Operating Margins
fi-le.net
fi-le.net
Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.
Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
Sometimes it feels like everything that I care about most has been marginalized and commodified to the point of financial inviability. Meanwhile people who simply came out on the winning side of the multiverse and pulled up the ladder behind them are doing so well that they mock the rest of us for working by actively making our lives harder at every opportunity.
I learned advanced engineering topics only to find that the “hot” areas were social media and cell phones.
Not sure what, but always assumed there would be better uses of such an education.
I was largely mistaken.
There's probably some meta commentary on the global risk climate in general since COVID here.
Peter G. Peterson wrote about this in Gray Dawn 25 years ago, Scott Galloway talks about it today.
https://openlibrary.org/books/OL385129M/Gray_dawn
https://www.ted.com/talks/scott_galloway_how_the_us_is_destr...
Critically, all the revenue for things you mention have yet to materialize, so they will show up in this naive analysis as losers. What they really represent is _opportunity_. Some may materialize but others have been around for decades and it turns out the "application for profit" step is much harder than anticipated.
> margin (profit) is inversely correlated with value to humanity.
You say this like it's a bad thing, but arguably the most valuable things to humanity are food, water, and shelter. These are simultaneously so important and so cheap that they embody the term "commodity," and that's a good thing! A _ton_ of human ingenuity from every society and culture has been applied to making these things better and cheaper and more plentiful. The same thing is happening to solar power (mostly for geopolitical reasons), which is conspicuously not on either of your lists.
Shelter is the one bit in the hierarchy of needs that got weird. Since it's not a consumable, there's incentive to treat it as an investment. In theory there's nothing wrong with that, but the incentives combined with local politics can become toxic. So many voters in the US own real estate (with leverage!) that everyone agrees by default that prices must never go down. That leads to a trap where politics revolve around housing prices never falling.
Of course, this pretty closely matches the basic Econ 101 explanations of competition and free markets. The entire goal of competition is to reduce prices, specifically to get the market price of a good to trend down towards the marginal cost. The thing that's supposed to be good for society isn't that some people get very rich by selling things at high profit margins, but rather that the stuff we want is available at the lowest feasible price.
OK, I'll bite. This is a very ungenerous take. Entities that aggregate and provide capital create enormous real human value. In fact, I would argue that most of the improvement in modern life that we all take for granted is because capital markets are available and accessible at scale. Where does the biotech company working on the new gene therapy get the billions it takes to develop and bring that drug to market? Where does the aircraft leasing company get the money to pony up for aircraft at hundreds of millions a pop?
I think it is fair to argue about whether the financial services use their position fairly/wisely/etc but it is unfair to dismiss the industry as "middlement using other people's money to extract wealth".
https://www.bitsaboutmoney.com/archive/mortgages-are-a-manuf...
That article could be reduced to one phrase: "banks off-load mortgage risk by selling that debt to investors". But that doesn't drive clicks or strike the fear of corporations into your soul.
I have met people who sincerely seem to believe that if an entity makes money then it must be societally useful because otherwise the market would not reward them with profits.
This seems to me like a self-help belief for people in these lucrative but ultimately not very meaningful positions.
This is patently not true. The USSR had no financial markets and engaged in the production high value goods. Whether it did so more efficiently than its capitalist competition is another matter, and I believe the answer is likely no, but it clearly did more than subsistence farming.
The broader economic situation of the USSR is a very different question to whether or not they were able to progress beyond subsistence farming. One is a relatively nuanced topic, the other is a question that can be answered trivially by someone with the most basic historical knowledge, or even knowledge of modern Russia which clearly has not developed from subsistence farming to a developed economy in the time between 1991 and today.
Also, even if some financialization is beneficial that does not mean all of it is. Too much can be very harmful.
Facilitating value creation is value creation.
Nevertheless it is not exactly the same. A carpenter’s apprentice is useful only when paired with his master. He facilitates the carpenter in his value creation but lacks the skills to do anything on his own.
Unlike the apprentice however, finance never actually learns the stuff.
