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WeWork and Counterfeit Capitalism (mattstoller.substack.com)
1158 points by cjbest 23 days ago | hide | past | web | favorite | 414 comments

> WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.

> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.

This is wrong, wrong, wrong. The difference is Amazon saw what the marginal costs could be, and had a specific roadmap to drive investment into bringing them down. WeWork fundamentally has no way to drive down the margin on real estate in any meaningful way. Especially as a lessee.

> The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly.

A bold assumption with no citations. There are just as many counterfactuals to this strategy as there are examples. The scooter market is an especially bad - there is so much capital from so many companies - if you were trying to establish monopolies that would be a bad bet.

> Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example.

The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more.

WeWork is a garbage, charlatan company. But don't misunderstand what is happening here.

>The difference is Amazon saw what the marginal costs could be, and had a specific roadmap to drive investment into bringing them down. WeWork fundamentally has no way to drive down the margin on real estate in any meaningful way. Especially as a lessee.

That's what the article says:

>At first, with companies like Walmart and Amazon, predatory pricing can seem smart. The entire retail sector might be decimated and communities across America might be harmed, but two day shipping is convenient and Walmart and Amazon do have positive cash flow. But increasingly with cheap capital and a narrow slice of financiers who want to copy the winners, there is a second or third generation of companies asking Wall Street to just ‘trust me.’

It's not that WeWork is the same as Amazon, it's that WeWork is symptomatic of a bubble caused by investors looking to copy Amazon's success without understanding why it succeeded.

Totally agree with the last pint, people completely tend to ignore the effort and attention to detail Amazon puts into executive and planning. That plus a very sound strategy. Also Amazon was profitable, even if just barely, for the most time while growing appr. 20% constantly. Not comparable to, say, WeWork from what I know. But it shows how powerful that narrative can be.

I'm pretty sure Amazon was profitable all along - it's just that the profit was all spent on expanding the business. Hence, there was no taxable profit.

Amazon was also able to make money selling products at little or no markup by taking advantage of the float. They'd collect money from the purchaser immediately, and would pay the vendor after 90 days. Then, Amazon would make interest on that money for the 90 days.

I do the same thing on a (very) small scale. I buy with a credit card, and don't have to cough up the money until the credit card bill is due. That gives me free use of the money for 30 days.

Pretty much all businesses do this, it's just that Amazon did it on a massive scale.

Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere.

Amazon has succeeded at beating bookstores in none of these categories - but it has succeeded in greatly lowering the difficulty and impediments in case that a customer wants a specific book, the unfortunate thing for bookstores is that that user flow is extremely common and winning on that flow pretty much got them the market.

W.r.t. the other flows... Amazon is still terrible, did you enjoy The Colour of Magic? Why don't you try Magic Eraser - guaranteed to get stains out of any fabric! Curious if this book is good? Why not try reading one of the hundred shill comments talking about how this book changed their life!

I think the key here is to focus on winning a specific market segment (a significant one) and winning it hard if you can do that you too can be the next amazon.

I buy a lot more books from Amazon than I did before Amazon existed. The reasons are simple:

1. I can get pretty much any book ever printed, not just newly printed books.

2. Prices are usually better.

3. The friction to buying them is very low.

If I want to buy books by the lot, such as every book in a series, I usually go to ebay.

1. True for mainstream books, absolutely not true for academic special interest titles. Many books simply aren't available - including some still-in-print titles from academic publishers.

2. Ditto. Pricing algos and greed can do insane things to prices. When I needed one out-of-print academic title recently the copies on Amazon were going for four figures. Luckily the author had uploaded a PDF to his web site.

For other books I've looked at, three figures aren't rare. Communicating with sellers directly has sometimes brought the price down to something more reasonable - a sale now being worth more than a listing that may take years to pay off.

3. This part is true - pay, wait, receive. Although it's not infallible, because some of the bigger sellers play an arbitrage game where an algo checks possible sources for tens of thousands of titles and then if found, adds a percentage to create an auto-listing. I've had orders cancelled when this process has failed, for whatever reason.

> True for mainstream books, absolutely not true for academic special interest titles. Many books simply aren't available - including some still-in-print titles from academic publishers.

Sure. But you wouldn't find those at B&N either. Amazon isn't in danger of putting university bookstores out of business.

Also Amazon (or to be fair any Internet book indexing service such as Google) allows me to know about books that I would almost certainly never have known existed in Barnes&Noble days.

There is so much tat though that you can't browse like you can in a bookstore.

> Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere.

The key part is “decent”. Outside of the “walk out” part, none of these advantages apply if you don’t have a bookstore that matches what you’re interested in, which can be pretty difficult outside of mainstream subjects and the latest-Summer-novel-everybody-buys. There’s no discovery system that I know of that would allow you to find a bookstore near you based on what you like or want to read.

This is why I use Amazon so much: I have a half-dozen wishlists and bought my books here for years, so its suggestions are often relevant. I like to be able to compare prices between new and second-hand books from third-party sellers. Reviews may not always be great, but that’s still better that what you’d get in a bookstore: one single review from the owner, if they did read the book.

Note: I live in France, where the law requires that books are sold the same price in bookstores and on Amazon (you’re allowed to do go down max -5% on the public price). You can also ask any bookstore to get any book for you, most often free of charge. However, this means they get very little profit from it since they have to pay the shipping cost themselves.

So much this -- and it applies not only to bookstores but to retail in general. So many times I've thought "I should give these retail shops some support"; I go looking for something particular I want, spend several hours of my own time only to come up empty-handed because nobody had what I wanted in stock. Example: I read about some really cool Etymotic musician's earplugs. I thought great, there's actually an instrument store near my work. Walked there; nope, none in stock. Or reading about one of those induction cooktops. Went to my local big-box electronics/appliances retailer. Nope, nothing. Pretty much anything that's even slightly niche, it seems like retail just doesn't have it.

As for books in particular - Kindle wins hands-down on convenience and portability for me, over bookstores (the 'walk-out' part is definitely covered). In my particular case, as I'm vision-impaired, Kindle ALSO wins hands-down on usability, because I can make the text any size I want. That's important enough for me that it can mean the difference between actually being able to read a book and not being able to read it.

I think I have 451 Kindle books. I can carry all of those in my pocket on my phone or in my backpack on my tablet, if I want. That's another huge advantage.

I should probably mention that given all that, I _still_ like physical books! I remember walking the aisles of Borders, but that was because they were huge and they had books in the niche I was looking for. I fondly remember a small bookstore that used to specialise in software development and IT books and they had a great selection of game development books. I used to love that place! For me though, that was all before I got a taste of the convenience of Kindle. Getting the book is worth more to me than stopping and having a nice coffee at the bookstore.

> Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere.

Maybe post-Amazon retro bookstores provide this, but prior to Amazon bookstores were mostly garbage. You could only browse what they had, which was far from everything. Prices were also very high. I remember as a kid bringing in pencil and paper to copy down algorithms from books that were simply too expensive to purchase. There were also few if any 'experts' at the book store.

For me, the internet + Amazon (and now 1/same day delivery) is better than a book store in every way.

The only place that I know of now that provides something close to what your are romanticizing about is libraries. People who work there for the most part still care about books and understand their catalog. But, anything even remotely popular will likely be checked out which means I'll end up back at Amazon.

If I try to build up a history of bookstores as I remember them as a consumer, at one point there were many small stores. A mall may have 3-4 book stores, all taking around the same space as any other retail store. There were also 'used' book stores and some niche stores around. When you didn't know what to buy, you browsed the generic stores and pretty much they all had the same content, if you sought out a niche/used store, you'd often get a personalized set of recommendations.

However, the Barns and Nobles and Chapters found out that if you knew what you wanted, and gambled on going to a small generic or even niche bookstore, you often had to put the book on order or get something you didn't want. They capitalized on this by stocking much more books than a smaller place could hope to hold. They still could on the surface handle the browsing public, so they quickly put the smaller generic stores out of business, and forced many niche stores out too.

They still have the issue though, that while a small generic may be able to stock the selection for around 80% of requests, and the larger stores 95%, Amazon immediately would sell you the book, either sending it out to you quickly or seemlessly putting them on back order. Also, in the early days, the unfiltered reviews and recommendations based on the other buyers of the books were great in identifying if you really wanted to buy the book anyways.

While Amazon now is facing issues with recommendations, 10-15 years ago it was hugely different, and provided a seriously better customer experience. What I've actually noticed, is that if any small niche bookstore has survived until now, they actually are starting to provide a real differentiated experience. A small, curated selection of books, that I feel easy to browse and I feel they've been filtered already. I also don't know off hand without leaving this and searching, wether barns and noble is still in business.

For those curious, it looks like Barnes and Noble is still around but Borders and Waldenbooks are not.

I'd consult goodreads.com (ownded by Amazon) to meet your criteria of matching experience with respect to genuine reviews, similar book recommendations, etc.

It's not a flashy service by all means and has definitely been neglected by Amazon since the acquisition; the community makes it what it is, and it is a very high quality community!

I've read that Goodreads has kind of an opposite problem to shill reviews: everything you write about a book is always completely public, so people don't write them.

Bookstores only offered negative value to me, outside of selling me what I wanted. Amazon allows me to purchase stuff without having to interact with another human. Not everyone is extroverted and introverts get drained by human interaction. I don't even have to talk to a human when returning stuff.

The only way you get past that is by forcing yourself to be uncomfortable. It's worth it. It's a learned and reinforced behavior. Much like the child who only eats hot dogs and mac and cheese, and their parents never really made them do otherwise. Now they're in their 30's, living in their house and don't have a job, still eating junk food, but now they have diabetes.

No need, I already have a job and eat healthy. It's not that I can't do human interaction, it's that it drains me.

My point was, the more you do it, the better you get at it... kind of like exercise or anything else. By avoiding interactions, it makes it worse over time.

A battery won't get better by providing energy to some device. It gets drained. Similarly, introverts get drained by human interaction, so they need to recharge by staying alone. Extroverts on the other hand get drained by being alone and recharge in company of other humans. Telling an extrovert to not socialize with anyone for a year to get better at it is as much nonsense as telling an introvert to go socialize more to get better at it. That's not how it works.

