This is one of SV's main competitive advantages vs not just the rest of the US, but the rest of the world: the amount of available financial capital to pour into scaling up quickly, which of course happens at a loss - sales generally lag costs and especially fixed costs.
If you include human capital, it's almost all of SV's competitive advantage: co-location of the people and the money to scale up.
Debt to scale up is one thing; operating for years operating/selling at a loss leading to ever increasing debt to choke out competitors and maintain a monopoly, fueling it with the expectation of a market valuation that will offset those losses, itself fueled by choking out those competitors, and all reliant on either getting out before it comes crashing down, or jacking up prices to profitable levels once there are no competitors left, is something else.
It works brilliantly. It's called dumping. It created major businesses like Standard Oil, prior to antitrust laws. Indeed, it's #1 on Wikipedia's list of anticompetitive strategies:
I have mixed feelings about some of the big money SV strategies. Antitrust concerns aside:
- They do allow some types of long-term transformative businesses, which would otherwise be impossible.
- They don't allow many forms of sustainable businesses to exist. If you and I have the same idea and ability to execute, whichever of us raises more money (and in an ideal free market, this means whichever of us is willing to accept less favorable terms) wins. This drains value from entrepreneurs to capital. Perhaps it speeds things up a little bit, but it's a net lose. It also leads to businesses with unsustainable debt and burn rates, and many viable business models crash-and-burn.
> whichever of us raises more money (and in an ideal free market, this means whichever of us is willing to accept less favorable terms) wins
I went through an entire economics PhD program, and had never before now heard of this founders' race to the bottom of investment terms. What a remarkable insight. Is there already a name for it?
I have about a half-dozen similarly remarkable insights each week. If you're interested in writing an econ paper about it, I'm glad to let you take first authorship.
We can call it the "Founders Race to the Bottom" or the "Brown Effect." :) If it goes viral, you'll be famous.
I've made that offer before on similar insights, and so far, no one has taken me up on it. And a few of them were really insightful.
Who knows? Perhaps you'll get a Nobel Prize for it. Econ give them out for less. Some of those insights were, er, less than deep.
The real insight behind this came in the Wealth of Nations. Adam Smith walks through this exact logic market-by-market, and for example, his section on rents leads to a similar degeneracy, where rents rise to match what the market can bare, and working people are driven to poverty by spending all excess income on rent. It's a great read.
This is very directly applying exactly his logic, just to a modern market.
As a fan of Henry George, I think the greatest trick pulled in economics was rentiers successfully getting Smith's concepts of capital and rent to be lumped together as "capital".
> This drains value from entrepreneurs to capital.
ISTM that it's draining value from entrepreneurs to the early adopters (on the consumption side) that make up the first-mover's market, and that the investors are just providing capital at competitive conditions, so they're not capturing any rent. Of course later-stage consumers can be seen as losers, if only because they must ultimately defray the increased cost of the initial excess-capacity building that results from imperfect competition.
There's nothing that suggests this is unique to the tech sector, BTW. It ought to apply whenever scale is sufficiently large and first-mover advantages sufficiently high.
It also eliminates a key benefit of capitalism: competition.
It is probably what allows Amazon to continue to exit as such a cesspool of fraudulent reviews counterfeit goods, shady sellers, and painfully bad search functionality. A near competitor could have pushed them to improve, but their moat is now too big except for certain niches, so we're stuck.
Is Amazon the best example of this? Their retail arm was never long term loss making in the way e.g. Twitter was, if I recall correctly, but rather more like break even because all profits were ploughed into growth. I don't know how much money Amazon raised but back when Bezos started out there weren't the same kinds of insane sums being tossed about by VCs.
Also Amazon's moat isn't really its website, which is mediocre at best, but its backend systems like fulfillment. Plus brand recognition, size, general efficiency etc.
In Amazon's case it's not using VC money to outcompete similar businesses, it's using their own money to demolish any competitors in the thousands of niche categories they sell products for. The diaper.com thing is the most popular example, Amazon tried to buy daipers.com, daipers.com said no, amazon sold their own diapers for such a low price they were losing money on each sale in order to put diapers.com out of business or nearly out of business. Forget how it ends, either diapers.com went out of business, or they had to sell to Amazon in the end for a small percentage of the original offer
What amazon did to diapers.com is a very good example of burning money to kill a rival. Especially because they launched their campaign while trying to buy them.
I don't think they're arguing that it doesn't work for the company doing it. I think they're arguing along the the lines that it's unfair or unethical (anticompetitive) and comes with costs for the broader society.
Yep. Of course companies do it when they can; it works for them. It's the effect on other companies, on actual market competition, and ultimately the consumer, that is a problem.
Heck, Amazon is a fun example; they've long used their monopoly power to dictate to publishers, and are currently seeking to leverage their monopoly, Kindle Unlimited, etc, to help drive self-publishing on their platform, to cut out Publishers entirely. I'm not saying that removal of publishers is innately a bad thing, I -am- saying that making Amazon the largest publisher and the largest distributor of books in the world probably is. And they've achieved it not by simply being the best, but also via predatory pricing, and using money from AWS to cover costs in their retail arm to help gain market share, at the expense of smaller retailers who don't have a massively profitable cloud service to offset their losses with.
> And they've achieved it not by simply being the best, but also via predatory pricing, and using money from AWS to cover costs in their retail arm to help gain market share, at the expense of smaller retailers who don't have a massively profitable cloud service to offset their losses with.