Again, all of this has it’s uses and all, it’s just gotten a bit out of hand in terms of gambling like behaviour and the push the financial world creates towards harmful monopolies.
For example according to the OECD [1] 25% of Luxembourg's GDP (excluding interest and trading profits [2]) and 10% of employment is due to financial services! For comparison, for the UK and USA it's 8.8% and 8.3% of GDP.
In particular it's hard to me to see how market trading activity that provides a price for equities to the second, instead of say holding auctions every hour (which would probably greatly reduce profits for day traders and HFT), helps any drug development or aircraft leasing company to raise money. Financing deals don't happen on the market, and if market price is involved, typically something like the last month's average daily closing price is used.
We might call middlemen parasitic if they extract more value than they provide, but as you say, without finance the global economy wouldn't function. Let's instead consider the marginal utility of more of the economy being dedicated to finance. I'm convinced it's negative.
[1] https://www.oecd.org/en/publications/2025/04/oecd-economic-s...
[2] Quote from [1]:
> In the national accounts, financial services output is measured as the sum of financial intermediation services indirectly measured (FISIM) and fees, for instance on account keeping, credit cards, brokerage, financial advice and asset management. ... Trading profits and other interest income, for instance on bonds and derivative products, are excluded from the national account measure of financial services output.
My understanding is that the majority of big finance's income is from private equity or debt deals (pairing companies who need money with investors who have money), not from trading (there's very few people who we can confidently say are net winning traders and they don't scale).
With that in mind, there are two types of productive financial work: actuarial services and accounting. Actuaries act as the managers of society's resources, ensuring that net profit is made and risk well distributed, and accountants determine what those resources are. It is clear that many of the people in finance are not qualified to provide either of these services and simply leach profit out of the rest of the economy.
Notice that neither of these rely on capital markets and speculation. Speculators have been repeatedly proven to be horrible managers, performing worse than random chance. History is clear on this: if left to their own devices, speculators will destroy the economy. Only by means of strict regulation can they be forced into doing the productive actuarial and accounting work for which they are hypothetically employed. Yet for some reason, we still allow these people to operate without oversight in many cases and to extract massive profit beyond the value of their work.
Are you talking about the 2008 financial crisis? or do you mean something else?
Compare and contrast: resource allocation in finance-heavy Western nations with the same in the finance-light China. It's abundantly obvious to me that, through suppressing their financial sector, China has reached a superior economic outcome than they otherwise might have. We have elected to make traders the managers of our economy, and I think they have done a clear bad job and that we aught to reassess treating their decisions with such primacy.
While these are bogeymen, they do provide clear services that people need.
Banks should be obvious. A toll road is the worst offender in the list, it's tough to justify the eternal regressive tax.
The rest falls into financial markets. A steelman argument here could be that those services all make the power of compound interest broadly available. It's maybe the only exponential power available to average people.
I think there's a good argument that financial markets are a big reason that people can ever retire.
There isn't. The reason people can finally retire in the 20th and 21st centuries is due to extreme exploitation of fossil fuels and using multiples of stored energy to make goods, which would normally be unavailable compared to the energy budget coming from the Sun in a given year.
You can argue in some way that the financial markets made this wealth easily accessible to the average joe through a 401k, but it could have been just as easily allocated using a different not-for-profit mechanism.
9th from the bottom is EV charging. You might think that's going to improve quality of life, but the reality is these are companies trying to be middle men in a commodity market. They want to profit from delivering electricity to locations along the highway. It's kind of stupid because most people can charge at home overnight and be good for the next day or three. OTOH if you're going on a long trip you'll want to plan stops at these places but since you're planning you can check prices too.
Every day is a new chance to re-examine what you most care about and make some surprising discoveries.
Or not :)
Article says Unit Economies or regulatory monopoly, but I'd be interested in something that goes deeper, specifically around financial services.
This is an absolutely insane take. If you truly believe it, then I propose two tests:
1. You should start a business that provides the same services without rent seeking. If they’re really these low-value things that are just charging high prices, then you should be able to setup very attractive alternatives, make a ton of money yourself, and improve the world in a big way.
