - and it's effectively an extension of search.
Meta had to acquire Instagram and WhatsApp. Without those acquisitions, I have strong doubts they'd still be a major player today.
You can run through this exercise with Microsoft, Apple, Amazon, NVDA etc.
The common theme is they did 1 or 2 things really well, and got big enough to acquire/copy/bully smaller players out of the market.
What's crazy is most of them still rely on that one original thing they did well for >50% of revenue.
> It's really hard to describe why it's inevitable (there are a lot of factors).
I think there's a lot of small factors, but of those the biggest on (IMO) is the fallacy that throwing people at a problem gets it done faster. For some situations: yes, for all situations: no. And you need experience or some kind of sharp intuition to know when to expand and when not to expand.
Add more and more people to a job and they'll find ways to justify their value at the expense of efficiency. And there's a snowball effect from there as an org adds people who believe adding people is always good.
Then the corpo runs into layoffs and everyone throws their hands up and says "How could we have avoided this?" By not overhiring in the first place.
The story with 3M and PostIt Notes is that the idea was originally rejected my management. The inventors created a batch and distributed them to all the executive admin assistants. When they went back a second time, they had the assistants speak up otherwise there would not be any more.
I didn't bring up 3M because of the Post-it story, but because they're being a "general research" company. From open reel tapes to sticky tapes and everything in between.
Würth is also similar. They make seemingly everything in a segment (lubrication, fuel additives, cleaning, restoration, protection, etc. etc.).
The bigger problem today is that there is simply nothing more left to research. Everything that is being worked on are at most optimizations, which allways have a dollar spent vs dollar returned amount on them.
“While it is never safe to affirm that the future of Physical Science has no marvels in store even more astonishing than those of the past, it seems probable that most of the grand underlying principles have been firmly established and that further advances are to be sought chiefly in the rigorous application of these principles to all the phenomena which come under our notice.” Albert A. Michelson (yes, that Michelson, one half of Michelson-Morley), 1894
If it feels like there’s nothing for us engineers to research, that’s probably a sign we need more basic research from the scientists!
LLMs are just better google. In the past, you used to google shit, and copy paste from stack overflow, now you just skip the middle man and go directly to Chat GPT. Anyone that has been programming for a while can attest to that the answers aren't any better, its just more efficient to iterate on them now.
AI hasn't even begun to be solved yet. Everyone is focused on feedforward transformer architecture that is never going to replace the imperative processing of actual intelligence.
Smartphones are pretty much solved, as they have replaced a lot of the need for in person interaction (which by extension means transportation). The last decade has been all about monetizing smartphones.
Wearables aren't transforming society at all.
3d printing and home fab is still too niche and expensive for most people, and you can't really make it cheaper and more accessible.
Electric vehicles largely suck. Self driving is mediocre.
We literally went through a pandemic and people got richer because they had to stay at home and not spend money on things like daycare or gas or car maintenance, without losing any productivity.
Hell, the state the US is in currently is largely explained by the fact that most all the problems in society have been solved to the extent that people have to invent bogeymen and elect a demented felon into office on the promise of solving those problems.
This is a very surface level analysis like saying that the automobile was just an iterative improvement over a horse. Or a computer is just a better abacus. Fundamental research is all about diving into the weeds and finding new problems to solve. It's true that some of the "low hanging fruit" no longer exists (you won't see someone like Euler or Newton who's names pop up all over the place), but I can promise you that real gains are being made on a lower level. These small gains in fundamental research snowball into bigger advancements. As an example, the transformer architecture used by LLMs was first published in 2017.
Automobile was improvement over the horse because things needed to get places. To improve on current automobile will require either massive government investment and regulation in the sense of flying cars, or full electrification with paradigm shifts in transportation, like induction charging roads or battery hot swaps or whatever else. The modern Corolla Hybrid is pretry much the peak optimal point of transportation.
What do humans need right now to improve their lives substantially?
high temperature superconducting would cause a big leap. cheap energy would also help. cheap compute-in-the-walls. machines doing all the dangerous jobs.
Cheap energy is possible now with solar. There is a reason why it hasn't been done yet. Nobody has a need for it. Remember, you may think it would be nice to have an electric car you can charge for microcents a mile, but most people dgaf about putting gas in their car.
Machines doing dangerous jobs also is a thing these days.
High temperature superconducting can potentially be useful in a few applications that involve high current, which mostly deal with transportation. The only real advantage of this is drone delivery service becoming cheaper, but that has big hurdles to cross.