Source? Their financials do not indicate that they were or are subsidizing losses in their retail business with AWS.
AWS income did not even ramp up until a few years after it came out in 2006.
Their main competitive advantage was having a decent website and shipping operation early on when other retailers did not, and being able to sell goods to customers in most states without charging sales tax until the 2010s for most states.
In fairness to the parent commenter, Amazon never had a net profitable year until 2004. Most new non-Silicon Valley retailers can't operate for ten years with yearly losses. Certainly not most smaller retailers.
They certainly can. They choose not to. Amazon, at the time, chose to invest in their warehouse operations, they chose to lose a little money in the short term and build out their operations to go head to head with Walmart and the other retailers. And they chose to invest in developing their website and e-commerce when online shopping was not a sure thing.
You bet big, you win big. Of course, now it is just a side show since retail is playing for pennies, but they certainly were not "dumping" back then just to kill the competition, and then planning to raise prices. They clearly innovated and brought online shopping to the fore.
That's because investors know those small retailers have no ability to scale. If Amazon did what most retailers do when they have a good quarter, throw their investors some dividends and only employ the people they need to keep things running, then investors would never have valued as high as they were/are.
Fair, I'm overstating it. They basically kept wall street happy with their profit in AWS, while having comparatively little realized profit in retail, allowing them to keep margins in retail extremely thin. I'm explicitly thinking of 2010-2015ish, when I recall seeing news articles about it, but I'm way too lazy to go find them. Either way, I completely agree that they're now in such a dominant position they don't have to have predatory pricing to still capture a huge part of the market.
Retail margins are already extremely thin at ~2%. However, the public markets allowed AMZN to maintain at 0% or even slightly negative because the market (correctly) believed the group of people at Amazon were doing something innovative.
The market could have chosen Walmart, or Target or Home Depot too, but they did not (correctly) because the chances of the people working at those companies coming out with something like AWS is insufficient.
Amazon is a poor company to use as an example for one that dumps their product at below cost in hopes of gaining market share.
For example companies like door dash that run at a loss while forcing restaurants to take in less profits (because restaurants must pay door dash and can’t raise prices just for door dash users). It’s a ponzi scheme of investors. The real business for many SV companies is keeping the investor money flowing in.
> because restaurants must pay door dash and can’t raise prices just for door dash users
All the restaurants I know charge higher prices if you order online than if you call directly or go in person. I do not use food delivery apps, but I assume prices are similarly inflated there since people willing to purchase online or via app are amenable to paying more.
It is absolutely crazy to me the amount of premium people are willing to pay just to not have to pick up the phone or drive 5 min.
I hope. I suspect many or probably most cannot afford to buy their time back though, based on who I mostly see using online food ordering and delivery.
It’s crazy expensive when you aren’t getting a discount, and even with many discounts. Tech money doesn’t really care about the amounts though. Whenever a food delivery app recruiter calls me up I tell them I don’t think delivering burritos to other programmers is much value to the world.
And on top of that some of these companies work by exploiting labor while not being held accountable for that.
I recently learned from a doordash courier that he and other Bangladeshi men had paid tens of thousands of dollars to a human trafficking organization to work doordash in exchange for getting to the United States. Of course he didn't have this money, it was debt to the organization, and he has to pay it out of his DoorDash wages, plus interest, to the organization. He lived in an apartment with dozens of other men in the same situation. He had a gps tracker around his ankle and everything.
How are you supposed to compete with a company that uses modern slavery in order to deliver your meal for $5 or less?
Amazon’s primary advantage, initially, was that you could save ~7% sales tax in most states by purchasing from them. They also probably had a good deal on shipping at the time since they were the only ones doing it at such a large scale.
If you look at AMZN net income graph, they never really lost a ton of money.
Amazon scaled up leveraging their monster positive FCF 2002-2015 . They didn't need equity raises.
Amazon is brought up often with regards to this, but somehow I've always encountered this argument when it was made as a rebuttal to a critique towards the business technique used by the Celebrity CEO at the helm of a particular car manufacturer (as well as battery manufacturer and solar panels manufacturer, oh and flamethrower manufacturer)
Long term it probably doesn't very often. That's cold comfort for the businesses that perhaps had better utility and better profit models, but couldn't compete because they couldn't debt finance as well. Likewise it's cold comfort for the consumer during the period when the company is able to jack up prices. And it's cold comfort for the retail investor who loses money should the company go under because it was unsustainable but had grown such market share it was included in index funds and things.
It's not necessarily a permanent thing; little related to industry is. But the seemingly permanent cases are telling (Walmart being a great example). But even the impermanent ones; 20 years, say, of suboptimal outcomes for everyone except the already rich (the VCs), and the founders playing a flawed system well, is a reason to re-examine the system.
Fundamentally being able to continually debt finance something that has no profitability, and possibly no path to profitability, or which leverages market inequalities to expand (again, Walmart; profits from one area enable predatory pricing in another to choke out competition, then you can raise prices, and repeat the cycle elsewhere), breaks a lot of the assumptions a 'free market' rests on.
Or more succinctly, the practice is what enables digging the moat. The size of the moat is entirely controlled by how much financing you can get. We're seeing a lot of companies focusing on building moats rather than competing fairly.
at 0% interest rates a lot of dumb investment ideas that could eventually earn money become surprisingly practical as long as the pitch that the firm could eventually become net profitable is even remotely viable.
