Is Amazon Doomed?

[RSTarga]

I agree with much of this. And anyone who's been to the DMV or post office lately will have to agree as well. But IQ is only part of it. It's also about the type of people who enter government. I've spent some time with Ted Cruz and, love him or hate him (and I can argue both ways), there is no denying the fact that he's brilliant. What he's not, is an entrepreneur. He doesn't have the mindset that great business people, technologists, or marketers take for granted. His thinking is linear, not outside the box, and he doesn't approach problem-solving from a place of wide-open creativity where failure is both an option and, oftentimes, more likely than not (and that's OK). He's an inside the box thinker as seem to be almost every person I know in government. Call it vision, or a lack thereof.


John's right that a huge part of it is the absence of lucrative opportunities inside our government. A couple years back I attended a TED talk and the premise was that much of our government employee compensation should be performance based. Save the military $100 million? Take a 10% commission. Cut the debt by a trillion dollars? Earn a billion for yourself. It'll never happen, of course, but it would be interesting to see what kinds of people would choose to work for the government f they could get rich doing so (and honestly, not the skeevy, Clinton-style of getting rich by working in government). Would we be in a better place if Steve Jobs, Henry Ford, Jeff Bezos and Larry Ellison had chosen to focus their efforts on government rather than business? It certainly seems likely.

Actually JP, all the entrepreneurs you mention above DO or did work for the government, also Elon Musk and many many more throughout government agencies. I won't even start with the multiple contractors involved conducting war or support services. There are plenty of lucrative opportunities working for the government, the CIA even has a venture capital branch. The NIH funds most of the research behind vaccines and many other pharmaceuticals but then gives them to private companies. The government funded the internet, GPS and most of our computer development came about because of the space program. Even the first IBM computer was government funded. Going back hundred years or so, they funded the transcontinental railroad, which allowed us to reach the much despised California There are lots of brilliant people working for government, who when they leave, have the opportunity to make lots of money ,working for some of the same contractors they met in Washington. The reason the post office doesn't work is due to the regulations saddled upon it by congress so it doesn't compete with FedEx et al. The DMV, well, those are state agencies. But, this is sort of off topic, we are discussing how to restore the world order!
Economic power is never assured and certainly not constant and not guaranteed to stay with one country, however, open societies have the opportunity to bring new and fresh ideas from all over the world and reward them highly. Color me "not worried".
One last thought from an old fart. In the old days to receive a University degree, a scattering of liberal arts and Humanities courses were required. I have seen that this is no longer the case and it really seems to be leading us to this tunnel vision, siloed linear thinking mentality, as Pogo once said "I have seen the enemy, and it is us"

Ravi, it is a pleasure to see how meticulous you are even in this web chat, no wonder your car turned out so well.

[NorthernThrux]

Thanks David. For the kind words and for recognizing the role that government plays in seeding the groundwork for innovation. Governments can be intrusive and over reach at times, but the role of the US federal government (in particular) in making America the shining beacon of capitalism and innovation in the world is severely under appreciated. It set the groundwork for discoveries and their monetization that have enriched the lives of everyone in the world.

One personal example. I'm a well known MRI researcher, working in a university. Short of a Nobel Prize, I've won a ton of accolades, including election to the Royal Society. I sit on the board of a few major corporations (and also NGOs) and I could most definitely make more money than my already pretty handsome salary working for one of those companies. I've produced two startups in my life and done a lot of due diligence consulting for a number of VCs. And I pay my taxes in the US and Canada.

But would I be happy in one of those companies? Probably not. Because I have a curious mind and I like to work on seemingly inconsequential problems, or what we in academia call "curiosity driven research". Or what other people call the effing ivory tower. Highly competitive research grants fund most of my research. Those research grants come from our government granting agencies, whose funding comes from....wait for it....taxes. Maybe 10-15% comes from industrial partners like Merck or Siemens.

About 20 years ago, a student of mine and I started to try to understand the well established mutual inductance that coupled currents in two loops of wire, specifically with regard to the small radio frequency loops that constitute the business end of all MRI scanners, the so called RF coil. The age old way of doing this (going back almost 200 years to Faraday and Henry) is to geometrically overlap the two loops by a certain fraction (10-15%). Since the advent of the MRI phased array several decades ago (by my friend Paul Bottomley, working at GE Healthcare), this is what all MRI vendors have used. It's cheap, and they can make a lot of money using this approach. But it is restrictive and reduces optimum imaging performance. But nobody cared. Because it was cheap and they could make a bucket full of money without investing further.

