Does Amazon have an investing advantage?

Thought experiment: How would Amazon enter the venture capital business?

Use data from AWS to inform investment decisions

Amazon can leverage its proprietary data from AWS (Amazon Web Services).  Amazon’s edge is that most of the best technology start-ups are built on its services.  Amazon has a lot of information about how much these companies are spending, what services they use, what technologies they use, and more.

The AWS data could be extremely predictive and give Amazon early signs that companies are growing fast or reaching an inflection point.  And it can use the data as a better diligence check of a company … for instance, the data could help determine which companies that claim they have “AI” are real and which are just marketing.

Using this data to invest in public companies would likely not be legal since it could be deemed as inside information.   But using it for private companies is something Amazon could do.

There is much more at the link from Auren Hoffman.

Comments

If this becomes a thing, imagine all the follow-on investors trying to get into whatever companies Amazon does.

Imagine all the startups goosing their AWS usage to get a better offer from Amazon. Of course, it's not really faking; they will owe real money to AWS.

AWS is the lucrative part of Amazon, and it faces tough competition; they will not screw it up by playing silly games.

This is clearly another Cowen misdirection, distraction, and attack on non-Koch affiliated media.

On a day in which Trump is seriously being considered for impeachment by the House for calling his own (!) intelligence agency heads liars and “delusional and naive,” Tyler takes a dig at Amazon. Of course Amazon founder Bezos is preventing Democracy from Dying in Darkness by paying for the Washington Post’s brilliant reporting on Trumpian corruption and violation of the emoluments clause.

So it makes sense that Tyler, paid by the Kochs, would distract and deflect.

Sad! As a moderate Republican, I would think we could all work together to impeach!

This is why Bezos is worth 44 Trumps in market value and will be worth even more in the coming years. Trump wants to build walls. Bezos wants to build wealth.

You simply don't get it. Most Americans want to build the wall and reduce illegal immigration. To say or believe that it is all Trump is naïve at best. The ONLY reason this is contested by the left is to pander to the many radical in the left wing so that the Democrats can get reelected.

This mistaken belief that Trump is up there standing alone is foolish. IF you really oppose everything the right (63 million voters) believe then you need to figure out how to change their mind or compromise with them. Attacking Trump is not that way.

"Most Americans want to build the wall"

This is false.

Also, if most Americans support Trump on this, how does opposing him help Dems get elected?

It might not, but it does help you win the D nomination. And keep you from being primaried.

Trump is a loser. If he was anything the left is accusing him of, he would simply have commenced wholesale deportation 2 years ago, and prosecuted and fined employers of illegal aliens to the maximum extent possible.

A loser who somehow, with no political experience or pedigree, ran a super lean campaign (relative), won the presidential election.

Sure, keep telling yourself that.

I have yet to see any "professional" pundits nail any predictions about Trump, he always seems to come out on top making everyone else look like fools. Takes a real loser to do that.

Since the election, many many pundits have gotten many many predictions about Trump right. They predicted he'd lose the midterms bigly, they predicted he'd cave on the shutdown, they predicted he wouldn't get impeached, they predicted he would pass a tax cut, they predicted he would piss off our allies, they predicted he would appoint conservative SC justices....the list goes on and on

These "predictions" aren't really predictions in the same sense that if I predict every single day that it wont rain, I would would be more accurate than random chance.

So i'll leave this here to remind you that you were wrong again when the wall gets built in 2 weeks or so.

or you'll remind me it didn't get built, but I'm pretty sure you'll be the one reminded.

You taking bets at even odds?

I’ll put down tens of thousands that there will be less than 5 miles of additional concrete wall on the border in 14 days. Shit, I’ll even give you slat fencing.

Predicting he would cave on the shutdown is every bit as much of a prediction as predicting he will eventually get his wall. Difference is that one was correct, yours is pretty unlikely.

Predicting the midterm shellacking was also a valid one, as many of your side predicted the opposite.

Why wait when you have an easy way to earn
http://GoForPartTime.com/?userid=56973

If there is a real advantage to having this information, then large banks would have already monetised on that – they handle a lot of money flows and can see how the clients' revenue is developing. And that is a much stronger indicator of clients' performance than AWS usage.

Financial privacy laws are strict in what banks can and cannot do with customers' information. Also, banks are conservatively run as they are tightly regulated unlike a tech company that can take lots of risk like Amazon.

Bloomberg thought of it first and is thus much richer than Trump, exttracting rents from those gambling their money and of fools who trust them, using the vast date Bloomberg gathers and presents on Bloomberg terminals.

Hey guys, today I learned Bloomberg extttacts rents from the date he collects from Bloomberg terminal, specifically on gamblers (traders?) and fools who trust them (no idea, is this like a stand in for the audience?).

Finance to some large mulpian chunk (mulpen-proletariat) must just be a black box where evil Jews (his name ends in berg!) steal hard working white money.

Are Nazis tolerated on this blog?

Reading comprehension fail.