The more human interaction I can avoid, the better, so I'm recharged when I have to interact with people.

A muscle doesn't grow stronger with atrophy... likewise, the mind doesn't grow stronger without challenge.

It's like trying to use a tool all the time expecting it to get better instead of wearing itself out. That's not how this works. No matter how good you get at human interaction it won't change the fact that it will drain you, if you're introverted.

My favorite Pratchett book is probably Men at Arms, though he has many greats (and I have not even read all of them yet).

The Vimes series is amazing... I think it's a bit above the Moist series but I absolutely love Raising Steam and, to a lesser extent, Making Money - because both characters are coming together. Still, I think my top pitch is somewhere within Night's Watch, Men at Arms & Jingo - I think Guards! Guards! is also quite good but Night's Watch did nearly everything Guards! Guards! did... but did it better.

Honestly, his books are just amazing though, quite worth a read.... possibly skipping to start at Equal Rites since The Colour of Magic and The Light Fantastic were less polished than his later works - but do check out the Tim Curry having movie covering those first two books... maybe bring a power point presentation or two along to appease any power hungry wizards though.

The movie was reasonably entertaining, and a stellar cast. I agree about skipping the first couple books were not as well polished - I'm glad I did not start there.

Yep: one major advantage of bookstores is that their recommendation engines work several magnitudes better, and reliably. I believe they always will, too.

I think it's also possible that at least part of Amazon's success was due to creating/increasing price sensitivity in an era where wage stagnation has become more and more apparent. That is, they are also the Dollar Saver & K-Mart of the Internet.

The segments that Amazon has conquered may be more abstract than those they're usually given credit for. Segments like "poor people."

>recommendation engines work several magnitudes better, and reliably

Surely that's only true for a vanishingly small subset of fields of interest?

e.g. I want to read books on construction site drainage. Is the dude in Borders going to have any tiny clue about that?

Surely that's only true for a vanishingly small subset of fields of interest?

I mean come on, Amazon didn't invent obscure topics. Bookstore people would know more specialized stores, though this was naturally less true at chain stores. This was at least as effective as Amazon giving you a list of other books bought by people who bought the one you're looking at.

> Amazon was also able to make money selling products at little or no markup by taking advantage of the float.

Amazon's margin for a long time was rorting the tax system, something they enjoyed via federal regulatory capture. Their competitors were paying state and local taxes. They weren't.

If there was regulatory capture it surely couldn't have been provided by them given they didn't exist yet. They were doing exactly what the tax system was designed to do - promote investment no trickery involved.

One can legitimately argue that the system sucked or could have been done better but it is not exploitation in the sense of a glitch any more than handling moving by selling your furniture, mailing your small items, and then buying new stuff insread of renting a van since depreciation losses would be less than moving expenses.

Catalog precedent was what they used for taxes and even a large company using it to sell everything enmasse wasn't new either - Sears Catalog.

A friend of mine after moving several times discovered it was cheaper to just throw away all the furniture (i.e. give it ot Goodwill) and buy new at the new place than ship it.

(Dict, for convenience - that's a good word, mate ;-)

rort - verb - AUSTRALIAN/NZ

gerund or present participle: rorting

engage in sharp practice.

- [...]

- work (a system) to obtain the greatest benefit while remaining within the letter of the law.

I worked for a book publisher from 1998-2002

At the time Amazon relied on huge 'subsidies' from the book publishers, they had huge trade debts, but the publishers couldn't afford to pull the plug as they'd loose that revenue

Personally, I think companies should have one of two models, growth or dividends. In the end, it really shouldn't be companies paying taxes (or meddling in politics), they should be growing, or paying out dividends that are taxed.

Amazon had an in-built 5-10% advantage for a very long time because they weren't required to pay tax. This clobbered small retail--and bookstores in particular.

Now that they are on an equal footing and have to collect tax, Amazon's retailing isn't doing as good.

I don't understand this comment. Amazon didn't invent mail order. They never have had a monopoly on websites that sell stuff to be delivered by mail, either.

> Amazon didn't invent mail order.

And were particularly bad at it for a long time. Selling books was the only thing keeping the company afloat during that span.

> They never have had a monopoly on websites that sell stuff to be delivered by mail, either.

Actually, they did on books. You seem like you may be young. In 1994-1996, credit cards were nowhere near as ubiquitous and certainly the online use of them was even less so. Online gift companies were still a big thing and not simply a given even into 1999-2000.

The big bookstores at the time all had physical presence. If they attempted to ship you book and not charge tax, some taxman was going to show up at their door. This stifled the development of the online websites for those companies.

Amazon had no presence that people could go after, so could skirt tax laws with far less danger. That gave them an in-built 5% advantage over everyone. And the small bookstores took it in the chin particularly hard.

The success of people like Bezos becoming huge by skirting the law is why we have people like Kalanick who thought they can become huge by skirting the law.

Not paying sales tax on mail order was the norm. The time period you're talking about, Amazon, and the internet in general, hadn't penetrated to the general public. 1995-96 was just when a small minority of people were waking up to the idea they needed to be on the internet and getting their first direct PPP dialup account. People still went to physical book stores because, for one thing, you couldn't preview a book online.

It wasn't at all obvious that Amazon would take over the world well into the 2000s. They looked like every other dotcom, particularly because they didn't consistently make GAAP profits and so people were just waiting for them to die. AWS, Kindle, Prime, Fresh, lots of stuff are recent developments.

Absolutely nothing about the original concept could have told you what it would become or was in any way exclusive.

> Not paying sales tax on mail order was the norm.

You're forgetting that mail order wasn't the norm--even if you ordered from a catalog you picked it up in person at the store. So, not collecting tax on mail order wasn't a big deal until Amazon flattened bookstores with it.

Huh? That’s not how I remember it at all. You ordered from the catalog and then waited three weeks. If you were going to pick up in the store, why not just go to the store instead of calling an 800 number and reading off your credit card info? There was a whole Seinfeld episode about how the only mail anyone got anymore was catalogs.

Per FRED[1], monthly mail order sales doubled from 1992 to the end of 96.

Obviously it was nothing like today, but mail order was, like, a thing.

[1]: https://fred.stlouisfed.org/series/MRTSSM4541USS

*Also, I learned in my google rabbit hole about this that it’s a 1992 Supreme Court decision that confirmed that mail order retailers didn’t have to collect state tax unless they had a physical presence in the state.

You picked up in store because there was free shipping to the sears store in town. You didn't go to the sears store in town because it didn't have very much inventory.

Note that we are talking about small rural towns in the middle of nowhere. When sears started most of the population was either a farmer, or lived in a small town in farm country. If you lived in a large city you could go to a department store downtown and it would have everything. If you lived in a small town the department store had only the very popular items and you were expected to order from them.

By the 1980s the population had shifted to bigger cities, and UPS offered affordable shipping to your door, so those small town stores had little reason to exist and started closing.

Sure, but we were talking about Amazon. The state of mail order retail in the 1930s isn’t super relevant.

I grew up in the 80s and 90s, and the claim simply isn't true. My family mail-ordered all the time, and it was nearly always delivered to the house.

I get that it feels neat and tidy to say that Amazon and Uber had the same growth model of skirting regulations, but the facts don't match that.

This doesn't mean that Amazon is good--I think that what the effect of what they've done to retail is awful. But using Uber as the key piece of a kind of Godwin's Law doesn't really help matters.

The only difference between wework and amazon is the way they finance their money-losing ventures.

Wework does that via the private market, hence the game is up when it needs access to the public markets.

Amazon does that via AWS. AWS is the money that fuels the eCommerce side. The game will be up when:

1) Kubernetes will move AWS customers back to on-prem, or at least turn clouds into a commodity. Amazon knows that and this is the reason for the push toward lockin (aka lambda / serverless).

2) Amazon will be divided into two companies.

Kubernetes is only a threat in that it is a buzzword much as cloud is a buzzword. The cloud and Kubernetes both are used to sell a triple fallacy: You need to care about scaling from day one, there is an easy way to scale, this way is the cloud/Kubernetes.

For almost all startups their app would run comfortably on a single dedicated server. This has been true for many, many years but only the YAGNI greybeards would go with it. Maybe two HA but even HA is overhyped, it's cheaper to be down. Down is part of this industry, you will be down in many circumstances anyways so perhaps don't chase a unicorn? Of course, above a certain size, two servers make sense but ... don't overdo it even then. You don't need microservices, you don't need containers. All of this is unnecessary hype. (And yes, both of you who works at a large enough company where being down is enough of a problem that it worths engineering about: good for you. I have architected a Top 100 website myself and we still didn't use more than a dozen servers and that included the staging infra.)

Gary Bernhardt of WAT fame from 2015 https://twitter.com/garybernhardt/status/600783770925420546?...

> Consulting service: you bring your big data problems to me, I say "your data set fits in RAM", you pay me $10,000 for saving you $500,000.

Very strongly related: a terabyte of RAM in just 16 modules so it fits most server boards is now under $5000 https://memory.net/product/p00926-b21-hp-1x-64gb-ddr4-2933-l...

Final shot, codinghorror of StackOverflow fame: https://twitter.com/codinghorror/status/347070841059692545

Containers, k8s (or k3s, because less bloat) and micro-SOA (but preferably in a monorepo) make development easier.

Overdoing the infra-HA-magic is bad, of course. But if you use containers, you can spin up dev envs faster, devs can just docker-compose (I still recommend Vagrant + docker, so devs can use whatever OS they like), and it helps with config management a bit too. (Much easier testing, deployment and upgrades.)

That said paying for AWS is the worst idea ever, it's so overpriced and the most used servie is EC2, which people could get anywhere else. (Sure, there are probably nice tricks that this pony can do, but there's probably a whole cottage industry trying to copy their niche offerings.)

Cheaper to be down? I guess if you don’t have users sure.