My student Rob and I set out to change that. We wanted to give MRI RF coil designers an additional degree of flexibility with which to build new and innovative RF coils. Actually no, we didn't. We wanted to understand the noise properties of overlapped RF coils, but we needed to figure out a way to decouple them even when they didn't overlap. Something considered impossible for 2 centuries. So as an afterthought to the main curiosity driven scientific project, we figured out a simple circuit that allowed us to decouple two or more radio frequency loops or coils. So we filed a patent in 2004 and did battle with lawyers until it was granted in 2012. US Patent 8,193,812 B2 if you are interested. You know who tried to quash that patent at every step? GE. Because disruptive technologies are not in their best interest. They would have to invest more in order to redesign everything. So much for free market innovation. They were the market leader and that was good enough for them.

But free markets also involve competition, and in MRI there are 3 big multinational conglomerates and a number smaller ones. So while the American free market company had fought to quash the patent, the German one saw the advantage over its rival and bought (not licensed but actually bought) the patent from us (or more correctly from my patent holding company - I too don't want to pay more tax than I have to). Siemens bought the patent in 2014 and then licensed it to others (including GE). This technology is found in all modern MRI scanners. Thousands upon thousands of them. I'd bet a Singer Porsche that more than a few of you have benefitted from it. Maybe some of you are even alive because of the enhanced sensitivity it afforded. All for the investent of a paltry C$25k a year for 5 years by one of the Canadian Federal granting agencies.

Siemens, GE and Philips have made millions (nay, billions) selling new MRI scanners that incorporate this technology. Do I care? No. I was never going to form a company and break their stranglehold. I got a very significant and fair price for the patent. But I did get to see first hand how a former leader (GE who had the lion's share of the MRI market 20 years ago and has since lost that lead to Siemens) would do anything they could to bury a technology because they'd have to invest more in order to incorporate it, and that didn't sit right with them or their shareholders. The only reason this technology came to be is because of government research funding and bright people (referring to my student!) who just want to understand things, not make buckets of money. These should not be mutually exclusive, yet somehow in much of corporate America, they are. I have watched Bell Labs, Hewlett-Packard, Watson Labs, Varian and dozens of other technological giants shed their corporate R&D facilities in the name of shareholder value. Which puts a further burden on government to seed innovation if America is to retain its lead. Apple, Google, Microsoft and Musk are doing their share to innovate, so it's not all bleak. But most of the innovation comes in startups, not the US Fortune 500 companies. Because startups are focused on getting a market edge. Large companies have shareholders and don't like to innovate. They'd rather cut costs or buy back shares. Always exceptions, but these are my observations from being in the game or on the sidelines.

Amazon benefits massively from government research funding. For its business model and for the things it actually sells. But it refuses to invest in the future innovation pipelines by paying federal taxes. If you feel that's capitalism and that's just the way it is, feel free to decline the next MRI that the doctor orders you, or go find an MRI scanner that is more than 15 years old (good luck) and get your scan done there.

[RSTarga]

Wow Ravi, I am in awe, and again great insights.
I know that Amazon, among others pays minuscule taxes, but I would love to see what they expend in lobbying.
I am a fan of capitalism, but we do have to acknowledge that unfettered free markets end in disaster, or have we all forgotten 2008? If the government had not bailed out wall street, the insurance companies and the banks. Again privatizing profits and passing the losses on to the taxpayer. I know people will say that the government got most of the money back, but in a true free market they would have let them all go belly up with of course disastrous results.
Not to mention the elephant in the room, without the government funding the development of the Covid vaccines, and by the way letting them keep the patents when they had not incurred any risk at all, where would we be?
Another case in point closer to home: https://www.texastribune.org/2021/05...-winter-storm/
Texas bails out the power companies, but not their customers.
I am not saying any of the above were bad use of public funds to avoid disaster, but acknowledge the fact that government has a function and the private sector can not resolve everything without government. (as you have illustrated so well above).
At least the Chinese government keep a piece of what they finance.

