Whether or not one agrees or disagrees with what’s about to follow is not the point, for I myself am not quite sure of precisely where, or if, lines should be drawn or should exist at all. However, with that said, I do feel that a discussion based on free market capitalism along with true business principles (along with ethics) is warranted.
The issue, as I see it, is far too many can’t (i.e., themselves entrepreneurs or business thinkers) seem to bring themselves up to questioning the premise for fear they themselves may not like the answer, so I will.
Free market capitalism is far too important as to just stand back and allow it to be bastardized, let run amuck, unfettered, with no considerations of the damage it can instill when not properly employed, or understood. But what at times may be far worse – is something thought of as one thing, then allowed to promulgate under that moniker instilling a “hands off – or don’t question” force field to be employed, while all the time it has morphed into something dangerous, or destructive and an anathema of its original intent or meaning.
The discussion arose the other day as we discussed the dire straights the state of Illinois finds itself in, and in particular Chicago itself.
Forgetting about the political the discussion inevitably turned to the ongoing collapse of the Medallion industry for cabs. For those not familiar with this topic, basically, what a Medallion is, is a government issued license allowing for a cab to operate. No Medallion? No cab. The issuance were limited but the licenses could be bought/sold/or transferred from one party to another. That’s the gist. So it made, via the free market system, Medallions valuable. In some cases – very valuable.
Then – Uber™ hit the market place and things have never been the same. And for cabbies’ and their once coveted assets? Things have gone from bad to worse, and as the above story shows – it’s not getting any better. Which was the genesis for this discussion, for the question is this:
If any nation (or for simpler constructs like state, local et cetera let’s just use the term: economic jurisdiction) has the right or concern as to not allow foreign entities or governments to unfairly dump competing products (“dump” meaning either government subsidizing or willfully allowing products to be sold far under well established actual costs, and in some cases near free) into a market, and applies remedies or threats such as tariffs or more as to stop the so-called “dumping” from unfairly competing. How is it that many of the so-called “tech disruptive companies” are not doing the same?
I believe it’s time to look at these questions honestly because what is happening in many instances is not what I believe to be free market capitalism, and is more along the lines of Wall Street driven monopolies, Robber Barron-ism, and in some cases – outright entrepreneurial and business ethical malfeasance. And in some cases outright fraud. (Think Theranos™ for clues)
Now I’m not singling out Uber per se, they’re just (in my opinion) one of the most recent and easily definable examples currently, for this applies also to not just the so-called Unicorn stable, but can also be applied to some of the most popular names in all of business like Amazon™.
Once again, the question is: Although I personally use and am an ardent fan of its service. At what point is Amazon not “dumping” against the likes of a Walmart™, Kroger™, Sears™, Target™, [fill in the blank]?
These are the sorts of questions I’m raising, and when I have, many a first reaction is something akin of “I never thought of it that way.” Which is precisely my point. (As I tell people all the time: “I’m not here to speak and make you feel comfortable, I’m here to provoke and get you to remember to think in the first place – comfortably or not.”)
Wall Street, in many ways, has morphed from what was once the bastion for the industrious, risk taking, entrepreneur as to raise capital for worthy enterprises in the gold standard environment that was once the envy of the world into – the equivalent of nothing more than a pseudo-government funding machine allowing for their entity of choice to facilitate a dumping of goods and services into a market place with no care about the profits, viability, or the human or business consequences left in its wake.
The only thing which now matters is creating another “symbol”, or “ETF” to be offloaded to anyone with a 401K who are either too stupid, or too unsophisticated to understand they’re being scammed (see latest IPO darlings for clues) to allow for more “red meat” to be ground into protons enabling the HFT parasitical monsters permeating the exchanges to front-run and gorge themselves without ever experiencing the slightest case of indigestion or hiccup.
Is this free market capitalism? Or free market entrepreneurialism? Or free market competition? Or free market anything as you or I have come to know and accept the term? My answer: Hardly.
Again, let’s use the both the premise and argument using another easily understood item: Steel.
If China dumps steel onto the U.S. market we understand at the gut level that this is a grossly unfair practice. Not only does it disrupt a market, but the damage it will cause a community, county, state, and even nation as a whole is not inconsequential. i.e., A company can’t afford to sell or match another governments subsidized price so it needs to cut back on production and then help, then a factory, and so on, and so on. Wages are no longer circulating, local business close, local and regional taxes plummet, again, and so on.
