Superstar Firms
Watching Amazon take home two Oscars last night brought home the point that they are a juggernaut, a massive business capable of throwing its weight behind all sorts of new businesses.
It turns out these superstar firms, not robots, may be the most important economic issue right now.
This piece from the Economist argues that taxing robots is a bad idea but figuring out how to deal with these superstar firms who are accumulating much of the profits in our economy is a good idea. Here’s the money quote:
A new working paper by Simcha Barkai, of the University of Chicago, concludes that, although the share of income flowing to workers has declined in recent decades, the share flowing to capital (ie, including robots) has shrunk faster. What has grown is the markup firms can charge over their production costs, ie, their profits. Similarly, an NBER working paper published in January argues that the decline in the labour share is linked to the rise of “superstar firms”. A growing number of markets are “winner takes most”, in which the dominant firm earns hefty profits.
Something to ponder.
Comments (Archived):
same reason there is wealth concentration everywhere, not just in amazon or “superstar firms” but down to the individual level also. monetary policy.
To the man with a hammer, everything looks like a nail. The monetary policy that made Amazon successful started with desks made from wooden doors.
Flywheel effect. Amzn and other so-called superstar firms have so much cash from other businesses, they can play, experiment, fail, succeed. Those that succeed finance new ventures. And so goes the cycle. Related is their ability to attract lots of quality talent.
I’m curious to know why Amazon has been so successful at “new ventures” whereas Google has not. I’m not nervous about Google’s search monopoly or innovation, but Amazon terrifies me a little in that they could flip the profit switch on at any point and bury competitors.
Flip the profitability switch…I don’t think that matters. They’re already burying competitors.
I think that a big part of the reason is that Jeff Bezos, the ‘person at the top’ is just a better business person. The man who setup the organization who was an adult when he founded it. Not 2 kids who were PHd students being guided by adults in charge and a hired gun who was, at the core, a nerd (Schmidt). Bezos was more of a slick operator. A little sleezy. The guy at the top guides who is hired and how employees think down the line. The employees that end up making a great deal of these decisions and doing the legwork. If you strip away the seminal paper that formed google, what do you end up with with the google guys? What have they done after that with their time? Maybe a great deal maybe it’s just no pr. Somehow I don’t think so. Bottom line: Bezos likes business [1] and by the things that he moves into (to make a profit) show this in his behavior. Google guys not the same. Other execs at google? Not the same. Different crew.[1] True business guys are always trying to make a buck when they see an opportunity they can exploit. Almost to a fault (see some of the things Trump has tried).
That’s a very good question. I think it starts with the premise that Amazon is more serious than Google at staying in these new markets. Google starts by treating these entries as experiments they can afford to dispense of.
I don’t know that that is true.I think the major difference is that Amazon is not by nature a tech company, Google is and they view and act towards the market in opposite ways.
“Amazon is not by nature a tech company.” Yup. They are a distribution company. And perhaps their secret is that they see that with clarity.I continue to be impressed by how well their initial name and the connotations of the Amazon River have served them over the years. Distribution to Manaus may take you 5 days on the river. By road, it’s 2 weeks if you’re lucky. The river is the only game in town. And if you can dominate that river, you can launch a hell of a lot of side businesses and see what floats and what sinks.
+1000.Distribution is the fulcrum for all successful startups. Many massive singular startups only know how to fill one distribution channel (MS/PC, GOOG/URL, FB/SOCIAL).Amazon knows how to fill any distribution channel.As a former patron oft said, Well Played.
Doesn’t Amazon’s distribution excellence pivot of it exceptional AWS tech foundation that few can compete with ?
Exactly right.Amazon founder is former Wall St person. Alphabet founders are former grad students.Philosophy matters.Bezos is incomparable though. Unlike Rockefeller or or Wilson or Gates or any other predecessor tech giant, he has pulled more than one monster out of his hat.
What you just said actually supports what I said. Amazon is more market driven, whereas Google is tech driven.
Amazon has a CTO who takes pride in the fact they have a better search algorithm than Google.
perhaps Google has too much cash to throw around and lacks discipline.
For sure.
Absolutely. Here’s a fine example of what happens when you have too much money and no adult supervision at a company:http://venturebeat.com/2017…
Amazon is a little like Virgin = they understand the importance of customer service. A lot of Google businesses have barely adequate design and poor customer service.
Great article on “How Amazon innovates in ways that Google and Apple can’t.” It argues that Amazon is much more user-focused while Google is more technology focused.http://www.vox.com/new-mone…
Google seems to take a tech-oriented, rapid iteration and fly-or-die quickly approach to every new project/product. Many die from this. Google Earth/Maps was their last big long play…. Amazon seems to take a long view, on everything, and they rarely give up. That comes from the top brass. — Comments about “Amazon not being a tech company” seem off-base. Amazon IS a tech company, just a different breed than Google. Maybe this makes Amazon better suited to certain kinds of ventures, new media?
Before Thiel wrote, “Never compete” in my copy of his ‘Zero to One’ and before I read it and before I now learnt this term “flywheel effect” (thanks!), Da Vinci and I decided that we would not go near the giants because their market power as well as the millions of startups copying them is not an interesting space to be near. https://uploads.disquscdn.c…@pointsnfigures:disqus — The problem for all the 0 to 1’s in economics, data and AI and their attendant bell curves and power laws and 240+ years of economics equations+graphs since Adam Smith’s ‘Wealth of Nations’ of 1776 is this:https://uploads.disquscdn.c…In terms of SV’s “Superstars” and Trump+Bannon, the 0’s and 1’s in the data and algorithms of the “Superstars” made them blind to the PERCEPTUAL AFFECTS of Trump’s language.So there’s a whole sphere of innovation ahead that users need to benefit from and investors need to seek out and back.
