Earlier this month Amazon announced a deal to buy Whole Foods for $13.7 billion in cash. The news precipitated a $32 jump in Amazon’s stock price–which equaled a $15.6 billion increase in market capitalization–leading some commentators to declare Amazon had purchased Whole Foods for free.
The deal hinted at why the regional economy is booming: Seattle’s confluence of tech monopolies makes it ideally situated to capitalize on the economic changes we’re seeing. But that market dominance also puts a tremendous amount of pressure on Seattle’s housing market. The restructuring of the national economy has elevated the fortunes of some metropolitan areas while leaving others to stagnate. There is no housing affordability crisis in Cleveland or Detroit. The crisis in shrinking cities like those is that vast swaths of housing have so little value that owners earn little equity and local government can’t gather enough property tax revenues to pay for maintenance and social services. Many stagnating cities used to manufacture goods that Amazon has gotten rich importing, distributing, and selling more effectively than anyone else. Their loss is Seattle’s gain.
The Whole Foods deal added yet another industry into Amazon’s empire and funneled even more data into its platform, which Amazon has been particularly good at leveraging for growth and profit. In his recent book Platform Capitalism, Nick Srnicek suggests Amazon is better at playing the game than its competitors, even other members of tech’s ‘Big Five’, a pantheon of the largest and most influential firms which includes Apple, Google, Facebook, Microsoft, and Amazon.
Platforming With The Best Of Them
Srnicek defines five different types of platforms: advertising platforms, cloud platforms, industrial platforms, product platforms, and lean platforms. The platforms are all alike in using their respective application to gather massive amounts of data to monetize in a number of ways, such as fine-tuning a product, offering targeted advertising, or selling or using internally as market research. He suggests Amazon is more diversified across the types of platforms than perhaps any other company:
Amazon, for example, is often seen as an e-commerce company, yet it rapidly broadened out into a logistics company. Today it is spreading into the on-demand market with a Home Services program in partnership with TaskRabbit, while the infamous Mechanical Turk (AMT) was in many ways a pioneer for the gig economy and, perhaps most importantly, is developing Amazon Web Services as a cloud-based service. Amazon therefore spans nearly all of the above categories. (p. 50)
Cloudy Outlook: Amazon As ‘Power Plant’ Of The Internet
In addition to diversifying, Amazon has positioned itself to be a gatekeeper for start-ups with its cloud platform Amazon Web Services, which rents digital infrastructure like servers and bandwidth to other companies. Amazon Web Services (AWS) has become very popular, even with startups that have grown quite large. “Airbnb, Slack, Uber, and many other start-ups use AWS,” Srnicek wrote. (p. 83)
The logic behind them is akin to how utilities function. Jeff Bezos, Amazon’s chief executive officer, compares it to electricity provision: whereas early factories has each its own power generator, eventually electricity generation became more centralised and rented out on an ‘as needed’ basis. Today every area of the economy is increasingly integrated with a digital layer; therefore owning the infrastructure that is necessary to every other industry is an immensely powerful and profitable position to be in. (p. 63)
Unlike many tech ventures, AWS is already very profitable.
It is unsurprising, then, that AWS is now estimated to be worth around $70 billion, and major competitors like Microsoft and Google are moving into the field, as well as Chinese competitors like Alibaba. AWS is now the most rapidly growing part of Amazon–and also the most profitable, with about 30 per cent margins and nearly $8 billion in revenues in 2015. In the first quarter of 2016, AWS generated more profit for Amazon than its core retail service.” (p. 64)
In fact, AWS isn’t just profitable, Srnicek believes through it Amazon may be leading the way on devising a resilient business model for platform corporations: “In the end, it appears that platform capitalism has inbuilt tendencies to move towards extracting rents by providing services (in the form of cloud platforms, infrastructural platforms, or product platforms). In terms of profitability, Amazon is more the future than Google, Facebook, or Uber.” (p. 126)
Competitors With More Tenuous Business Models
In the Big Five, Apple gains most of its revenue from iPhone sales; Microsoft profits from software and cloud services, while Facebook and Google are very dependent on online advertising revenue. “In the United States, Facebook and Google receive 76 per cent of online advertising revenue and are taking 85 per cent of every new advertising dollar,” Srnicek wrote. (Platform Capitalism p. 96) Those advertising revenues make up nearly all of Google and Facebook’s total revenue: “Today Google and Facebook remain almost entirely dependent on them: in the first quarter of 2016, 89.0 per cent of Google’s and 96.6 per cent of Facebook’s revenues came from advertisers” (p.53).
The problem with relying on advertising for revenue is that advertising is often one of the places companies looks to cut costs during economic recessions, which could expose Facebook and Google during a downturn. It’s also possible than a company like Amazon can cut Google out of its primary line of profit if it is able to supplant its search engine role. Srnicek gives us an idea what that would look like:
Rival platforms have had to route around Google’s search engine dominance by extending their business into new interface areas. One expression of this is that search engines within apps (rather than the open web) are becoming increasingly widespread. Instead of searching the internet through Google, users can search internally, on Amazon or Facebook. If people move into apps or start searching on Amazon instead of Google, these are threats to Google’s basic business model. (p. 105)
A Brief History Of The Economy
Beyond providing cool new apps, the tech industry’s massive growth and success was fueled and supercharged by capital seeking higher returns than manufacturing could offer in Late Capitalism. The wealth of venture capital allows tech companies to have an intense growth over profits model. Srnicek traces the slump back four decades:
The 1970s therefore set the stage for the lengthy slump in manufacturing profitability that has since been the baseline of advanced economies. A period of healthy manufacturing growth in the United States began when the dollar was devalued in the Plaza Accord (1985); but manufacturing slumped again when the yen and the mark were devalued over fears of Japanese collapse. And while the economic growth recovered from its 1970s lows, nevertheless the G7 countries have all seen both economic and productivity growth trend downwards. (p. 19)
Frustrated with slow growth and low returns in manufacturing, investors turned to internet-based companies with speculative fervor.
