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Whole Foods Deal

Shows Amazon’s Prodigious Tolerance for Risk

JUNE 17, 2017

Joke all you want about drone-delivered kale and arugula.

Amazon’s $13.4 billion bet to take on the $800 billion grocery business in the United States by acquiring Whole Foods fits perfectly into the retailer’s business model.

Unlike almost any other chief executive, Amazon’s founder, Jeff Bezos, has built his company by embracing risk, ignoring obvious moves and imagining what customers want next — even before they know it.

Key to that strategy is his approach to failure.

While other companies dread making colossal mistakes, Mr. Bezos seems just not to care. Losing millions of dollars for some reason doesn’t sting. Only success counts.

That breeds a fiercely experimental culture that is disrupting entertainment, technology and, especially, retail.

Mr. Bezos is one of the few chief executives who joke about how much money they’ve lost.

“I’ve made billions of dollars of failures,” Mr. Bezos said at a 2014 conference, adding that it would be like “a root canal with no anesthesia” if he listed them.

There was the Fire phone, for instance, which was touted as being crucial to Amazon’s future. It was one of the biggest bombs since New Coke. At one point, Amazon cut its price to 99 cents. That did not help.

For any other company, this would have been a humiliating experience with severe repercussions. Wall Street did not blink, even when Amazon wrote off $170 million related to the device.

“If you’re going to take bold bets, they’re going to be experiments,” Mr. Bezos explained. “And if they’re experiments, you don’t know ahead of time if they’re going to work. Experiments are by their very nature prone to failure. But a few big successes compensate for dozens and dozens of things that didn’t work.”

It is an approach baked into the company since the beginning — and one that is difficult, if not impossible, for competitors to emulate. Consider how Amazon Web Services began as a small internal cloud computing project to help Amazon’s core business. Then the company started selling excess cloud capacity to other companies.

Before Google and Microsoft realized it, Amazon had created a high-margin multibillion-dollar business that was encroaching on their turf. They are still struggling to catch up.

If the cloud computing business just grew, Amazon Prime was a bold bet from the beginning, the equivalent of an all-you-can-eat buffet for shoppers: Pay an annual fee and all shipping costs for the year are covered. Amazon’s shipping expenses ballooned, but revenue soared so much that no one minded.

“When you have such a long-term perspective that you think in decades instead of quarters, it allows you to do things and take risks that other companies believe would not be in their best interests,” said Colin Sebastian, an analyst with the investment firm Robert W. Baird & Company.

Amazon began, for those too young to remember, as a discount internet bookseller in 1995.

In the headiness of the late-1990s dot-com boom, it became the symbol of how this new invention called the World Wide Web was going to change everything. Then, like many of the leading dot-com companies, it blew up. The world wasn’t quite ready for Amazon. It came very close to going under.

Mr. Bezos redoubled his focus on customers, largely closed the company off to the media and got to work doing some serious experiments. Amazon developed, for instance, the Kindle e-reader, which for a time seemed likely to kill off physical books entirely.

One thing the retailer did not do was make much money.

In its two decades as a public company, Amazon has had a cumulative profit of $5.7 billion. For a company with a market value of nearly $500 billion, this is negligible.

Walmart, which has a market value half that of Amazon, made a profit of $14 billion in 2016 alone.

But the tens of millions of customers do not care whether Amazon is hugely profitable. They care if it is making their lives easier or better.

“Jeff Bezos is making shopping great,” said Chris Kubica, an e-book consultant and software developer who watches Amazon closely. “He’s made me come to expect better from every checkout counter. Oh, I can scan my entire shopping cart full of groceries in one go, without stopping, as I roll into the parking lot? Yes, please. Where do I park?”

After the company’s disastrous foray with the Fire Phone, Amazon could have done what many other also-rans in smartphones do and keep putting out devices that most people ignore in favor of Apple and Samsung devices.

Instead, in 2014 it released Echo, a speaker that looks like a small poster tube. The Alexa intelligent assistant, which runs on it, can play music and tell jokes, and now Google, Apple and Microsoft are copying it.

“Bezos is ahead of the game, always,” said Sunder Kekre, a professor at the Tepper School of Business at Carnegie Mellon University. “Be it drones or Amazon Go” — a grab-and-go shopping experiment that eschews human cashiers — “he is able to craft smart business strategies and position Amazon quite distinctly from competitors.”

As Amazon pushes on with its ceaseless experimenting, however, it risks being seen as less of a cute disrupter of the old and as more of a menace.

It has hired many workers for its warehouses, but it is also betting heavily on automation. Amazon Go, after all, is an attempt to drain the labor out of shopping.

“Amazon runs the risk of becoming too big,” Mr. Kekre said.

Some Amazon critics would like the Whole Foods deal to be the trigger for reining in the company.

The Institute for Local Self-Reliance, a frequent foe of Amazon, noted that the company is “rapidly monopolizing online retail” and that both Prime and Echo “are strategies for locking in consumers and ensuring they don’t shop anywhere else.” Amazon declined to comment for this article.

Where will it all end? Mr. Kubica has thought about this.

Amazon can be understood as a decades-long effort to shorten the time between “I want it” and “I have it” into as brief a period as possible. The logical end of this would be the something Mr. Kubica jestingly called Amazon Imp, short for “implant” and also “impulse,” Mr. Kubica said. It would be a chip inserted under the skin.

“The imp would sense your impulses and desires,” Mr. Kubica wrote in an email, “and then either virtually fulfill them by stimulating your brain (for a modest payment to Amazon, of course) or it would make a box full of goodies for you appear on your doorstep (for a larger fee, of course).”