Why invest in promising internet startups when you can simply copy their entire business models with greater economies of scale, after those startups put in the work and take the risks to show the models work? Why accept part of the profit when you can have it all, and deepen the moat around AWS at the same time?

Entire classes of artificial intelligence startups are having their livelihoods stolen by the release of AWS SageMaker and related services, and MongoDB now has to compete with AWS DocumentDB. That's only the tip of the iceberg. Anything a mostly B2B or infrastructure based startup does, AWS can do better, and there is a good chance the startup is using AWS so they know exactly how well your business model is doing. They are the ultimate fast follower.

Think Amazon would be happier playing the "sell shovels" game than the startup game. Also, there's less of a moat around AWS than appears. There's the big guys like Google, Microsoft and to a lesser extent IBM and Oracle ramping up their cloud operations. There's also competitors from below like Digital Ocean, OVH, Heroku, etc. that will move commoditize the space for those who don't need a lot of handholding and want rock bottom pricing.

Given this is a well known risk, why would any start up rent amazon capital instead of building their own capital?

Why hasn't any of the large number of corporations with tens of billions more in profit they keep parked off shore doing nothing, simply paid workers to build server farms and have a few coders hack up a cleaner recoding of AWS?

They can borrow thhe cash to pay workers in the US using cash off shore as collateral, bringing back cash tax free to pay interest, pay management and operation wages, pay expensed capital costs, and pay accelerated depreciation, power bills as rent to own solar farms.

Apple would be able to afford 10 $10 billion server farms around the US probably coming close to matching what Amazon has in AWS server farms. And by building them a decade after Amazon, the hardware costs will be half what Amazon paid.

The problem is thats capitalism as Keynes argued for:

"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

"Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. "

Ie, all the high profit corporations like Apple would end up like Amazon with zero cummulative profit, but better off than Tesla with billions in losses from capital depreciation expenses from billions in new capital built each year.

Apple's tax problems is from contracting with China to build factories to Apple's specs for Apple to rent.

Only the US would call building a copy of a factory you were contracted to pay with your own money to build and operate "theft" based on renting the factory to a US company.

Our AWS invest is firewalled through an IT contractor that offers AWS services. Their business bundles several clients...

The whole premise of a setup like AWS is that Amazon won't poke around in your stuff for their own purposes. If they get caught doing that, then the only investments they need to think about are those that involve the rapid building of and migration to on-premises private data centers.

As for due diligence, any investor can ask to see AWS bills or other AWS usage data (and other more detailed information, that even Amazon would struggle to get at without straight up hacking the client). That would be an appropriate request in most cases, and would be easy to complete in an above-board way, but no particular edge for Amazon.

I suppose the one thing Amazon could do is to derive macro-insights based on the ebbs and flows of aggregate demands across their platforms, ie AWS, retail and others.

This. I'm surprised at the blithe assumption that businesses would stand for their proprietary data being combed through except in very specific circumstances, previously agreed on; you wouldn't stand for your landlord entering your apartment to snoop through your drawers - if he's there to fix a leak in the plumbing that's another matter.

I take Tyler to mean that Amazon has a list of customers and their usage statistics. This is Amazon's proprietary information.

For what it's worth, I think the reason they don't try to sort that into investment data is that they have a better position now already.

Amazon is fully diversified if you look at it that way, making money off of every transaction by every company on their platform.

Why worry?

Amazon sells the goods produced by the companies that advertise on the tech company platforms. It's a symbiotic relationship that would be disrupted if Amazon chose to compete with the tech companies in the digital advertising business. Here is a critical look at Facebook by an early investor in the company: https://www.nytimes.com/2019/01/29/books/review/roger-mcnamee-zucked.html The author/investor, Tom McNamee, points out the obvious: Facebook's products are its users; if Facebook were to lose its users, its business would vanish in an instant. There's no there, there. Unlike Amazon, which has facilities, equipment, employees, etc. and actual "customers" who purchase actual goods from Amazon. Why would Amazon disrupt this arrangement by competing with Facebook? Here's an interesting fact: advertising, which is Facebook's business, constitutes about 20% of GDP. Has the ascent of Facebook (and Google, etc.) increased the percentage? No. It's just that a large share of that 20% moved to the digital platforms. Something similar occurred with retail: it's not that the retail sector grew, a large segment moved to internet commerce (Amazon). A cynic might observe that tech hasn't grown the economy, it just rearranged the chairs on the Titanic. Recall that the Titanic was the greatest passenger ship of its era. Until it hit that iceberg. Disrupting the symbiotic relationship Amazon has with digital platforms would risk a collision with an iceberg.

Advertising 20% of GDP? What in the f.

It’s less than 1%.

