Competition Is for Losers
The Wall St. Journal quoted Peter Thiel’s business plans. It is mostly behind a paywall.
Competition is for Losers
If you want to create and canpture lasting value, look to build a monopoly, writes Peter Thiel
What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value isn’t enough—you also need to capture some of the value you create.
New Republic points us to the politics of Democrats of monopoly:
What drives monopolization is not business know-how or technological innovation, but public policy—a political environment that permits or even enables an investor like Jeff Bezos to engage in a massive accumulation of economic power. Not that long ago in America, no company as large and destructive as Amazon would have been allowed to exist. Preventing and breaking up such corporate behemoths, in fact, was at the very center of the Democratic Party’s agenda. “Private monopolies are indefensible and intolerable,” the party’s platform declared in 1900. “They are the most efficient means yet devised for appropriating the fruits of industry to the benefit of the few at the expense of the many.”
In the late 1970s, however, the Democrats began to abandon the idea that big is bad. Over the past four decades, the party has stood by as giant supermarket chains replaced local grocery stores and Too Big to Fail banks replaced local lenders. As monopolies broke up unions and drove down wages, Democrats increasingly came to rely on campaign contributions from the very corporations that were consolidating their control over the American economy. The Obama administration, like the Bush administration before it, declined to bring a single major monopolization suit against U.S. companies. Even The Washington Post, that exemplar of political opposition to Donald Trump, is now owned by Jeff Bezos. Dissent, brought to you by monopolists.
But with Republicans in control of all three branches of government, and with the big business ethos espoused by Hillary Clinton in tatters, Democrats may finally be returning to their anti-monopoly roots. Leaders within the party are once again looking to the aggressive antitrust movement launched during the Progressive era and extended through the New Deal, which propelled America into three of its greatest decades of rising prosperity and economic equality. The question now is: Can Democrats find a way to rechannel the popular outrage unleashed by Trump, and to repurpose the party’s traditional opposition to monopoly in the age of Amazon?
So New Republic points out that if Democrats return to busting up monopolies, they will do so only because they see that it will benefit them politically and enhance their power position.
I’m disheartened to see the liberal & progressive New Republic use Amazon as an example of monopoly gone wild.
Their basis for this is
“What drives monopolization is not business know-how or technological innovation…”
In fact Amazon only exists because of technological innovations —
— Computing technology (semi-conductors & software)
— Communications technology (both from Computing Technology & the Internet), and lower costs of transportation (air & land).
— Innovation – using the internet and computing technologies in combination with lower transportation costs to sell things to consumers without their having to brave traffic, parking, personal extra time, and shop several stores to find what they actually wanted.
That was undeniably one of the major innovations of the 21st century, which was available to all comers , unimpeded and unrestricted.
As to monopoly power that depends on how one wants to define the market place. On-line advertising or advertising? On-Line retail or retail?
Of course On-line advertising competes with print & tv advertising.. it’s that competition in fact which makes On-line advertising exist at all.
Of course On-line retail competes with Brick & Mortar retail.. it s what makes On-line retail exist at all.
Of course electrical energy competes with human energy.. it’s what makes electrical energy have any value for humans. — lights instead of kerosene lanterns (& candles) instead of wind, water, animal, and human energy.
Of course the internal combustion engine competes with horse & buggy, sail power, steam power, and pony express and provides humans with more time and faster and more frequent services and goods, more water (digging deeper wells), and making human energy uncounted times more productive.
Of course indoor plumbing (extruded metal pipes) displaced women and children’s energy and time carrying buckets and buckets of water from well to residence — up multiple flights of stairs in most cases, and displaced the outhouse for greater sanitation and less disease and infection transfer.
It was only over time that these technologies and innovations spread beyond the early innovators and investors and precisely by these same competitive forces.
I recall when IBM’s monopoly power in central computers when in had 80% of computer sales and was cut by federal prosecution; when AT& T’s monopoly power with also 80% of telephone communications was cut the same way,
Total On-line retail is 10% of Total retail and Amazon’s retail sales is only has less than half of that, so it’s by far and wide not even remotely close to a monopoly of retain.
Google’s on-line advertising is still a minority of all On-Line advertising, and On-Line advertising is a tiny fraction of total adverising, so it can’t be even remotely called a monopoly.