The boom in the 1990s amounted effectively to the fateful commercialisation of what had been, until that point, a largely non-commercial internet. It was an era driven by financial speculation, which was in turn fostered by large amounts of venture capital (VC) and expressed in high levels of stock valuation. As US manufacturing began to stall after the reversal of the Plaza Accord, the telecommunications sector became the favoured outlet of financial capital in the late 1990s. It was a vast new sector, and the imperative for profit latched onto the possibilities afforded by getting people and businesses online. When this sector was at its height, nearly 1 per cent of US gross domestic product (GDP) consisted of VC invested in tech companies; and the average size of VC deals quadrupled between 1996 and 2000. All told, more than 50,000 companies were formed to commercialise the internet and more than $256 billion was provided to them.” (p. 20-21)
A quarter trillion dollars was a colossal investment to make in a fledgling industry that had demonstrated little profitability. (As luck would have, some did strike it big.) What that infusion of money meant was that tech companies could be ambitious and pitch the biggest idea. Rather than finding a niche, many companies hoped to corner an entire market, and, since companies with even marginally promising ideas had so much venture capital, they could pursue a growth before profits model and aspire for monopolies without needing to turn a profit in the near-term:
While many of these businesses lacked a revenue source and, even more, lacked any profits, the hope was that through rapid growth they would be able to grab market share and eventually dominate was was assumed to be a major new industry. In what would come to characterise the internet-based sector to this day, it appeared a requirement that companies aim for monopolistic dominance. (p. 21)
In America, monopoly is a board game; we don’t always think of it as a real and present danger in our lives, and, in recent years, the federal government has been reluctant to enforce anti-trust laws to break up monopolies or block big mergers. But monopoly could rise in public awareness as the biggest corporations grow more gargantuan, their flouting of anti-trust laws more egregious, and the side effects more damaging. One of those side effects is skyrocketing housing costs in areas lucky enough to host the most firms dabbling in monopoly and hooked into the stream of investor cash that results. Seattle is one of those areas.
Lina Khan wrote a staggering article in the Yale Law Journal that outlined Amazon’s monopolistic practices and the change in legal thinking–in short, a focus on prices rather than market structure–that led government to turn a blind eye. In fact, Khan argued Amazon structured its growth to thwart antitrust law: “It is as if Bezos charted the company’s growth by first drawing a map of antitrust laws, and then devising routes to smoothly bypass them. With its missionary zeal for consumers, Amazon has marched toward monopoly by singing the tune of contemporary antitrust.”
Khan contends investors react to the truth regulators have overlooked: “Investors know it’s monopolistic. That’s why it’s stock price has been so untethered from profits. The market can register a reality that our laws cannot,” Khan told Robinson Meyer in his recent article in The Atlantic, which delved into the question of whether Amazon is a monopoly. One fact Meyer would have us consider: “Last year, Amazon sold six times as much online as Walmart, Target, Best Buy, Nordstrom, Home Depot, Macy’s, Kohl’s, and Costco did combined. Amazon also generated 30 percent of all U.S. retail sales growth, online or offline.”
The switch to price setting rather than market structure helps monopolies to go unnoticed by antitrust regulators; if prices remain low, they would likely overlook a company, for example, taking over the majority of e-commerce sales and infrastructure. One reason anti-monopolists argue structure needs to be considered is that if a company’s dominance is so complete, how far into the future can we expect competitive pricing?
Additionally, a monopolistic company can use its dominance in one industry to unfairly infiltrate another, increasingly become a vertical monopoly spread across a supply chain. This monopoly then crowds out entrepreneurs, leading to great centralization of the economy. “Owning your own business used to be a way for Americans to build assets and pass on wealth inter-generationally,” Khan said in The Atlantic. “But if you look at any sector where Amazon is a dominant player—you’d be somewhat crazy to enter there.”
Vertical monopolies are already hard to detect with price theory before considering how it’d be detected in brand new industries like cloud services. Hence, folks like Khan are calling for a return to the market structure standard of the past so monopolies cannot evade regulation so easily. Khan seemed doubtful that the government should approve Amazon’s Whole Foods acquisition, given the anti-competitive implications. Most people seemed to expect the deal to sale through even though President Trump did fit a few critical words for Amazon into his rambling drunk-uncle diatribes on the campaign trail.
What This Means For Seattle
The Whole Foods deal is a reminder that Seattle’s faces an imperative to grow our housing supply because of the high-growth firms in our midst quickly adding jobs. In January, Amazon announced it would add 100,000 jobs nationwide within 18 months. Some might like to snap their fingers and break up the monopolies calling the Seattle metropolitan region home. Doing so just might slow Seattle’s juggernaut-like growth and allow us to grow more incrementally. But until that happens, we should plan as a high growth region for the foreseeable future. Growing the supply of affordable housing when local companies are adding high-paying jobs at such a rapid rate is a monumental challenge. Finishing the implementation of the Mandatory Housing Affordability (MHA) program by passing the rest of the MHA upzones is a good first step. But many more steps will be required of us–from the other 64 recommendations in the Housing Affordability and Livability Agenda (HALA) report to perhaps entirely new approaches. When your region is home to a company that might ultimately own the internet, timid solutions will not do.