The Moral Hazard of Break-Up

Anyone who recommends we break up Amazon isn’t thinking about the consumer

Lately, an increasing number of people have been discussing the idea of breaking up some of the large tech companies that dominate our lives: Amazon and Google, for example.

From recent articles and political statements, though, it seems the conversation around Amazon is the most passionate.

In response to these very enthusiastic, often knee-jerk, and hasty comments, let me offer a caution: breaking up Amazon is unlikely to have the effect that these people wish for. It’s not actually clear what the true concerns are, and as a result, these responses are likely to be undisciplined pursuits and fail.

Let’s think it through together.

The first question we should ask ourselves is this: Who is actually demanding that Amazon is broken up and why? What incentives influence these people? (Incentives are key).

The next key point is psychology. In exactly the same way that right-wing anti-immigration dogma is founded in fear and an inability to compete with outsiders, many of those who call out large tech companies on the basis of unfair competition or anti-competitive behavior are actually low-productivity people. They know they can’t compete and are, again, just weak individuals who lack what it takes to face facts and manage their life and business. The limit to our success is ourselves. Therefore, to win, to excel requires what we must change internally. Failing to be honest and make the right choices are not success factors.

It’s easier to complain and blame than admit the problem lies within.

The most vocal people are politicians and business owners. Politicians want votes and will go with any narrative that gets the headlines. Narratives do not require any evidence or rigorous analysis and are easy sells as they feed on emotions, not facts.

Managers and so-called entrepreneurs that demand government protection are people who can’t make it and should be ignored. (I have discussed this in more detail in previous articles). I do not hear consumer groups calling for the breakup of Amazon.

I would like to hear more from unions and Amazons employees and partners though. This is where the first-hand truths will be found.

The next question we should ask is: is Amazon damaging consumers? Consumers should be the first and primary concern when we consider getting involved in any company’s operations. If they aren’t, then you’re likely doing it for the wrong reasons.

Historically, companies have been broken up when it becomes clear that they are damaging consumers, stifling competition, charging monopoly prices and/or engaging in unethical behavior. That is to say, the harm is direct to the consumer.

Before we continue, we should ask ourselves what we mean by “harming the consumer.” ‘Harm’ is an interesting term for me as it is one of those words whose meaning changes over time and can be both direct and indirect. For example, think about the differences between an assault on the person and an assault on property. I can physically hit you — direct physical harm. I can also put a brick through your window. This does not harm you physically, but it is harmful as the house is your property. How we define harm has changed over time. This can thus have a material influence on how laws can be interpreted.

Typically when people think about “harm to the consumer” they assume people are paying too much money for a certain product or that their choices or rights are restricted. Monopoly and oligopoly businesses extract consumer surplus, which leads to higher prices, fewer choices and fewer rights.

Markets “normalize” with the competition, when more people and companies are trying to sell the resulting increase in choice and capacity (competition) reduces prices and improves quality. This means that consumers have a surplus of income they can spend elsewhere.

The only exception here is when we include patents. A patent is a monopoly right that is granted for a period of time and recognizes the risk, work, and investment made. Patents and other intellectual property rights are another form of incentive.

With the likes of Amazon, for example, it’s interesting because consumers are not being harmed through the traditional framework of harm and anti-competitive behaviors. Consumers get a lot more choice through Amazon because Amazon isn’t the only one selling stuff, and they’re not the only ones making the stuff they are selling. It’s truly open source. They’re selling other people’s products. They allow competing companies to sell using their storefront and their infrastructure because it stimulates competition and ensures Amazon’s managers stay true to Amazon’s founding principles and core values.

What’s important to ask is “where could the harm be happening?” Another possible answer could be in the labor market.

The harm in labor market practices can be solved through legislation and where good unions really make a difference. Thus, it can be better to regulate employment practices rather than just break up a firm, because their preferred employment practices conflict with our society’s values.

Scale is an important consideration here as behaviors change with scale and concentration.

Amazon employs 541,000 people in the US alone. This is a huge number and puts them at number two. However, their current scale is nothing compared to Walmart’s 2.3 million employees. Concentration is the next aspect to consider and this is not only local concentration but national. At a national level, I don’t think it's credible to say that employees have no choice and have to work at Amazon and are thus harmed. However, at a local level, major employers can harm by holding pay down, limiting terms, or agreeing not to steal each others’ employees (as many Valley firms did). These practices result in harm and are designed to benefit only the employer. I understand that many of Amazon’s practices upset many people, but Amazon is really focused on living life on the edge. Testing what is possible and creating tensions. Boundaries and tensions are where innovation happens.

This will create tension, but without these tensions, there is no learning and no excellence. Amazon and its peers are run by super-focused, super-disciplined people who have very high standards for themselves and they don’t demand anything of others that they won’t demand from themselves. Markets will ultimately regulate these practices and define what is acceptable and not. However, concentration can be an important consideration at a local level. If Amazon is the main or sole employer in a poor town, then yes, there is a risk of poor behavior as the incentives are in Amazon’s favor because the people don’t have other job opportunities.

