My point is that the massively profitable, "free" website run by three people in a garage is probably a myth. The massively profitable online retailer run by three people in a garage is definitely a myth. To reach the scale where non-trivial profits are possible from the internet, you've got non-trivial expenses.
Why hello, craigslist.
I'll grant you that they're exceptionally small for a website of their size -- but being "exceptional" means only that they're the exception to the rule. The rule is what's important.
There's simply nothing about Craigslist that you can count on reproducing. If you're creating an internet company today, and you're aiming for hundreds of millions in revenue, it's 99% probable that you will need to spend more money than they do.
Again: you're missing the point. Craigslist is the exception to the rule. It's a product of its time. For any value of X, if you tried to say "this is the way Craigslist did X, therefore I should too," you'd very likely be wrong. And in any case, Craiglist is pretty far from the romantic notion of three guys in a garage. It's an expensive site to run, even if it's more cheaply run than other big sites.
for starters...
Plenty of empirical evidence out there in the decline in shrinked wrap software, the disappearance of successful IPOs, and the inability of the vast majority of websites to charge for any service whatsoever.
http://www.squeezedbooks.com/book/show/7/information-rules-a...
Very high risk / Very high returns
Like Gambling ?
In other words, it benefits from speculative bubbles.
The reason is scalability.
My dad was always shocked that investors valued the last startup I worked for in the tens of millions of dollars while we were losing money. He's worked in construction his whole life for firms that do on the order of $100MM in revenue per year. Like all construction firms, however, their margins are razor thin. Their revenue doesn't grow much faster than their costs (employees and materials, primarily).
A construction company that loses money is not going to be worth $50MM any time soon. A tech company with similar financials might be. A tech company might take a while to get their technology right. But when they do, they can leverage it. Their revenues can grow far faster than their costs. Software as a product scales better than just about anything I can think of. Software businesses often go from slightly in the red to huge annual profits in very little time.
Everyone in tech is trying to find the Next Big Thing. This includes us (entrepreneurs), the media, and investors. In the case of the media, they're just trying to be the first ones to break the next big story, as usual. Just like investors, if they want to succeed, they have to be willing to take risks. They have to bet on companies that look like they have potential. Sometimes they're wrong. But in those rare cases where it pays off, it usually pays off big.
Other industries lack this quality. In other industries 1 success is not going to make up for 10 failures. In technology you make money by picking winners before everyone else. It's somewhat of a crap shoot. But the bar is low because the potential reward is high.