Yes. I’m coming to the belief that “jobs” and “income” are the wrong things to focus on — instead, we should direct our focus on what we expect our institutions to contribute to society/community.
Yup!Time to change governance by political ideology to governance by global societal goals and stakeholder optimizing methods.In democratic societies “institutions” are the “employees” and the citizenry are the democratic enterprise owns. Time to start putting the tail and dog in a more globally rational relationship.
MS-LinkedIn vs Twitter.https://uploads.disquscdn.c…
Marketers and business developers in architecture, engineering, and construction have always used LinkedIn (deeply, widely) because no one firm can build a building alone, and we do a lot of the connecting between firms.
Thanks, that’s really useful to know. I’ve seen a few startups trying to provide more collaboration tools to the construction industry and some experiments in applying AI to architecture design.
Yes, but Linkedin is a real pain to use, is too creepy, and it feels like people are stalking and tracking one another more than just enjoying the content. (vs. Medium).
Medium …* http://www.businessinsider….https://uploads.disquscdn.c…Twitter and Medium …* http://www.vanityfair.com/n…https://uploads.disquscdn.c…A notable thing about the “Superstar” firms is they’re clearly identifiable with 1 CEO-founder “Captain steering the ship” (Bezos, Jobs, Gates, Page, Ellison, Benioff, Zuckerberg, Hastings and others) which means continuity and coherency in product strategy and technical execution.For all we know, there may be a lot of in-fighting and “Game of Thrones”-style politicking (à la what Susan Fowler blogged happened at Uber) at the “Superstar” firms. Still, they seem to have their team play together so that’s also part of their longer term success.
A very European concern. # of SuperStar firms in Europe? Right.Technology, specifically information management, is what creates these superstar firms. Its a Valley Effect, across multiple industries.These SuperStar firms are led by SuperStar people, not just SuperStar Entrepreneurs – https://givingpledge.orgWe need more of them, not less.
Why do you think I flew 8000 km to be in SF when I could be with my widowed mother and taking care of her? SF is the epicenter of end-to-end integration, innovation and business models (search, advertising, recommendations, content delivery).Jan 2016, I shared my idea with one of the top incubators in the U.K.: measure people’s perceptions via a Web app embedded into a key U.K. media property they have a relationship with. A media property that’s struggling — given Facebook’s newsfeed dominance and that needs to know their readership as well as Facebook knows its users, so this is a REAL BUSINESS NEED because the media property is losing out on $20 million in revenue.Whilst I was in SF in early 2016, I kept the incubator updated; with a view to creating a “Superstar” startup in Europe.July 2016, I returned to London and submitted a technical spec with a specific use case: measure Election 2016 perceptions with a simple surveying MVP. The incubator has a PhD in AI, a team of product people and 10 or so engineers who could have been resourced.Yet I got an email saying that none of them or their network of PhDs knows how to make such a Web app or simple surveying system for the AI era.So this is the state of play (even before we factor in the Brexit thing):https://uploads.disquscdn.c…The irony being I’d already designed and coded the prototype of the system. A SYSTEM THAT HAS PASSED THE PRIOR ART TEST in the patent process, including successful defense differentiating it from systems by MS.So that is an example of some of the bottlenecks and barriers in Europe that explain why it has 0 “Superstar” platforms.Meanwhile, tomorrow night, I’m giving a lightning talk at Galvanize in SF on ‘How to Disrupt the Scientific Method to Solve Natural Language Understanding.’ NLU is the Holy Grail of AI that not even Google-Stanford can solve.* https://www.technologyrevie…Galvanize train the developers, Machine Learning and Data Scientists of the Valley.Yes, this little bee has had the hardest journey of all little bees to get a systems invention out to market.This is why I’m taking a random walk on March 11 (anniversary of my Dad’s passing) and eating a LOT of ice-cream on that day. I need the comfort after all the sexism in tech, all the unscientific nonsense I’ve heard spouted by some Professors of AI (and their disciples) and the lack of guts, curiosity and know-how of some investors I’ve experienced.
I should add that I do have a list of investors, engineers and other talented people/communities whose guts, curiosity and know-how I respect tremendously, am grateful for and learn a lot from.
Wow. Say what you really think! :-)Good luck tomorrow. Will a stream be available?L
Haha, thanks. I’ve slogged away for years to invent this system so am allowing myself a day or two to vent.The other 360 days all I do is put in the work to solve the problems of making technologies that are more representative of us, so better able to understand and serve us.My Dad’s passing was the worst and best thing that happened to me. The worst because, obviously, he was a very important part of our lives.The best because it made me learn more about Neuroscience and to have the “lightbulb” moments that the signal:noise problem in my Dad’s brain is similar to the signal:noise problem across the Global Brain that is the http://WWW.And those signal:noise problems can be solved by inventing new tools,
Think you can still be an optimist here. The analog I think about is the rise of railroad monopolies in the 19th C. Tremendous concentration of wealth, but it also was the catalyst that opened up the western US to all kinds of wonderful economic spillover effects. We need to keep our eye focused both on the “infrastructure monopolist” and the benefits they leave in their wake.
How do we codify the metrics by which we define the acceptable limits of various flavours of monopoly power and the potential methods for monopoly end point transitions.Now that is a truly complex economic food fight chockfull of unintended consequences especially given our present transitioning into a network-effect economy.