Thus, Amazon’s recent increase of its minimum wage to $15 per hour is unlikely to be as a response to bad publicity and more likely designed to put cost pressure on its competitors. I don’t know what benefits Amazon gives its employees, but I can say that $15 per hour is about what you need to live in the poorer States of America (assuming a 36 to 40 hour week). One of my factories is based in upstate New York and our pay starts at $15 (New York State’s minimum wage is $11.80). We give the full 401K and the same medical benefits you would expect at a Blue Chip company and five weeks paid holiday. We do this because not only is it important to treat people fairly and enable them to live and raise a family but because it’s good business. It means we can choose and keep who we want.

The positive impact to Amazon in terms of its public image is outweighed by the benefit this brings to be able to choose employees and put cost pressure on competitors by creating incentives to attract the labor it wants, and thus help ensure that not only costs rise, but competitors have an adverse selection issue with recruitment and get second best.

Some other questions might be, “Are they harming small- and medium-sized businesses?” Are they price gouging the firms who wish to use the Amazon infrastructure? Are the terms under which they engage with their partners fair and reasonable? Is Amazon over-charging for their services?

All these, again, can be dealt with by regulation. I won’t answer these questions because I don’t know the answers, but the casual observation is that the number of third-party companies selling on Amazon is growing, as are their revenues. What I have not seen is noise in the press about poor or improper practices here as both parties have strong incentives to cooperate because they mutually benefit.

Yes, there are many business people from all levels saying we should break up Amazon. But let’s take a look at those businesses.

Some of them are simply not capable or competent. It’s easier for them to say “Break up Amazon” than to look at their own business and make the decisions required to compete with the threat that change can bring. It’s no different than when someone complains that China isn’t playing fair, or so-and-so country/company/organization needs regulation. These people are just denying the fact they can’t compete and are not up to the job. Do you think China is going to break up Alibaba? Get real, face facts, and compete.

If you read Jim Collin’s books Great by Choice and Why the Mighty Fall, what you find in businesses that fail is a bunch of people who do not want to face reality and are more interested in personal gain and being seduced by hubris. These types of people are present in many companies today, they are only there for themselves. Their own personal interests are placed ahead of those of the organization and they allocate more of the firm’s resources for themselves. Success is about confronting brutal facts, a culture of discipline, focusing and getting out and meeting your targets every day without fail.

A perfect example of failing management is the increasing gap between the pay rates of leadership and everyone else.

People who are there for themselves and use their power to allocate more resources to themselves have no interest in competing or working for a living, they are there to extract and coerce. They use the resources available to them to lobby and complain and exert influence that will only ensure that their tenure of leadership passes without awkward things (like competition) getting in the way before they move on to their next victim, or retire to the golf course. It is this management style that the US is particularly prone to, resulting in the US losing its leadership in car manufacturing, electronics, shipping, aviation and more.

Big tech will go the same way because culture eats strategy, and people don’t change.

Economically speaking, monopoly behavior is usually easy to measure and observe, we know it when we see it. Breaking up a monopoly can bring challenges, (it’s not something anyone particularly looks forward to) but when carried out well, it brings value to not only consumers but also shareholders. The breakup of Standard Oil, for example, led to an increase in share prices, and added value to all the shareholders because the newly-formed companies (Exxon, Chevron, Amoco, Mobil, et al) were worth more as independent firms than together as Standard Oil.

This highlights another key component of what happens when companies become large: cross-subsidization. This means one business unit provides, or acts as a subsidy, to another and incentivizes inefficiency. However, managers and shareholders can be easily seduced by the lure of being a monopoly, or conglomerate, despite the fact that the evidence says that it’s not in the interests of shareholders.

People like power.

It is beneficial to remind ourselves that today’s success is no guarantee of success tomorrow. During the latter half of the last century, Ames Department Stores was the fourth largest retailer in the United States and was often accused of the same things we accuse Amazon of today: stifling competition and driving small-town retailers out of business. But we didn’t break them up. Eventually, they grew arrogant, lost focus and drove themselves out of business.

The irony is that Walmart entered the market shortly after Ames and simply did the same thing, just better: selling everyday items to people with lower-than-average incomes. And because they stuck to their values they are still here and still wanting to grow by building on these values. The values of Sam Walton. They’re competing directly with Amazon, which is tough for them, but they’re doing it and doing it well. They’re facing their reality and getting on with it.

The point is: who is able to tell the future? Who is able to say what will happen with the market leaders just a few years from now? Close scrutiny of leadership, management, and culture tells us more, but not all that we need to know is always observable and companies can recover and be reborn.

Now, I’m not close to Amazon, nor do I follow their business dealings in detail. As a consumer, I find it hard to see how, currently, I’m being harmed. It’s easy to see all the benefits I enjoy. But then, I’m a white, middle-class professional and not the person who should be answering some of these questions. Where I am concerned and feel most of the tech giants really need to sort themselves out, are their tax affairs. Coming to a country and benefiting from the infrastructure, labor market, and consumer base and not paying tax is not clever, nor is it good business. It’s called shitting on your doorstep.