The New Republic’s article laments the loss of jobs in Brick & Mortar because of On-Line retail, but every single major innovation on the planet since human’s invented the hoe, harnessed oxen to pull skids, and wheels to make carts has displaced jobs. and improved standards of living.
Yes, I fully agree displaced job by innovation of technology is a problem and I’ve often posted that it’s going to get a lot worse as more and more automation occurs at a faster and faster rate. But innovations and use of them to improve human productivity at a faster and faster clip and thus displace more and more labor at a faster clip, isn’t the problem.
The problem is with how society wants to deal with it — how can displaced labor be compensated by the labor that isn’t displaced (yet), and by the capital owners that profit from it?
Gov’t hasn’t even begun to deal with this problem in the U.S. yet. Why not? Gov’t can’t even keep up now with the rates of change in technology, and so clearly gov’t methods have to change from the “good ol’ days” when things changed slowly enough to ponder and pontificate, and procrastinate and find sufficient compromise or change gov’t from one party to another. And the more polarized the nation becomes the longer it will take even in the face of the problems it’s creating by not doing anything, making them even greater and greater problems.
If not gov’t then perhaps private enterprise should take the lead? But it’s private enterprise that does the innovation and investment to keep increasing human productivity and displacing more and more jobs. So that won’t work.
If not gov’t and not private enterprise then should labor take the lead in changing things? If so they need the power to change laws and influence interpretations of the Constitution. But with more and more human productivity and fewer and fewer jobs, then that means fewer and fewer in labor so how does labor take the lead against private enterprise’s economic power which has the far more influence in gov’t and judges than labor has had since the 1960’s.
The New Republic article didn’t address the real problem at all.. they pointed fingers at the only thing that isn’t a problem… innovation and increasing human productivity which has brought the U.S. the highest standard of living on the globe by far.
Shame, shame on one of my favored progressive groups. The article effectively advocated and proposed shutting off innovation and human productivity improvements. .. as if the rest of the globe will follow suit.
This was as amateurish and article as I’ve ever seen from a progressive group — right up there with the National Review.
Trying to figure out why neoliberalism, the theory of which William Davies represents as having competition at its core, has become increasingly tolerant of monopoly, I ended up at the section of Davies’s “The Limits of Neoliberalism” that talks about Ronald Coase. Coase does seem to have engineered, or at least strongly supported, an important turn in neoliberal thinking with his ideas on efficiency.
If I am reading it right, Coase wanted to evaluate all capitalist structures, market and non-market, on the basis of efficiency, as indicated by transaction costs and other factors. What strikes me in this is the extreme pragmatism of the neoliberal position. Competition was never a value, no matter how glorified by Hayek. It was a means to profit, and now, apparently, it has been superceded by a better one.
“In fact Amazon only exists because of technological innovations”. Perhaps but in their litigation with the IRS over the value of intangible assets sold abroad – Amazon said the technology was not really worth a lot.
You make a good point that they have competition and they keep their prices low. Which is why their operating margin is also low. But wait – their valuation is over 100 times earnings. What gives?
My theory is that Amazon wants to take over their markets and only then exploit their monopoly power. The predatory pricing model is the only rational for their high valuation
pgl,
My theory is that Bezos has a great grasp and understanding of history of new tech displacing and reducing the influence of old systems… e.g. on-line retail displacing or reducing the dominance of Brick & Mortar. That history requires he compete with all his might now so that Amazon doesn’t succumb to future competition in on-line sales or similar major productivity improvement and become obsolete or a “has been” player.
Let me also note that On-line sales is at least 3 orders of magnitude(maybe more in fact .. I need to do more precise calcs) more energy efficient, and I don’t know how many orders of magnitude more efficient use of real-estate than Brick & Mortar and at least 3x more productive for consumer’s time and energy.
If and when automated autonomous vehicle systems and infrustructure become the norm on-line retail energy efficiency will increase by another 2 orders of magnitude.
Those are the reasons why Bezos must compete at the leading edges since he knows those levels of efficiencies will induce far more capital to compete in the field than is even remotely being invested now.
There’s simply no way a single player can remain singularly dominant in a market no matter how many patents they own. That is eminently clear in history since the industrial revolution. Thinking otherwise is just inventing a fiction.
