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It is a beautiful example of dogma. It has some meaning but can be bent and molded to fit almost any argument.

The obvious argument, especially in Etsy's case is 'well, this works for the short term but can mean no profits in the long term as you commoditize your business and what makes a company like Etsy, Etsy fades into market oblivion.'

To which the next statement is 'Oh. Well, Friedman meant all expected profits even into the long term.' which may even be true, but the statement is used to justify all sorts of business behavior that is not in keeping with that idea.




Yea, if you twist Friedmans meaning you can make all sorts of nonsensical arguments. Value is profits extending into the long run forever, he spoke and wrote clearly enough that he doesn't have to spell that out for you.

In Etsy's case, paying above market wages and benefits does nothing for the company and it's shareholders, it's just a gift from the CEO to workers, paid for out of shareholder accounts. Etsy didn't get the best web site or software out from it, they got rampant entitlement and sub-par work.


>paying above market wages and benefits does nothing for the company and it's shareholders

Again, we can use Friedman on both sides of the argument (which was my original point as to the meaningless of the statement if not in original intent then in popular application).

I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time.

I'm not saying that's what I believe but let's assume it is true.

Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits.

I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps.


> paying above market wages and benefits does nothing for the company and it's shareholders, it's just a gift from the CEO to workers

The real problem in compensation is executive pay, which reaches extraordinary levels, explicitly rewards failure (Yahoo passim) and tends to be a gift from the CEO to themselves.


>he spoke and wrote clearly enough that he doesn't have to spell that out for you.

Death of the author. Most people who read, and quote, Friedman's quote, haven't read Friedman's other writings or watched his speeches. People can't apply context that they don't have.


"I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. "

Market value means that your turnover should already be low, your employees can't leave for better paying jobs. Obviously there is more to retainment than just wages, there is managerial competency and how you treat people. Bad workplaces have to pay more than market to retain people, good workplaces shouldn't.

But again, it's a silly argument that paying substantially more than market is going to benefit shareholders in some obtuse way. There are as many disadvantages as advantages, such building a complacent, insular underperforming culture just like that Etsy appears to have.

And another is using excess comp to build a "cult of personality" so the CEO can be worshipped, and those are terrible for business/shareholders.

"It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time. I'm not saying that's what I believe but let's assume it is true."

Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices?

"Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits."

Do you really think Etsy's massive admin spending, far higher than similar companies, is really translating into long term value and higher profits? This is money not spent on partners or customers or brand, but internally.

"I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps."

The easiest response is to ask you to read some Warren Buffett. All his shareholder letters are free to read going back to the 1970s on Berkshirehathway.com. Long term value in a business is created by building a unique and defensible product offering, a brand, a technology, etc.

It's not from throwing more employee parties and increasing employee compensation. Employees can walk out the door at any time, even the CEO. One of Warren's favorite quotes is you want a business any fool can run, because sooner or later a fool will be running it.

In Etsy's case, it needs to be the best source/destination for it's unique crafts. To do that it needs to provide a viable market place to it's partners. Otherwise it's entire business will just dissipate to Amazon and Ebay and the Kum ba yah nirvana will disappear anyways.

Paying engineers $200k a year when they would be content if they made $150k a year is simply wasting $50k each on something that doesn't add value to the business. That excess comp would be far better spent hiring more people to build more and better competitive advantages, or marketing campaigns to get more partners and better build Etsy's brand, or kept in the bank to safeguard against rainy days, or returned to the shareholders as dividends and better support the value of it's stock.


>Market value means that your turnover should already be low, your employees can't leave for better paying jobs.

The curve isn't flat.

>Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices?

I think people that spend their time learning a craft then peddling hand crafted objects for, let's face it, love over money, will not want to work for anything approaching a Wal-Mart or other 'soulless corporation'. Speaking generally, of course.


>The easiest response is to ask you to read some Warren Buffett.

I've read plenty of Buffet, Munger, Graham, Dodd and the rest. Pretty common knowledge.

What you are missing in your analysis is that Buffet et. al. invest in very well understood businesses (hell, they didn't even touch Amazon). Very well understood businesses tend to have very well understood systems (including the people and their roles and contribution to those systems. They have settled to a point where they /are/ interchangeable. They also tend to be boring and have well understood moats like huge capital or regulatory requirements. They can thrive in the fat part of the curve (or even a bit below it if they have stellar management).

Etsy is none of those things. They are carving out a new niche (or an very old niche with very new scope) with new technology in a constantly changing landscape that, really, anyone with a laptop and some free time could monkey. They will die if they try to live with average, interchangeable parts. No doubt about it.


If Etsy's management didn't understand their business, they shouldn't have been it's management.