2. If you don’t have the energy or willingness to start them yourself, you could limit your use of them to the absolute bare necessity. If you believe they extract value, you could probably do better for yourself by using them less.
You're missing how the calculation works.
Suppose you work in a lab doing genomics etc. You get paid, say, $100,000/year, and you require some equipment which costs another $100,000/year to pay off and which goes to pay the salaries of the people who invented or manufactured it. Then your lab has $210,000/year in revenue, which means $10,000 in profit and a margin of ~5%, which isn't super high.
That's good! It means the people paying for your services aren't paying a huge margin on top of your salary to receive your services so more people can afford it. Or it means you're getting paid $100,000 instead of $60,000, the latter of which would have quintupled the investors' profit but reduced your incentive to do that work, reducing the quality of the people they can attract to do it.
Whereas industries with high net margins are the ones that are the most dysfunctional or captured by incumbents. It's no surprise that all the finance stuff is there at the top since that's the most thoroughly captured industry in the country. But that doesn't mean you want other things to be like that, it means you want those things to be more competitive so the money is going to customers as lower prices or workers as higher wages instead of going to fat cats as higher margins.
The industries with excessive margins are the ones where the incumbents make it prohibitively expensive for anyone to invest in those industries by entering them as a new business, as opposed to buying the stock of the incumbents. Which is one of the risks to their investors -- their stock prices are thereby inflated and they're running the risk both that voters will never get mad enough to actually push through regulatory reform and that the huge market incentive to find a way to disrupt them will never actually find a way do it.
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[a] Warren Buffett has written and spoken extensively about return on invested capital for more than six decades.
Profit only makes sense when considered against the amount of capital required.
The cost of capital is expressed in their balance sheet as expenses or depreciation. Pay back loans, investors, etc are all considered when calculating profit.
For example, a consulting firm may have almost no fixed assets, but let's say its customers are mostly large corps that take 90-120 days to pay invoices. When the firm gets hired for a new project it must cover its expenses for 90-120 days until it gets paid. As a going concern, the firm requires capital equal to 90-120 days of revenues to finance its accounts receivable. If the firm's revenues grow from, say, $100M/month to $120M/month, all else remaining the same, the firm will require an additional $60M to $80M in capital = ($120M/month - $100M/month) / 30 days/month * 90 to 120 days to collect.
So in other words: something like amazon is not a good business for Buffet since they have to finance the inventory for a couple of month at least?
Amazon, in particular, is a large entity incorporating numerous businesses (AWS, Prime, Alexa, Merchant Services, proprietary brands, etc.) that are different from each other. Each should be analyzed on its own, because their dynamics are different. For example, Merchant Services is a platform for third-party sellers. They, not Amazon, are the ones who pay upfront for the inventory. They pay Amazon to store and manage that inventory. When a product in that inventory sells, Amazon gets to collect the money upfront from consumers. The sellers get paid sometime later.
Here's a decent primer on estimating return on invested capital: https://www.morganstanley.com/im/publication/insights/articl...
Of course you’re right that it’s a complex business nowadays.
https://www.berkshirehathaway.com/letters/letters.html
A good place to start is by reading his thoughts on See's Candy as of 2007 (~four decades after he bought it):
https://berkshirehathaway.com/letters/2007ltr.pdf (search for "See's Candy")
I.e. a company could be “profitable” but also basically broke at the same time with no cash to pay people or suppliers.
Op margins are a great way to think about where one might see mean reversion, which then flows to net.
Ie are there structural reasons for the op income or is it a maturing sector which will attract new entrants.
A classic example of 'profit but no cashflow' might be where you made a profit but spent a lot of money on stock that you haven't sold yet. Or you made a lot of sales that you are yet to be paid for.
In the PE world it is just as likely that you made a profit before interest and tax, but you paid it all in interest. You would then have an operating profit but no cashflow due to a cash item. It could still make it a good business to own, if you didn't need the debt, or wanted to have the interest paid to you.
Maybe you made a profit but paid it all in dividends to a holding company. Then you have a profit but no cash flow due to cash items that don't affect the p&l.