0% interest effectively means there is no time cost to money - As a large LP you could probably hold open a money burning position in a firm for decades as long as each year it looked like you would turn a profit within N years (conveniently far enough away that its beyond the funds horizon). At 5% interest N years gets a lot closer.
That is implausible in the general case. If a business actually had a better profit model then they would be able to attract financing. Capital is about as cheap now as it has ever been.
Do you really think a VC is going to say "This small 3 person startup has a better profit model than that 'startup' with 10k people, hundreds of millions in raised funds, that is still operating at a loss. I'm going to invest so heavily into them that they can operate at an equal loss with that big player, AND scale enough to catch up, and then it becomes who has the biggest war chest to burn to outlast the competitor, so that in the end their profit model can keep them afloat"?
That wasn't my claim. My claim was that the thing the VCs are backing is not simply a better profit model. "You can do X for 10% less than the incumbent? Nothing else to distinguish you? And all we have to do is risk half a billion dollars over the next 5 years to compete on an even footing with what they've already spent?" - who is signing up for that?
Many profitable business models do not survive competition with unprofitable ones without becoming unprofitable.
If WeWork subsidizes all office space with ~50 billion dollars, all other profitable landlords will need to lower prices to compete. To the investor the only viable business is the one that grows so large as to not have any unprofitable competition.
WeWork is not a landlord, and actual landlords would never give away their land / space so cheaply to WeWork such that WeWork could afford those losses. I do not see what kind of moat WeWork could ever have to justify being locked into it, which means they would always end up being a useless middleman if they tried to monopolize and raise prices. And even if they succeeded, then the landlord would just raise the price it charges WeWork.
Other landlords can borrow money the same way that WeWork borrowed money. There is literally a whole specialized financial services industry which arranges such financing for landlords.
I don't think most landlords have the option of convincing Masayashi Son to write an infeasibly large cheque on the grounds that that remind him of what he used to be like, and/or that they are making a "tech" company.
Yes, but in order to attract tenants, they would have to offer lease terms competitive with WeWork and thus lock themselves into a similarly unprofitable business model.
It seems that "competitive" and "anti-competitive" mean about the same thing and it's a matter of perspective. It depends on which companies you support.
My own observations of this are that it only works in smaller areas where there isn't enough critical mass to support a lot of choice in markets.
Where I live, we have WalMart, Target, other national "big box" retailers, three different supermarket chains, and a pretty wide variety of locally-owned small specialty retailers.
Could a town of 10,000 support this kind of diversity in retail? No. So there, WalMart wins. Before WalMaret, there was more local retail, but they were barely making a living.
This is the playbook that works for ridesharing as well (which seems to be an oft-cited example of this)... in a larger city the density of riders and drivers is sufficiently high the market is able to support a 2-company system. In smaller markets, it quickly tilts into one of companies because no driver will stay on a platform without demand (long wait times for a ride), and no rider will use a platform without sufficient supply (high ETAs).
Anti-trust is a funny thing because one hand it is clearly needed for power dynamics, but on the other hand orthodox econ with its increasing price curves underestimates how many sorts of monopolies are in fact "natural".
Put another way, anti-trust looks very different if one doesn't believe competition is a stable outcome in the long term.
In the specific Walmart/Amazon case, I would like to see a nationalized warehouse network run by the postal service. Warehousing-distribution of goods is just "content-addressed post".
Every economy has information networks like roads, broadband, shipping services, etc, and government’s role in the economy should be to keep those networks fair and efficient. Free market competition is the best way to handle price discovery, but it becomes a problem when one company can take over the full information network.
Most of the massive companies today have successfully captured an entire network or a huge part of one, Facebook with the social graph, Microsoft with OS, Amazon with AWS and online shopping, Apple with mobile devices. Any antitrust legislation should focus on opening up those networks, but without introducing the inefficiencies that show up any time government takes something over because of misaligned incentives.
It seems very unlikely that a government run warehouse network would have invested into Kiva Robotics like Amazon did. Their warehouse tech is a big part of their competitive advantage.
The legislative purpose was to amend the inadequate Clayton Act so as ". .. to curb and prohibit all devices by which large buyers gained discriminatory preferences
over smaller ones by virtue of their greater purchasing power." [1]
It’s now interpreted based upon cost of manufacturing, so the FTC has this Q&A [2]:
> Q: I operate two stores that sell compact discs. My business is being ruined by giant discount chains that sell their products for less than my wholesale cost. What can I do?
A: Discount chains may be able to buy compact discs at a lower wholesale price because it costs the manufacturer less, on a per-unit basis, to deal with large-volume customers. If so, the manufacturer may have a "cost justification" defense to the differential pricing and the policy would not violate the Robinson-Patman Act.
Note as [1] describes, this act was done in reaction to chains causing much distress. The nature of manufacturing changed, and as the notion from the 60s/70s that consumer pricing was the most important trait in anti-trust law, so enforcement stopped and now we have chains everywhere.
Its my understanding that walmart sells at discount prices, not sells at a loss. they have scale that local competitors do not. there's a huge difference
Loss leaders does not mean you are selling at loss. Small businesses do use loss leaders to generate leads. It costs less than marketing. It just means you price a product under the price of the market (you don't even need to lose money on it) to attract customers who will hopefully buy other products.
