Amazon borrows from the NFL
Delivered on 18 November 2018 by Justin Pyvis. About a 6 min read.
Amazon recently announced the “winners” of its HQ2 competition, New York City and Northern Virginia (Washington D.C.). I put “winners” in inverted commas as while there are without a doubt winners and losers, it’s not a given that the chosen city is actually a winner at all. But look at Seattle, you might say. Amazon itself estimates that between 2010 and 2016, its local spending added $38 billion to the city’s economy, with every dollar invested worth about $1.40.
Economic multipliers aside, it’s true that Amazon spends a lot of money. It also employs a lot of people. But so do other businesses, even in the technology sector. Facebook and Google have come out and said they took no state subsidies to develop their respective headquarters. Why is Amazon special?
Home is where the heart is, until it becomes too expensive
Amazon’s home - HQ1 - is in Seattle, where it has a huge presence. It employs over 45,000 people and owns 13.6 million square feet of real estate (nearly 1.3 million square metres), with:
…the largest footprint by both raw area and percentage of any single company in any single city. Between 2014 and 2017, Amazon went from occupying 9 percent of the city’s prime office space to 19 percent.
It received no subsidies, tax breaks or special laws to operatein Seattle. But therein lies the problem: while Facebook and Google may not have lobbied for special treatment, other companies certainly do. Taiwanese technology giant Foxconn, for example, will receive somewhere in the region of $3 billion to locate its new factory in Wisconsin, receiving a “state incentive package” that runs about 12 times higher than the national average. Yes, subsidising big business is so prevalent in the United States that someone built a database to track it all.
By comparison, the cities hosting Amazon’s new headquarters offered up a paltry combined $2.4 billion in subsidies and investments, although that could rise if Amazon receives the federal tax benefit for which it’s currently applying (meant for economically distressed communities known as ‘Opportunity Zones’).
But why didn’t Amazon just expand in Seattle, a city in which it already has a huge presence? For one, the city has struggled to keep up with Amazon’s rate of growth. Estimates put the number of direct Amazon and spinoff jobs at 100,000 since 2010 and Seattle is now the third-worst city in the United States in terms of “megacommutes”, commutes of more than 90 minutes, having expanded the number of them by 80% in seven years. Housing prices in Seattle have doubled in the last six years. I know from personal experience that accommodation anywhere near central Seattle is both (a) hard to find and (b) ridiculously expensive.
But Seattle also tried to tax it:
A month after Seattle leaders applauded themselves for landing a small blow against big business in the form of an “Amazon tax”, on Tuesday they hurriedly abandoned it to avoid what they called “a prolonged, expensive political fight”.
Amazon and other large companies based in Seattle eventually defeated the proposal - a $275-per-employee tax for businesses making over $20 million per year - but why risk further expansion in progressive Seattle when other cities will literally throw cash at you? Relocating your corporate brand in exchange for benefits is as American as football!
Amazon is not special
Big businesses in the United States have long held cities to ransom with the threat to relocate. Perhaps the best, and most visible example of the phenomenon is the NFL (or any other North American sporting league). Take the Los Angeles Chargers, formerly of San Diego, which has received its fair share of public support over the years:
The problem was the Chargers had already cut an ugly deal with the city in the mid-1990s, one that turned scenic Qualcomm Stadium into a concrete urn. It also forced the city to buy any unsold Chargers tickets for 10 years to guarantee sellouts and bypass a foolish league rule that pulled games off television in any markets where a stadium was not fully sold.
And yet even with that sham, San Diego might have come through had California’s economy not fallen into near-ruin this century… No way was San Diego handing out $1 billion for a stadium that would sit empty for most of the year. Even assuming the special tax – which would have raised the city’s take on hotel bills to 16 per cent – wouldn’t have pulled money that could have gone to schools and roads, the effort to raise the tax would have taken energy away from tending those schools and roads. Giving Spanos $1 billion, regardless of where it came from, would have sent a terrible message.
San Diego isn’t playing ball? Easy, move to a city that will. Similar moves by NFL team owners over the years have cost local taxpayers in the region of $6.7 billion since 1997, helping to finance 19 new stadiums and 3 major renovation projects (more than one a year!).
Amazon’s ransom seems reasonable by comparison; at least having Amazon in your city may actually produce some net benefits, unlike sporting subsidies:
…which cannot be justified on the grounds of local economic development, income growth or job creation, those arguments most frequently used by subsidy advocates.
Remember the multiplier effect I mentioned earlier? Having Amazon open a headquarters in your city may plausibly pull in employment and investment from other parts of the United States, whereas a football team generally substitutes for other local entertainment spending. Its local spending multiplier will therefore be higher, although the opportunity cost of the government subsidies (e.g. potential public projects with higher rates of return) is likely similar for both.
What makes Amazon odd
Amazon is a technology company masquerading as a retailer. Most of its profits are derived from Amazon Web Systems (AWS), its cloud services division. It generates operating margins consistently above 20%and is therefore incredibly profitable, whereas its retail business - at least outside of North America - consistently loses money.
What that means is that the jobs Amazon is promising these new cities are not your run of the mill retail jobs. They’re high paying, with average salaries of $150,000, and are likely to be technology-focused, rather than logistical (Foxconn’s jobs, by comparison, only pay an average of $53,000). Business Insider had a lookthrough Amazon’s Seattle-based occupations and salaries to see what kind of jobs might show up at HQ2. And guess what? They’re almost all technology-related, with titles such as Data engineer; Business intelligence engineer; Research scientist; Software engineer; Software development manager; Technical program manager; and Database administrator.
With jobs like that, you’re going to want to locate somewhere that already has some form of clustering benefit; setting up in a city that is already ‘techie’ will make it easier to recruit and retain talent. It also helps when your Founder’s house is only a short drive away.
If you can tick the above boxes and get some subsidies and tax breaks thrown in to boot, you’d be foolish not to set up shop elsewhere.
The real “winners”
Amazon. Amazon, Amazon, Amazon. While the whole contest idea may end up costing it a bit in the long-run if it ever sends out another request for favours in the future, the company is the real winner, not the cities. New York and Washington D.C. already havethe most people employed in computer and mathematical jobs in the United States. So, some of Amazon’s new jobs may come at the expense of smaller businesses that won’t be able to afford the inevitable higher wage demands as demand outstrips supply.
Amazon now has three headquarters in populous cities with an abundance of skilled workers, places it probably would have wanted to open an office even without subsidies. So not only has it reduced its costs, but by diversifying across the United States it has reduced the risk of another city council attempting an “Amazon tax” in the future.
Amazon essentially borrowed a play frequently used by NFL teams and executed it beautifully.