Retail Sales is a
1. Distribution of goods system
2. Delivery System
3 Sales System
Both On-line and Brick & Mortar retail require and pay the costs of all three of these systems.
The difference is that On-line retail changed the delivery system — instead of delivering to Brick & Mortar physical real estate for customers to “touch & feel” and take delivery, it by-passed the “touch and feel” paradigm (THE BIG RISK in starting such a business, by the way.. indeed nearly the only risk) entirely and replaced it with an extended Distribution System — the generally referred to “last mile”.
If you’ll recall Amazon began only offering compact CD’s music.. a product that requires browsing but not “touch and feel” because the product was to listen to (hear) not see or use in the physical sense … hence only quality brands perhaps was the discriminator along with the music desired by he consumer.
Compact music CD’s were small & light weight enough for common carrier delivery and had already long been adopted by consumers. I differed only from prior “mail order” by replacing catalogues with internet browsing a far lower cost method of presenting the choices to mail order consumers and easy order and payment by using the then standard Visa or other credit card and verifying the authenticity by already standard retail methods used (also by internet communications)
So the only “new” aspect was displaying the product offerings via computer browsers instead of mail order catalogues. The risk was only when the consumer population would have computers at home or available to them in sufficient numbers to support volume sales. At that time, if you weren’t computer savvy, there were not many households that had ready and easy access to computers and internet connections.
Bezos simply looked at the growth rate of computers and rapid reduction in prices with increasing capabilities and speeds and knew as every body else who looked knew that the proportion of households with computers and internet connections was increasing at exponential rates (and that the exponential was increasing as well). I knew it. Every computer company and modem supplier knew it. Every software provider knew it. Every semi-conductor producer knew it.
It was openly available and easily acquired information in both internet news and print news to any body who cared to look or pay any attention.
So Bezos risk at the time was only how fast the exponential rate of household computers and internet connections would increase since he had to install and pay for servers to handle the internet traffic and distribution centers to make deliveries short enough to be compelling enough to use his sales system.
The real question though is why Brick & Mortar retail didn’t do the same thing at the same time Bezos did it? Of course the answer is that it would cannibalize Brick & Mortars own primary source of revenue and profits. — the same reason IBM hadn’t previously invested in distributed processors since it would cannibalize it’s hugely profitable central computer sales (and that was back in the mid-1970’s already).
Brick and Mortar simply bet that either the on-line business wouldn’t have any significant impact OR that they could play catch-up when On-line sales volumes became economically worthwhile.
They failed on both counts by their own considered decisions, letting Amazon continue to experiment with new products that increasingly encroached on the “look and feel” paradigm Brick & Mortar relied upon entirely.
It wasn’t that Bezos had an advantage, but that Brick & Mortar refused to take advantage themselves Sears, Macy’s, Walmart, etc., etc., etc. They had the same opportunities, same capabilities, had the same information, and far more capital to put into it than Bezos did.
Those are the realities. Any other story is bullshit on a stick… loser’s fictions, blaming anybody but themselves. I’m sure buggy makers made the same considered decisions back in the day..
pg,
“l But wait – their valuation is over 100 times earnings. What gives?”
Good and relevant question. As best I have been able to answer that myself, major investors (the ones that actually dictate the value) is that they’re monetizing future profits based on revenues and revenue growth rates instead of present profits.
There’s an inherent risk in that method of valuation as well, however. since it assumes an eventual profit will occur as a percentage of revenues…. the question is not if, but when..
Amazon’s stock is a huge risk at the PE’s it’s now has, Part of taking that risk I think is on Bezos’ tutelage of the company… if he’s out, then the risk doubles and I think the price would halve.
It’s recent grocery investment is, imo, an experiment… find out what it takes to compete in that market and how to do it and if it’s profitable enough in the long run. It’s not a high risk though since Bezos can sell it back to some normal grocer at a relatively small loss, but if he did it would indicate that groceries is not a viable on-line market yet., and Amazon’s price would take a hit (how much a hit is debatable.. maybe 20%? I dunno).
Amazon is the quintessential “long term bet” So was IBM in the 1960s’s under T.J. Watson Jr who literally bet the entire company on one new product (System 360)…. which blew away the competition and cut the cost of computing in half while doubling or tripling compute speeds.