Loss leader literally definitionally means that you're selling that good or service at a loss. Yes, you hope you recoup the losses by selling more goods and services but you do lose money on that good/service.
except walmart didn't operate at a loss in most cases. they figured out early on that they could operate profitably on the float between when they took delivery and sold items (usually a few days) and when they paid their suppliers for them (weeks, sometimes months, later). in effect, these were continual short-term zero-interest loans that, combined with predatory labor pay rates with socialized costs, often exceeded operating needs, so stores often generated profit entirely from finance rather than operations, and thus could offer cut-throat prices. it's become a classic business case study in cash flow management taught in business schools and employed quite sucessfully by other mega-retailers like carrefour in france.
There's already a law against predatory pricing. It just has a high burden of proof, isn't enforced, and the FTC's own website expresses skepticism that such a thing could ever really happen:
I share your concern. In this era of cronyism and regulatory capture, the stated intentions of legislative efforts rarely seem to survive through the law-making process, no matter how laudable their origins. They get weakened, undermined, loop-holed or otherwise subverted. Even the recent "Right to Repair" efforts appear to specifically exclude things like mobile devices, PCs and consoles.
Seeing so many bills launched which appear to be so positive yet end up being either irrelevant or perversely damaging, has left me deeply skeptical anytime I hear another legislator announce some bill. The more I agree with the intent, the more I now just fear disappointment. The system is corrupt. Both major parties play these games and there is no longer a party I can rely on to be consistently better. Even when one party appears less bad, it's usually just that they promise things I find more agreeable, yet don't actually deliver when in power.
> Seems like the sort of scrutiny that would produce a well-intentioned law that will end up propping incumbents. Excited to be proven wrong though.
Maybe by itself, but it could be coupled with other laws designed to knock those incumbents down (e.g. by breaking them up), resulting in a better-structured and fairer market.
IMHO, the biggest tech giant should have their peripheral businesses broken off (e.g. separate Facebook and Instagram), and their main businesses should be further split to create well-matched peer competitors (e.g. Facebook Red, Facebook Blue, and Facebook Green).
The issue seems, to me, that we're picking between propping up the incumbent (by preventing anti-competitive pricing) and propping up the competitor (with VC funds). Neither of these is a neutral choice, really. Competitors should win when they have a fundamental advantage like a technology jump -- switching because one company can temporarily price below the cost of providing service is not much of an improvement.
That could work. Market forces will play it out, investors will get burned and be more hesitant to pour more gasoline on the fire. The business model as it stands appears to not work long term (maybe). What company has had long term success with this model (operate at massive losses until no competition left)? But short term the investors have been dumping their money directly into consumers' pockets via cheap uber rides or uber eats subsidized by VC so whats not to love?
investors will get burned and be more hesitant to pour more gasoline on the fire
that defintely makes sense, but from what i hear we are in a glut of cheap capital in recent times, so this might not be so effective deterrent
What company has had long term success with this model
im not sure it needs to be long term sustained, as long as short term damage is severe enough, the player can just harvest the market share from the competition... when it heats back up again, just use that financial might again to clamp things down... it would be a huge deterrent to further investors/entrepreneurs
Well, Amazon could have taken profits earlier but was investing back into the business instead, so I'd argue its quite different. Tesla makes cars with relatively new tech, which has super high fixed costs in an industry littered with high profile failures.
Uber is maybe the canonical example of what's being discussed.
>Well, Amazon could have taken profits earlier but was investing back into the business instead, so I'd argue its quite different.
Their free cash flow didn't really take off until AWS came along. A couple billion a year vs 100 billion in profit for Walmart. They were definitely trading cash for market share. The only reason to do that is if they can later use that market share to make even more cash.
Amazon is (and even in the past, was basically at a rounding error to zero on margin, since they were plowing so much money into R&D), and Tesla has had the past couple quarters be profitable (though amusingly more on bets on Bitcoin than actual car sales), both essentially creating a new market, and while not actually undercutting the competition. But I thought Uber was 'expecting' to be profitable by the end of the year? While basically making it so cab companies have a hard time competing, since they, you know, obey the rules (albeit ones they created to, themselves, maintain a monopoly), and have to turn a profit.
Yeah, I wasn't commenting on how long Tesla has been profitable, just that currently they are. But it's been due to emission offsets and bitcoin. And given they don't make a profit on their cars...they've made more from bitcoin than on car sales.
Why are people so obsessed with picking some parts Tesla revenue and claim that what makes it profitable. What makes them profitable is all the ways that make revenue and all the ways they spend money.
Bitcoin was relevant for 1 Quarter. And trading in fuel credits has been a thing in the automotive industry for decades and are simply a normal part of the business.
You might as well point to specific spending and say 'they are only not more profitable because of XY'.
They have a ~20% unit margin excluding credits so clearly they are making a massive amount of money selling cars. If they weren't selling credits they would likely spend differently and still show moderate profitability. Their goal is not maximum profitability but maximum growth while showing consistent profitability.
> Why are people so obsessed with picking some parts Tesla revenue
Because people (for the most part) aren't fools, especially on here.
People see a 600B dollar company and expect it to feel its presence in their lives each and every day.
They expect to use the thing, or their employer to use the thing or their supplier to use the thing on a daily basis like it happens with Exxon, Amazon, Microsoft, Google, Facebook, Netflix, Salesforce, Oracle, IBM...