And no. Amazon is AWS. Like the quip about Toshiba “an insurance company that sells TVs” Amazon is a cloud company that has a retail side

Sorry, I was mixing different data about advertising, my point (confirmed by your correction) is that advertising is not a growing industry (in relation to the total economy). Historically, advertising has averaged about 2% of GDP, but fell during the great recession. It's true that digital advertising has been growing, but at the expense of non-digital advertising. That Amazon's profits are generated mostly from its cloud services, does not detract from its main business of digital retail (only about 11% of Amazon's total revenues are generated from cloud services, but the % has been increasing). Again, Amazon has a symbiotic relationship with the companies generating the most revenues from digital advertising (Google and Facebook) that would be disrupted if Amazon chose to compete in a major way with them. [Here's a chart of advertising spending from 1919 to 2007: https://www.galbithink.org/ad-spending.htm More recent data is available, but it's not free (that I could find).]

Amazons retail side basically breaks even. Their losses in international markets are pretty much balanced by their NA operating income.

So maybe this is semantics at this point: Amazon has AWS which generates the entirety of their profit, and a retail side that generates zero profits. You could easily argue they’re willing to lose money overseas while they establish footprint and a customer base.

In any sane world, Amazon would be forced by shareholders to split AWS into its own company. After Bezos’ impending divorce we may see this happen.

Why are they losing in international markets?

Size matters, and Amazon's retail business gives it the size that allowed it to enter and almost dominate cloud services. But I do worry about Bezos. No, not because his interest in Amazon will be divided between him and his soon to be ex-wife, but because the fact of the divorce is an indication that he isn't focused on what needs his full attention. Men. God love them, because they need His help.

I don’t quite see how this would be insider trading. As long as it’s data that Amazon is allowed to view and use based on its terms of service, it’s Amazon’s proprietary information. In the US at least insider trading requires that the information has been in some sense misappropriated.

On the legal question of Amazon exploiting inside information, the courts have been narrowing the scope of the securities laws. Ordinarily we think of the buyer suing for fraud under the securities laws if the seller makes a misrepresentation to the buyer or fails to disclose material information about the company whose stock the buyer is purchasing. Does the seller have the same remedy if the buyer fails to disclose material inside information about the company whose stock the seller is selling to the buyer? That's essentially what's being described here: Amazon would be the buyer/investor with inside information (i.e., information not publicly available) about the company whose stock Amazon is purchasing from the aggrieved seller. Does Amazon have a duty to disclose that information to the seller? Does Amazon, the buyer, have the same duty if the seller is an insider? I know what the statutes and the regulations say, but that doesn't mean today's Supreme Court will read them the way I might. A libertarian might argue that, because Amazon has the better information about the company's business, Amazon is in a better position than the seller to exploit (in the positive sense) that information and thereby expand the business (and expand the economy with it).

The silence is deafening. So tech guy creates a promising new business, but doesn't know how promising. Tech investor guy comes along and makes an offer for tech guy's business. Tech investor guy has the advantage because he has more information than tech guy about tech guy's business. Tech guy sells for an amount that is below what he would have accepted if he had known the information. Should tech guy have the right to sue tech investor guy for withholding the information?

This is stupid as fuck. a) Any investor could ask about the size of the AWS bill of some startup, or whatever AWS services they're using, or way more information than that in general in the course of a due diligence. b) They don't ask for it because it has precious little to do with the value of a company. You can rack up AWS bills because you're doing compute-intensive stuff that produces nothing of value. There's no correlation. It's worthless. And that's why investors tend not to ask about that when they can ask things like, uh, hey guys, how's your revenue growing lately?

At that level, yes. But Amazon's stats might also include traffic, its volume, its global distribution.

Still, monitoring customers that way might risk killing the golden goose. All the clouds probably have a privacy policy for that reason.

+1

Really, this feels like motivated reasoning. Motivated by fear and hate for amazon.

Didn't Tyler cover a very similar concept with Eric Schmidt in their Conversation?

"And the answer is always the same, which is that you need people’s permission to do that, and you can be sure you won’t get that permission, if you follow that reasoning. So we decided that was a pretty bright line. For example, if a tech company that were a consumer company were bundled with a hedge fund, you would have to disclose that it was being used in that context. The people would go crazy."

Google invested in Snapchat before IPO. It's well known that Snapchat is one of the largest users of Google Cloud. Did they invest because Snapchat was low on cash?
https://www.businessinsider.com/alphabet-google-capitalg-invested-in-snapchat-snap-inc-2016-11

The risk with "investing" in your customers is when it's easier to "invest" rather than collect bills in cash.

Cloud services are some of the largest expenses of these startups. If the cloud provider takes payment in equity, it could delay failure and make it harder to tell if the startup is a truly viable operation.

Isn't this the question that was posed to Eric Schmidt and also a Matt Levine question - if you have all the information, why are you using it to sell ads rather than using it to more directly.

If Schmidt is right, the answer seems to be, TechCo would lose customer/societal trust and that would be value-destructive.

If wrong, it's more interesting right? You can invest in the venture fund that has a huge informational advantage via the public equity. Then if the information really is as valuable as you think and returns are reliably better, we're just using the tech company as a platform to make societal investments - is it not 'socialized' at some point?

Or in the 80% of times the answer is not at the extremes then it all feels a bit icky but its hard to prove that the informational advantage is absolute.

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