For me, I feel I should be asking myself: is my desire (as a consumer) for cheaper prices and increased choices harming others? Harm caused due to extraction of a country’s resources by using tax laws to subsidize. This type of extraction does harm consumers as it puts a greater tax burden on them.

It should be noted that in most modern countries, tax and employment matters are regulated. Though usually (and most significantly), markets are an undervalued regulator for poor employment practices and tax matters. These markets can be rallied by a free press and social media.

To meet its growth targets, Amazon is dependent on labor — both white and blue collar. Poor practice makes it tough to get what you need, no matter how much you pay, especially when you are as large as Amazon. This is a critical market incentive.

If you break Amazon up, it’s not obvious what you could do, or what the results would be. Everyone has an idea of what they think would happen, or what they hope would happen, but nobody really knows.

You can’t just set up a replacement business overnight and have it be Amazon Mk2. Amazon has its own vast infrastructure and software. They are far more than just the marketplace that many of us use and are familiar with.

Even if you could, somehow, successfully break the whole company up, it would have to be along the lines of existing entities. You would have separate companies for Amazon Prime, Amazon Cloud, Amazon Retail, and everything else. First of all, how would you decide which ones get broken up? How small is small enough? Second, all these entities already use the same platforms, the same data, the same infrastructure. It would still be the same company, just separate in name only. Breaking up tech companies is not like breaking up an oil business, or a rail business, where each company had their own equipment, their own facilities, and operated largely independent of each other. The entirety of Amazon works on the same software, the same architecture. Be mindful of the law of unintended consequences.

No country, unless it’s extremely wealthy, and small, and well-managed, for example, Singapore, is able to manage infrastructure well. Even Singapore has faced challenges over the last few years as things have grown. Government-run infrastructure always tends to be a catastrophe. Yes, you can prevent monopolies, but there’s an obvious trade-off with standards of management, innovation, and maintenance. You really want the same people running Amazon and the internet who are responsible for the road, airport and rail infrastructure of the US?

Those who call for the break-up of these companies don’t understand the role these companies play in the global economy. Much of this conversation is parochial politicking. The world is bigger than the US and to forget this and underestimate the importance of Amazon in world trade and that this benefit is two way is rather short-sighted.

The problem with all of these conversations, both in government and in the press, is that none of them revolve around the consumer. They revolve around the self-interests of the people concerned. That should be a red flag. My personal view is that the problem is a classic Coasean one of social cost. These problems center on externalities, transaction costs and the allocation of rights. If one group, say labor, has inadequate rights allocated to them this would distort costs and result in favor of Amazon Inc. The courts or Government can reallocate rights and thus balance the market and adjust the transaction costs. The same would hold for Amazon’s partners. Like the examples in the linked article, Amazon, Amazon’s employees and Amazons partners all provide a valuable service [and products], thus setting fire to the oil well would be rather foolish and result in a new set of externalities to manage.

One of the many differences between China and the US is that the Chinese prefer the long view. It is this view and their application of economics when negotiating that helped them build their auto, electronics, software, defense, and medical sectors. Now China has Huawei and no other country has any company that comes anywhere close. A recent article in the Financial Times explored this, and in short, it is stated that “[in the United States] telecoms insiders blame the government and industry decisions in the 1990s for stymying innovation.” Government and the companies in the US repeatedly focused too much on protecting their own power and position, using “everyday citizens” as the reason, instead of on innovation and progress. They essentially handed over electronics dominance to Asia. This is not just consumer electronics, toys, clothing, etc, but the base for our communications and the infrastructure it needs! It’s as critical to the economy as the banking sector — the ability to make payments, save, invest.

Would you hand your entire banking sector, including the Federal Reserve, to another country?

It is essential that the Government sets long-term goals and objectives and manages the incentives that help deliver those desired outcomes. By focusing on the short-term and being comfortable, government incentivizes failure at every level, including State level. I think that I can be confident in stating that most Americans are not happy that the only company that has the hardware for a 5G rollout is Chinese. I’m also pretty confident to say that most Americans would be pretty uncomfortable to recognize that their short-term profit goals and poor legislation underpinned this failure.

Think very carefully about what you wish for. Given that we humans tend not to change and that history repeats itself, do you really want to hand big tech to another country and do you really want to create the incentives that mean the world’s most talented and hardest working people leave the US and the capital they need to succeed follows them?

So, do we really need to break up big tech? Or do we need to think about other things? Do we want to continue to give away our leadership position? Or would we prefer to build on what we have, our core values, expand our networks and partnerships and be stronger together?

Do we really need to break up, or is it that we should take a long look at ourselves in the mirror and face facts and change?

Founder and CEO of Datum Alloys, Ben is a dedicated innovator and thought leader in the tech world seeking straightforward solutions for industry needs.

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