They all earned their significance by touching so many lives and making people lives a tad better and less complicated for their users, and the rise to riches of their founders has happened in lockstep or almost lockstep with the changes and the improvement they were making in people's lives.
With Tesla you have a 600B company and Porsches (which are a rarity on their own) are still more common then them on our roads.
People are suspicious about unjustifed enrichment, always been, always will be.
"What have you done for me to deserve that amount of money? What have you done for society to deserve that amount of money?"
Such question will always come up. Musk has been able to answer to such question up to now with:
1) "Give me time!" and
2) "Wait, neat things are a-comin" as well as
3) "Population wide morale boost given by the prospect of amazing future is the real product"
People are more and more asking questions though, and he keeps answering with postponements and future deadlines, while Teslas are still less common than Porsches
Porsche is not private, it is a subsidiary of Volkswagen which is a publicly traded company. Porsche has 3B euro of profit per year, per Wikipedia, and I would guess it is worth far less than $46B if it were to be sold today since they seem to have stagnated.
I do not know what Ferrari has to do with Porsche.
If your question is why is the outstanding number of shares of Tesla multiplied by the most recent share price of Tesla equal to $x, then there are multiple answers.
The simplest is because someone decided they wanted to buy the most recent share of Tesla at $y. The slightly more complicated one is that that person decided that buying that share was a better use of their money than whatever other alternative they had. The most complicated answer is going to be that many actors in the market are betting Tesla is going to “grow” by market share or new technologies over some nebulous amount of time, and that given all the investment options, people are allocating that amount to Tesla compared to others.
All fair game. By the same token, those who have not been bitten by the Tesla bug have all the rights to point at the highest beneficiary of Tesla shares appreciation which is the CEO who goes by Musk Reeve Lyndon Elon and ask him:
"Hey chap, what are you doing for the consumer? Meaning those who buy products, not those who buy stocks. What's the concrete quality of life value your company is producing in exchange for all that wealth? How does it compare against Amazon, Google, Microsoft, Daimler, Ford, Porsche?"
And if enough people ask the question and the response is unsatisfactory and there are not enough people to defend him , then he'd be expropriated. You can see pockets of the population which are more and more asking the question. Especially here on HN, one of them was the one which started the discussion. Game recognizes game after all.
And again, just like Tesla market cap is fair game, and Musk wealth is fair game... so is people asking questions and the expropriation if the answer is unsatisfactory.
The only rule to the game is that there are no rules and that everything is fair game... never explain, never complain, for this sort of things have always happened and it goes with the territory really. It already happened with J.D Rockefeller, and nearly happened again with William Henry Gates III.
At least those chaps produced lots quality of life, people went after them due to the hedonistic treadmill effect and the inability of Standard Oil and Microsoft to keep the pace of quality of life improvement after the initial burst which happens when a new tech such as Petroleum oil or the Chip emerges for the first time.
Musk Reeve Lyndon Elon has yet to produce some tangible quality of life which is not to the benefit of Musk Reeve Lyndon Elon, or one of his cousins.
Tesla most successful product is the common stock of the company, it's also the most pitched and promoted by the CEO. Not even close.
> Because people (for the most part) aren't fools, especially on here.
But even if it were true and those revenues wouldn't exists and Tesla would have 0 profit, it wouldn't actually change that much about the overall position.
If you want to make the argument that Tesla is not worth 600B then just make that argument. Rather then endlessly trying to make an incredibly marginal argument about Quarter to Quarter possibility.
Literally nobody that owns Tesla stock believes this Quarter profits are what gives the shares the value.
> They all earned their significance by touching so many lives
No they don't. In fact most people don't have a clue about what Salesforce is or how IBM touches their lives.
They are valued because of their financial data, predictions about and predictions about future potential data.
> Musk has been able to answer to such question up to now with:
At this point you are just making things up. Musk has not said any of these things and seemingly isn't very interested in answer that question.
> People are more and more asking questions though, and he keeps answering with postponements and future deadlines, while Teslas are still less common than Porsches
No in fact people are asking less and less questions. The FUD about Tesla was 100x larger a few years ago.
Also, even a 14 old should figure out that a product that has 20-30 year utility will be more common then a competitors product of a company that started less then 20 years ago and didn't even growth to any relevant size until less then 5 years ago.
> No they don't. In fact most people don't have a clue about what Salesforce is or how IBM touches their lives.
False, regular people were so confident in IBM that it became a catchphrase in IT departments around the world:
"Nobody ever got fired for buying IBM!"
Meaning the products not the stock.
A scenario where you make 150B based on future hypothetical execution which you can always postpone because your cult followers will always give you more time....that is bound to cause an opposite reaction of equal strenght among those who are not part of the cult and see this very suspicious allocation of wealth playing out.
It's just what it is, people are suspicious about unjustified enrichment, always have and always will be. The owners and founders of the other companies that I mentioned saw their fortune rise in lockstep with the real life relevance of their company. I mean concrete and tangible relevance, quality of life being produced in a way which is proportional to the rise in wealth, not future projections of infinite growth based on up & to the right charts.
Gates first made Windows 3.1 and then became a billionaire, he then made Windows 95 and then became a multibillionaire.
Same goes for Rockefeller, Ellison , Buffett and so forth
> No in fact people are asking less and less questions. The FUD about Tesla was 100x larger a few years ago.