Having a hot spare, a database slave and a mirror of your assets so you can manually fail over? Probably a good idea. Architecting a very HA infra? Now wait and look hard at all the possible downtime causes (you have a DDoS provider for sure, Voxility or Cloudflare probably, what if they go down and so forth) and so and then look at what you are protecting against: a hardware failure which is exceedingly rare and again you can manually failover. The costs vs benefits will not come out in your favor up to a very large company size where even the smallest amount of downtime is so costly it doesn't matter how many engineering hours go into avoiding it.

Anecdotal evidence.

I remember working for a company about a decade ago where we spent so much time engineering duplicate everything hardware or hot spares everywhere.

Guess what, when switch failed it didn't properly failed over. When router it started sending spurious packets everywhere and had to be taken down manually.

All the effort that went into duplicating hardware and making hot spares could have been save by just... having cold spares, and in the end the amount of downtime would have been the same, or less -- because when one thing fails it's really easy obvious where things stopped working.

It's interesting that you bring up the importance of AWS to Amazon, nowadays, because...companies like Uber, Lyft, and WeWork spend a lot on AWS.

In other words, like Yahoo getting a lot of their late-90's advertising from dot-com bubble companies that evaporated in 2001, AWS is massively exposed to the current bubble in "we have so much VC cash we don't know what to do with it" companies. When that goes away (i.e. the next downturn), AWS will lose a huge chunk of their business all at once. It will be interesting to see what Amazon's bottom line looks like at that point.

So I am not sure. I think that startups (with all due respect) generate buzz, inversely correlated with their technical depth. So AWS is mainly composed of non tech companies.

I also think that AWS did an excellent job locking its customers, so they cannot just "leave".

The real treat here is kubernetes. If I program to kubernetes , I can, in theory, move the workload from cloud to cloud, or move the workload from on prem to cloud.

This brings actual competition to the cloud space.

The problem is how to provide all the high-level services that AWS provide, and this will have to be taken by future startups which would extend kubernetes.

Amazon must know that and i guess thats why they dont give up the commerce biz

Lol, or the bulk of the AWS income that is probably boring enterprise. Sure, less startups is less cpu cycles bought, but there are a shit tone of companies that aren't going to scale down in a massive way.

yahoo was at risk because the BULK of their ad business was ads for a budding industry that was hit hard. Normal boring enterprise was still selling buying ads elsewhere.

AWS did not become a product until Amazon had been around for several years.

But today, AWS is hugely profitable and hides the money losing parts of the business.

So tue. AWS is generating the biggest part of overall profits while contributing 10% of revenue (from top of my head, so numbers might be wrong). Only logic that one day Amazon would be split up. Might also partially explain the high valuation.

Operating a kubernetes cluster on-prem is much harder than you think. Kubernetes is an overcomplicated mess if you want to build a cluster yourself and it's a mess every time you want to upgrade to a newer version.

WeWork is a cargo-cult startup

> The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more.

The subprime mortgage crisis is basically godwin's law for finance. Want to make something look awful? Compare it to CDOs or mortgage-backed securities.

I think the point the author was trying to make with "counterfeiting" wrt the subprime crisis is like this: counterfeit goods offer superficial similarity to the real thing, but are made of inferior materials when you unpack them.

During the GFC, toxic mortgages were bundled in with mortgages with a high probability of repayment. Since the debt rating agencies gave those mortgage backed securities a AAA rating without doing quality assurance, they entered the market on the same footing as legitimate AAA-rated debt.

That’s not really what happened. It’s not that AAA rated MBS packages were secretly full of shit that should have brought down the whole rating. It was that the systemic feedback of over leverage wasn’t really taken into account.

The AAA’s wouldn’t have failed if it weren’t for the cascading effect of ARMs blowing out shit mortgages causing the financial system to get caught with its pants down.

In other words, the AAA criterion based on historical data would have been applied to the vast majority of each of the individual mortgages as well because they wouldn’t have been problematic assuming housing prices didn’t contract more than they ever had.

There’s a reason it’s called the subprime crisis.

I take your point, though counterfeit goods aren't necessarily made of substandard materials. There are plenty of ways to skimp and then take advantage of the brand's existing reputation beyond shoddy crafting.

I was thinking 'counterfeit' in terms of things like baby formula and plastic rice, which cause severe consequences when co-mingled with regular inventory. I believe that's the scenario the author was referring to. For things like knockoff handbags, the materials used are largely the same and the price premium is heavily dependent on brand itself and not the cost of production and regulatory compliance.

> The subprime mortgage crisis is basically godwin's law for finance.

This is so spot on - I'm 100% going to steal this.

That’s because it’s such a massive example of a systematic corporate private capital failure that was bailed out by equally massive public power while regular people were left on the hook.

No other industry has gotten that kind of bailout that far into supposed maturity.

Huh. Many sectors are "strategically important" and are constantly subsidized. Farming. Everywhere in the world. Automotive industry. Fossil related industries (oil subsidies).


I think that is only because of the relative age of sectors given the sheer number of times airlines got bailed out.

I don't think the magnitude is remotely close, but perhaps I'm off here? What airline bailouts are you thinking of?

The multibillion post 9/11 ones for one both post attack and Iraq wars and SARs related travel reductions. If you count uniquely privileged bankruptcies and other activities there is a whole lot of the 20th century to include.

I get your point, but Ponzi would be an even better candidate, though.

People usually know what Ponzi is about so comparing unrelated things to it is going to be obviously wrong. But most people have very murky idea beyond "something in capitalism went bad" when talking about the subprime crisis, so any time anybody wants to criticize anything going bad in capitalism, they are free to grab this example with low(er) risk of being called out.

I was thinking of a Godwin equivalent for finance, which is narrower than capitalism as a whole.

What I had in mind is that once you take several rounds of investments (especially from private individuals) and are not profitable, bad faith critics may try to picture you as some kind of Ponzi scheme (trying to repay early investors with late ones, etc.)

Well, the trick of Ponzi scheme is that it looks externally exactly like legit financial company - you get investments, you pay dividends, you attract more investments to finance growth - this is how many legit companies work. Without looking inside - whether or not the company has legit activity going on on the inside, whether currently profitable or not - it's impossible to know, externally it looks the same.

> with the idea of profiting later on via the surviving monopoly

I don't understand...if you undercut your competitors so you're the sole survivor, I don't see how profiting is a obvious end result.

When you return prices to market value wouldn't competitors just appear again. Is predatory pricing really such a bad thing, I'd assume the market would just corrects itself later?

This is a big topic in business school - never compete on price for that exact reason.

Although things like Uber may be a different beast. They basically got big enough that cities were willing to push aside all of these special interest rules that kept the taxi industry crappy. So by dumping their product and acquiring customers, they were able to change the legal environment and infrastructure around them.

But they are also at a huge disadvantage because they changed it for everyone behind them as well. Lyft doesn't have to burn money as fast and gets all the same benefits for scale. Under their current market position, the minute Uber starts raising prices, they die.

> “This is a big topic in business school - never compete on price for that exact reason.”

no. business school teaches you that you can compete on price (cost strategy), or on value (differentiation strategy).

if you compete on price, you’re betting that you are, or will be, the most efficient provider in the market (e.g., walmart and its supply chain dominance). it’s completely viable/acceptable to compete on price. what you don’t ever want to do is price on cost, rather than on value provided.

you can also compete on being better in many other dimensions, which is lumped into the broad differentiation strategy category. you are then betting that you are better on your dimension and that customers really value that dimension (more than price).

Technically it's not competing on price. It's competing on cost, a result of which is often, but not necessarily, a lower price point. Business strategy courses explicitly teach you that simply competing on price (that is, simply lowering prices in hopes that you'll beat the competition), will blow up in your face.

A classic example (presented to my MBA class) was the two adjacent pizza parlors in NYC competing on price and driving the selling price of a pizza down to less than a dollar, whilst a shop a block away and around a corner was able to keep normal pricing.

well, it's not so black and white as only competing on cost or price. it's true that your competitive advantage has to come from lower costs (via operations, marketing, finance, or whatnot), so you do compete with other market participants on cost.

but you also compete on price in the marketplace--not so much as to ignore your costs, as you note, since negative margins generally don't lead to viable businesses, but price competition nonetheless.

your example is the simplest game-theoretic version of price competition, which is more of a teaching model than a practical application.

(dynamic) price discrimination and other marketing tactics are typically employed to ensure positive margins even as you compete on price in the marketplace (e.g., airline seats).

I had the same example in my class... purple pride represent?

Something something... "Go Cats!"

> never compete on price for that exact reason

no, you should compete on price if you are the low cost producer, as my neighbor comment notes. monopolists frequently are the low cost producer because of economies of scale, scope, etc.

another "compete on price" strategy is if you are the disruptive upstart: you have small market share, so your losses (tangible and intangible) will be lower compared the losses suffered by the fat lazy high-multiples incumbent who must satisfy angry shareholders when they see profit eroding.

> This is a big topic in business school

I could be wrong, but "network effects" is a recent phenomenon and business schools haven't really taught students about it much. Either way, we have very little history for assets that appreciate in value the more they are used. Traditionally it's been the exact opposite. In fact, this concept basically doesn't exist in finance other than translations into FCF...but depreciation does.

It depends on how hard it is to get going in that business. For example, in some markets (e.g. computer operating systems), it takes a big ecosystem of 3rd party companies making applications for your OS to be viable, so if you drive Blackberry out of business, you can own the smartphone market and crank up prices later. But, Google saw that coming and sponsored Android to prevent it, because they recognized that pattern from the PC market.

In the case of retail office space, it would depend on how much of the available office space you had locked up in long-term leases. If you have locked in most of the office space in long-term leases, but you are renting short-term, you can crank up your rates and in order to compete your would-be competitors would have to build an office builing, which is not impossible but is not quickly or easily done.

Not saying this was likely to work for We, just saying that's the theory.

I don't know why this is so hard for people to understand (you obviously seem to get it).

WeWork is basically a hybrid bank/retailer. They take big, complex, slow-moving long-term commitments, just like a car rental company or a bank, and repackage them into shorter-term, small commitments, while managing risk and adding a bunch of value-added services.