So I would think the "other way" from profitable/no cash flow is loss/with cash flow.
The margin on most items is 4% (some lower, some higher e.g. luxury items are 10%).
4% is not terrible in and of itself.
But then you factor in:
- advertising costs
- conversion rates on clicks from the above
- taxes
and you get a real appreciation for how hard it must be to run high volume/low margin businesses.
Sure, you can do organic marketing etc but then you are just trading time for dollars.
But the alternative, trading dollars for dollars, is essentially just arbitrage, which tends to disappear from competition. Organic marketing is the only sustainable source of alpha I’ve found in affiliate marketing.
https://www.bloomberg.com/opinion/newsletters/2025-11-13/bla...
If I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?
> For some volume of sales that comes into the business, it gives an idea of what percentage is left as cash in the end.
There is gross income, which is roughly sales (revenue) minus the direct costs of those sales. There is net income, which is the money left over after also accounting for other costs, like fixed overheads and marketing.
What I end up with is disposable income which I can keep/invest.
I found different definitions, but it seems net profit = net income.
Income is what you sit with after all the expenses and taxes have been deducted from the retail price.
Let's say you create some product, XYZ, which takes you exactly 5 hours to make. The materials to make the product costs you $50, the salary costs $100 ($20/hr * 5 hours), the shop costs (rent, utilities, etc.) costs roughly $5 pr product. And the things involved in selling your product (marketing, etc.) costs you $45 pr. product.
So in order to break even, you need to charge $50 + $100 + $5 + $45 = $200
You decide to sell the product for $250.
So before taxes you've earned $250 - $200 = $50
And let's say you have to pay 10% taxes on that, so 10% off $50 = $5
Your shop is left with $45 for each product they sell. Or you have $45 in income.
Your operating margins would be $45 / $250 = 18%
That’s the net income. That word is doing a job there!
> Your operating margins would be $45 / $250 = 18%
No, that’s the profit margin or net margin.
Revenue = The total value of goods or services a company sells during a particular accounting period.
Gross Margin = The difference between revenue and the cost of goods sold. Also called Gross Profit.
Net Income = A corporation’s net earnings or “bottom line.” Net income is the residual of revenues after cost of goods sold, operating expenses, depreciation, interest, and taxes are considered.
Operating Expense = Expenses incurred in conducting normal business operations. Operating expenses may include wages and salaries, employee benefits, administrative expenses, research and development costs, and other similar expenses.
The article found that the highest margins are in ports, financial services, toll roads, etc. with certain key (but not all) software, AI, and semiconductors having good margins. But this is a logical consequence of the definition of margin they chose. These are all very capital-intensive businesses: it takes a huge amount of money to build a port, or a fab, or a search engine, or a road, or to start up a bank or insurance company. The financing cost of building these capital improvements, as well as the depreciation on them, is explicitly excluded from the definition of "margin" that the article chose.
Note also that this explains why certain semiconductor and tech companies have high margins but many are very low-margin. If you are TSMC or Intel, you own your own fabs. You spend tens of billions of dollars to construct them, and the financing cost of those investments is explicitly excluded from the definition of "margin" chosen by the article. But if you are a random ASIC manufacturer, you pay TSMC to fabricate your chips, and those payments are included in Cost of Goods Sold and excluded from your gross margin, let alone your operating margin. Likewise, if you are Google, Amazon, or Microsoft, you're making huge capital investments in datacenters. But if you're a random SaaS, your cloud computing costs are included in COGS, they become revenue for the cloud provider, and so your operating margins look much worse.
I'd be much more interested in seeing the analysis re-run with net margins.
[1] https://www.investopedia.com/ask/answers/102714/whats-differ...
The article is quite embarrassing - it’s ok if you don’t know how P&L statement and balance sheet work, but writing an entire blog post without ever feeling the need to verify basic terminology is either very lazy or very ignorant…
HTML looks pretty handwritten (lack of crazy css classes and simple structure)
<link rel="stylesheet" href="https://fi-le.net/css/tufte.css">
They are using tufte.css https://edwardtufte.github.io/tufte-css/
I held my phone sideways
https://i.xkqr.org/medianvsmeanmargin.png
Though I do recommend exploring the plot on a full-size monitor too – it's zoomable etc.