It's not FUD, it's FACTS. As of today Tesla doesn't produce any tangible quality of life, whereas the guy who sued for the title of owner of the company is pocketing quality of life with a shovel, matter of fact he needs thousands of bulldozers to pick up all that quality of life.
People look around, see suspicious stuff and sound the alarm, it's just what people do. That's the reason why people report suspicious activity and denounce cults such as Scientology, NXVIM etc and I am sorry but this is one of those cases. You should not be upset about it, you should ask yourself why so many people are sounding the alarm.
So as a note, this whole tangent is built on my -aside- "and, amusingly, they made more money from Bitcoin than car sales". An interesting aside, that is a point both in favor and against Tesla with respect to the original post, but ultimately not that relevant with the core proposition I was making that Tesla is not like Uber, and could reasonably be argued to not be the kind of company that is kept afloat solely by VCs, to the detriment of would-be competitors, unlike Uber.
And, as you mention, emission credits are something all competitors can take advantage of. Bitcoin kind of is too, though speculative investments outside of the business the company is in strikes me as just as problematic as debt/equity funding an unprofitable company. But not the point I was trying to make. I actually was putting them in the "reliable profit" category, unlike Uber. Though if being profitable requires governmental incentives and speculation on crypto, maybe not so much.
> The problem with anti-competitive practices is that they're immune to market forces.
No, they aren't, in general.
They are self-limiting, though, where the actor isn't insulated from idealized market forces by market position. In that case, they are incentivized by the same real market forces which protect them.
This is what China did to destroy the solar panel manufacturing in the U.S. as well. Some of my colleagues now were kicked out of that industry because US politicians didn’t respond to the tactic.
Also, China is using this tactic now on critical speciality materials related to the global polymer supply chain.
Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant firm in an industry will deliberately reduce its prices of a product or service to loss-making levels in the short-term.
The aim is that existing or potential competitors within the industry will be forced to leave the market.
This can occasionally backfire spectacularly. Consider the story of Herbert Henry Dow[1]:
> With his new company and new technology, Dow produced bromine very cheaply, and began selling it in the United States for 36 cents per pound. At the time, the German government supported a bromine cartel, Bromkonvention, which had a near-monopoly on the supply of bromine, which they sold in the US for 49 cents per pound. The Germans had made it clear that they would dump the market with cheap bromine if Dow attempted to sell his product abroad. In 1904 Dow defied the cartel by beginning to export his bromine at its cheaper price to England. A few months later, an angry Bromkonvention representative visited Dow in his office and reminded him to cease exporting his bromine.
> Unafraid, Dow continued exporting to England and Japan. The German cartel retaliated by dumping the US market with bromine at 15 cents a pound in an effort to put him out of business. Unable to compete with this predatory pricing in the U.S., Dow instructed his agents to buy up hundreds of thousands of pounds of the German bromine locally at the low price. The Dow company repackaged the bromine and exported it to Europe, selling it even to German companies at 27 cents a pound. The cartel, having expected Dow to go out of business, was unable to comprehend what was driving the enormous demand for bromine in the U.S., and where all the cheap imported bromine dumping their market was coming from. They suspected their own members of violating their price-fixing agreement and selling in Germany below the cartel's fixed cost. The cartel continued to slash prices on their bromine in the U.S., first to 12 cents a pound, and then to 10.5 cents per pound. The cartel finally caught on to Dow's tactic and realized that they could not keep selling below cost, they then increased their prices worldwide.
Important to distinguish two types of loss-leader; this is a strategy that non-dominant companies in competitive markets use too, and all startups are in a sense running a loss leader until they get to break-even.
A loss-leader is not necessarily anticompetitive. It’s when you combine it with a dominant market position that the problems emerge.
My understanding is that EU antitrust law is more concerned with preserving competition as a benefit in itself for the consumer, whereas the US doesn’t think lack of competition in itself harms consumers, and requires you to show evidence of other harms before enforcing antitrust laws. The case of predatory pricing is a good example of where the US model tends to fail, and it seems like we are currently re-examining this regulatory philosophy.
Is the question is whether predatory pricing either works or harms consumers?
I think it's quite widely understood by economists and legislators that it can work; the Wikipedia article up-thread gets fairly technical, e.g. https://en.wikipedia.org/wiki/Predatory_pricing#Long_term_co.... You can absolutely loss-lead a competitor out of business if you have a bigger pile of cash, and then raise prices higher.
Perhaps facetiously, I'd suggest the question can be more succinctly answered by saying if it didn't work, then large companies probably wouldn't do it.
Or is the question about whether or not this is a failure of regulatory framework?
It's understood that it "can" work - but we don't see it actually working / harming in the medium/long term. It's the same way cornering the market "can" work, but doesn't really happen.
> we don't see it actually working / harming in the medium/long term
I am not sure about that. There's a lot of consternation about this currently, many people think that there are serious long-term harms currently being inflicted. The fact that Biden picked a strident anti-trust advocate like Khan to head up the FTC suggests that there's political support for the case that there's active harm going on right now, as well.
