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Eugen Tarnow


    It Is Not the Algorithm; It Is the Race to the Bottom

    Eugen G Tarnow  September 1 2018 08:06:33 AM
    Here is how I understand Amazon.

    Amazon keeps its customers happy but this happiness comes at huge costs that will eventually spiral out of control.

    The real genius is not its algorithm, nor its electricity subsidized cloud division but its converting of warehouse and transportation worker salaries into retail salaries. These "Amazonians", as Amazon refers to their workers, make $12.75 an hour or slightly more than $15 per hour, depending upon whether you look at Amazon advertisements or its https://www.foxbusiness.com/politics/amazon-slams-bernie-sanders-over-inaccurate-accusations-against-company" target="New">lecturing to Senator Sanders.

    Amazon claims this is a competitive retail salary. But in retail the people work with other people (and they get store discounts). Working at an Amazon fulfillment center, where each workers is expected to pack 1250 items per day or get fired, cannot be very social so Amazon hires a Twitter squad to say that their workers just love it.

    I can't find any journalists to come with me and actually talk to the Amazonians so Senator Sanders will be the first one to find out. But here is how Amazon minimizes its cost (still does not make a profit): instead of paying $35 per hour as UPS does or $25 per hour plus lots of benefits as USPS does, they pay just $12.75-$15 per hour. Mr. Bezos converts their salaries, tapping into a Wall Street confidence game, into nearly $1 trillion in paper money. I may be wrong about these numbers - if anyone has better information, please tell me.

    Image:It Is Not the Algorithm; It Is the Race to the Bottom

    $10 per hour for 600,000 workers translates into $12 billion per year, $20 per hour into $24 billion per year. Amazon's EBITDA for 2017 was $15 billion...

    And when the employees make so little compared to the value that Wall Street assesses their work at, some decide to cheat by leaking data and erasing negative reviews (at $500 per review). I have previously written about the problem of fake reviews.

    The confidence game uses our religious belief in tech and algorithms. It makes the Amazon algorithms (whatever they might be) into a God with Mr. Bezos as their prophet.

    The belief in algorithms amazes me. We must feel very insecure as people to put that much stock in algorithms. Steven Cohen, who went on the record saying that he does not understand what insider trading is, believes (he says somebody else said so) the Netflix algorithm is worth $1 billion per year. I think he did not know (does he know anything?) that Netflix gets much of it for free in the Kaggle competitions. If you can get it for free, it cannot possible be worth billions. And even then Mr. Cohen values the algorithm only as a small percentage of the Netflix market cap of $0.15 trillion. What does the algorithm do? It prevents people from quitting by suggesting other, for Netflix, low cost entertainment. I use Netlix and find the recommender algorithm poor, I tend to select what I watch by category instead. At some point I will run out of movies from Chile...

    And even with what there are questions about whether Netflix is cooking the books and what the meal will taste like when there are no more new subscribers added.

    The conversion of high paying jobs into low paying jobs is also, in part, how Uber does it. It is not its algorithm, nor its easily reproducible software. It started by not being an employer but being a payment processor. IRS did not find out about the first $12,000 in earnings of each driver who could pocket the money tax free. But to be able to continue pretending to make money at some future date Uber lowered the driver reimbursements and created a tax nightmare for them. Uber also saved money by going into urban markets like New York without a license that usually costs $2 million per driver (and driving down the license price to just $200,000 in a couple of years). They were able to do that because the customers just love it.

    And that is something else Amazon, Netflix and Uber have in common - their customers love them because they are inexpensive and easy to use. And if the customers are happy the US government cannot go after them using antitrust law.

    We can get a clearer view of these three "businesses" if we look at MoviePass.  MoviePass kept the customers extremely happy by allowing them to see as many movies as they wanted for $10 per month. Of course, MoviePass lost money on every customer and as more and more customers were added the losses were magnified. MoviePass was not a business and it appears that neither might Amazon, Netflix or Uber be.

    When will the Minsky moment happen? The Amazonians going on a strike or its shareholders realizing they have been taken for a ride to please the Amazon customers, Amazon's suppliers tiring of the squeezing or the tax payer tiring of footing the Amazon bills?

    A few taxi drivers in NYC have killed themselves because it becomes impossible to make enough money in this race to the bottom.

    Because that is what it is. A race to the bottom. To please the customers in businesses that cannot make a profit.


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