Paintbrush in Gimp on top of screenshot.
> Appendix
> The by-category margins are repeated in this table.
These days it seems that 30%+ operating margins are what VCs and stock market are expecting now, which seems unsustainable. Software and similar businesses can easily do it because cost of manufacturing one more unit is close to zero, all the costs are primarily NRE. Not all business fit that model and but yet they all aspire to the same margins.
That's what private equity loves.
High 80%+ gross margins; high retention/recurring revenues (if you're doing it right); easily metric'd (CAC, LTV, conv%, etc); capital specialized for deploying into it (most VC of the last decade); alignment with clients w.r.t. value/impact (or they don't renew); straightforward lining up of 'value to customer' and pricing; common benchmarks and shorthands for valuation multiples; etc.
Simple business to understand / run / grow, assuming you have a good product in a good market.
It really is quite the business model.
This article compares the gross profit vs. net profit differences by industry.
https://www.venasolutions.com/blog/average-profit-margin-by-...
> Divide a company's income by its revenue
How about dividing a companies operating profit by its revenue? Income is a vague term and is just as often equated with revenue... which makes the opening sentence a bit weird.
Going further, most people talking about different sectors having different margins are talking about the gross profit margin. In a retailer gross profit could be the sales minus the cost of the things that got sold and probably the cost of the people in the stores. In a service business it is normally the sales minus the cost of people doing the work that was sold. At a hosting company it could be the sales- minus the electricity, Internet, engineers.
The important distinction is that gp does not normally include 'head office costs', accountants and other parasites, so it is easier to compare the different segments from the amount they are going to contribute towards your fixed costs.
Imagine you are working on a drug you will take to testing next year. You could be 5 years from actually marketing it. Even if you capitalize all the expense of research and development, to get it off the income statement, you still have to pay for the rest of the business.
Absent a true monopoly or government protection high margin businesses are usually those most ripe for disruption. Someone eventually comes along and, for various reasons, is willing to make far lower margin and then the battle begins. Lots of sleepy high margin businesses out there just waiting to get picked off by a new entrant.
It lowers the profit of a public company, thus decreasing pressures to pay a dividend, while the consultancy leeches money and pays it forward to some other company in which the public company’s founders/executives are direct beneficiaries.
I think the "quasi-monopoly" segment is the best attack vector if you are willing to get your hands a bit dirty. Companies like Mastercard and Visa are the closest thing you'll get to an actual money printer.
The trick with starting these kinds of businesses is to find one customer (B2B) who is willing to do the crazy thing with you. Someone who is fed up with the current state of affairs in their domain. Ideally, someone who is already a customer of one of these vendors you seek to compete with.
If I wanted to build a payment network from scratch, I would partner with a bank and begin with existing payment rails (Jack Henry, etc.,). and layer value-add on top (custom fraud detection, rewards programs). Over time, issuance, merchant acquiring and other concerns could be discussed once the trust and value proposition has been proven out. This is a very long play.
The hardest part of breaking in is finding that first customer and making sure they're a good one. If you have a good partner, it really does feel like cheating by comparison. I've worked with banks who could get things out of vendors with a five minute phone call that we couldn't in a million years. Stack a few of these and it begins to look like you're on the correct side of the moat.
> Country Median Margin Average Margin Sample Size > South Africa 28.86% 82.37% 7
How can the average be 82% with a median being 28% without having one that is above 100%?
It being a weighted average does sound like a reasonable explanation, though. A median of 0.29 and weighted mean of 0.82 is trivially possible given e.g. values (0.29, 0.29, 0.82) and weights (0, 0, 1).
And for the classic HN comment about the site itself: I think it looks very nice, but the native justification algorithm is not very good (especially with hyphenation turned off) so it ends up looking quite sparse at parts on mobile and is a bit jarring to read. I'm a big fan of this implementation [1] of the TeX linebreak algorithm for the web, and think it would make this site look even better with minimal effort.