Amazon reinvests profit and we get AWS. Aren’t there other superstar firms to worry about?https://en.wikipedia.org/wi…
supersuck firms
Whenever a firm reaches monopoly or monopoly-like status, it essentially becomes a utility.. it’s wealth is created by the members of society and it’s value should accrue more (not completely) to society than shareholders… we saw this is energy, then finance and now tech… #basicincome
Peter Thiel had it right in Zero to One. The winners of blow out businesses become One. Tech has enabled monopolistic monoliths. The funny thing is, some of the monopolies are fragile. If everyone quit using Google for search they’d lose their primary profit stream.However, the market would probably fragment, then re-arrange again into a new monopolistic type of business resembling the same network as before.
Thiel backed Trump because he saw the potential of a 0->1 situation:https://uploads.disquscdn.c…
i don’t buy that.
Trump has changed the game — whether some of us like it or not.He did go from 0 to 1.
True.
I think it’s still too early to draw conclusions in all of this. It is new territory with little data and less clarity on the full picture.
The economist has been trying to be right and first for decades and has done neither particularly well.
A growing number of markets are “winner takes most”, in which the dominant firm earns hefty profits.This is one of those statements that sounds great until you unpack it to find that it is meaningless. What does ‘a growing number’ mean anyway? Quantify that. [1] Take a look at the dollars that you spent last year in total. How many of those dollars went to ‘winner take most’ businesses? Housing? Not winner take most. Autos? Not winner take most. Food? Not winner take most. Entertainment? Not winner take most. Travel? Not winner take most. Dining? Not winner take most.[1] This is like the Nightly News saying things like ‘and there is a growing concern’ referring to the fact that a few people have started to complain and raise an issue. Like .000001% of the population.
“”A growing number of markets are “winner takes most”, in which the dominant firm earns hefty profits.”” IE > Competition is for losers ? : /
Greenspan on the decline of productivity:https://www.forbes.com/site…
Fred, your moral compass is admirable and your VC cred speaks for itself. But taxing robots is a terrible idea. I’m “capitalism with a human face”…but not literally. Innovation and efficiency should be encouraged not squashed. Maybe train some more people to maintain the darn robots.
It’s fundamentally false analysis when The Economist suggests that superstar firms are accumulating much of the profits (economic surplus) but that we shouldn’t worry about the robots/automation that enables it. The overlooked factor is that the way our current system is structured, Amazon is strongly incentivized, as is every business, to drive down costs through automation, and a large part of the reason why is that human labor is heavily taxed (employment taxes, social security, healthcare, retirement, other “benefits”), while machine labor carries no such burdens, putting people at an enormous disadvantage as the cost of technology falls exponentially. If we taxed the economic output of all the resources used to generate profit equally (as machine output becomes more productive, it automatically generates more taxes), it would automatically distribute the gains more equitably.In Amazon’s case, despite being a near monopolist, they do not behave as a traditional monopoly. They do not extract excessive profits, nor try to gain regulatory advantage, nor abuse their market power. On balance and compared with historical examples of companies who have gained such market power, Amazon is very socially responsible and because part of their secret is that they try to minimize, rather than maximize the retained economic surplus, they are also very hard to disrupt. As long as they are a “benevolent monopolist”, they shouldn’t be penalized for their success, or subjected to unnecessary regulatory controls.We should only worry about “superstar” monopolies like Amazon when they have a detrimental impact on markets and consumers, not when they provide a net benefit. We should monitor for signs that a monopoly position turns exploitative, and the market power is abused, harming consumers, competitive upstarts (potential disruptors), employees, or other stakeholders. The most important thing we need to do is protect the ability of future disruptors to create even better systems and compete in a free market.On the other hand, our governments and social systems for the past 100 years have been structured based on taxing human labor, and when there is less labor to tax, there is less money available to support social infrastructure and to assist those impacted by forced career transitions to make the necessary changes. Taxing robots as if they were people, at the same rate of economic output as a human doing the same work would have generated, has several immediate positive impacts. It would more equitably distribute the productivity gains of automation, enable support for the social infrastructure (including education, whose cost via tuition and student loans is already unsustainable, but the unsustainability is increasing exponentially as lifetime learning becomes the norm), build the negative externalities which are currently borne entirely by displaced workers into the cost of deploying automation placing human labor at less of a competitive disadvantage (after all, if human labor is taxed, but machine labor isn’t, that’s a big part of the reason that it makes economic sense to replace people with machines), and slow things down just enough to be able to absorb more people back into the system.Long term, a tax system which is mostly based on employment income is structurally flawed (and this is the reason why this is a problem at all), and incentivizes the fastest possible deployment of automation, and we should figure out how to replace that system with something that doesn’t reward business for putting people out of work by avoiding taxes. Elimination of income taxes altogether and replacement with consumption taxes might do the trick, although it will likely take us a long time to agree on such a massive change, and there would naturally be objections from those who believe consumption taxes are regressive. (My view is that income taxes increase the inequitable distribution of income, and are part of what creates and amplifies the regressive nature of the system). Taxing the deployment of automation would go a long way to correcting this problem, and distributing the increase in economic surplus more fairly across society.In a scenario such as that described, I don’t worry about a company like Amazon, or Google, which both seek to minimize their margins and retained economic surplus and end up in strong monopoly positions as a result. They, and any who follow this pattern, provide net social positives (unlike, for example, big pharma which behaves in exactly the opposite way as a rule).We need to stop thinking like this is still the 19th century industrial revolution, and start thinking about how systems should be structured for the betterment and protection of all. Worrying about Amazon’s power when they haven’t done anything to abuse it, and not recognizing the self-regulating power of disruption (so long as the ability to disrupt is protected from interference by incumbents or regulators) is 200 year old thinking, and we need to get over it.