There is a reason why being a streamer is the top choice of "what I wanna be" when you ask kids. Everything is about the internet now in terms of motivation. And unfortunately there, we already hit a hard limit of the speed of light.
oh, I was thinking about science. material science is doing some pretty cool things. quantum is getting interesting. we're just starting to really get a handle on reverse engineering the cell. battery chemistry. whether or not we're going to see practical fusion it seems likely that we'll see knockoffs. I just saw an ad yesterday that Avalanche is planning on selling waste (I mean useful quasi-stable elements). not just that but the non-sexy science (I met a guy yesterday and we talked about how a lot of his colleagues got the axe. he's working on characterizing the response of skin tissue to uv damage. that doesn't sound that sexy, but wouldn't it be nice to know?)
yeah, mostly forget about computers, we're still just coming to grips with the fact that we stopped doing largely innovative work decades ago. my bet is its going to go back to being interesting pretty soon. we are having a lot of interesting discussion about cognition though :)
All of this is research from the 90s, with a few decades of polish.
Now maybe we could start looking at what research labs have come up with since then.
> Hell, the state the US is in currently is largely explained by the fact that most all the problems in society have been solved to the extent that people have to invent bogeymen and elect a demented felon into office on the promise of solving those problems.
That's... an interesting point. I don't really buy it, though. The same could have been said of the fascist movement in Italy, or the royalists in France in 1905.
Corporate R&D dies under the short-term thinking of quarterly profits. The best pure R&D seems to be coming from private companies that are able to sustain losses for long periods of time until a significant breakthrough is achieved (e.g. SpaceX, OpenAI, etc.).
Share buyback is the same as giving dividends - except the share holder doesn’t have to pay taxes until they sell. To the company, they spend the same amount on share buyback vs giving dividends. I don’t see how this argument holds up.
Further more, while some might argue that corporate R&D is better due to being closer to the problem but it is private research and not shared with the world like university research is.
If they really wanted that dividend, they could see that the company is doing $X in buybacks, figure out what percent of its market cap that works out to, sell a corresponding amount, and pretend it's a dividend.
A lot of shareholders also DRIP, but they should prefer buybacks for tax reasons.
depends how sophisticated the investor in the story is. it thay are perfect homo economicus they would have been selling some of those inflated shares to do what they would have done with the dividends
I read "stock buybacks in 1982" as shorthand for "financialization and short-term thinking at the expense of long-term gains", which certainly happened across corporate America and Britain starting with Reagan and Thatcher.
You state that as if it is a fact, but from what I see the tech industry has engaged in the longest term corporate strategies I have ever seen. Amazon took losses for the better part of two decades before it showed a profit, and public markets would never even fund a venture like SpaceX.
Amazon is a dystopian nightmare of a company. Amazon took losses in order to decimate their competition. Their business model you hype is evil af. They have to have people planning for when they run out of local workers their warehouses are so bad. They allow in fake fuses and tons of other fake products because they are cool with the risk to peoples lives. Instead of giving you decent search results they sell ad spots.
So yes, Amazon represents 'good management thinking' post 2010. But not corporate thinking pre 1980s that, you know, build the US/UK to the positions they were able to cost on up until now.
Good point. And both Google and Apple used to reinvest all benefits in R&D.
My impression is that as they calcify into money-printing machines, this stopped. An example being Google's famed 20% that are apparently a long dead memory.
In tech it was the switch from creative corporatism, which is focused on opportunities, invention, and infrastructure, to extractive corporatism and oligarchy, which are focused on scams, exploitation, and the creation of rigid hierarchies of privilege.
We're now in the end stage of the latter in the US.
The US still plays at invention - or rather a few of its oligarchs do - but it's far, far behind what's happening in other countries.
Shares of a company are indeed money - or can be used as money in a roundabout way.
They can be placed as collateral in exchange for a loan or other similar ways to access capital immediately.
If Zuck walks into a bank and asks for a million dollars cash on the spot and is willing to place a few thousand shares up as collateral, he gets that done in minutes.
He can get millions, but he can't get his entire net worth. His net worth is quoted as if the marginal price of one Meta share is the price you'd get for selling every Meta share at once. Which of course doesn't make sense.
It doesn't make sense, until it does - because Mark's shares are quite literally a separate class from all other shares and IIRC have 10x the voting power as common class A stock.