Gates bet with Microsoft was on Wndows.. had that failed or had an adequate competition, (including even IBM’s efforts to displace it) Microsoft would be a fraction of its present self. As it was it was cut down by federal consent decree when by virtue of Windows increasingly user friendly system it took 80% of the OS market. Same thing happened to IBM after System 360 and it’s follow-on improvements took 80% of the entire computing market.
Amazon only has ~ 5% of the retail market so it’s not even close to having a monopoly on it. (10% of retail is On-line sales and Amazon has less than half it of On-line sales)..
Re Loogtooth. Amazon’s idea was not as big as you put, it was mainly the idea of an online catalog and ordering system. as Sears in the latter 1/2 of the 19th century had the same distribution capability (all be it that in many cases you had to go to the local freight depot to pick stuff up) Express companies did what ups/fed ex did, as well as the post office between rural free deliver in the late 19th century and parcel post in 1913, so you did not have to go to the local depot. Indeed the history of Sears may reflect the future of Amazon, after Julius Rosenwald and those that had worked with him left the scene sears peaked and established a baroque corporate structure. (As an example, different regions had different credit cards and you had to get a new one when you moved) It had a number of regions that were essentially fiefdoms. Its peak was in the 1950s and it has been downhill ever since. Once Bezos and the folks that knew/worked with him leave the scene amazon might be in the same position. This might well be in the 2050s for example. Amazon is hinting at following sears with the idea of retail stores which sears started in the 1920s to attract city customers (the rural folks just used the big book, and mailed in their orders)
Or to another disruption recall that the supermarkets put the small non self service local stores as well as the special purpose stores out of business (butcher, bakery, milk delivery service, etc) I think if one went back there were howls about this take over also.
Lyle
What I said was:
“It differed only from prior “mail order” by replacing catalogues with internet browsing a far lower cost method of presenting the choices to mail order consumers and easy order and payment by using the then standard Visa or other credit card and verifying the authenticity by already standard retail methods used (also by internet communications)
So the only “new” aspect was displaying the product offerings via computer browsers instead of mail order catalogues. The risk was only when the consumer population would have computers at home or available to them in sufficient numbers to support volume sales. At that time, if you weren’t computer savvy, there were not many households that had ready and easy access to computers and internet connections.
You construe this to mean Amazon will follow Sears path (rise and fall) by its opening some retail stores, but what you apparently aren’t familiar with is that the retail stores they are experimenting with are far, far from what the Brick & Mortar stores do… Those concepts and experimental stores have been widely reported on by the normal newspapers and web-news from major news outlets.
Though I can’t prove it, several years ago my son asked why I remained invested in Amazon (not a lot, but I bought in 1999, sold at cost then bought back again at same price in 2000).
I relayed to him and in other writings that one of the remaining retail opportunities went like this: Customers walk in having some sort of ID or credit that is scanned from a purse or pocket. They go to their purchase or browsing interest area where there are only “samples” even in clothes with color swatches, and they don’t even have to be displayed physically until the customer touches a button to see an actual physical sample — which then appears from above or below level storage rapidly. If the customer choses any objects the simply select their options for each. As they exit the store the merchandise they selected if any is handed to them by a robot (which has scanned their ID or credit as the approach , charged to their ID and out they walk, OR they can select which items to be delivered or carried out when they select the objects they want to purchase.
This doesn’t eliminate real estate but it eliminates the real estate required for display with touchy feely of every available piece of merchandise .. and space for customer to select from every damn combination of sizes, colors, etc. available as is now the case in standard Brick & Mortar. It eliminates retail clerks and checkout kiosks or checkout stands and customer inconvenience of waiting for same and the space required for it.
There are many other variations on this same concept to make the customer’s experience as effortless and easy and as fast as possible.. increasing throughput and sales per unit area.
I documented this several years ago (10?) by e-mails to my son and others who asked what I thought about Amazon not to mention verbally when asked.
Whether Amazon proceeds with this or not is still a wide-open question but they are actively researching and experimenting with it now.
The reason I think they’re researching and experimenting with it is because they and everybody else knows Brick & Mortar retailing isn’t going to vanish…ever. So it pays to research and experiment now to find out where the inefficiencies of standard Brick & Mortar are and how to overcome them at a greater profit margin — why wait to find out what you need to do in the future to compete head-on in the standard Brick & mortar’s physical real – estate paradigm?. It’s a sitting duck for competition using newer technologies.