So if corporations can be adjudicated into being persons with attendant rightsthen so should robots be granted the same personhood status with the attending tax implications :-)”Long term, a tax system which is mostly based on employment income is structurally flawed” I think that generic assertion baits the hook for a much broader/important set of question than just the robot focused one you have cleverly pointed out here. It might be and excellent starting point around which to debate/develop a more meaningful/fair/productive tax reform strategy.
Of course, I think it would be better to fix the tax system, but it’s clear that one of the unintended consequences of taxing income but not capital is that capital has a huge unfair advantage when calculating ROI versus human labor. If you want to retain an income-based tax system, then I think you have to tax the output of capital investments to level the playing field. If people are cheaper in that scenario, then a) their jobs won’t be automated away, and b) when they are, we have the same tax revenue (or more) to support social systems, retraining, etc. Socially, we all share in the gains that way.The only other option is to eliminate income tax, which is overly complex, arbitrary, full of loopholes and unfairly penalizes the middle class, and replace it with a consumption tax. This has the added benefit of making the IRS, and tax lawyers and tax accountants unnecessary, taking away the incentives to cheat, and creating a fairer, more efficient and more predictable tax revenue stream. I prefer option B, but realistically, I think it would be easier to accomplish option A.I would never suggest that machines should have rights (I get that you had a tongue planted firmly in your cheek), but some think that’s reasonable, so I hesitate to even pay it lip service.
A simple fix would be a plan that shares the increased profits with workers who are working more efficiently with more and better technology. But don’t pay that out in cash, use it to purchase shares so if and when the worker loses his or her job to automation they’ll continue to benefit along with other shareholders, a form of crowdfunding you could say. One nice feature of this model is that the longest serving workers, the ones least able to adapt to changing job markets, would accrue the most benefit over time. Seems more aligned with our capital driven model than taxing efficiency increases.
I would agree with this if we did not add huge tax burdens on human labor. But since we do, it puts people at a distinct disadvantage when ROI is calculated for a capital investment in automation. We either need to eliminate income taxes of all kinds, or tax automation to level the playing field. If we don’t, we pay for it in much more socially harmful ways.
Is this not the job of the market to suss out? If human capital has a competitive advantage, firms will find ways to entice them. Most outcomes will be economic, sure, but there are intangibles that others may value more.This is why I cannot get angry with what a private firm decides to compensate its executives: industries are condensing, leading to fewer CEOs at the helms of ever-consolidating corporations controlling more resources than ever before in our modern history.If you’re lucky enough to attract a Jeff Bezos with $50M annually, it seems the shareholders are getting an absolute steal.
Huge transnational firms = huge financial resources = huge resources for lobblying = distortions in political decision making to advantage those firms (clientism with favorable law) = generation of superprofits (economic rent)
All of that is irrelevant if they don’t actually behave this way. Contrast Amazon behavior with the pharmaceuticals industry where EpiPens have quadrupled in price in less than 5 years, despite no new IP or changes in cost. Or, the price of insulin, a drug that’s been around for almost 95 years with only relatively small changes, tripling in price in the last 4 years. Products like this have zero elasticity of demand because the patient has no choice — if they don’t have access to them, they die. Amazon has an earned monopoly (they got it by competing to do things better and more efficiently and targeting low prices. I could name dozens of pharma products (and there are probably hundreds, if not thousands of similar situations) without thinking very hard where customers are being taken advantage of and the patent system is being grossly abused.Why would you imagine that Amazon’s power is harmful or risky while permitting the rapacious behavior of pharma to continue unchecked? Shouldn’t we worry about where the problems really are?
Do you really think it’s pharma? Maybe it’s the FDA creating artificial bottlenecks on innovation. That could be in a response to lobbying, but if you didn’t have the federal agency to begin with lobbying would be moot. Nearly every problem can be traced to government intervention. UBI (which I believe you’ve rejected in an earlier comment) does nothing but promote a coterie of the population that has no marketable skills. Is this really good for the species?
Yes, I know it is pharma. I’ve been watching the industry carefully for a while. There are some bottlenecks, but this is more about laziness and greed.Pharma profits are skyrocketing, and it is a very big part of the increasing cost of healthcare which Obamacare did nothing to address. Consider that a single disease, diabetes, is directly responsible for 20% of spending on healthcare, and indirectly a lot more due the secondary effects such as heart disease, neuropathy, blindness, loss of limbs, kidney and liver failure and more. 1/3 of medicare dollars are spent on diabetes care. The average cost annually for diabetes care is approaching 20K/patient, with 2/3 of that for medication, testing supplies and other equipment.Consider also that the doctors who discovered insulin in 1921 donated the patents to the University of Toronto to keep the costs low so that every diabetic who needed it would be able to afford it. Unfortunately, the three companies that control most of the production of insulin today globally do not have similar attitudes, and continue to raise the prices every year despite the drugs being off-patent, low cost to produce, and very little in the way of new formulations, research or costly regulatory hurdles driving up cost. It is 100% about profit. One specific example: Humalog was priced at $21/vial 20 years ago. Today, off patent, the same product costs $255. All insulins have risen along a similar path — the range of costs for different formulations by vial (the cheapest way it can be purchased) ranges from $241 to $283.Martin Shkreli is the poster boy for bad behavior, raising the price of his company’s medicine by over 5000% in one jump from $13.50/pill to $750/pill, or $75,000 for a bottle of 100 — for daraprim, a 60 year old generic (except it has a monopoly because no one else makes it) drug to treat toxoplasmosis. We don’t know the production cost with certainty, but it is estimated to be around $.20/tablet — it cost about $1/pill ten years ago at the pharmacy. But, he is only the least ethical of many bad actors, and unfortunately gives cover to the insulin manufacturers who look positively moral in comparison.Understand that I am a big believer in capitalism and free enterprise, however capitalism is a social system that depends on a free market. There is no free market in pharmaceuticals, only monopolies (for drugs still subject to patent protections) or cartels (for those without). There is no competition to speak of, and patients do not have a choice — it’s like someone got IP rights to air, and started charging everyone $500/month to breathe. This is an industry which to my mind has forfeited the privilege of setting their own prices — all product pricing should be done the same way we regulate utility pricing. It is an essential service, and should be treated that way.Amazon, on the other hand, is not an essential service, but competes aggressively with fair pricing and constant innovation. Of these two, it’s clear to me which one is a danger and should be regulated.