I don't know about all this governance stuff or their growth rates, but on its face, that activity clearly DOES add economic value, and might be a viable business if executed well.

Doesn't an REIT (that "might be a viable business") fit your description as well?

No, it's a completely different thing.

A REIT owns real estate assets.

WeWork doesn't need to own assets, they're an intermediary that does something economically useful.

If you can maintain a credible threat that you'd do it again (and win), competitors shouldn't be expected to enter the market even as you're extracting rent. This is amplified by any barriers to entry.

See cable companies.

What do you conclude from cable companies? On the one hand, competition is legally restrained. On the other hand, the cable companies are still somewhat constrained by imperfect substitutes - for instance, wireless is not a great substitute for cable, but it's enough for me to live without it.

Not as much as they use to be from what I understand. Other providers can get right of way access via the city, but building out infrastructure is not easy and is costly and as soon as they build out the incumbent will reduce their prices low enough to not make it worth switching.

The only company that can compete with the cable company at scale is usually the local phone company.

Maybe markets would just correct themselves later, but in the meanwhile a lot of people went broke and a lot of businesses closed, because a company was giving out free meals (payed by someone else who is also going to lose money). In the end who profits? Only the "charlatans" who managed to convince others to give them absurd amounts of money. Everybody else comes out with a bloody nose.

And yes, of course the strategy might work if there is a substantial network effect. But if there isn't, such as in the case of Uber, or WeWork, or even maybe Netflix, then the whole operation can only end in losses.

I work in a sector where to build a single factory it takes many billions of dollars and half a decade; if you wipe the competition, for the next 5 years you are free to ask for any price you want, by the time competition appears you are loaded with cash to kill them again.

It's more complicated than that.

When you're the sole survivor, you have a lot of options. In Amazon's case, what they have is immense leverage over the whole supply chain. Amazon extracts higher margins from manufacturers, shipping, etc, etc. And they have enough influence that people pay them $80/year for the privilege of being a customer.

Is Amazon really much more than an arbitrage on people's desire for "free shipping" at this point? The last time I wanted to buy something online, the price plus shipping elsewhere was noticeably cheaper than with free shipping on Amazon.

The majority of shoppers do not actively price shop. If they do at all, they do so passively in the form of selecting a retailer based on perceived prices (i.e. they may not compare pricing between Target and Walmart on specific items, but they may choose to go to Walmart due to the perception of Target being more expensive).

At this point, Amazon is riding on the momentum created from their previous habituation. They built up a (true) reputation for being incredibly cost competitive for the products they carried, and enabled minimally delayed gratification in the form of 2, 1, and same day shipping. Because of this, they became the retailer of first choice and people only went elsewhere if Amazon didn't have the product they wanted.

Then they widened their inventory to items that weren't as capable of being efficiently shipped in individual units with last mile residential delivery. They also shifted more and more to holding less inventory on their own books and having third party sellers fill that void. And then had to start collecting taxes nationwide so they could more easily build out their distribution network without tax-related geographic constraints. All of which led to more and more price inflation.

But Wikipedia says it best[1]:

"New behaviours can become automatic through the process of habit formation. Old habits are hard to break and new habits are hard to form because the behavioural patterns which humans repeat become imprinted in neural pathways,[7] but it is possible to form new habits through repetition."

As long as consumers default to Amazon, they'll never notice how uncompetitive some of their product pricing has become. And as long as Amazon's inventory keeps expanding and they get closer and closer to instant gratification from compressed delivery timelines, consumers will have little reason to look beyond Amazon and change their habits.

[1] https://en.wikipedia.org/wiki/Habit

> When you return prices to market value wouldn't competitors just appear again.

No, because at this point the barrier to entry is substantial. And, if a competitor does come in, the incumbent with a huge warchest can just drop the price again temporarily to drive them out.

In the case of WeWork the warchest is streched by a price war. And the barrier to entry is basically office space in the interesting locations. Just what is an interesting location changes, and real estate is plenty. So the barriers aren't probably that high. Generally speaking the point can be valid so.

I agree in the case of WeWork.

>No, because at this point the barrier to entry is substantial.

Not really. Unless the product has a powerful network effect, people can easily enter. If that weren't the case, starbucks would have run every coffee shop out of business by now.

OK, well then go open book store. Online or brick and mortar.

There's no money in it, because Amazon has such as HUGE advantage in mindshare, pricing and delivery that you can't compete.

Does a book store have a network effect? No. But it's hard to sell something for more than the dominant competitor without a compelling reason.

My mother-in-law did just that and is doing fine, thank you very much. May not be the world-beating "money in it" as you define it, but for the small business she's running it's viable.

Ask her what she thinks of Amazon and how she views the future.

Would it shock you to know these topics have already come up in the family, and have since day one? Or that she herself is an Amazon customer?

Somehow, she still finds a way to sell books and make some money, as well as highlight local authors and sell trail guides. The Barnes & Noble down the road, to be frank, seems to be her bigger headache.

Starbucks has caused a lot of coffee shops to close. Boutique coffee shops have a significant advantage however—people like variety in their café's. This exists in some industries more than others.

> Starbucks has caused a lot of coffee shops to close.

Sure, but normal legitimate competition causes worse-performing competitors to close, so some distinction should be made between this supposed "predatory pricing until competitors shut down" strategy and the normal "cause competitors to shut down by simply being better than them" strategy.

...to my knowledge, Starbucks has never engaged in predatory pricing to begin with, so at this point I'm legitimately not sure what we're discussing here.

If the question is, given a willingness to blatantly violate anti-trust law, and lose immense amounts of short-term for long-term gains, could Starbucks drive out all competition? And... I actually don't think they could, because (A) coffee shop patrons like variety and (B) I'm not clear that Starbucks could necessarily outlast e.g. Dunkin' Donuts.

Starbucks is just a poor example. Walmart would be a much better example.

Has Walmart ever been charged for predatory pricing? There have been plenty of accusations and lawsuits, but from what I've seen, they amount to accusations of having a few "loss leader" products. I can't find any evidence that either 1) loss leader pricing strategies are clearly illegal or 2) that Walmart actually prices things at a loss rather than simply cheaper than the cheapest price a competitor can offer.

This assumes that starting up a competitor is frictionless and has zero-overhead. If the market which is now dominated has a large enough barrier to entry the monopoly can temporarily return to their loss-making tactics to starve you out. Capital will rightly look at your business and ask why they should invest in it when they can just get onboard with the current monopoly and get those profits instead.

There's a reason that we had to deal with monopolies largely through regulatory means, and it's not because we were afraid of letting the market correct itself, it's because, by and large, the market does not correct itself once a stable monopoly has been erected.

For example, when you reach that scale, you may have enabled some economy of scale for you that is unavailable to your smaller-sized competitors (like Amazon). Or, may be, there's some friction for customer to switch when you stop selling a dollar for 90 cents, like with american internet operators (I don't live in US but I constantly hear horror stories about Comcast here on HN, and I assume it's similar).

As said in siblings comments, it depends on the barrier to entry of your market.

Once big (and profitable) enough, you can also just buy out any threatening competitor.

The monopoly benefits from economies of scale. The future competitor has to make every investment that the monopoly made.


Lose on every sale but make up for it with volume.


The issue is fixed vs variable costs. The scale argument requires very high fixed costs and very low variable costs. Then, once the initial hurdle is cleared, marginal costs per incremental unit of revenue are very low while barriers to entry against competition are very high. WeWork is the exact opposite of this as their leasing costs (variable) are like 90% of rental revenue.

But leasing becomes ownership - and than it's a "high fixed costs, low marginal costs" situation.

If WeWork had ownership claims to the properties it rents out then it wouldn't be in trouble. It's value would be equal to how much real estate it owns.

Go look at the history of Diapers.com, now owned by Amazon.

Diapers was purchased by Amazon -- not run out of business.

Purchased by Amazon after being nearly run out of business by predatory pricing.

Competing with a monopolist takes a lot of capital. Where would those competitors get it from? Investors would probably prefer to hold stock in a company that can extract monopoly rents, all else being equal.

> When you return prices to market value wouldn't competitors just appear again.

No, because they won't be able to raise enough capital to cover startup costs when investors know that the dominant player can just price dump long enough to starve any new company out.

Relatively unregulated capitalism works OK when the product area naturally approaches a perfect market:

- Simple easily compared products - Consumers have easy access to accurate product information - Low startup cost for producers to enter the market - No costs for consumers to switch to a different producer

Very few markets actually resemble that. In order to keep non-perfect markets functioning efficiently, it takes a lot of strong, enforced regulation.

This is increasingly true as we transition to the Information Age where products are increasingly data and services. For those, network effects are powerful, which further entrench the dominant player.

> I'd assume the market would just corrects itself later?

How? "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere.

> No, because they won't be able to raise enough capital to cover startup costs when investors know that the dominant player can just price dump long enough to starve any new company out.

For the larger company to do that, their losses would be correspondingly larger. This is why it's pretty hard to find a case history of this strategy being successful.

> "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere.

Neither is regulation. While it is true that "market failures" (imperfect markets) are common, it does not follow that regulation will improve them. In fact regulation usually makes things worse due to a combination of imperfect information (the regulators can't find out what they need to know to regulate efficiently) and regulatory capture (the regulators end up acting in the interests of the regulated industry instead of the consumers).

> > This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.

> This is wrong, wrong, wrong.

I agree with your analysis, that Stoller is wrong in this case (and I say this as a non-fan of Amazon)

> > Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example.

> The subprime crisis is completely unrelated!

Here I don't really agree with you. That whole subprime market collapse was not due to monopoly (the ostensible focus of Stoller's blog) but it was an excellent example of the phenomenon he was talking about:

1 - some people saw opportunity in subprime.

2 - they made very good returns on their relatively small and carefully chosen working set

3 - they therefore got gobs of cash to try to duplicate those returns.

4 - the gobs of cash and the early outsize returns caused many others to rush in as well, not just the many charlatans but also honest fools.

5 - All that money turned into a smoking hole in the ground that swallowed up people who had nothing to do with it.