Lyle,
Basically you under-estimate the potentials with standard readily available current technologies, much less with some modest improvements to it. And you apparent under-estimate Bezos as well.
Here’s another Brink & Mortar head to head with standard retailing
When autonomous vehicles and infrastructure for them is widely available:… several decades yet into the future:
An Amazon (or any other company) has on-line sales just as today but also as today an on-line customer can select whether to pick up themselves at the local store or have it delivered from the central warehouse or distribution center.
But instead of the customer having to drive to the store and back to pick it up, a fleet of autonomous vehicles get’s the message that customer at address abc has ordered merchandise for pick up from store XYZ.
The vehicles are dispatched by computer for the most efficient pick-up and delivery on the same route of which customer at address abc is just one. The vehicle picks up the several deliveries form each of several stores for home delivery on that delivery route and delivers the merchandise ordered to each customer within an hour (or customer may select various delivery elapsed times via pricing).
The store itself uses robotics to obtain the items, package them and they wait for the assigned autonomous vehicle to arrive at the transfer spot (automated) and place the packaged merchandise in the vehicle, charging the customer’s account for the merchandise including delivery charges.
This is a huge efficiency of energy and time use. Productivity improvement in other words..
This will happen. I just can’t predict when.
When autonomous vehicles and infrastructure for them is widely available:…
Yes, but will it be US producing the infrastructure to allow autonomous vehicles or are we really going to privatize our transportation road (or what ever an autonomous vehicle moves on)?
If we privatize, then does Amazon and it’s like need to buy the roads to prevent being held hostage of sorts in tolls?
With all this retailing shifting to the net, the one big thing for me that needs to be solved is sales tax. States/towns are running out of places to get revenue from. We are shifting income to the few (and not just via pay checks) while putting it off limits to taxation. We are shifting retailing away from taxation. We are shifting inventory away from taxation.
The lack of income tax on an internet sale as I understand it was a big part of the Amazon et al success.
Lastly, being that this article is about monopoly power as a political card to play, consolidation of retail has played as big a roll in cutting out the labor class from pocketing the efficiencies gained as income as much as automation. The consolidation to me is retails version of off shoring.
The cry in the 80’s was “economies of scale”. Great, but where was the thinking as to how to structure such (as in regulation) so as to maintain the balance of income share to all and not just the capital class?
Daniel Becker,
Interstate retail sales were not taxed by any company at any time simply because that is the law:
“1992 Supreme Court ruling (Quill Corporation v. North Dakota) that prohibits a state from forcing a business to collect sales tax unless it has physical stores in the state.”
Amazon collected sales tax on sales in States where it had physical presence — 5 States by 2011.
Here’s the status of State efforts in 2011to pass legislation to require on-line retailers to collect and remit state taxes. Amazon simply then made deals with the States (which benefited the states) to not pay state Sales taxes until a future negotiated date OR they just stopped doing business with the state “affiliates” in some states. These efforts at that time only applied to Amazon “affiliates” in the State, not to Amazon’s direct sales (because that was still the federal law).
https://www.thestreet.com/story/11052898/1/amazon-sales-tax-the-battle-state-by-state.html
By Dec 2013 Amazon collected sales tax for 16 states.
In Dec 2013 the US Supreme Court upheld New York State aeur an appeals court decision. – that decision required all internet retailers to collect and remit taxes in New York whether they had a physical presence in the State or not. however, the Supreme Court did not reverse it’s 1992 ruling, whch remained the law unless and until states passed legislation that would be challenged to the State Suprement Courts and then to the Federal courts. Thatwould be an extreme expense to the States (and Amazon) and a very long time before the decisions were upheld or denied. As a result Amazon made deals with the States in return for the States not legislating to pass laws. .
http://fortune.com/2013/12/04/amazon-loses-a-battle-but-still-fights-the-war-on-state-sales-tax/
By 2016 Amazon would have physical presence in 20 States according to Amazon’s plans for warehouses by 2016 and would pay taxes in those states (in other words 4 more states than in 2013).
In 2017 Amazon agreed to pay state sales taxes in all 45 states that have sales taxes… beginning April 1, 2017, after making deals with the last 4 states.