The article provides a few concrete examples, and while I think Amazon is sometimes unfairly treated in the press, this is a case that I find quite troubling:
> In 2009, when Amazon noticed an e-commerce upstart called Quidsi making inroads with a subscription business aimed at parents, Diapers.com, Amazon made a bid to buy it — while launching its own subscription service, Amazon Mom, that offered even steeper discounts. Documents later revealed as part of an antitrust investigation reportedly showed Amazon was willing to lose $200 million in a month on diapers alone to neutralize the threat Quidsi posed. Quidsi gave in and sold to Amazon in 2010.
And on the core point of the article, whether Facebook Bulletin is an example of predatory pricing -- I think that the FTC doesn't understand social networks, made a huge mistake allowing FB to buy Instagram, and the current regulatory framework doesn't work for social networks.
Zuckerberg understands social networks. As he put it:
"There are network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it’s difficult for others to supplant them without doing something different.
“One way of looking at this is that what we’re really buying is time. Even if some new competitors springs up, buying Instagram, Path, Foursquare, etc now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. Within that time, if we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale.”
Through this lens we can analyze Facebook's strategy. Zuckerberg (correctly, I believe) thinks that it needs to win in each of the finite number of "social mechanics" that will be invented in order to maintain dominance over these modes of sharing. If it can't buy competitors in these spaces, it will create clones and run them at a loss to prevent them from taking off. Hence "Bulletin"; copycats are in some sense inevitable, but if FB undercuts Substack on their platform fee and/or overbids for content creator contracts, then they could drive Substack's valuation down and ultimately acquire them, just like Amazon did to Quidsi.
It seems start-ups are different. When they do this they are not dominant. They are up and coming and attempting to leverage scale before competitors come and take their lunch (Uber, AB&B). At some point they cross the threshold and do become the dominant player, however, often not yet profitably. So the question is how to gauge that so as not to kill innovation but also to ensure other competitors aren't drowned.
If you look at the Standard Oil case it doesn't make much sense - they lowered costs dramatically, greatly improved the world, and by the time they were broken up had already lost a huge amount of market share and were trending down.
What exactly was the benefit that happened after the break up?
Sure, but better laws to prevent it prevent everyone from doing it.
Debt financing to expand is one thing; debt financing to expand when you currently aren't making a profit, and you don't have a business model to make a profit after expansion except "choke out competitors so you have a monopoly and can raise prices to profitable levels" is anti-consumer.
This is pretty shallow thinking. Facebook doesn't charge Facebook users for the service. Are they "losing money" because of that? Clearly not. Is there a way for them to make money out of Bulletin without explicitly charging writers? Let me think....
Lots of companies run negative cashflows for years before positive. The oil and gas industry get's to categorize drilling expenses "capital expenditure" and run it through their financial statements over many years. Intel builds a factory and does the same thing. If you could (and it's a reasonable position) run direct sales expenses for recurring revenue, and all R&D, through your financials as capital expenditures depreciated over 10-15 years... poof.. many so called Silicon Valley money losers are running positive net income.
In raw materials and manufacturing this is called "dumping" and is often illegal because it can have absolutely disastrous effects on supply chains. A well financed competitor can sell something below cost, crush all its competition, and then raise prices to whatever it pleases.
Just to expand on this, it's the sort of thing that sounds like it shouldn't work, because the competition can just wait you out and raise prices down the road too. But it can, because relative advantage is stateful and path-dependent. If you lay off skilled workers, cancel contracts, close factories, lose customer mindshare, and so on, that damage can be very hard to reverse even when favourable conditions eventually reappear.
What allows this tactic to work is the size asymmetry between very large companies and smaller companies. It is much less effective against similarly sized companies. Very large companies have much more buffer (reserves of capital, talent, etc.) to draw from. The very large company can absorb layoffs, cancelations, closures, and mindshare losses longer than a much smaller and very likely leaner company can.
Defining what does and does not constitute predatory behavior is difficult to define clearly and concisely.
One potential mitigation, given the above, would be to routinely break up companies above a certain size. To make it perfectly typical, ordinary, and automatic to do so. To shift the burden of proof from the government needing to establish monopoly status to the giant company needing to demonstrate that the consumer benefits due to economies of scale derived from its size outweigh the negative externalities due to its size and subsequent disproportionate power and influence.
Economies of scale leading to lower consumer prices are a positive good. The negative externalities of huge companies due to their size and outsized power and influence aren't given as much consideration as they are less quantifiable, but they are real and should be taken into account.
Forcing companies to break up can have the unintentional effect of creating cartels where the previously joined companies of similar size work together to push out smaller companies with price fixing. If there is only so much business to be done and there's no realistic way for you to cover a majority of the industry, you can make more money pushing out any of the competition that won't keep prices fixed.
You’ve just described why I am so cynical about the magic of free market competition. Often, the competition has absolutely nothing to do with the price, features, and quality of the product being offered. It’s competition on the business side of things that artificially removes a better competitor from the market because they couldn’t keep their supplier contracts locked in.
I think marginal unit costs should not be allowed to be higher than the sale price in general, with maybe some exception (liquidation of existing stock with no further production or explicit temporary promotions).
For example a company like Uber should not be allowed to sell rides for less than what they pay the driver for the ride.
Dumping, in the context of international trade, is very specifically a price discrimination rather than just an absolute price concept: it's where you export for cheaper than you sell domestically.
But it's also not just exchange rate. Other things come into consideration like local cost difference, PPP and so on. You can't expect a coke to cost the same (relative to USD) in the US as in Azerbaijan for example.
