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 you can learn on Brilliant.org. Their pitch is simple: Sure, you can spend
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100 Responses

  1. Erika Welindt

    September 28, 2019 7:00 pm

    Not that low. Bezos pay Taxes, pay Taxes you miserable Human beeing, can take it with you, and dont treat your employees like slaves. We know , what you are doing, we are watching you. Treat them, i for one will never buy from you, you Slave owner

    Reply
  2. Dubkay

    October 2, 2019 1:47 am

    The segways that this guy makes between videos and sponsor ads are absolutely top notch. I even watch the whole thing to give him props.

    Reply
  3. Clark Giswold

    October 4, 2019 6:05 pm

    Far from a tech only problem. Do the banks first… No bank should be more than 3% of the market.

    Reply
  4. Stella Roberts

    October 5, 2019 8:11 am

    5:14 hold on a sec… 100,000,00 is one hundred thousand? Not one hundred million? Something’s off here

    Reply
  5. Unreliable Narrator 66

    October 5, 2019 2:25 pm

    Apple Music pays content creators more than Spotify. That makes Spotify less attractive to producers and less sustainable.

    Reply
  6. Tristan Causer

    October 6, 2019 11:38 pm

    I wish dumbass politicians would leave capitalism alone. The directs opposite of capitalism is communism and that's what we will become if we let these politicians have their way.

    Reply
  7. Ákos Matyus

    October 11, 2019 6:56 pm

    Its pretty off topic but why do you use live footage from hungary to visualize a market while you talk about mega companies?

    Reply
  8. SuperSolenoidEngine

    October 12, 2019 4:37 pm

    When is Amazon going to have its own military equipment company and build tons of autonomous killing robot?

    Reply
  9. Domyras

    October 15, 2019 7:02 pm

    11:30 funnily enough i agree, but for another reasoning;
    I feel like these coherent experiences could and should be more common across all platforms, devices and such.
    The only reason it isn't is because the companies "stand to profit more" by trying to enforce Monopolies over their devices.

    They created the issue.
    Then make a local patchwork fix to pretend it's an achievements.
    While all it'd take is not being corporate d*cks.
    … To put it very bluntly 😀

    Reply
  10. Ivan M

    October 15, 2019 8:15 pm

    If anyone ever played any tycoon game like TTD they know how well the Amazon trick works. Starve out the competition by losing money in one area and making up for it in another.

    Reply
  11. Jack L

    October 15, 2019 8:54 pm

    These are private companies. No one needs to be on social media. If you do not like what they are doing, stop using their services. Welcome to the free market.

    Reply
  12. Jack L

    October 15, 2019 9:07 pm

    If people really want Spotify, they don't have to have an iphone. If Spotify really cannot compete on Apple's PRIVATE market, then they don't have to. There are alternatives. It is not the government's (which is us tax paying citizens) responsibility to make sure spotify makes money. If they can't cut it in the free market, tough shit.

    Reply
  13. Anthony Decesare

    October 16, 2019 11:52 am

    Okay but who gives a fuck if they're to big? Seriously, these peoole were super smart and made very useful platforms.

    Reply
  14. frep you

    October 17, 2019 9:45 pm

    id expect to find amazon products on amazon websites
    not allowing them to sell there own products is just stupid
    next you will be saying i can't order pizza from pizza hut website lol

    Reply
  15. TFrills

    October 18, 2019 3:18 am

    I agree with Elizabeth Warren. Silicon Valley is getting out of control. The concentration of wealth and power there and the extreme income gap here in California is absolutely abhorrent.

    Reply
  16. Changer101

    October 18, 2019 2:15 pm

    Yes, soon enough they’ll build a whole state/city in 2050

    Edit-if google was shut down then you wouldn’t be watching this/have an account

    Reply
  17. Justin

    October 21, 2019 1:58 am

    "Target had Up&Up" I work at Target and about half of the brands we sell are Target owned, they just give them different names as a disguise

    Reply
  18. Ato

    October 21, 2019 3:56 pm

    just saying, but cookies not being mandatory is just a straight up good thing… you're presenting it as if it were bad

    Reply
  19. Amelie Wilson

    October 21, 2019 8:18 pm

    The whole time I was watching this I was thinking about Yamaha. Is there anything more drastically different than classical instruments and motorcycles?

    Reply
  20. cast3yo

    October 22, 2019 8:07 pm

    This doesn’t make sense. They made the product so they should be able to sell it wherever they please. I understand what’s being said but this isn’t the right approach.

    Reply
  21. Red Bull

    October 23, 2019 4:04 pm

    https://www.google.com.au/amp/s/www.thesun.co.uk/news/10174799/bodies-found-essex-lorry-grays-pictured/amp/ look ur gonna get from these Rebel cunts from petty people who would’ve been physiotherapist all the way to America’s richest families as I work. That’s how it’s gonna work. But it’ll be orderly and precise how everyone would agree

    Reply
  22. Rishi

    October 24, 2019 5:56 pm

    A better idea would be to give everyone a guaranteed income that can pay their bills so that they aren't going to be dependent on jobs that will be automated away like what Andrew Yang is proposing.
    Trying to restrict corporate freedom to certain markets sounds like a terrible idea that would lead to inefficiency.

    Reply
  23. ArthurNL78

    October 25, 2019 10:06 am

    Providing failed EU legislation as an example that simple actions never work is bullocks of course.
    The EU is simply a terrible, terrible bureaucratic political institution populated by severely out of touch career politicians.
    But there are relatively simple solutions and these companies should be broken up.

    Reply
  24. ArthurNL78

    October 25, 2019 10:11 am

    One of the most obvious examples of how you as a customer are not benefiting from companies getting this big is trying to get support from an actual human when you are having critical problems with some Google or AWS product or service. It's simply impossible. And they couldn't care even 0.01 cent whether you are losing all your income that month.
    Try providing that same support as a small business. You will be out of business in no time. As you should.

    Reply

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