[NorthernThrux]

Amazon spent $80M over the period 2009 to 2019 in lobbying according to the investigative reporting at the Washington Post. A paper, should I remind people, that is owned by Jeff Bezos. They spent $16M lobbying in 2019 alone. BTW, you are right David. $80M is more than the federal tax it paid in that same period. Its revenues went from $20B to $241B during that period. So on over $2 Trillion in revenue (not profit mind you - I don't have those numbers at hand. But as a guide, their margins are about 10%, so roughly $200 Billion in profit), they paid no net federal tax but happily spent $80M on lobbyists. Capitalism. Gotta love it.

BTW< it's not just the US. In Canada, Amazon has a net tax rate of -1%. That's right. We pay them to operate in addition to our taxes covering the healthcare of all their employees. My net rate is 33% and my marginal rate is 53%. I paid more capital gains tax on the sale of my patent to the US and Canadian governments than Amazon ever has. I don't employ a million people, but I have saved a few lives from my research. So yeah, that's fair too.

[jaudette3]

It's a wonderful thing to tap into the intelligence and experience present in this group. Let's keep chatting.

Cheers,
John

[NorthernThrux]

At least the Chinese government keep a piece of what they finance.

This is something I have thought a lot about. In North America, the most innovative universities have IP policies that result in inventor ownership, with a small cut for the University. It incentivizes academics to create value from their discoveries. All other universities have institutional ownership policies with perhaps a small cut to the inventor (faculty member, grad student etc). This totally disincentivizes academics from commercialization. And if the academic isn't involved, the university industry liaison offices rarely score a sale or license. It's a lose-lose model, but pervasive. What is true in North America is that none of the granting agencies take a cut of any IP. That's also true if you have US DOD funding for example (we have such a grant, for a therapeutic for concussion). So there is no federal granting agency ownership and potential pay back in Canada or the US.

In the UK, the Medical Research Council (the major health research funder) holds the IP for everything it funds. There may be a small cut to the institution or the Inventor. This is a horrible model because once again, it disincentivizes the inventor from going out of their comfort zone and commercializing a product or technique. Which means a lot of stuff remains lab-bound and published just in academic journals. It's also why commercial entities wait for the IP to expire and then exploit it. And thus why it takes so long for a lab discovery to move to monetization.

It has been estimated that if NIH took 10% of all the patent sales and royalties that come out of the basic research it funds, that could be several billion dollars a year. If it took a percentage of the actual sales revenue for stuff that was originally funded by them, it would be tens of billions. But they don't. probably because the institutions (universities) have a powerful lobby too through their senators and house members. And because the IP legal headaches would just make the lawyers rich. What is clear in the US is that both major parties support the NIH. Because both see the massive multiplicative economic benefit it has in their constituencies. That's our tax dollars, enriching our lives. But some people think free market commercial entities will produce all the research we need. Which has failed in all 195 countries in the world so far. Including the most innovative country...the good old US of A. Companies are good at monetizing discoveries. They are not so good at discoveries. Discoveries take decades. Companies operate on quarterly targets.

[nvr2mny]

Amazon spent $80M over the period 2009 to 2019 in lobbying according to the investigative reporting at the Washington Post. A paper, should I remind people, that is owned by Jeff Bezos. They spent $16M lobbying in 2019 alone. BTW, you are right David. $80M is more than the federal tax it paid in that same period. Its revenues went from $20B to $241B during that period. So on over $2 Trillion in revenue (not profit mind you - I don't have those numbers at hand. But as a guide, their margins are about 10%, so roughly $200 Billion in profit), they paid no net federal tax but happily spent $80M on lobbyists. Capitalism. Gotta love it.

BTW< it's not just the US. In Canada, Amazon has a net tax rate of -1%. That's right. We pay them to operate in addition to our taxes covering the healthcare of all their employees. My net rate is 33% and my marginal rate is 53%. I paid more capital gains tax on the sale of my patent to the US and Canadian governments than Amazon ever has. I don't employ a million people, but I have saved a few lives from my research. So yeah, that's fair too.

Why pile on Amazon here? Did they write the tax code? Maybe through lobbying they influenced some lawmakers who did, BUT, they are playing by the rules those low IQ’d govt leeches (for the most part) put in place. I do ALL I can to legally minimize my tax liability. I’m sure most, especially business owners or entrepreneurs, do. You got to be smart enough, or hire people who are, to play by the rules THEY (govt) set up.