While the example is interesting, it is indeed irrelevant to the thrust of the article, serving more for the author to show off his cleverness.

I look forward to his book but I hope his editor is able to apply some focus.

There are two ways to get to positive margins: Either drive down costs (as Amazon did) or increase price. Part of WeWork's plan is presumably to increase prices once tenants are locked in.

The big question is how much lock-in they can achieve. The lock-in is largely caused by employee loyalty. Employees who like beer and camaraderie in the evenings may be hard to persuade to move to a soulless office park.

It's a micro version of the way a city gets lock-in. San Francisco office space costs 2-5x more than Sunnyvale, because employees will quit if you move your office from one to the other.

Would 50-80% of employees quit if a company moved to Sunnyvale? Was that a serious fact?

Yes, something like that depending on the company and how committed employees are. It’s a horrible commute.

But for many companies, even 10% of employees quitting is enough reason to stick with the expensive office space.

>Amazon saw what the marginal costs could be, and had a specific roadmap to drive investment into bringing them down. WeWork fundamentally has no way to drive down the margin on real estate in any meaningful way. Especially as a lessee.

It absolutely has a way; hold landlords hostage. They've got another WeWork 4 blocks away. WeWork can walk, and leave landlords with a lot of space to lease and an expensive buildout to demo. It's quite likely that WeWork will use that as leverage to put pressure on landlords to negate rent bumps, add in a new concession, or just decrease their rent. Landlords will be in a tough spot because the option is to let the space go dark and collect nothing, or take a bit on the chin to have WeWork keep the lights on.

WeWork has a lot of long term leases, so it doesn't take many concessions for them to get their rent far below market in the years at the end of their lease. WeWork is playing a game of arbitrage on two sides; it's about risk with the landlords and about time with the rest of the market. That's how they hope to money.

I don't see how. WeWork would need to be a large player for this to work out. Landlords in office parks will rent to anyone. WeWork can threaten to walk, but the landlords can just offer the space they left to someone else - they might not supply beer, but rent is cheaper so you can bring your own and still save. Or they can offer beer if that is what customers demand. There is nothing WeWork is doing that a small Landlord cannot. Or at least nothing that I can see.

In comparison to nearly any other tenant, they are quite large and also structured quite differently. Other large tenants put similar pressure on tenants, with the clearest example I can think of being anchor grocery stores in strip malls.

The issue is not that landlords can't relet the space, but in the additional cost and the lost revenue of doing so. WeWork has large blocks of space, and in many cities, multiple locations within a single submarket or adjacent ones. If WeWork decides to go dark, that's a significant block of space coming to market, which will drive down market rates. Landlords know this.

The other challenge is that there may not be a prospective tenant willing to take the amount of space that WeWork has, meaning a lot of CapEx to split up the space just to make it marketable. WeWork's buildouts are expensive, and they likely will not work for many tenants, so there will likely be significant costs to the landlord to get new tenants into the space.

There's also a good chance that the spaces WeWork leases may have been hard to lease in the first place. There are reasons why you'd want to take another tenant as opposed to WeWork if you're going to be getting the same facerate for the space.

>There is nothing WeWork is doing that a small Landlord cannot

Yes and No. For an individual WeWork location, your correct. At that level, it's more of an operational concern which the landlord could potentially take over. However, you need tenants and those tenants are attracted to WeWork, not the landlord itself. WeWork has the brand that brings in the leases, not the landlord. We've yet to see what happens when a WeWork location goes dark. Yes, the landlord could just take over the day to day and cut out the middle man. But it's not clear how the tenants themselves would respond to that.

The other side is that landlords don't want to operate and manage these short term leases. It's the reason why there was Regus before and why WeWork took off. The thing is that Regus wasn't really a desired tenant. WeWork has been a darling, but the tides could change quickly.

Many of those pressures also apply to WeWork staying in the same place.

For WeWork to leave a lot of space behind that means they are taking a lot of space elsewhere (or going out of business) Of course they can leave one space behind no problem, but that happens all the time. (though less valuable places may run into problems it was the same problem they had before). Large tenants leave all the time, it is a cost of business: you factor that into the lease terms.

If WeWork goes out of buisness that changes things, but those renting from WeWork need to do something, some will talk to the building owner about getting a lease on their current space, so it won't be as bad as you state (it won't be good either). This same can happen if WeWork decides to move: those who are using WeWork space may decide that the location is important and see about remaining in "their" space.

It will be interesting to see what happens.

I don't think it's about WeWork leaving like a normal tenant, but simply shutting down a given location.

>Large tenants leave all the time, it is a cost of business: you factor that into the lease terms.

Big tenants leaving is something that takes a lot of effort to manage. If a tenant is potentially giving back 100k sqft at the end of the lease a landlord is going to be getting in front of that years in advance by determining renewal probability, engaging with brokers to find tenants that might be in the market, and possibly actively marketing the space even while the tenant is still occupying the space. Even with that lead time, that space still might be vacant for 6 months to a year, and that's in decent market. This is all because larger tenants don't move at the same pace medium or smaller tenants do.

As far as being factored into the leases, the way WeWork structures their leases is such that the break even point for a the landlord is farther into the future that most of their typical leases. This is mostly due to the significant build out work that WeWork does their best to get the landlords to subsidize, and the amount of free rent they ask for on the front end. Therefore, if WeWork goes dark before year 5 of their lease, then the landlord has likely lost money on that lease.

When it comes to the landlord taking over the short term rentals, some probably will, some maybe won't. Who knows if the tenants will be interested in that or whether the landlords will make enough money for it to be worth their while, but these kinds of short term rentals are not the kind of business landlords want to be in.

My understanding is that WeWork has long term commitment with the landlords, and cannot walk out of it, thus canceling their leverage.

The entity on the lease is a single SPE that is specific for that one lease. The landlords to not have the We corporation behind the lease itself. WeWork is fully aware of the possibility that their business model does not become as profitable as they've portrayed and left themselves the back door of getting out of leases. Landlords don't like it, but WeWork does not budge on this in negotiations.

They can't hold landlords hostage. The best they can do is to cancel the lease and convert WeWork into an Airbnb style platform that lets the landlord rent out their office space as a workspace. This shifts most of the risk to the landlords and WeWork can simply take a transaction fee as a middle man.

Landlords don't want to do that, or else they wouldn't have had the need to rent to WeWork in the first place. Landlords like the risk profile of having an entity in the middle. There are significant operational costs of doing this, and in some cases there may be legal or tax provisions that prevent a landlord from doing so.

Dunno why the downvoted but I’m glad somebody is willing to argue why it is a good idea WeWork leases all their offices. To me it seems nuts, but I am more than happy to hear arguments for why it makes sense.

I hope this doesn't get entirely buried at this point, but I think you bring up something interesting with driving marginal costs down.

Ostensibly both Uber and Lyft are doing the same thing, but with the item that will bring the marginal cost down being self-driving cars. They've both bet big in order to capture the market, because it's likely that whoever owns the market before that transition will own it afterwards as well.

It does seem like there was probably more optimism that the technology would materialize sooner than it really has, but assuming it materializes some time in the near future it's likely that whatever company manages to hold onto the market until then will reap massive rewards.

It's clearly a risky bet, but at least from my view doesn't seem like a pump and dump type of scheme.

> Ostensibly both Uber and Lyft are doing the same thing, but with the item that will bring the marginal cost down being self-driving cars.

The key factor in the Uber/Lyft business model is not so much anticipating self-driving cars, as offloading the overhead costs of inventory (who owns and maintains the cars) onto someone else, so they can focus on just being a service broker and not have to get into all the messy details of large, expensive physical objects. From that viewpoint, self-driving cars really improve things more for the car owners, by decoupling having the car provide a service from having to drive the car yourself, thus reducing the overhead to the car owner.

I'm not sure if there was any thought beyond "make it really big and figure out details later".

It's certainly interesting. But I am doubtful about the self-driving cars being a factor. There are at least 4 companies developing the technology and there is really no indication that it will prove a barrier to entry at this point.

Not to pick nits, but gambling your business on self driving cars being just around the corner is nuts. They aren’t gonna happen for decades, if ever. We may well have teleportation before self driving cars because it turns out that solving teleportation is easier...

Humans can drive cars, but not teleport. Driving cars is definitely easier.

Today, but if the ability to teleport (last I heard we can teleport a single particle half a meter - but not even an atom) gets the needed breakthroughs... If teleportation worked and was safe [insert other considerations that I don't know here] I'd teleport to work instead of hoping for a self driving car. Today it looks like the self driving care will be practical sooner, but who knows how the science and engineering will really advance.

The Economist had a good essay on taxi companies going back to the 1600's. Basically it's always a race to the bottom and no one wins for long. Four hundred years of history there through all kinds of changes in transportation.

Paywall: https://www.economist.com/business/2019/04/27/can-uber-ever-...

Really excellent post by OP - thank you.

> There are just as many counterfactuals to this strategy as there are examples. The scooter market is an especially bad - there is so much capital from so many companies - if you were trying to establish monopolies that would be a bad bet.

That's not a counterfactual. The fact that the strategy wasn't executed in this market, or was poorly executed, or was executed by too many people, doesn't mean it's not a strategy. It's just a strategy that is imperfect.

This isn’t what the article said. He said companies that came after amazon. Yet hacker news upvotes this the most.

It's more like this "blitzscaling" system is sort of a ponzi scheme. Keep taking money from investor after investor until MAYBE you have a massive payday.

BUT.. you haven't actually proven that it's viable business market.

> The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more.

I think the connection here is that the assets themselves were money losing but they passed them off as safe assets despite knowing they weren't safe. If I make money by producing counterfeit bills and circulating them then it makes money. It's still counterfeiting. The underlying assumption that makes capitalism desirable is that you are (supposed to be) rewarded based on the value you put into the system. If there are ways to reliably create and dump value inflated assets and those ways are easier than actually producing value, then we shouldn't be surprised when that becomes a competitive business.

