The $1 trillion company

It's the most expensive game of Snakes and Ladders in history. On Thursday the market value of Facebook dropped by around $100bn (£76bn) after the social media leviathan reported an unexpected decline in user growth numbers to the US stock market.

The very next day Twitter's shares fell 20 per cent, though this meant a slightly less impressive $6bn drop in market capitalisation. Meanwhile, Amazon shares were popping higher after reported quarterly profits exceeded $2bn, reigniting media speculation that it could beat Apple to become the first company with a $1 trillion valuation.

But what does a one trillion dollar valuation mean? Rather less than the media commentary would lead you to believe. The truth is nothing happens when the threshold is crossed. There's no prize awarded.

Shareholders don't receive a cent more in dividends than when the company's value was $1 trillion minus $1. At least not automatically. It's just a big and round number.

The significance of the first $1 trillion company even as a meaningful numerical landmark is overstated. In 1999, at the apex of the dotcom bubble, Microsoft was worth more than $613bn. Adjusted for inflation, that's $927bn in today's money; so in line with both Apple ($954bn), Google ($888bn) and Amazon ($877bn) today. This is not uncharted territory for corporate valuations.

What does "market capitalisation" mean anyway? There are two traditional ways of valuing a company.

The first is to simply ask what someone else would be willing to pay for its shares. If you can sell the share for $10 it's worth $10.

The second is based on calculations of the value of all its future expected profits, adjusted for how much those revenues would be worth today. So if a company makes $10 in earnings per share today and you think this will grow by five per cent a year for the next 50 years you might value the share today at around $200.

It's important to bear in mind the pretty speculative nature of this second method when considering media reports about the value of fast-growing technology companies. In a world of massive uncertainty over digital disruption and the potential for sudden shifts in online consumer behaviour such estimates are inevitably going to be highly volatile.

The valuation of a company such as Amazon is based not on its current profits but on its profits later this century when, many assume, the "everything store" will have pushed aside almost every other retailer on the planet. That's certainly the trajectory. But it may not work out like that. As we've been reminded this week, it can be easy come, easy go in the Silicon Valley valuation game.

But there's probably another motivation for the obsessive media interest in the ups and downs of tech company valuations, and that's the ability to personalise the stories. Amazon, Facebook and Google have outsize founder share ownership stakes. Jeff Bezos owns 16 per cent of Amazon. Mark Zuckerberg owns 28 per cent of Facebook. Larry Page and Sergey Brin own 11 per cent of Google. This lends itself to eyecatching calculations of swings in personal wealth on the back of share price movements. It makes for a striking headline to report that Mark Zuckerberg lost $15bn in wealth in a single day. Or that Jeff Bezos gained $12bn in an afternoon.

But these are not losses and gains in the way that most people understand them. There's nothing those two individuals could suddenly afford after a good day, or which they could not afford after a bad one. These are paper fortunes that they could never spend over their lifetimes, even if they shopped like Michael Jackson in Las Vegas.

This fixation on personal wealth is, in some respects, socially useful. With this kind of corporate paper wealth tends to come control. And with control, rightly, comes responsibility. It's good that when Amazon fulfilment centre workers strike over their brutal working conditions they have a flesh-and-blood person like Bezos to direct their complaints to, rather than an anonymous board. It's useful that, when Facebook becomes a vector for democratically damaging misinformation on an industrial scale, pressure can be brought to bear on a powerful individual like Zuckerberg rather than a committee.

Yet, at the same time, there's also something slightly socially unhealthy about fixating on the paper wealth of individuals, at least in the celebratory way that one often encounters in news reporting. As Adam Smith, the father of economics, wrote: "This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments."

Something to bear in mind next time you are invited to enjoy a game of Silicon Valley billionaire snakes and ladders.