I found this and admit the author probably has biases, nor did I read it carefully (http://www.post-gazette.com…. The synopsis, though, is that drug treatments in other markets are substantially cheaper. Is that A) because the government is forcing pharmas to make the drugs available at a loss, or B) there’s no market monopoly created by agencies like the FDA?Many health practices view welfare programs Medicare and Medicaid as an endless ATM. Why bother curing patients when the taxpayers foot the bill for ongoing procedures? This type of relationship further unshackles personal health responsibly, which creates a downward cost spiral.The government has no business usurping private property (taxes) and reallocating it via patronage (votes). The republic prospered for many generations without taxes and welfare. I find it disheartening that there exist otherwise educated voters who do not understand the inevitable demise of democracies, including the author of this blog.Is not the better question how to create more competition? I contend abolishing the FDA is a start. In private industry we use coopted standards bodies and see no reason why the same cannot apply to health-related issues. Lord knows there are enough attorneys looking for work should corporations mislead their customers.
Governments are not forcing anyone to make drugs available at a loss. it is the opposite that is true — in the US, we have no controls at all, except to shame execs in congressional hearings when they raise the price of a life-saving 60-year old drug by 5000%, knowing that they are the only manufacturer and that people (or their insurance plans, or medicare) will have to pay for them to survive.The problem is that we don’t see the forest for the trees. We believe in capitalism and free enterprise, and allow pharma rhetoric to exploit that philosophy, while we forget that they have 20 year patent protection (monopoly pricing), abuse of patent extension rules (minor change in drug formulation that has no therapeutic benefit, but enables prices to stay higher for longer), and that we’re talking about an essential product where there is zero price elasticity — they can charge whatever they want, because without their product, you will die.Other countries have used rules like mandatory licensing of patents to generic manufacturers, or imposed price controls similar to how we regulate essential utilities (e.g. water and electricity companies are given the ability to make a profit, but their prices must be approved). I would propose a radically different solution for pharma (it would take pages to outline, because all the assumptions are different from how things are done today), but either of these approaches would immediately put brakes on the spiraling cost crisis.I agree that governments should not usurp private property, but you have to keep things in context. Patent protection is a privilege, not a right. The period for which patent protection is extended is arbitrary, and could be anything. It doesn’t need to be 20 years — a period that pharma lobbied for aggressively, and has done nothing but exploit (it has not resulted in increased research spending, for example).There is also nothing that dictates that pharma should be doing the basic research and owning the patents, or dealing with the immense trial period risks and costs that have been used to justify longer patent protection. The current system incentivizes the bad behavior we see, and attracts immoral leadership — it has high barriers to entry, and all the rewards accrue when a new blockbuster drug gets approved. Since all the power resides with pharma execs (impossible to negotiate a fair price when demand is absolute, and they know you need the product), this is what you get.Consider that Martin Shkreli actually went through this logic when considering whether to acquire the product whose prices he jacked up ruthlessly. Internal memos show that he determined they could charge whatever they wanted as “value pricing”, suggesting that since the product was life-saving, it was reasonable to spend up to $100,000 to save a life. The fact that the cost to produce that much product was less than $10 (a lot less) never entered into the calculations. He knew they had a monopoly position, that buyers of the product had no choice, and that it would take a considerable time for a biosimilar or even an identical generic to make it through the testing and approvals process, and that is how a 60 year old drug gets a 5000% price increase. As I’ve noted, this is only the most egregious case — this kind of thinking and rationalization is common in pharma. The only way to fix this is to take away their ability to exploit the public.For all the reasons noted above, pharma is one of the most profitable industries on the planet. Pharma is profitable in every country, even those with the lowest prices. The FDA is part of the problem, but they are not the problem. They didn’t create the system, they just administer it.Creating competition is easy, and fixing what’s broken is easy. We just have to have the will to do it, and not be persuaded by false rhetoric about free enterprise (when it doesn’t exist). One of the most important things to do is to realign incentives. I would have no problem with pharma making obscene profits if the way they earned them was by competing to be more cost efficient than other sources and by searching for cures rather than maintenance drugs that serve as long term annuities, rather than by lobbying congress to change the rules in their favor and to turn a blind eye to their systemic abuses.