Arguably this is what WeWork was trying to do by going public. I don't think anyone here who has followed WeWork over the past few years was itching to jump into day-1 buying even before the current iteration of the Neumann freak show began. Would any engineer here really have taken a stock heavy WeWork comp package in the past two years? On the other hand if you're a rando investor who just sees "oh Uber for office space!" you might line up to get fleeced.

The CDO assets were money losing but in a much more obfuscated way.

They acted like a bet where you make a dollar if you roll 1-19 on a d20, but lose $50 if you roll a 20. And because they had higher-than-sp500 returns, short sighted investors flocked to them.

The one point where WeWork is similar to those CDOs is the stack of complexity used to obfuscate the fairly simple business financials

CDO assets were money losing for people who mispriced them. CDOs are a class of instrument similar to insurance in terms of payout. You collect very regular premium and occasionally have to pay out big when a claim cones in. This is a valuable investment vehicle for people who know what they are doing. They all come under the umbrella of negatively skewed investments, that is, the distribution of returns on these investments have a negative skew. They are fat tailed to infrequent but large drawdowns. Short selling options is another strategy with this profile for example.

In this respect, I'd argue that We is very much playing the CDO game. They enter into long term leases and sell short term leases, harvesting the spread. They take on the risk of finding enough short term tenants to pay for the long term commitments, and their profit is the premium for this risk.

This trade will make a reliable but small margin during good economic environments, but they have to leverage it up a lot to actually make money over fixed costs.

What happens when recession hits? Nobody knows, but it is fair to assume that people will cut high cost, easily broken contracts first - exactly We's revenue source. On the other end, We is on hook for all the long commitment contracts.

Sure, they can just atop honoring the leases and shutter the subsidiaries who actually signed the leases, but this is signing their own death warrant because who will do business with them afterwards?

So I'm seeing a lot of indications of a negatively skewed pnl profile, with not a peep about how We plans to hedge them.

Absolutely true that a CDO is more obfuscated in terms of its actual structure. Pre-crash I don't pretend I would have spotted the risk (because my stats knowledge is meh on a good day).

I would say though that WeWork's insistence that it's a "tech company" is an obfuscation at the social/marketing level. This appears to be working somewhat, as evidenced by the various "Is WeWork a tech company?" articles [0]. Even though this time the trick seems to have been caught early it doesn't make it different in nature, just in how well it worked.

[0] https://stratechery.com/2019/what-is-a-tech-company/ https://hbr.org/2019/08/no-wework-isnt-a-tech-company-heres-... https://www.builtinnyc.com/2019/03/11/spotlight-working-at-w... (had to find someone with a vested interest to provide an affirmative answer)

No one seriously claims that IPO stock is a "safe asset". The prospectus is crystal clear about the high level of risk.

> WeWork fundamentally has no way to drive down the margin on real estate

But they can make the spaces more popular and raise their prices (thats the added value they claim). Coworking at full capacity can be quite more profitable than any other RE investment

"A bold assumption with no citations."


The author of the Yale LJ Note assumed that there is in fact a conscious desire on the part of investors to fund companies pursuing a growth over profit strategy.

If her assumption is correct, then there is no precedent for this type of investor behaviour. That explains the lack of citations.

Here are some quotes from the Note:

"Ironically, the logic that is motivating investors - the idea that it is worth encouraging platforms to bleed money to establish a dominant position and capture the market, at which point these firms will be able to recoup those losses - maps on to the logic underpinning current predatory pricing doctrine. The main issue is how narrowly the law currently conceives of recoupment, which does not account for how Amazon can leverage its multiple lines of business."

"One might dismiss this phenomenon as irrational investor exuberance. But another way to read it is at face value: the reason investors value Amazon and Uber so highly is because they believe these platforms will, eventually, generate huge returns."

More quotes:

"First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational - even as existing doctrine treats it as irrational and therefore implausible."

"Despite the company's history of thin returns, investors have zealously backed it: Amazon's shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor's 500.10 As one reporter marveled, "The company barely ekes out a profit, spends a fortune on expansion and free shipping and is famously opaque about its business operations. Yet investors . . . pour into the stock."11 "

"Just as striking as Amazon's lack of interest in generating profit has been investors' willingness to back the company.195 With the exception of a few quarters in 2014, Amazon's shareholders have poured money in despite the company's penchant for losses. On a regular basis, Amazon would report losses, and its share price would soar.196 As one analyst told the New York Times, "Amazon's stock price doesn't seem to be correlated to its actual experience in any way."197"

[Diapers example] "Through its purchase of Quidsi, Amazon eliminated a leading competitor in the online sale of baby products. Amazon achieved this by slashing prices and bleeding money,306 losses that its investors have given it a free pass to incur - and that a smaller and newer venture like Quidsi, by contrast, could not maintain."

"Relatedly, Amazon's expansion into the delivery sector also raises questions about the Chicago School's limited conception of entry barriers. The company's capacity for losses - the permission it has won from investors to show negative profits - has been key in enabling Amazon to achieve outsized growth in delivery and logistics. Matching Amazon's network would require a rival to invest heavily and - in order to viably compete - offer free or otherwise below-cost shipping."

"In interviews with reporters, venture capitalists say there is no appetite to fund firms looking to compete with Amazon on physical delivery.354 In this way, Amazon's ability to sustain losses creates an entry barrier for any firm that does not enjoy the same privilege."

"Given that online platforms operate in markets where network effects and control over data solidify early dominance, a company looking to compete in these markets must seek to capture them. The most effective way is to chase market share and drive out one's rivals - even if doing so comes at the expense of short-term profits, since the best guarantee of long-term profits is immediate growth. Due to this dynamic, striving to maximize market share at the expense of one's rivals makes predation highly rational; indeed, it would be irrational for a business not to frontload losses in order to capture the market. Recognizing that enduring early losses while aggressively expanding can lock up a monopoly, investors seem willing to back this strategy."

"In essence, investors have given Amazon a free pass to grow without any pressure to show profits. The firm has used this edge to expand wildly and dominate online commerce. The idea that investors are willing to fund predatory growth in winner-take-all markets also holds in the case of Uber."

"Though this trend departs from the history on which I focus, my analysis stands given that I am interested in (1) the losses Amazon formerly undertook to establish dominant positions in certain sectors, (2) the investor backing and enthusiasm that Amazon consistently maintained despite these losses, and (3) whether these facts challenge the assumption - embedded in current doctrine - that losing money is only desirable (and hence rational) if followed by recoupment."

"Amazon often flip-flops between showing profits and losses, depending on how aggressively it decides to plow money into big new business bets. Investors have granted the company much wider leeway to do so than other technology companies of its size often receive, because of its history of delivering outsize growth."

In a remarkable coincidence, someone will post the exact same comment in 2039:

>The difference is wework saw what the marginal costs could be, and had a specific roadmap to drive investment into bringing them down. FutureTechCo fundamentally has no way to drive down the margin on its business in any meaningful way. Especially without being the owners of their infrastructure.

What I'm telling you is, how do you know what Wework's roadmap is? You don't.

> [Company] then used this cash to underprice competitors in [market], hoping to be able to profit later once it had a strong market position in [market].

This template appears to be one of the author's deepest understandings of capitalism. It wouldn't be so bad if I didn't look at his resume and realize he was Senior Policy Advisor and Budget Analyst on the Senate Budget Committee from Dec 2014 – Dec 2016.

edit: also 2 years as a Senior Policy Advisor for a congressman


There's an intelligent conversation to be had for sure about how large firms like SoftBank are intentionally playing the market and unsavvy investors. This isn't it.

Interesting. I'm not sure I understand why one type of charlatan is more important than the other.

If you want WeWork/SoftBank to be regulated, which a lot of people do, it's kind of important that the people doing the regulating understand what they're doing.

(edit: If you think a comment is off-topic then just say so. There's no need to be so insulting.)

The 'yikes' was more a response to his credentials. I agree, this argument seems scary coming from a policy adviser.

I apologize, I took your comment personally when I shouldn't have.

For me, this whole WeWork fiasco has shown just how valuable the SEC and the S-1 filing process is. Let's be clear -- Neumann was fired because any investor who read the S-1 was mortified and wouldn't touch the company with a 10 foot pole. If anything, this shows how lawless the private markets are and the lack of guardrails that are present to protect private investors -- perhaps this will lead to some reform in the private market and more transparency, but either way I'm glad that the SEC provides such a breath of fresh air when evaluating companies with large valuations.

I think it also shows the stunning level of mass delusion in the SV VC space.

To this day I don't know whether the people who throw around and parrot the valuations actually mean it.

I mean, take the price of a small portion of an asset that is illiquid and in short supply, and assume the same price would apply for valuing the whole?

This sort of crap wouldn't fly amongst kids in kindergarten, so I'm astounded that it is being perpetuated on this scale.

I really feel like a massive reality distortion field has been pulled over our eyes by the inflow of easy money.

I don't know, it feels like deja vu. The same mistakes were done in the early 2000s, then 2008. Except we all think that back then people were idiots to not see it.

Anecdotally, no one in SV ever believed in WeWork except Softbank. I couldn't find anyone to take the Bull case on WeWork, whereas at least some people could argue Uber had a real business model that depended on self driving cars.

WeWork, and Theranos before it, are not really the norm in SV. But SV and the tech ecosystem in general has a culture of "money talks," so when Softbank and Kissinger start backing these ridiculous companies, people think "well, good for them?" and move on. Skepticism towards WeWork's model has been the conventional position since Day 1, but no one is going to argue about the validity of Masa Son's dollars.

Softbank didn’t start investing in WeWork until others had gotten it to a $16B valuation 3-4 years ago. A lot of the investors weren’t SV but some were in its history.

> others had gotten it to a $16B valuation

Which just shows how much "valuation" is bullshit. I would've thought that was clear ever since 37Signals were (sarcastically) valued at $100B in 2009:


(They repeated the joke at least in 2011 and 2015. Maybe 2009 wasn't the first time either)

Yeah for sure. I think we are on the same page. I was specifically pointing out the OP seemingly putting SV at odds with WeWork implying WeWork is ridiculous with ego, money, et al, and not SV.