[NorthernThrux]

Amazon goes beyond what normal businesses do. Any normal business claims its property taxes etc as deductions. Yet normal businesses still pay tax. Amazon doesn't. But it benefits from all the things we pay tax for. Does your business routinely get paid by the federal government instead of having to pay taxes? If not, I guess you are just a bad business person. Which I doubt you are, because while you can be bad in government and still continue, any business that ran as badly as the government would be out of business pretty soon.

So what differentiates Amazon from the many business people on this forum? Why does Amazon get money from the government and you have to pay the government so they can give Amazon the money? The answer is Internal Revenue Code (IRC) section 41 and applies to any taxpayer that incurs expenses for performing Qualified Research Activities (QRA) on U.S. soil. Every industrialized company has some version of this tax code. I used this IRS section to reduce the taxes owing on my patent sale by having a US patent holding company.

The intent of that piece of the tax code is to reward investment in innovative technologies that give American companies a leg up. Everybody uses it. Some abuse it. Abuse comes in how you value the R&D investments you make past, present and future. Section 41 was originally introduced in 1981 as a 2 year trial balloon. It proved popular and arguably accomplished exactly what it was supposed to. In 2015 it was made a permanent part of the tax code when the PATH Act was passed. A number of loopholes were inserted in the law at that time that allowed abuse. You will not be surprised to know which company led the charge to get those loopholes through a multimillion dollar lobbying campaign. Of course Amazon wasn't the only one. Google, Microsoft, Apple etc all lobbied to various extents.

So what's the difference. All on that list are truly tech companies. They employ a lot of highly qualified people, sell a lot of tech hardware and software and pay a lot of tax despite offshore tax havens, huge patent portfolios and R&D investment. Apple is the single largest taxpayer in the US (something like $20B per year now), and we know they dodge a lot of taxes with their Irish holding company. Do you think Apple has stupider accountants than Amazon? I can assure you it doesn't. The reason is more subtle.

Amazon is a hybrid. The majority of its revenue comes from the fulfillment business, which employs low wage, mostly uneducated people. It's not super lucrative, it's low margin and it may even be money losing in some ways. But Amazon claims all the R&D from its tech side (Alexa, AWS etc, which is totally legit) and applies that against the large, but less profitable side of the business. But it goes further, because as a tech company, it claims R&D tax credits on every warehouse it builds, which is not what the tax code was meant to support. Not only does it get land free from municipalities and sweetheart deals on property taxes, but it then gets paid by the US Government to build its warehouses. Because, you know, it's a tech company, and it is working in a socialist-capitalist hybrid model. It's a scam, is what it is. We pay Amazon to build its warehouses through our taxes. It's a subtle aspect of the tax code which says you have to build, not buy, which is why Amazon always builds greenfield. A grocery store that builds the same warehouse doesn't get the lucrative R&D tax credit, it gets other depreciation credits which are far less lucrative.

I could go on, but I won't.

It's all legal of course, as you point out. It's legal because the companies lobbied for the loopholes or exceptions, not because of low IQ'd govt leeches. There are plenty of examples in legislation of government stupidity, but many things you and I think are stupid, are actually by design. Somebody powerful lobbed for them.

Final exhibit. As some of you know, SpaceX (Musk owned) and Blue Origin (Bezos owned) were in competition for NASA's lunar missions. SpaceX won. So Bezos spent over $625 grand in the first 3 months of this year lobbying Maria Cantwell, D-Wash., the chair of the committee for what is now known in the Capital as the "Bezos Bailout". It's actually in legislation already (the Endless Frontier Act). It's $10 Billion. His company failed and we are going to pay him $10B of taxpayer money in a bailout, disguised as a 2nd option lunar lander system. Did the Apollo program have a 2nd parallel program? No, it did not. Amazon has yet to pay any net tax in the US but Jeff wants a bailout because he didn't get the lucrative NASA contract. Bezos has powerful partners in Blue Origin (Lockheed Martin, Northrop Grumman and Draper). They spent a lot lobbying too. Is this Socialism or Capitalism?

I think we can all agree the system is rigged. If you benefit from it, you think it is capitalism. If you look closely, you see a lot of socialist underpinnings. It's messy and it's not simple and the rules are made by the uber wealthy. Amazon is an easy target, but it's not the only one. Agreed. Government can do a lot of good. But it is bloated. Agreed.

[jimhuiz]

Wow. Love the discussion.