Trade wars between nations happen all the time because of dumping. Timber, aluminum, soybeans, and all kinds of other commodities.
Tech companies have largely gotten a pass on normal business practices and codes of conduct this century because they're shiny and new. But as the industry ages, it will have to learn to work within the boundaries or ordinary civilization.
Why would a company with 90% market share crush it's own profit margins to drive a 10% competitor out of the market? They'd be losing $9 for every $1 they took from the little guy.
> China filed a lawsuit at the World Trade Organization over Australian anti-dumping and anti-subsidy measures on Chinese exports of railway wheels, wind towers and stainless steel sinks, the Ministry of Commerce said Thursday in Beijing. This would be the third recent WTO case between the two countries, after Australia sued over Chinese tariffs on wine and barley.
Prior to that (three weeks ago), it was China dumping steel alleged by Japan.
Here’s one - China flooded the global market with cheap solar panels that undercut everyone else in an effort funded by the govt. It made building massive solar projects cheaper but it decimated the domestic solar production around the globe because they couldn’t compete.
Except... that's just the first part. Where's the second part where they "do whatever they want" (I assume this meant raise prices)? Even after winning, they haven't done this. Why?
The goals of a nation-state are not the same as those of a corporation. Having a monopoly on a strategically important industry is valuable in and of itself, especially when viewed from a geopolitical perspective. Just look at what's currently going on in semiconductors.
I know EU deals with anti-dumping[1]. As of 2019 there were anti-dumping measures for 67 products from 10 countries as mentioned in the annex of the annual TDI report[2].
In section 3.1.4 of the annex, they go into some detail regarding a dumping claim on electric bicycles from China.
You don't necessarily have to engage in predatory pricing if you can sell in such volume that you can get better prices than a mom and pop as well as offering a one stop shop for most consumers. You don't even need to raise prices once the competition is gone simply because you are already making a decent profit.
Isn't this also a criticism of open source software? The final paragraph says if you do it yourself, it's OK, but concerning if Facebook does it. So all the open source software mainly built by big tech companies is also predatory pricing? Where do you draw the line?
I see what you're saying, but then I also don't share the author's viewpoint. That may have a little to do with it.
It is an interesting thought. What if you, as a company, create some open source that eliminates or genuinely competes with other companies?
When a large company has the resources to foot the bill on some project, and just give it away as open source because it is not a core product, is that just as bad as any of the article cases?
Some FB, Google, Amazon, MS et al. tool could be someone's entire business.
Is it fair, open source or not, to release software for free, because you make money elsewhere such that you don't care about monetizing it? Is harming a competitors admissible if you literally never intend to directly profit off the endeavor?
Imo, this line of thinking really challenges the point of the article, I don't know where you draw that line.
I feel it would be interesting to evaluate a real example, though admittedly I can't think of one on the spot.
I guess compilers? Especially for languages invented by big tech like Go. What came to mind when I wrote that was Tensorflow which seems like an attempt by Google to create some kind of lock-in there.
Open source naturally allows for competition. Look at Chrome, Google employed all these predatory practices to get Chrome to the market share it is today, but a significant amount of that market share is split between Chromium forked competitors.
It's nothing more than borrowing a tactic from Standard Oil Company and Rockefeller.
While markets generally don't respond healthily to regulations, it really ought to be illegal to offer goods/services for less than cost amortized over a certain period (maybe two years?). This would prevent a lot of monopoly formation, but probably have some unfortunate consequences for investment in markets that have slower yields.
the interplay between this pricing practice, and the proposed partial or wholesale bans on large tech cos making acquisitions is where it gets interesting. copy acquire kill just becomes...copy, undercut on pricing and kill. this pricing practice will become even more prevalent, and is much harder to regulate.
Only a part. In Europe you could not even become big, each country is too much its own market. It sis much much harder, or even impossible, to build a large company for all or even only for many European countries compared to building one for the entire US.
I worked for a German IT (software) startup in Germany and also in the US, for that startup and before that for another large German company. We found that getting started in Germany was easier compared to the US, where the "winner takes all" mentality was also visible on the side of potential customers, so entrance into the market was hard(er). In Germany getting initial customers for unproven stuff was pretty easy in comparison.
The problem is the switch from initial customers to scale. What made it easy to get started made it hard to achieve scale. When you get to a certain size and "fame" you get a big share of the entire US market. In Germany, but I think I can extrapolate to Europe, from what I experienced, the buyer side does not have a similar tendency to favor large already-winners and get them to become (European) champions.
It's maybe not exactly completely valid examples, but I like them as illustrations: coffee machines or phones. In Germany (never mind Europe) even within the same company I found completely different phone systems and desk phones in different buildings (same with many other small parts). In the US, where I was sent to many big companies, I saw much less variety. Same with coffee machines, where every single department often has a different machine. In the US, more of the same wherever I went.
I'd be interested what you guy think about my coffee machine and phone (and phone system) observations, if you have relevant experience. I saw this as a sign how buyer forces in the different countries (EU as a country) supports more but much smaller variety vs. fewer but large winners, but wasn't sure with my small sample.
i disagree. The US has arguably a better, larger, and cohesive economy.
Also EU talent comes to the US because EU companies just dont value their tech workers as much. EU has to pay tech workers more, or else it will loose in tech, 100%.
Lastly, there's regulation and taxes that makes it hard for businesses to develop.