Two possibilities: 1) Jamie Dimon and Softbank/Saudi Arabia are the only idiots here, and everybody else just chipped in relatively small amounts; neither could be considered classically "SV VC". 2) Similar to many people deciding to all buy the same stock at the same time, bidding it up far beyond it's real value but hoping to sell before everyone else realizes it, the VC money was thinking that the sheer size of their investment would make everyone else get on board, allowing them to cash out. A sort of "pump and dump" before it technically went public, such that it is (perhaps) not illegal, except that they did it too late in the cycle so people spotted a bad deal before buying.

Sorry I should've been more specific. I didn't mean this valuation specifically. We is really looney bin category. I mean the industry as a whole.

Oh, well in that case, it's a combination of: 1) lying, and... 2) there are no better numbers available for an early stage company. You can't go by profitability or revenue early on, because there's a lot you need to do before you get your first customer, and some of that continues to pay off. So, in the absence of reliable measures of value (a long history), they make do with the least bad method available (how much did somebody guess it would be worth).

I think also, if you have to find a place to park billions or tens of billions of dollars, it's easy to convince yourself that the $10million company you're looking at is worth a billion, or the $1billion company you're looking at is worth ten billion. The alternative is to go back to your own investors and say, "sorry, there's not enough good ideas out there to invest in, here's your money back". It's got to be hard to convince yourself that's the least bad option.

To be fair public company valuations are not that different. Sure, the price discovery is more efficient, but still if you were to sell any significant part of the stock it would lower the value of the company.


> CHICAGO — December 1, 2015–Basecamp is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.

> In order to increase the value of the company, Basecamp has decided to stop generating revenue.

Why do private investors need protection? Why can't they be held responsible for the foolishness of their actions?

> Why can't they be held responsible for the foolishness of their actions?

Because it's politically difficult. Sometimes, infeasible. The public often pays for defrauded grandmas' mistakes.

There are also positive externalities to stable business environments. Diligence costs money. Putting some of that cost on the issuer, once, is more efficient than each investor incurring it. Consistent rules around fraud and disclosure thus prompt new capital formation.

The best examples of the need for this protection are the cesspools that are ICOs.

But she can buy lottery tickets without understanding that her odds of a profit are worse than jumping on an ICO? Seems hypocritical to me.

I'm no expert about legal matters. I'd appreciate if someone else can chime in here. But I found this with a brief search:

"To be an accredited investor, a person must have an annual income exceeding $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income in the current year."

Let's say you're smart but poor. So, even after doing your research, you have to be richer to get richer? Again, seems hypocritical and feels like it does less to protect people.

Now, let's say the SEC develops a test for an accredited investor status. How is the SEC supposed to test that you can assess good business ideas/risk efficiently? Some of the smartest people took bets that seems insanely risky and were considered stupid. I don't think there's a test able to judge this.

As an aside: It would be cool if hacker news could let you attach a flair to your profile for an area of expertise, and then you could request input from people with a specific flair who are also commenting on a thread.

You sort of answered your own question. Yes, there are people who are smart but poor. But they are significantly outnumbered by those who are poor but don't have great financial/investment sense. Since there isn't really a good way to differentiate between the two, you have to choose between letting many people be scammed to enable the few to invest or prevent the few from investing to protect the majority.

In your argument, the sum of all wealth for the lower class is what's being optimized for here, which you claim is a good thing. We can prevent the most money loss by restricting movement of capital. I happen to disagree with this but's let's table that and look at an analogy.

Say you take that argument and apply it to education. Poor people are generally less educated. Does that mean we should optimize limited budgeting resources to only teach to the average denominator to maximize total knowledge among lower classes (increasing value among many, just as we did with your previous argument)? This means the needs of many outweigh the ability of a few to move up.

I don't think it makes sense to hold back a few ambitious people for the good of everyone, when those few are not adversely responsible for other people's losses.

> How is the SEC supposed to test that you can assess good business ideas/risk efficiently?

Diligence costs money. Legal diligence costs more money. Deep, expensive diligence is pretty much required for private market investing, setting a lower-bound threshold on transaction sizes.

Someone who can’t make that minimum size will thus either invest (a) more than they can lose or (b) based on insufficient diligence. The first leads to getting screwed and second leads to getting screwed.

Erm... okay, but grandma couldn't have invested in WeWork unless she was an accredited investor, and if she's an accredited investor, I'm not so sure we need to be feeling a lot of sympathy for her greed.

> grandma couldn't have invested in WeWork unless she was an accredited investor

Which is a protection around American private capital markets.

Our economy and financial systems are built on trust. Fraud makes it hard to have productive transactions. Fraud also has a massive detriment to society. It's not that private investors needs protection. It's that people who commit fraud needs to be punished.

It is the SEC's job to build trust and prevent fraud, which it looks like it's doing a great job.

It's not that private investors need protection, it's that legitimate businesses have to compete against their fountain of capital and that all of these companies employ a lot of people.

The model of driving every profitable company out of business by undercutting on price to a massive per unit loss, funded by venture capital, in an attempt to corner the market and have a pseudo-monopoly is bad for "the public" in the long run.

It's bad for "the public" in the short run also, because competitor companies are employers and they can't afford to compete in the short run.

Because the LPs who fund VCs aren't only using wealthy individual's money, people's pensions are in there too.

I generally agree with this, but:

1. Pensions are diversified for exactly this reason and VC isn't usually a large % of the fund.

2. This should be exerted through other pressures at that LP level: political, regulatory, etc...not at the GP level.

Markets are more effective when there is truth and transparency, that's why the S-1 was so effective and derailing WeWork's IPO. Private investors don't necessarily need protection but if I was a big player in the private market I'd definitely be an advocate for more transparency.

What if there’s no way to know what’s foolish and what isn’t? The protection we’re talking about here is equal access to information which is a necessary prerequisite for an efficient market.

A maximally-efficient market needs all the information. Equal access is probably less important.

equal access implies every participant has all known information, the key word here being 'known', so you're probably right, but it doesn't matter either way in the real world :)

People's pension can get dragged into this mess.

I have the impression this is what lead to the Great Depression. Lots of people were saying, well, banks are failing, they screwed up, let them fail. More recently we had bailouts because the people running things learned about the Great Depression in school.

What would it take to convince you that unregulated markets lead to fraud? Are events like 2008 and dotCom bubble unimpressive to you?

Don’t forget crypto currency. Massive* unregulated market that is probably 99% fraud.

*of course because it is completely unregulated we have no real way to determine if it is truly a “massive” market or just a relatively small amount of people painting the tape with wash trading....

Crypto is an experiment, and everyone knows that. The 2008 crisis happened to AAA rated securities.

I think part of the article's point is that private investors cannot be held responsible for their foolish because they cause "ripple effects" as externalities (eg: dismantling of a functioning taxi industry)

Because with the rise of 401k and lately low interest rates a lot of people were forced into the market who simply don’t have skill or time to learn these skills to make investments in an unregulated market.

The vast majority of 401(k) funds are in large-cap mutual funds which don't invest in IPOs. Most 401(k) plans also offer some sort of money market or Treasury bond fund. It takes about 5 minutes and zero skill to learn that T-bonds are safe investments.

It’s not like treasuries or money market return acceptable returns for people’s retirement portfolio.

What is an "acceptable" return? No one has a right to achieve any particular return.

Treasuries and money markets basically return zero after inflation.

So, at least more than zero.

I never understood how anything can return more than zero after inflation "in the long run". If it did, then over time people with that asset would have all the wealth. But if they did, then they would buy things with it, raising prices of everything else.

You may want to peruse some of the econ stuff from mit ocw:


Things don't return a lot over zero in the long run. Maybe 5-7% in the absolute best case for long term returns. Enough that even a million dollars generates maybe less than $40k of reliable income.

Most people need to expend so much of their income just to live that this mostly doesn't affect the average person.

But yes, the rich get richer. They don't always buy things proportionally more, some of it just sits there.

I never know if "the rich get richer" means the people on the tail of the distribution now will be farther out in the future, or if it means the people on the tail of the distribution in the future will be farther out than the people on the tail now.

That's actually a very good point. That's kinda why Housing will always return 0 (real return - not including all the costs, like property taxes, repairs, HOA, insurance, etc) in the long run. And if we're actually making progress on housing, it'll return negative returns.

Now as for other stuff, returns can be greater than 0 because there's more stuff to buy, later on, hence greater than what there is today. There are two components to long term returns above 0: population growth and productivity growth. In the past century we've done quite well on both fronts. Productivity has expanded at 2% per year and populations have increased by a massive 1.6% per year, add to that the 4% dividend and 3.5% for inflation and that gives you the 10% return on equities everyone is quoting.

but the future returns are expected to be much much lower. labor force size in the US is projected to grow 0.4% and per capita increase in productivity is now at about 1% for the last 20 years. and dividends are roughtly 1.8%. So, in the longer term, not including a contraction in PEs, we can see roughly 3% increase in equities on average/yearly

A return that lets you retire in this lifetime seems to be the minimally acceptable return.

Return by itself is meaningless. If you want to discuss retirement then you have to account for the other variables: consumer price inflation, risk, contribution levels, lifespan, etc. For individual workers the most practical suggestion is to save more instead of expecting high returns.

Most people don’t make enough money to save that much money so they can retire.

The number of new cars, new iphones, large houses, and other luxury purchases suggests otherwise.

Most 401ks are invsted in public companies, not private ones

The comment was about SEC and S-1. This is very relevant for 401k investors who were supposed to be the suckers to buy this crap.

Aren't all of them? I thought you could only invest in public companies that have PE funds.

401ks are rarely self directed investments though. You can pick fund types, but rarely, if ever, could you pick stocks. The 401k is heavily regulated.

And nobody is “forced into the market.”

You are basically forced into the market if you ever want to retire. Where else can the regular guy get decent returns? Real estate?

Oh, there is an alternative? As far as I'm aware every form of 'I don't want to work, but be paid as if I am' is tied to market return on capital.

Because fraud can be dressed up any number of ways, with no transparency it's impossible to know one way or another.

