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Is Amazon Too Big?

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Apr 29, 2019

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Is Amazon Too Big?
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  • This video is sponsored by Brilliant!
  • The first 200 to use the link in the description get 20% off the annual subscription.
  • Elizabeth Warren wants to break up Amazon, Facebook, Google, and Apple.
  • The argument goes, roughly, like this: Tech companies have gotten really big, really fast.
  • And they’ve abused that power by favoring their own products over their competitors.
  • Therefore, once a company reaches a certain size, it shouldn’t be allowed to own both
  • the products and the platform on which they’re sold.
  • In English, Amazon can’t sell the Kindle on its own website, and Apple has to pick
  • between owning Music and iMovie and News or the App Store itself.
  • Now, whether Warren is 100% serious or mostly just generating publicity for her presidential
  • campaign, she isn’t alone.
  • This is only the latest part of a much bigger movement.
  • We’re at an inflection point in history, where new, fast, Silicon Valley is crashing
  • in to slow, old, government.
  • Everywhere, all at once, the power and influence of big tech companies are being questioned:
  • Google was recently fined $1.7 billion in Europe for being anticompetitive.
  • Sprint is trying to merge with T-Mobile, despite significant push back.
  • Facebook has, well, continued to be Facebook.
  • And Spotify has launched an all-out attack against Apple for what it claims is unfair
  • treatment.
  • So, who’s right - Apple or Spotify?
  • Google, or the EU?
  • Facebook, or, literally everyone else?
  • First, we need to understand why these companies have such a huge advantage.
  • And how, in just a few years, Amazon went from being synonymous with “cheap, convenient
  • shopping”, to a scary, political, nebulous Walmart-like mega-corporation.
  • Let’s say you wanna start a grocery store.
  • Maybe you know a little bit about merchandising.
  • Maybe you come from a long line of grocers so selling produce is just in your blood.
  • The other kids were playing with fire trucks and trains but you, you were daydreaming about
  • the retail implications of The Engel Curve.
  • Anyway, the bad news is that the grocery business sucks.
  • Like, famously so.
  • If you’re lucky, you might manage a profit margin of 3%.
  • Unless you have some revolutionary way of arranging bananas on the shelf, you’re just
  • one of a thousand stores, which customers have no special loyalty towards.
  • You don’t see a lot of “Proud mother of a Safeway shopper” bumper stickers.
  • But - there is money to be made at the very, very top.
  • If you can become a Kroger, or a Whole Foods, or Trader Joe’s, well, that’s a different
  • story.
  • The trick is surviving long enough that you sell lots of things, so you can, (a), turn
  • around to the companies making those things and say “Hey, we’d like to buy 3,000 stores
  • worth of your bananas, can you make us a deal?”,
  • and, (b), cut out the middle man by creating your own generic brand.
  • With size comes leverage, which lets you buy cheaper, and, ultimately, make more money.
  • But, again, the problem is getting there.
  • Competing with established companies in any industry usually means losing a lot of money
  • for a long time with only the hope of making it back in the future.
  • But don’t give up on your dream quite yet.
  • Here’s an idea: Forget groceries for now, let’s just find some way of making money.
  • Like, I don’t know, selling cloud storage to enterprise customers!
  • It’s a good business, no one else is doing it very well, and, in a few years, you’ll
  • have so much money, you can come back to your dream of starting a grocery store.
  • What does cloud storage have to do with selling grapes?
  • Is that really the most exciting thing you could be doing?
  • Pretty much nothing and probably not.
  • But who cares!
  • Money is money, and as long as it makes more than the grocery store loses, you can afford
  • to slowly grow it into an empire, even while it isn’t yet profitable.
  • This, if you haven’t noticed, is my very crude way of describing Amazon.
  • It started as a book company, but Bezos had no special love for books.
  • That was always just a good way of generating capital for his real dream.
  • Today, books are a footnote.
  • The new distraction is called Amazon Web Services - AWS.
  • If you’re already familiar, bear with me for a sec.
  • A few videos back I said: > A thousand downloads don’t cost any more than one.