Ravi, as a past physician and educator I often took the opportunity to comment to my colleagues and students that if you want to see real smarts...go find the people who invented MRI. I still can't get over the incredible imagery provided by flipping protons. I don't get it...but there's no denying its impact visually and clinically. Crazy to think I'd finally find one of "those people" here on a Porsche forum.

Thanks to all for the thoughtful and thought provoking posts.

I'm going go look for some thick books to read...

[NorthernThrux]

This is off the topic of Amazon per se, but the story of MRI is definitely an interesting one and one that demonstrates the importance of fundamental research and the importance of taking things out of the lab into commercial ventures, where they add value to the economy.

MRI is based on the principles of nuclear magnetic resonance (NMR) which was simultaneously discovered by Ed Purcell at Harvard and Felix Bloch at Stanford in 1946, both using WW2 surplus equipment. The concept of NMR was already well described by Rabi (who won a Nobel Prize for it), and even shown in an unconventional way by him, but the practical approaches that Bloch and Purcell used also won them a Nobel Prize in 1952. NMR would go on to become an important analytical tool to this day. And of course underlie the principles of MRI.

Now comes the commercialization part. Purcell tried to get Harvard to patent the discovery, but they declined. They thought it had no commercial value, because that's how the old guard in the Ivy leagues thinks. Stanford, being the wild west and innovative, filed patents for the method and then licensed/sold them to one of their electrical engineering grads who started a company called Varian Instruments. The Varian brothers turned this company into the second silicon valley company (the first being Hewlett-Packard). It's a sad story about American corporate greed though. Varian was a leader in NMR for decades. One of their clever employees first described the multi-dimensional encoding techniques that would give rise to MRI (Richard Ernst, who also won a Nobel Prize for his work). Varian had a number of divisions. One that made vacuum tubes and klystrons (essential for microwave generation), one that made analytical instruments like NMR and one that made medical linear accelerators used in cancer therapy. The vacuum tube division was sold off to Communications and Power Industries and is still doing very well, mostly manufacturing just a bit east of where I am sitting in Georgetown, Ontario. Varian Medical had 80% of the world's linear accelerator market but couldn't get more capital to grow in the US, so it was recently sold to Siemens Healthineers. European companies have a much longer horizon for looking at profits and growth than American companies do (in general).

The NMR story is the sad one. Varian NMR also introduced preclinical and human research MRIs in the late '80s and became a leader there. The company was then purchased by Agilent in 2010. Agilent was a spin-off of Hewlett-Packard (what goes around, comes around - the two founders of silicon valley merged 60 years after their foundings). But Agilent's growth modus operandi, similar to many other American companies, was to cut costs rather than innovate. Agilent spun off its instruments division to a company in Malaysia and it closed the NMR/MRI division after 3 years of ownership. This division was quite profitable, but apparently not profitable enough for Agilent. So one of the most storied companies in US history was wiped out of existence. And another (the instrument division of HP) was sold of to foreign interests.

Almost all of Varian and HP's technologies were funded through either direct government contracts or government research grants to academics that bought all the stuff they innovated. Had there been no US DoD, NIH, NSF or other funding, these companies would never have become what they did become. They employed 10's of thousands of brilliant engineers over decades and every computer, cell phone, cell phone tower, microwave oven, linear accelerator etc. etc. has components they innovated and built. None of that would have come if only private industry was involved because private industry rarely takes risks. They want sure short-term bets that will produce black ink on the next quarterly report.

The story of MRI is also very interesting. I won't go into that, but it was also developed through government research grants in the UK and the US. It however, was commercialized first by EMI (yes, the record label of the Beatles). Beyond the company's Abbey Road studios, EMI was famous for one of its employees, Godfrey Hounsfield, who invented the CT scanner and won a Nobel Prize for that. Hounsfield also built the first all-transistor computer, but EMI didn't see that as a profitable venture (what did I say about companies and short term vision?) and sold that division in 1962, the same year they signed the Beatles. Now many people think it was EMI's financial largesse that allowed Hounsfield to develop the CT scanner. In fact it was a £606,000 British Department of Health and Social Security research grant to EMI that funded the invention. So again, that darn government inserting itself where it don't belong....because even a hugely profitable company (EMI accounted for a significant fraction of all British exports in the late '60s) would never have made a bet on such a doubtful long term investment. Socialism or capitalism?