But truth is, their business isn't from Mars, it's easy to understand, even if it's not easy to optimize. And if they truly need special custom development, why are they so poor at doing it? Where are the benefits of all that admin spending?

And BTW, I can't think of one Berkshire business that has any significant moat from "like huge capital or regulatory requirements". In Insurance their real moat is either the direct cost model (GEICO), or their underwriting discipline and long term thinking.

Etsy should know what makes it special to customers. Why isn't it more efficient at delivering that?


>Etsy should know what makes it special to customers. Why isn't it more efficient at delivering that?

It is a Very Hard Problem and I don't envy them at all.

Verification of authenticity. I honestly wouldn't know where to begin. Spot check with live people? Expensive and begging for errors. Have sellers document their process? Easy to fake and expensive to check. Have a hair trigger for banning people that are clearly breaking the rules?

They also have the structural problem that Painstakingly Crafted generally takes time. That means less throughput.

And all of that is on top of the general problems of running an internet retailer with global reach.

Because of all of the pressures of throughput and the cost of verification they decided to ignore all of that and just give up, for the most part. And now it is a race to find a new 'quirky stuff that looks crafty' niche like an online Hobby Lobby to live in or lose their brand completely. I don't think it will work in the long term and I think we are witnessing a slow motion Pets.com.

Probably, what they'd need to do is split what they are doing.

One side would be how most of Esty is right now: a bunch of Hobby Lobby level quality crafty looking things that aren't actually hand crafted in any meaningful sense. It would be the place to go to get cheap, somewhat unusual gifts.

On the other side would be high end items. Hand crafted $2000 rocking chairs, for example. Something that can be marked up significantly and that it is worth it to go the extra mile by Etsy and sellers to verify is handcrafted. Maybe video walkthroughs of the process, spot checks, samples sent in to Etsy to be examined by experts etc.

Sellers can exist in both areas or one. The Verified Crafted side would buttress the Crafty but not Crafted side brand wise and the Crafty side would have a larger, more predictable income stream to make sure Verified Crafted can tackle the sticky problems it faces.


> But truth is, their business isn't from Mars, it's easy to understand, even if it's not easy to optimize. And if they truly need special custom development, why are they so poor at doing it? Where are the benefits of all that admin spending?

Speaking of Buffet, this sounds a little bit like his explanation of the "Institutional Imperative" http://www.berkshirehathaway.com/letters/1989.html (just above the 'miscellaneous' section at the bottom)


The curve isn't flat, but the benefits are massively disproportionately expensive the farther up it you go.

This isn't an argument about making the company "soulless". You can still have a great and fun work environment without spending 25% of sales on admin. And much of what makes work enjoyable isn't benefits, but leadership. Having management that is competent, humble, approachable, and driven to empower employees can change a lot.


No argument here but what do you mean by 'admin'?


"Etsy’s general and administrative expenses amounted to 24 percent of total revenue. (EBay and MercadoLibre.com, the Latin American online marketplace, each spend about 10 percent of revenue on such expenses.) "

I should have said G&A (general and administrative expenses). Essentially the cost of your workforce, the offices, benefits, etc. Etsy's is huge compared to any reasonable comp, and nowhere has anyone explained why it must be so.

Ebay has bigger economies of scale, so maybe Etsy can't really get to 10% with their smaller sales, but it should be in the 10-20% range. If it's "correct" number for G&A is 14%, they are essentially taking 10% of every sales dollar to spend on a party for the employees.

It also means their total compensation per employee might be as much as 70% higher than market. Total comp is pay, payroll taxes, benefits such as medical/dental/parking/mass transit/etc. Probably not, since it also includes office expense such as the cost of the CEO's merry band of office decorators. But it's not hard to imagine that they might be 40-50% over market in employee comp, plus spend way too much on office costs.


Interesting.

So you are talking about executive management, finance, and other overhead staff not developers or product development.

I asked because you mentioned developer salaries earlier in the thread.

24% does seem awfully high.


"Brand" is the key thing here. There's obviously an upper level where increased pay / perks becomes excessive, but for the type of customers / sellers that Etsy wants to attract the line is FAR above "as little as possible to make employees not leave". Etsy has to, more than most other companies, maintain an image of not being a soulless corporation as much as humanly possible.


I disagree. Friedman's statement isn't a justification for decisions and it doesn't determine which specific decisions are right or wrong. It determines which justifications are right or wrong.

"We made this decision because it improves environmental sustainability" may or may not be a prudent decision depending on whether the justification of environmental sustainability correlates positively or negatively with financial success.

Clearly running your business into the ground through over-spending, even if it generates modest short-term results, is a poor application of Friedman's idea.




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