  • Scale is (nearly) unlimited.
  • My point was: it’s a whole lot easier to sell a thousand note-taking apps than it is
  • a thousand actual notebooks because software is made of bits, and bits don’t cost money.
  • Which, is mostly true in that context, but, not totally accurate in practice.
  • Consider the scale at which some companies operate:
  • Out of all the bandwidth, from every phone and every computer, in every country, 15%
  • is just people watching Netflix.
  • 15%!
  • Even Uber, which, in theory just connects the nearest driver to the nearest rider, stores
  • over 100 petabytes of data - or 100,000,000 GB.
  • It also fluctuates dramatically.
  • Every startup dreams of hitting the front page of Reddit, Unless you’re the engineer,
  • in which case you have a heart attack trying to keep up with such a huge spike in views.
  • Companies, and, especially, startups with limited budgets, have a tough choice:
  • Either buy too much capacity, Or save money and hope they don’t get too popular.
  • At least, until AWS.
  • Amazon realized it could solve this problem with a service: Only pay for what you actually
  • use.
  • If your business suddenly explodes in popularity, no problem, just pay a little more.
  • Turn the handle for more data, as you would water or electricity.
  • Amazon takes care of the rest, the same way we outsource building windmills to electric
  • companies.
  • Now, if we look at its total revenue, and then divide it by source, it’s pretty much
  • what you’d expect: Amazon is mostly an online store and you’re probably wondering why
  • we’re talking so much about AWS.
  • But what about its income?
  • Where is it actually making a profit?
  • This is where it gets interesting.
  • Now, Amazon looks like a cloud storage company with an online retail business on the side.
  • In the 4th quarter of 2018, AWS accounted for 58% of the company’s operating income.
  • It alone made more money than McDonalds.
  • So, yeah, it sells lots of USB cables and bananas, but that’s not where the money
  • is.
  • AWS is camouflage.
  • It makes the company look good overall and conceals how much money it loses.
  • One business subsidizes another.
  • And this is where it gets tricky.
  • Because, if you’re one of the other grocery stores, you’re thinking “This isn’t
  • really fair - how can we compete with someone who doesn’t even need to make a profit?”
  • Safeway and Publix don’t have a $25 billion a year cloud storage businesses.
  • When they sell bananas, they have to, like, ya know, make money.
  • This is how, one after another, Amazon enters and dominates a new industry.
  • It plays by a fundamentally different set of rules.
  • Turns out it’s a whole lot easier when you’re not super worried about the whole profit thing.
  • Of course, predatory pricing, when a company lowers its prices to starve out the competition,
  • isn’t a new idea.
  • But once they’ve done so, companies usually raise their prices again - that’s the whole
  • point.
  • Amazon, on the other hand, has always kept its prices low.
  • It’s not playing the long game, it’s playing the looooong game.
  • Here’s it’s revenue, and here’s it’s profit.
  • The company touches more money than ever - it just doesn’t keep it.
  • Profit has stayed around 0 because it’s more interested in growth.
  • That’s the loophole.
  • In this essay, researcher Lina Khan explains how, since the ‘70s, antitrust law has used
  • short-term prices to determine whether a company is being anticompetitive.
  • In other words, sure, Amazon is big, it’s dominant, and it’s killing lots of competitors.
  • But it’s prices are low, so it flies under the radar.
  • You might be thinking - so what?
  • If a company uses its size to save you and me money, isn’t that a good thing?
  • But when products are subsidized, either by another profitable business like AWS, or,
  • Venture Capitalists burning money for the sake of growth, they don’t have to compete
  • on their own.
  • Products win not because they’re the best but because they’re funded by someone, or
  • something, unrelated.
  • For example, on iPhone, Apple has the Platform Advantage.
  • It controls which apps are allowed on the App Store, and doesn’t have to give up 30%
  • of its revenue or follow the same rules, as everyone else.
  • If you’re Clash of Clans, this may seem like a relatively small price to pay for access
  • to 1.3 billion users.
  • For someone like Spotify, it’s a very different story.