So right now you’re possibly thinking, “But that’s on a large-scale, how does that apply to anything going on in “tech” or Wall Street?” Good question, so let’s look at a few examples. (Note: To reiterate – this isn’t to single out any company saying this or that is wrong, for even I’m not precisely sure. However, no one is asking any questions about a condition that seems to be growing more onerous, if not cancerous, with every passing day. And true free market capitalism is far too important to let rotting in some pile and allow everyone to just walk past and ignore it. The examples are to open the questioning which no one is currently doing. For over the last 10 years, nothing, especially when it comes to business, is what it once was.)
Using the above example of steel let’s move it a few “tech” examples and see if the argument I’m implying fits:
What is the difference between a government dumping steel – and a disruptive tech company that burns through more cash quarterly than the GDP of some small governments, along with, has never been, and may never be, profitable enough to make up that lost capital burn (via product sales, not stock) into a market where fixed costs demand higher product asking prices?
Or, said differently: (Remembering Medallions, or licensing if you will, are an enforced legal requirement with real costs as to operate in Chicago and is just one of the many expenses that cabs must pay and account for.)
What is the difference in allowing passenger service via the “cab” model made possible only by the equivalent of subsidizing the enterprise via the expense of using capital raised funds, and not true business fundamentals, anything different that a government subsidizing any product unfairly and dumping it into a market allowing for significant pricing discrepancies as to gain unfair market advantage? And I’ve not even mentioned the other required licensing and insurance costs the “disrupters” not only disavow, but rather disregard as even applicable. (Think AirBnB™ for more clues)
OK, I know because I earlier used the Amazon example earlier many want to know how that would apply. Again, fair question, so here’s one:
How is it different from the government dumping example when a company is allowed to sell and deliver products below well established norms any different that dumping. Example: All things being equal like price of product (let’s use $10.00 for this hypothetical) Say competitor A, B, or C decides to competitively gain market share from another it decides to work on little to no profit margin on our $10.00 example. Let’s say that’s competitor A.
Come into the store and the item is $10.00. It does this (and can remain doing it) only because it will make it up on other items when you come in. At least in theory. An easily understood model. Company B, and C either have to compete in other ways or fall victim to the market forces. But we all understand the item at $10.00 is basically the same for all. Only out of competitive bidding, size, and other fundamental practices would the price differ. i.e., If C ever got to A’s size; it would have the same bidding power.
Now let’s throw Amazon into the mix.
Suddenly not only do you have the price match of $10.00 – but now there’s another advantage. It’s delivered to your door for free if you either add a few more items (now between $25 or $35 threshold) or, you pay an up front yearly fee of about $100 and two-day delivery is available on just about anything, and is unlimited in number.
Could Walmart, or Target, or any other do that? Well, it’s kind of trick question, and here’s why…
Wall Street at the time wouldn’t allow for it to happen back when Amazon was cutting its teeth about ten years ago. And in truth, Amazon itself was beginning to acquire the ire of many early investors and analysts right before the financial crisis with a never-ending musing of when, or if, they would ever become a profitable company where Wall Street could be redeemed for their patience.
That was when the stock price was at around $100 and appeared to always be one earnings report away from share holder annihilation. For it was the Amazon model (because it flew in the face of fundamental business metrics like net profits and more) that was always the one questioned. However, that was then, today?
Its stock price is now over $1000.00
But has its fundamental business (e.g., the retail) side warranted this valuation? Hardly. And if one looks at it honestly it’s not all that much better than it was when people didn’t know if the model would ever work long run. i.e., The “delivery” model and pricing never made the fundamental business math work.
Again, forget the Walmart example, use the small one person mom and pop shop, or even a small business. As a matter of fact, any business which does not have the availability or access to Wall Street. (e.g., any non public company) Can they compete?
Well, yes some will say. They can, that is – if they sell on Amazon. But is that really competing? Or a fair business environment? As I said, I don’t know the correct answer, but something just doesn’t seem to fit when applying the “competitive market” overlay on these constructs via today’s Wall Street environment.
Let me use another example that at first glance might seem out-of-place, yet, also fits the area for questioning, for as much as it has enabled many a new giant tech disruptor to become worth $Billions upon $Billions of market cap – it also is anathema to their true fundamental enterprise competitive models, whether they realize, or even understand it.
These two names for that comparative argument: Facebook™, and Snapchat™.