I’m not defending Amazon, but that it was following the law of the land from 1992’s SCOTUS decision. There was and remains a major question of what “physical presence” means — the States decided it mean any “affiliate” of Amazon’s — independent business’s that sold their stuff through Amazon’s website but that are not otherwise associated with Amazon’s sales. There is ample prior precedent however in federal law that may not support the State’s interpretation of “affiliates” meaning “physical presence” and this issue is what the States were not willing to pursue at the federal level if they could make a deal with Amazon instead.
But here’s what I find the most interesting.
Prior to Amazon volumes becoming a significant source of loss ot sales tax revenues in states no state laws required any out of state business with no physical presence to tax sales made in their state .. and in fact almost all had specific laws to that effect.
No Brick & Mortar business complained even a little bit until Amazon’s sales volumes were obviously having an effect on Brick & Mortar price competiveness. Yet, every major Brick & Mortar business had the same opportunity, knowledge, and capability to do what Amazon did in 1994. They deliberately chose not to catabolize their own Brick & Mortar revenues and profits by doing what Amazon did. They were not a bit concerned with any appreciable volumes of merchandize sold by Amazon having any effect on their sales at all… none. They said as much at the time (no citation.. I read everything about Amazon and Brick-Mortar major retailers in the US and their analysts I could find in 1999 when I decided to spend a few bucks and buy a few shares of Amazon).
This was Brick & Mortar putting their head in the sand. and then being “surprised” when Amazon’s volumes increased to begin to cut into Brick & Mortar’s profits and sales… and the sales tax was only part of that effect. Brick & Mortar deliberately chose not to compete with Amazon. “Just desserts” comes to mind, wouldn’t you say?
Though several types of bills to require internet sales taxes were introduced in Congress none passed and one is still in consideration.
Amazon lobbied against them of course, but much larger and far more profitable Brick & Mortar lobbied for them as well as the States. Amazon was clearly outnumbered and outspent yet Congress couldn’t pass a bill to require internet commerce to pay sales tax — due in very large part I surmise because of the SCOTUS law of the land in 1992’s decision….which would force a constitutionality issue .. basically Congress didn’t want to force that issue.
In 2016 South Dakota passed an internet sales tax bill, which was overturned by the South Dakota Supreme Court based on the 1992 SCOTUS decision.
The current status (Jan, 2018) is that SCOTS has decided to take up the issue, though Amazon is not involved anymore because it already has agreements with all states that have sales taxes.
https://www.nbcnews.com/politics/supreme-court/supreme-court-agrees-consider-internet-sales-taxes-n837351
The issue isn’t as simple as it might seem. Each state has multiple sales tax entities (cities and county’s) with multiple methods of defining and calculating them. This shouldn’t be an issue (and isn’t) for Amazon’s massive compute power, but it is a major issue for all other internet sales businesses, both large and small. As best I can tell, on of the congressional issues have revolved around an annual revenue per state per internet sales business threshold value … below which no tax is required and above which it is.
For example during the recession and recovery States needed sales tax revenue, but internet sales plummeted for most internet sales businesses which would have put the below the thresholds contemplated in many states that needed sales tax revenues the most.. What to do? Congress hasn’t been able to decide on this and a host off other competing interests.
One of the issues is employment. For example, in Jan 2017, Amazon said it would hire another 100k full lime employees in the US over the next 18 months.
” Amazon (AMZN) announced Thursday that it plans to create more than 100,000 new full-time jobs in the U.S. in the next 18 months, bringing its total workforce in the country to 280,000.”
http://money.cnn.com/2017/01/12/technology/amazon-us-jobs/index.html
Amazon acts as an internet conduit to thousands of small business’s sales which have increased several fold with total global and US consumer access… undoubtedly also increasing employment — I can’t find any numbers. Consumers benefit by being able to be more selective on price and brands available to them that otherwise wouldn’t be. so there are multiple conflicts of interest in the “sales-tax” arena.
I still say though that the Brick & Mortar businesses brought this on themselves by choosing not to participate in internet retail commerce when Amazon did (1994) or at any time over he next 4-5 years. It reminds me a lot of the buggy mfg’ers ignoring the “new fangled” horseless carriage and sticking with their buggy mfg’ing profits instead.
The upshot though is that Amazon played by the rules and laws of the land. They didn’t cheat as is commonly written (and directly implied). use