  • Music streaming is the digital equivalent of a grocery store - Spotify has such tiny
  • margins that giving Apple 30% breaks the entire business model.
  • And even if Apple didn’t make a dime from its Music or News apps, it might still offer
  • them just to attract users to the iPhone.
  • Spotify needs to make money, but Apple Music just doesn’t.
  • Apple’s apps, therefore, almost certainly have more users than they “should”.
  • Which is not saying they’re good or bad, but that some number of people, maybe 1, maybe
  • 1 million, use the service only because Apple had an unfair advantage in putting it in front
  • of them.
  • Likewise, Amazon has the Platform Advantage on its website.
  • At some point it realized, hey, wait a second, if we have all the data, and we control what
  • people see, why on earth are we sending customers to someone else’s product?
  • So now it competes with its own sellers, on everything from batteries to backpacks and
  • keyboards.
  • But wait, how is that different than any other generic brand?
  • Target has Up&Up, and Walmart, Great Value, but no one’s complaining they have an unfair
  • advantage.
  • The difference is lock-in.
  • It’s much easier to switch grocery stores than it is between iPhone and Android.
  • Companies like Facebook will always say “Look, you chose to use our service, you chose to
  • give us your information, didn’t you quit your job, become a lawyer and read our 3,000-page
  • terms of service?”
  • But that’s not really true.
  • We made one, unrelated choice, like buying an iPhone or Android, which required that
  • we make a bunch of other choices later on.
  • Nobody knows what they’re getting into.
  • And this will only happen more as companies get even bigger.
  • Amazon is an extreme example because AWS is really profitable and groceries are really
  • not, but entering new categories with the resources you already have is kind of what
  • a company is.
  • You might start by making smartphones but then use that money to sell refrigerators.
  • Fast-forward a few years and now you sell life insurance and container ships.
  • Samsung is less a brand and more a Buy-N-Large, E-Corp conglomerate.
  • Like Amazon, it barely makes sense to think of it as a single, unified company.
  • One division sells parts for the iPhone.
  • Another fiercely competes against that very same device.
  • Even Apple is moving in this direction.
  • It may not be in the business of refrigerators, but you now buy your iPhone with an Apple
  • credit card, download Apple apps, back them up on Apple’s cloud, and watch Apple-branded
  • TV-shows.
  • But there’s also a benefit to this integration.
  • One of the bests feature of the iPhone is that it’s all designed by one company, as
  • one, coherent product.
  • Because Apple owns both Music and iOS, they’re easier to use, more convenient, and more powerful
  • together.
  • And because you have no choice but to use Apple’s App Store, your phone is more secure
  • and your data more private.
  • Now, of course, you may disagree.
  • For some, having more freedom might be worth the trade-off for privacy and security.
  • But that doesn’t diminish its value for the rest of us.
  • In other words, breaking up some of these companies would actually mean a worse experience
  • for you and me.
  • And if your “consumer protection” proposal makes our lives worse, it’s probably a bad
  • one.
  • The EU has shown - time and time and time again - that governments can make technology
  • worse simply because they don’t understand it - even with the best intentions.
  • So, what’s the solution?
  • I don’t know.
  • If anything, we’ve learned you should be skeptical of any simple solution to a problem
  • this big.
  • Instead, here are some ideas:
  • First, we need to expand the scope of what qualifies as anticompetitive behavior.
  • Low prices don’t mean the customer isn’t being harmed.
  • On the other hand, closed, locked-down markets like the App Store aren’t necessarily always
  • a bad thing.
  • Second, we need to reexamine some mergers and acquisitions.
  • It happens all the time: An exciting young startup gains some traction only to just be
  • bought by a Google or an Amazon.
  • Sometimes we never heard from it again.
  • Founders are incentivized to sell their companies - to the tune of billions of dollars.
  • But society at large would be better off with more competition.
  • The key is balancing the benefit we all get from the scale of companies like Amazon, with
  • the drawbacks of their immense political and economic power.
  • Many of these ideas to break-up tech companies are designed only to get headlines.
  • But a real solution requires a deeper, mathematical understanding of the problem, of the type
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