What average return on capital will companies in the industry earn once the industry matures?
In the Internet world, the assumption is often made that successful companies will earn very high returns on capital employed (fixed assets and working capital). These high returns, often assumed to be greater than 20 percent after taxes, are typically attributed to either the notion that these companies have mostly intangible rather than physical capital or that, in the Internet world, network effects lead to effective monopolies. This blanket assumption of high returns is dangerous. While some segments of the Internet world will generate high returns, it is unlikely that most segments will demonstrate such unusual economics. One reason to be skeptical of the high-return claim is that there are many other industries with lots of intangible capital that do not earn very high returns. Investment banking and motion picture production are good examples. In these industries, much of the value is captured by the talent (the bankers, actors, or directors) not the shareholders. Intangibles pe