If he announced he is selling them all at once, I have no doubt in my mind he could get someone (or a group of investors, or a bank) to purchase all those class B shares almost immediately at a VERY healthy premium. Meta shares are currently around USD $715. There's absolutely zero doubt in my mind that if he was to sell them in a block, with the outsized voting power, he could command roughly USD $950-1100 per share with ease.
New Deal-era regulations on financial flows made it painful tax-wise to remove cash from a company. So you either had to pay it as dividends, or you invest it in R&D, wages, or benefits for employees (this is why companies used to have very plush benefits even for lower level managers). When combined with pretty aggressive anti-trust, it also funneled cash into business expansion via conglomerates.
Companies were asset rich (which is the seam of valuable companies that private equity has been strip mining for 40 years, but even those are running out now).
Share buybacks are more symbolic that the Reagan era made it easy to take cash out of companies, which led to a race to the bottom of extracting as much cash as possible while leaving little for operations, wages, or expansion.
a) allowing share buy-backs might be good or bad. But it isn't good or bad unconditionally! The restrictions on the buyback policy should matter. Ideally, buybacks should make prices boring not create ultra thin books with hefty valuations that are cheaper to manipulate. But it seems the regulations around buybacks are in line with incentivizing growth and not stabilizing real prices.
b) to some extent putting uncertain/opaque research inside corporations is a defense against getting into regimes where it becomes easier to manipulate prices. I hadn't thought of it before, but if if important public companies become beholden to traded price and it becomes easy enough for large foreign entities to move markets, then it is simply a matter of "pricing" short term market punishment of a company for any policy you don't like. Yes, this might seem a bit far fetched, but remember that this kind of incremental worsening of outcomes is precisely what people say is hapenning via regulation and legal challenge in key industries.
Just some interesting thought legs spun off from the discussions here.
share buybacks are sort of a voting mechanism - it shows the company has no other uses for the money than to reward shareholders - hence pumping stock price up.
if the company has a vision - then reinvesting that money into research or what else is better. it might reap the benefits, it might not.
companies use buybacks if they can't do anything productive with the money - Apple is a recent example.
> I'm not seeing how you get from share buybacks to a shift in priorities in corporate research.
pretty easily: stock buybacks allow you to directly reward executives and funnel profits back to shareholders (by increasing share prices), making the company appear more valuable (further driving investment)
research brings long-term benefits, and immediate outcomes don't show up in 10-Qs
At least for AT&T, Kodak, and IBM, what was funding their research divisions was monopoly profits. When those dried up, the research dried up as well. The modern equivalent to AT&T is Google.
I think the core problem is that innovators typically only capture low single digit percent of the value they generate for society.
Bell Labs existed in an anomalous environment where their monopoly allowed them to capture more of the value of R&D, so they invested more into it.
This is the typical argument for public subsidy of R&D across both public and private settings because this low capture rate means that it is underprovisioned for society's benefit.
Something I haven't seen mentioned in this thread or TFA is just how high corporate taxes were (and even personal investment taxes) in the 50s and 60s, and this influenced spending on R&D immensely because that investment wasn't considered taxable income. Tax rates were over 50% for much of the era of Bell Labs and Xerox PARC.
I would agree the anti-monopoly action had far more to do with that.
Basically, if you you think you can leverage your R&D into maintaining your monopoly and extending it to other areas it makes sense if for nothing else to keep the smart people who might otherwise disrupt your monopoly connected to you.
But if you are going to get broken up, just take as much short term profits as soon as you can
It is a totally delusional argument. Companies always could reward their shareholders, stock buybacks aren't fundamentally different from paying dividends to shareholders. The idea that stock buybacks are what caused a decrease in company funded basic science is ridiculous.
Only in very rare cases is doing basic science anything but a total waste of money, viewed from a commercial perspective. Companies should seek to be commercial entities, which operate for profit. Anything else is just self destruction.
Look at Bell Labs, it could only exist because some company decided it could use a money shredder. Bell Labs could not survive the dismantling of the Bell telephone monopoly, because ending that monopoly ended the prerequisite that was needed to allow it to exist.
Yes yes, companies used to compensate management with 'dividend options' so switching to stock options totally didn't pervert management's incentives.
And management doesn't manipulate the stock using stock buybacks. Why would they? Their performance and compensation are only completely tied to stock price. But no, stock buybacks don't allow perverse incentives that lead to short term thinking different than dividends. Totally the same.