The 20-year patent could be arbitrary, or it could be steeped in historical economics: the R&D cost to develop a drug is so large (ironically much of it for the FDA approval processes https://www.fool.com/invest… that firms need two decades to earn respectable financials to attract lenders and shareholders. I am not intimately familiar with the nuances but a cursory look at Ely Lily’s financials show a 23% EBITDA margin, which is less than companies like Google and substantially less than Apple.Since you seem much more educated on this topic than I, how is it that Turing has a monopoly on a drug developed 60 years ago (according to your text; I have done no research to confirm this statement)? Wouldn’t that be off-patent and available as a generic?I am genuinely curious to learn the actual cost for drug development. If we eliminated regulation, would the entire industry be more competitive? I’ve found this light history incredibly elucidating (http://www.econlib.org/libr….Thank you for a civil discussion. You raise great points and not once did anything become personal. If only the majority of our body politic reacted accordingly.
Before Shkreli purchased the company/product, it was priced at $13.50 a pill (the price was much lower than that — about $1/pill a couple of decades ago — but each time the company has been acquired, the new owner has raised the price). Toxoplasmosis isn’t that common a disease in the U.S., although it is estimated that about 60M people may have the parasite that causes it in their bodies (often from contact with cat feces, or eating under-cooked food). As long as they are healthy, their immune system can deal with it, so the disease manifests most commonly in people with compromised immune systems (for example those with HIV/AIDS). It’s more commonly seen outside the U.S. due to lower standards of hygiene or tendencies to not cook their meat thoroughly.In the U.S., in a typical year there are between 400 and 4000 cases (average is 2000/year) that require treatment. (Doing the math, total possible profits between 500K and 5M annually at the price before Shkreli). Because of relatively low demand, there wasn’t reason for more than one company to make the product at the going price before Shkreli acquired it. It was profitable, but not enough to support multiple companies offering it. Of course, without running the numbers, those are all subjective statements, but pyrimethamine (the drug name vs brand name) costs between 5 and 10 cents a pill in other countries, and they are making money selling it.What’s also important to know is that Shkreli was actively searching for life-saving orphaned drugs sold by only one company with the specific intent of leveraging inelastic demand and monopoly provider status to raise the price. On top of that, he changed the distribution method after acquisition to be direct from Turing so that possible generic makers would not be able to acquire samples of the product to reverse engineer and prove medical equivalence, doing a complete end-run around the FDA process.There are many drugs like this (probably the majority actually), where the incidence of the disease doesn’t justify more than 1 or 2 companies making the product. Patents may have expired long ago, but generic makers tend to focus on drugs with higher volume sales. Even with those, it costs a lot to prove the efficacy of your drug to the FDA and takes a long time to get through the testing process, even when you can prove it is medically equivalent to existing products. Those barriers to entry explain how an unscrupulous operator can take advantage of the system.It used to be that pharma saw themselves as part of a social compact, like doctors. Their job was to heal people, not maximize profits, and prices were set based on reasonable margins above cost to produce (rather than how much are you willing to pay to stay alive). A big part of the problem today is that we’ve put insurance companies in the middle, so pharma doesn’t have to justify to individuals why 100 pills should cost $75,000. They just stick it to the government or insurance company. You see ever rising premiums (mine went up 40% year over year this re-enrollment season, even with higher deductibles and lesser coverage), but you don’t have any idea why.The irony is, insurance is structurally unnecessary, but since they want to make 15-20% margins, it has effectively added 15-20% to the costs directly, and indirectly made it possible for suppliers to jack their prices thinking they aren’t hurting anyone. That, and legal costs, represent at least 80% of the excessive costs of our system.We are now the most expensive system in the world, but only 34th in the world in terms of quality of health. We would have been far better off getting insurance out of the middle, going back to the way my parents paid for healthcare (out of pocket), with direct assistance for low income patients that needed help, and only having insurance for catastrophic needs (major car crash, heart attack, cancer, etc). Using insurance to pay for regular checkups and maintenance drugs is just dumb, but we inherited that from union negotiations in the 1960s where it was seen as a cheap benefit that people wanted but cost less than increasing salaries. Eventually, everyone got it through their employer, and that’s when the price escalation really began.Imagine if pharma had to explain to you and I directly why they are entitled to 500% margins on old products without substantial r+d investments, and especially what would happen if it was easier for competitors to enter the market and we accepted more risk (put caps on medical lawsuits, for example, and raised the bar on what sort of claim could make it to court vs being settled by arbitration).Like I intimated earlier, the system is only difficult to fix because of entrenched interests. If I was Trump, I would expend a bunch of political capital to blow the system up and attack costs directly, and not bother tinkering with Obamacare, which just institutionalizes the problems. I don’t think he will, but it will take someone who is prepared to be unpopular for a while or a “bull in a china shop” to get it fixed.Don’t believe anything pharma tells you about the need for longer patent protection. It used to be shorter, and they didn’t have any trouble making money or paying for r+d. On the other hand, if you were paying a quarter of a billion annually to lobby congress, you’d expect something in return, no matter how you justified it. It’s complete baloney that they need 20 years to make a return.It would be more reasonable to eliminate exclusivity after 1 year, and then mandate compulsory licensing (with regulated licensing fees) to anyone interested in making it, including the precise formulation so it doesn’t require a new round of testing to get to market. Let companies compete on efficiency, and remove the incentive for 20 years of riches from blockbuster drugs. This is not my preferred choice for fixing things, but it is a quick fix that could be done almost overnight.Shkreli is only the worst offender. Pharma has been routinely jacking prices of old drugs by smaller increments of 50 to 100% annually. Their reasoning is always the same: it costs a lot to do research. But it costs nothing to research old drugs which have been the same for generations. Quadrupling the price of insulin in less than 10 years is just as unconscionable to me, and more problematic, because diabetics need it for life, not just a two or three month supply. Costs have not risen so what is the justification? The reasoning is simple: line up at the public trough and use the system against itself to take as much as you can. Greed, pure and simple.And, it’s ridiculous to compare margins to Apple, or any tech company. Nothing Apple does is essential, and they have lots of competition. I don’t have to buy their products, which means if people choose to buy them, they are getting good value. Also, Apple prices as a luxury product, but since it’s discretionary, that’s perfectly fine. And software products like Google’s have a completely different set of economics than manufactured products, although the majority of Google’s revenues come from adwords, and buyers set their own prices for that, so it’s hard to argue how that could be unfair either. Moreover, tech companies invest enormous sums in r+d for product cycles that refresh every 12-18 months, so they have to recover their costs in that amount of time, and we all know that’s part of what we’re paying for — it’s just not a similar model to drugs at all.re: civility. I don’t believe that politics should be a team sport, and am generally disgusted by it and dislike engaging with people whose opinions are made up a priori based on which team they play for. I prefer to stick to facts, or opinions that are supported by facts and principles.