Putting aside my bias against social media in general along with my arguments about how I feel about these current businesses, let’s apply my premise to these two entities and see if what I’m arguing still applies. Because if the argument applies to one, it should apply to all. And yes, even to what is surely taken as touchstones aka “disrupters” of the “disrupters.”
So, here’s the question: What’s the difference between a government sanctioned dumping into a marketplace and the unfair competitive advantage afforded by Wall Street that Facebook has to compete with at Snapchat?
I can hear the howling through my screens right now in a chorus of “Now wait a minute, now you’ve seen to taken this idea or argument just a bit too far! No way can the premise be applicable here.” Too which I’ll say, “Au contraire mon ami.” To wit:
Regardless of what one thinks about Facebook, it does have a fundamental business practice in motion. i.e., It has a platform where it sells access (aka ads) to companies, and other user metrics, to allow its business to be profitable, thus rewarding investors with potential returns either now, or in the future. At least that’s the theory and basis. Let’s not get side tracked with valuations and other metrics at the moment.
Regardless of what one thinks about either company one thing is indisputable: Snapchat – as can be inferred via its creators – is not only the next Facebook, but possibly the Facebook killer. At least that’s intention I guess, which by all accounts is what any entrepreneur would think. It’s the entrepreneurial way. But here’s where thing go awry in my assessment of free markets, or free market capitalism, or fair competition, level playing field, whatever descriptor you want to use – and it is this:
Why should Facebook have to compete at all with a company whose own proclamation of business metrics which I wrote about back in February states clearly, on its S-1 filing, page 19, in bold, italicized text. To wit:
“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”
That implies, means, clearly states, leaves no room for other considerations other than this:
As long as Wall Street buys our stock – we not only don’t have a clear idea of how we’ll become profitable – we don’t even care as long as long as Wall Street keeps buying. Cha-ching!
So now Facebook (even throw in Google™ if you want) has to openly compete for ad revenue as to sell the virtues of their platform, and all its sunk costs, against a company who has openly stated not only has it no concern for profitability. If it never becomes profitable that’s fine with them because they (at least in theory) will still be able to be around and compete for who knows how long. That’s Facebook’s or Google’s, or [fill in the blank] problem.
So, if that’s the case? (and it’s a very real case) Just how low of a price does one think prices in that environment have to go when having to compete against an entity that is the equivalent of a Wall Street sanctioned product dump machine?
Can it just “give away” ads for ever? According to its S-1, why not? Is that a fair competitive edge for Facebook, or Google, or anyone to compete against?
Remember, how would Snapchat (or any company) even stay alive, let alone compete on a fair playing field when profitability – the do-or-die metric of any and all businesses is not even a priority? (If I’m wrong than why is it on the S-1!)
The other underlying issue that gives this whole “dumping” argument even more credibility is the fact that central banks have facilitated this phenom in spades ever since the financial crisis and its permeated throughout the entire “market” and business complex as has never been seen before.
Again, with central banks openly buying equities (see the afore-mentioned Facebook, Amazon, along with others) over the last years (which even further complicates the concern) there has been the equivalent of government sanctioned dumping throughout the entire business landscape turning the once bastion of free market enterprise, open markets, capital formation, and more – into a cesspool of sovereign wealth driven, crony styled capitalism, creating motes and unfair enterprise advantages that border on command and control business monarchies. Period.
I’m not exactly sure of how we go about addressing some of these concerns, but I do now this – nobody’s even giving these issues a modicum of thought – and too me, that’s not just ludicrous – it borders on dangerous for free markets, fair practices, level playing fields, and fundamental fiduciary based business funding and oversight. Somethings got to give, because like it or not, true free market business principles demand it. And giving the words “free market capitalism” lip-service ain’t getting it done.
I am an optimist though, I believe in many respects there’s going to be a re-birth of small business away from all this Wall Street crony capitalism stylized funding like we haven’t seen in years. Many think I’m crazy, but what I believe might be the catalyst for it is where many believe there’s currently no hope – the unemployed. Why?
Because if there is one thing that can help the unemployed find worthwhile work it is this – Forget about looking for your dream job, go create your own business and life where you stand right now. You need no one’s approval to begin. Just begin, you’ll work out the details as you go along, but just start, and stop waiting. Why?
We need anyone willing to take up the challenge and become a self-starter, self enterprising individual now, more than ever, in the fight. Because the fight for true – free market capitalism is – indeed – on. No job application needed to apply…
Just some guts.
© 2017 Mark St.Cyr