If you write something which is more than pure sarcasm it might become readable and form into a coherent argument.
Do you genuinely believe that the breakup of the Bell monopoly had a smaller effect on Bell Labs than stock buybacks?
Stock buybacks also are not stock manipulation and managers aren't rewarded because they buy back stocks. The board understand what a stock buyback is, they reward managers for being able to buy back stocks, in other words, they reward them for profits, which are then paid in buybacks or dividends. Stock buy backs are a tool corporations use to reward shareholders, they have no fundamental difference to dividends.
Dividends have the exact same short term incentives. Do you think that a manager can not be rewarded for his paying out dividends, which leads him to cut R&D spending to increase short term profits? It is just delusional to think that there is a difference and certainly in the scientific literature about corporate finance it would be a fringe belief to separate those two as you do.
To be honest it is a bit upsetting to read a comment with so little understanding of the subject and so little imagination. Do you truly believe that managers can not have short term dividend goals? How uninformed are you.
> I'm not seeing how you get from share buybacks to a shift in priorities in corporate research.
Share buybacks are just the new go-to thing to blame. Economics students (at least "development economics") are memorising this concept all over the globe, so you can expect it more and more.
You make tax optimising by dumping profits on R&D less attractive (and around the same time change patenting law with bayh-dole) and make it more attractive to spend it on stock buybacks to directly benefit shareholders
Results seen in the real world line up as less is spent on the former and more on the later so i'm not sure how the blame is unfounded
Ah yes. The share buyback boogie man. If only companies couldn’t buy back shares then all that extra money would flow into research, except not. Shareholders would be demanding dividends.
Because before buybacks there were dividends. Did the difference between buybacks and dividends really make the difference between doing basic research and not?
It’s likely, dividends provide higher levels of exponential growth long term for an otherwise steady state company. It makes them more compelling than many long term investments.
Convert X% of a stocks value into a dividend and you pay taxes on that before you can buy more stock, but someone who keeps buying stock sees an exponential return. (Higher percentage of the company = larger dividends)
A company buys back X% of its stock functions like a dividend w/ stock purchase, but without that tax on dividends you’re effectively buying more stock. Adding a tax on stock buybacks could eliminate such bias, but it’s unlikely to happen any time soon.
On one hand, sure. They're able to make an informed decision to maximize return to shareholders.
On the other hand, a ton of amazing inventions came out of that system which created entire industries that went on to turbocharge the economy and create millions of jobs. I can see how someone may feel that a company being able to inflate it's stock price more is less useful to humanity and not worth the trade.
There may have been other reasons as well for the collapse of corporate research like changing tax rates, or maybe we were just in a golden age (1940s-1980s) as new advancements in physics and materials science allowed for a rapid amount of discoveries and now we're back in a slower period.
Note the "maximize shareholder value" aspect.
That's the essential driving force behind business since then: The Friedman doctrine.
Now consider the choices a company makes when executives hold the Friedman doctrine as orthodoxy.
Put money into basic research that might generate shareholder value in some unknown time,
or buy their own stock back and pump up the price?
Buying back stock is just as a way to distribute money to shareholders. It's neutral when it comes to "shareholder value". It's the same as paying dividends and having some shareholders reinvest it.
It just saves an extra step and doesn't trigger tax event. It also makes more sense. If you prefer cash you sell it on the market to the company. If you prefer holding shares you don't do anything. You get a choice when it cash out instead of being forced to on regular basis.
Where do you think the capital being returned is going? If it's not being consumed but instead is mostly getting reinvested somewhere else than what is the problem? Capital markets are working as intended to move capital out of a firm that cannot generate high returns with it into ones that can.
Your question is a reflection of just how engrained the Friedman doctrine has become in business. Milton Friedman introduced his theory in 1970, but it really got a boost in the 80s. First in 1981 when President Reagan named him to his Economic Policy Advisory Board and again in 1988, when Reagan gave him the Presidential Medal of Freedom and the National Medal of Science.
There are still many competing theories of business ethics,
but the Friedman doctrine is what drives corporations today.
And what other theory is there? The only two I know of are the shareholder theory and the vague "Capitalism bad. Shareholder bad." theory, which isn't actually a theory, but a complaint.
I'm not seeing how you get from share buybacks to a shift in priorities in corporate research. If there's a fundamental reason why it can't be done now how it was before the 80's it's not that.