But all large corporations do behave in this way. In fact such behavior is the norm. And it does distort free market economics.”In economics, economic rent is any payment to a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In neoclassical economics, economic rent also includes income gained by beneficiaries of other contrived exclusivity, such as labor guilds and unofficial corruption.”https://en.wikipedia.org/wi…and”Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy” Francis Fukuyamafor an excellent analysis of contemporary US capitalism.You have a sensitivity about big Pharma, which is fine. You are clearly correct that such abuses exist. But don’t you think that countless other large companies employ their economic power to lobby for their corporate advantage? Do you have reason to believe Amazon is likely to be or to remain an exception in this regard?Amazon has consistently increased the funds it has committed to lobbying. https://uploads.disquscdn.c…and this article”Why Amazon is doubling down on Lobbying”https://www.washingtonpost….I think it is highly unlikely they are spending this kind of money for no reason, don’t you?No large corporation can avoid spending money to protect and expand its corporate interests because its competitors are spending the money to bend the state to their purposes. It’s the reality of our system for ALL such companies. Amazon isn’t lily white.
No, “all” large corporations do not behave this way. That is provably false on the surface — Amazon and Google don’t (numbers 2 and 5 on the largest companies in the world by market cap list), Netflix doesn’t, Walmart doesn’t — lots of companies have become big and established de facto monopolies, but don’t extract excessive economic rents.I have a sensitivity about pharma because they abuse the social contract (which is what patent protection is) that guarantees a temporary monopoly to help promote the “progress of science and useful arts”. There are other industries which have acted similarly (music + recording arts, for example, which is why they became immensely vulnerable to disruption by Apple), where they invest more effort in lobbying for laws to prevent future competition and technological advancement than in providing better solutions for their customers, but pharma is special because a) how extreme their abuse of the system is, and b) how dependent their customers are (they don’t have choices),Pharma spends hundreds of millions annually lobbying congress to protect them from change ($2.3B spent on lobbying over last 10 years, and the number 1 spender for lobbying for 6 years in a row, $244M spent in 2016, with a budget increase of over $100M for 2017 alone to fight prescription price controls), and to protect abuses like patent extensions for miniscule changes in formulations, protecting themselves from foreign competition where producers have demonstrated they can create the same things for a fraction of the cost, and to buy cover from the protests about rapidly rising costs. All the while, we have diabetics (just one example) who are literally having to make the choice to eat or buy drugs or who can’t afford their drugs at all.Understand that I gave price changes over the last 10 and 20 years, because that’s a time horizon most of us can grasp in terms of changes to income, inflation, taxation, job growth potential, but if I go back to the 1960s, it was possible to buy a vial of insulin for about $1, and pharma was still making a lot of money. Cumulative inflation in CPI since that time is approximately 12x, so even allowing for extreme changes in cost of production, a vial of insulin should still cost less than $20, not $250. There is no earthly justification for this, and you can see this directly by crossing the border to Canada, where you can buy the same product over the counter (without insurance) for less than the co-pays in the US.As I said, the justification for free enterprise critically depends on free markets and competition (going back as far as Adam Smith), and there is no effective competition, and pharma industry execs have lost touch with the reasons their products exist, and that there is an implicit morality embedded in the product when your price dictates whether someone lives or dies, or is impoverished.On top of all this, I have an even greater frustration with how ineffective Obamacare, whose ostensible purpose was to make healthcare affordable, has been. Ensuring people can buy insurance does not reduce costs in any way — in fact it tends to increase costs (something most of us have directly experienced) as it insulates people from even knowing what the real costs of products and services are and how fast they are changing. If you want to reduce costs, you need to attack where the costs are, and the structural issues that create those costs, and you need to ensure that free markets can operate and that there is competition. Economics 101.My point in raising it however, is to contrast with a company like Amazon, which is an amazing company that built its market position honestly, aims to keep prices as low as possible, innovates like crazy, and just keeps growing because it does such a good job of all these things. Why would anyone focus on Amazon as a threat, when they’ve done nothing wrong and have not exhibited any monopolist behaviors, while we allow pharma to run roughshod over us, bankrupting our heathcare system and many of its patients?Tinkering around the edges, especially by government, is what got us in this position. If you want to fix problems, you need to focus on what causes those problems. The Economist’s analysis is wrong because it focuses on controlling symptoms, not the disease.
You make a great point here. When a company becomes a monopoly, not by dint of protected patents or power, but because they are at the very best in delivering a superior experience, they need to be celebrated, not regulated or anti-trusted.