>If anything, this shows how lawless the private markets are and the lack of guardrails that are present to protect private investors

I would go stock up on popcorn. We may see some very interesting lawsuits soon. Unless the Saudis get him, well, the Saudi way.

While you're right, I also wonder why anyone cares if a bunch of cash-rich, overconfident private equity funds get fleeced? They're more than capable of taking care of themselves.

"Counterfeit capitalism" in the era of cheap money is probably a net benefit to the average Joe because it subsidies his co-working space/taxi trips/meal deliveries/etc.

Unfortunately the opportunity cost of those bad investments might sting many in the long run. I'm not going for any trickle down style economics just that smart investment may help a smart company blow up and solve a generalized problem. They can profit but over time that improvement might spread to another industry or company and slowly make many other groups better off sort of like how investing in NASA led to advancements in technology we all use today.

I do think there should be greater checks for private capital but then again it is their money to throw around. I just lament the lost opportunity because a 50:1 unicorn was picked over a 5:1 more generalized solution, failed, and now although billions was put back into the economy no progress was made.

I’ll bet money he was “fired” for something much more banal, like using harder drugs than just the admitted marijuana. Still probably can credit the IPO process for bringing it to light, but I don’t think taking Neumann off the tiller of this company is going to make it any more attractive to investors.

I really wish the author had sensed the limits of his argument, because I think the point he's trying to make is basically correct. He's just stretching it to the breaking point by invoking Amazon and the subprime crisis.

If he'd left the stretch goals out of it, it would have stood as a perfect foil to the avalanche of "meta-meta-meta analysis of everything except where the money's gonna come from" in the Stratechery article [0] also up on HN now.

[0] https://stratechery.com/2019/neither-and-new-lessons-from-ub...

There's a line in the Stratechery article that makes perfect sense in the context of WeWork: "Uber without an at-scale competitor is a much more valuable company."

It's the same point Stoller is trying to make: Financiers "find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor."

I can't recommend the Stratechery piece enough (or Stratechery in general).

On the contrary, given the author's myopic and rosy perspective on surveillance capitalism as espoused in the article "Privacy Fundamentalism"[1] (and apparently amended in a follow-up which is paywalled), I find it hard to take anything on that blog seriously.


Even a viewpoint or philosophy you disagree with strongly can be useful as insight into "the other side's" thinking.

Stratechery is hit or miss in my view. It epitomises the definition: "An expert is a person who avoids the small errors while sweeping on to the grand fallacy."

I'd recommend giving it the occasional gander.

A valid point.

Ben is one of the greatest thinkers in technology writing today - period.

You're only depriving yourself of an important perspective in this case.

He's open to arguments and is extremely reasonable. If you're only looking for writing that agrees with what you already believe then you might be disappointed, but if you're looking for extremely thoughtful thinking on strategy and technology then you won't find anyone better than Ben.

It's not just a blog, it's a paid publication with a ton of research and effort behind it.

The article I referenced boils down to dismissing fears of online privacy invasion as alarmism. Exploring his own site's dependencies, Ben concludes that the third parties phoned home to for every visitor are probably harmless. He recommends that discourse focus on striking a balance between technology being convenient and secure, and not worrying too much.

This essay reflects a profound failure of imagination with respect to the present and future of online tracking, and the risk it poses to consumers and citizens. This is an issue which is at the heart of the business models and strategy of the world's most powerful corporations, so in my opinion having this blind spot (or, perhaps, degree of ethical flexibility) seriously undermines the veracity and objectivity of his analysis in many areas.


Say some company found that they could pay landlords to let them borrow everyone's keys, and used them to go inside while you are out and stick an ad inside your bathroom where you will see it when you're taking a dump. Sure, the ad is harmless. But you can't just shrug it off because then you've accepted the principle that companies can pay your landlord for access to you and your house.

Wow. That is a SERIOUS mischaracterization of the article and his conculusions. The third parties in question were services like Stripe (since he monetizes with subscriptions, not advertising) or Cloudflare. His whole point was he takes privacy seriously, but fundamentalist policy punishes good and bad actors equally.

But even all that aside, by your own words, it's not his treatments of the facts but his failure to account for the worst possible hypothetical situation that you have imagined in this specific area that is most important to you that makes him an unreliable journalist on any-and-all subjects? I would challenge you that this is an unhealthy purity test for him to pass.

Except that using CDN services is a privacy hole in itself - I don't know whether Cloudflare[1] currently collects or sells tracking data on usage (including referrer information) but there is definitely a technical capability there and no legal impediment. If they don't do it now then whenever a vulture capitalist scoops them up you can be sure they'll start.

1. To be clear, I am specifically referring to cloudflare because it's the service under question. I have no opinion on Cloudflare or knowledge of any specific and current privacy issues.

Which is why that article that OP points out is such an odd outlier. In contrast to the normally wonderful and insightful reading on that site, the one on privacy stood out as total defensiveness. I’m not going to condemn the author over just that one but it was weird!

I agree, I'm pretty unfamiliar with that source personally but I did check out that article and was quite disappointed with the content of it... It didn't seem malignant but it was certainly quite ignorant of potential issues.

I think Ben is one of the greatest writers, I'm not so sure about thinkers. It's pretty easy to sound smart in a very carefully calibrated format where you get the Monday morning quarterback things that have happened after you set all the rules for the game.

He's said a few interesting things but how much of what he writes can you use to make better choices yourself? Almost nothing.

Who do you recommend reading for more actionable insight?

I was a paid subscriber for years until he started saying shit like “actually, the US giving employers control over access to healthcare is good because they can force people to work harder” and “it’s bad for China to jail ethnic populations but ok for the US because they’re good guys”.

I realized that for how insanely smart he is in analyzing business plans he ultimately worships the rich and despises collective power.

I now HN loves that kind of rhetoric but yeah, I’m not really a fan anymore.

> Again, this is not to say that privacy isn’t important: it is one of many things that are important. That, though, means that online privacy in particular should not be the end-all be-all but rather one part of a difficult set of trade-offs that need to be made when it comes to dealing with this new reality that is the Internet. Being an absolutist will lead to bad policy

I don't understand, this article seems completely reasonable. He's asking people to think critically about their absolutist takes.


Reputation and past records are not ad homs. They're reputation and past records.

That's a valid heuristic for assessment in cases where quality is hard or expensive to measure or value. Information acquisition is not itself free.

> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.

This is false.

First, Amazon is far from controlling the whole market. They control close to 50% of e-commerce which itself represents less than 12% of total retail sales.

Second, Amazon didn't predatory price, or if it did, it didn't for long, certainly not long enough to achieve its current market share. The author is mistaking Amazon's lack of profit for its propensity to reinvest all of its profit into other businesses (e.g. AWS), or its willingness to take short-term losses in order to reach economies of scale where profits exist (which, as Amazon's retail business has shown, they do).

I think you have it reversed, AWS accounts for most of Amazon's profit and is used to fund other ventures.

> AWS revenue came accounted for 13% of Amazon’s total revenue. Of Amazon’s total $3.1 billion in operating income, 52% came from AWS. [0]

[0] https://www.cnbc.com/2019/07/25/aws-earnings-q2-2019.html

No, long before AWS, Amazon intentionally re-invested all of the excess revenue that would be reported as profit back into the business instead (expanding capex and opex).

I thought aws sprung out of investment in their own infrastructure. A happy accident of sorts, not some preplanned mammoth investment in building AWS from the ground up

Not at all.

AWS, or rather S3 was a pet project of one of the very early Amazon employees who wanted to do something fun. It wasn't really taken seriously or had deep strategy at first. Once it's started to gain traction, Bezos realized the enormous potential and full-steamed-ahead AWS.

Then it took many years for Amazon retail to actually start using AWS products in any meaningful way.

That's not how profits reporting works.

Yes, so 52% of Amazon's operating income came from AWS.

Which means, conversely, 48% came from Amazon retail and other services.

In other words, it's not true to say that AWS subsidizes the rest of Amazon, or that the rest of Amazon runs at a loss.

Or, it’s true.

Amazon did predatory price for several years, subsidising sale and delivery with venture capital.

I’m baffled by the nonsense point about reinvesting profit from a lack of profit. AWS doesn’t excuse the years of cynical predation.

50% of a market is easily enough to dominate and control one, of the other players aren’t the same order of magnitude of influence.

>Amazon did predatory price for several years, subsidising sale and delivery with venture capital.

Amazon was founded in 1994 and went public in 1997, and sold more than books in 1998. Where does "several years of subsidy with venture" factor into this?

It's also hard to believe that Amazon weathered the dotcom crash while losing money.

> They control close to 50% of e-commerce which itself represents less than 12% of total retail sales.

Both of these numbers are surprising to me, can you source them? Particularly the first one, which I assume is a global measure, and I'd be interested to know what % of North American e-commerce Amazon controls. I wager I could walk outside my home and ask 100 people on the sidewalk to name one e-commerce site and far more than 50% would name Amazon first.

> I wager I could walk outside my home and ask 100 people on the sidewalk to name one e-commerce site and far more than 50% would name Amazon first.

I don't know how many people would consider the likes of Wal-Mart, Target, and Kohl's "e-commerce sites" even though they have probably ordered stuff through their websites.

I'm not the original commenter, but here's two sources [1] [2] for the 50% number, with [1] saying this represents 5% of US retail sales. It's 50% of US e-commerce.

[1] https://techcrunch.com/2018/07/13/amazons-share-of-the-us-e-... [2] https://www.cnbc.com/2018/07/12/amazon-to-take-almost-50-per...

Thanks very much. Some great other replies to my question in this thread as well.

In North America, Walmart seems to be a significant competition amongst others.

Clothing is also a big part of e-commerce, and Amazon doesn't have a good hold on that.

I would struggle to name a single online general retailer that isn't Amazon.

Unless you count, like, Walmart. Basically everyone else has some kind of niche. Amazon sells everything.

Why wouldn't you count Walmart or Target? For household consumables I bounce between Amazon and Target's subscribe and save offerings depending on whichever is cheaper.

Jet still exists (a Walmart acquisition), but I don't hear much about them and have a feeling they're not doing so great.

Naming something popular != market share.

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