The connection between winnner take all and amazon’s movie division is weak. It paid 10 million for a finished Manchester By the Sea.
Amazon’s Studio’s film strat is primarily on the distribution (not production) side of the biz. Significantly less risk. On the TV side, their biz is far more production oriented, though they obviously have at their disposal a strong in-house distribution engine. Their model on creative development is open source and quite novel, though it seems like the foundation and common thread in all of their biz–from e-commerce to entertainment–is distribution.Edit: AMZN didn’t produce either “Manchester by The Sea” or “The Salesman.” They were solely co-distributors.
Production requires creativity of a different kind than techies are skilled in.Yes, techies believe they can make the process more efficient; and certainly production schedules, financial budgets and some contracts lend themselves to automation.However, until AI can FEEL and understand everything written by Euripides, Cao Xueqin, Dante, Shakespeare, Dickens, Hugo, Tolstoy, Faulkner etc and painted by Stanley Kubrick, Zhang Yimou, Steven Spielberg, Marlon Brando, Bette Davis, Marilyn Monroe etc …We can look forward to more great human productions ahead, distributed by the bots.
Why is it alienated intellectuals can even find something wrong the Amazons Success.
Conventional wisdom is to assume incumbents will fail over time… However, for many of the technology giants today in the U.S.A. and China that have leverage the web, they benefit and get stronger from network effects — they don’t seem to be getting weaker.
Conventional wisdom is wrong. Incumbents fail when they don’t understand the customer’s job to be done and have business models that don’t keep up with modern realities. Long established companies like Proctor & Gamble and 3Mdo just fine and are likely to continue to do just fine, because they know how to adapt and focus on what customers want.Many recent disruptors are likely to fail sooner — companies similar to Blackberry, who thought it was all about the product, rather than the reasons people bought the product. Amazon is a very smart company, and as long as Bezos is at the helm, they will continue to adapt and disrupt new markets. Google is almost as good with their business model and execution, but is too tech-focused — Amazon is more likely to be the long term winner.If you want to predict who the winners and losers will be, you have to look at their behaviors, their business models and their strengths and weaknesses. It’s far too simplistic to say “incumbents will fail over time”.
Top down mindset long tail benefits respect.
If this is true, and Trump maintains his goal of forcing companies, including these superstar firms, to bring its overseas jobs back to the U.S., then he’ll be on to something, as that would, at least in theory, be the most direct fix to the problem.
not sure how much force there is. gut says Trump tells them he will be dropping corp income tax and regulation. They do the math and bring jobs back.
Hi Fred,thanks for sharing this fact! I have been noticing similar facts and by studying the change especially in smaller cities/villages we can see that big chains, like Home Depot or Dunkin Donuts are taking away SMEs business, which in the long term run ruins a healthy community economy.
Well done Amazon! I’m sure five years ago, most analysts discounted these type of pursuits. The right vision is the one that creates competitive separation and strengthens your platform + brand.The economist is spot on about assessing growing markets and new winner stakes but I believe, quality is at the heart of market dominance – quality always stands out and
It is a fallacy to think there will be no jobs. There will always be jobs. None of us want to sit around doing nothing — what a boring existence. We will find useful things to do, and ways to compensate ourselves for doing them. We do need to figure out better ways of ensuring that the productivity gains from automation are better distributed to everyone.
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There will be less total “traditional” work for everyone, not just blue collar, but that doesn’t mean no jobs, and it doesn’t mean that we can’t keep everyone fully occupied if they want to be. That is independent of a guaranteed basic income paid to everyone, which is probably a reasonable thing to do, especially if it means scrapping all other systems which are inefficient, means-tested, and punitive. There will be lots of disagreement about what livable means, so I don’t like that as a qualifier.The bigger question is whether everything should be automated just because we can. I don’t believe that we should, and if the negative externalities of automation were factored into its cost and machine labor was taxed by value of output similar to how human labor is, I don’t believe it would be. We would make more rational decisions about leaving many jobs for people to do.
What we take to be true is our reality.
In the transition your point maybe well taken but in the long term most people will be glad to move on to more creative/satisfying endeavours and leave the robots to do the more mundane tasks.No one is pining to do any type of transactional data-accounting by hand anymore are they?
That’s very zen, but what point are you trying to make?
Of course, if they have the ability, they will prefer to do things that are more creative. Not everyone has the ability or wants to do stuff like that — many are happy feeling competent and productive doing more manual things, and it isn’t morally right to tell those people who can’t be UX designers or painters or startup founders that we have nothing for them to do to earn a living.I like painting (as in house painting) — it can be relaxing and meditative, though often monotonous. If there was a robot that could do it for me, I’d still prefer to do it myself. Same with driving a car actually — something those rushing to make autonomous vehicles the norm might be well-advised to consider.If the benefit truly exceeds the cost of using people (after factoring in the transition costs, the social costs, the “sharing the wealth” costs, and the systemic costs), then businesses will still choose to automate. We just shouldn’t pretend that replacing a person with a machine is always better, or that there aren’t hidden costs that businesses are asking society to pay when they let people go.
That I do not agree with your reality (comment) Zen ? https://www.brainpickings.o…
My reality is based on clearly observable facts. What reality do you perceive, and what is it based on?
“The bigger question is whether everything should be automated just because we can” “don’t believe it would be`” “taxed by value of output similar to how human labor is” Not comparable not based on clearly observable facts other than an opinion. IMO homo sapiens will adjust to social structures and will evolve to compete and develop new challenges without big brother.