Every desire fulfilled. “I am sure that Amazon even now is building it,” Mr. Kubica said.

Next Big Tech Corridor? Between Seattle and Vancouver, Planners Hope

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The Amazon campus sprawls throughout downtown Seattle. The political, academic and tech elite of Seattle and Vancouver are looking for ways to bring the cities closer together. Credit Ruth Fremson/The New York Times

VANCOUVER, British Columbia — Seattle and Vancouver are like fraternal twins separated at birth. Both are bustling Pacific Northwest coastal cities with eco-conscious populations that have accepted the bargain of dispiriting weather for much of the year in exchange for nearby ski slopes and kayaking and glorious summers.

Yet 140 miles of traffic-choked roads and an international border divide the two cities, keeping them farther apart than their geographic and cultural identities would suggest.

Now the political, academic and tech elite of both cities are looking for ways to bring them closer together, with the aim of continuing the growth of two of the most vibrant economies in North America.

“Vancouver has a lot more in common with Seattle than we do with Calgary, Montreal, Toronto, anywhere else in our country,” Christy Clark, the premier of British Columbia, said in an interview. “We should make the most of those cultural commonalities.”

Photo

Pedestrians pass a Microsoft location in Seattle. American tech icons like Microsoft are expanding their presence in Vancouver, but the cost of living there is an obstacle. Credit Ruth Fremson/The New York Times

Whether their grand vision of a “Cascadia innovation corridor” — which borrows its name from the region’s Cascade mountain range — ever materializes, leaders on both sides of the border have motives for getting cozier immediately. American tech icons like Microsoft, with voracious needs for global engineering talent, are expanding their Vancouver offices, partly because of Canada’s smoother immigration process.

For its part, Vancouver wants to bring more American technology companies to the city in hopes of spinning out future entrepreneurs who will expand its comparatively small base of technology companies.

One serious obstacle to Vancouver’s tech ambitions is its head-spinning housing costs. The median price for a detached home in the metropolitan area in August was 1.4 million Canadian dollars (about $1.06 million), a 27.8 percent increase from a year earlier, according to the Real Estate Board of Greater Vancouver. In the San Francisco metropolitan area, the median single family home price was about $848,000, according to Zillow.

But while median pay for tech-related jobs is $112,000 a year in the San Francisco Bay Area, it is just under $49,000 in Vancouver, according to an analysis by PayScale, a compensation data firm. (Some of that discrepancy is due to a drop in the value of Canada’s currency relative to the United States dollar.)

We have San Francisco real estate prices with the incomes of somewhere between Reno and Nashville,” said Andy Yan, acting director of the city program at Simon Fraser University in Vancouver.

Photo

The University of British Columbia. Plans to deepen ties between Seattle and Vancouver include more collaboration between the university and the University of Washington. Credit Ruth Fremson/The New York Times

On the thrumming streets of downtown Vancouver, signs of the Seattle region’s growing economic ties to the city are hard to miss. A rectangular glass and steel office building with a large Microsoft sign occupies nearly an entire city block, sitting atop a large Nordstrom store (another Seattle brand).

Microsoft says it invested $120 million in its new offices in Vancouver, which opened in June, and expects to spend $90 million more annually on wages and other operating costs. It plans to employ nearly 750 people in the city.

Microsoft is hiring Canadians for the facility, but the country’s more open immigration policies were an important factor in its investment, Brad Smith, Microsoft’s president, said in an interview. Microsoft and other tech companies have long complained that the United States education system does not produce enough computer science graduates, forcing them to rely on immigrants from India, China and elsewhere.

Foreign workers in the United States can wait about three times as long for a work visa as those in Canada do, the Boston Consulting Group estimates. And the prospect of Donald J. Trump winning the presidency has raised concerns among tech companies, because of the Republican candidate’s comments about further restricting immigration to the United States.

“Right now, there’s just a lot of uncertainty about open immigration,” Mr. Smith said.

Last month, officials and executives from both cities huddled in a Vancouver hotel to discuss how to enable people, ideas and capital to flow more freely between them, as heedless of the international border separating the cities as a pod of orcas swimming in the sea.

Photo

Christy Clark, left, British Columbia’s premier, and Gov. Jay Inslee of Washington signed a memorandum of understanding affirming their shared interest in creating regional economic opportunities for innovation in the technology sector. Credit Ruth Fremson/The New York Times

At the Cascadia conference, Ms. Clark and Jay Inslee, the governor of Washington, signed an agreement to deepen the ties between Vancouver and Seattle, including more research collaboration between the University of British Columbia and the University of Washington. Bill Gates, co-founder of Microsoft, and Satya Nadella, its current chief executive, talked about globalization and education.

One proposal to deal with traffic between Vancouver and Seattle was for a high-speed rail line that would whisk travelers at more than 200 miles an hour between the cities in 57 minutes (it can take four hours or more by car). The details on financing the project — which could cost an estimated $30 billion or more — have not been worked out.

A group of Seattle techies proposed a cheaper alternative: a dedicated lane for autonomous vehicles on Interstate 5, the highway connecting Seattle to the Canadian border.

The plan — which relies on autonomous vehicles that still need a lot of work — would not shave much time off the commute between the cities, but could make the ride less tedious by letting travelers work or watch a movie, said Tom Alberg, a managing director at Madrona Venture Group, a Seattle venture capital firm, and an author of the proposal.

With roots in timber and shipping, Vancouver’s economy has diversified in recent decades with the growth of film and video game production. The city claims a tech “unicorn” — a start-up valued at over $1 billion — in Hootsuite, which makes social media tools.

But Vancouver remains a relative small fry in tech, with about $1.78 billion in venture capital flowing into local tech start-ups in the last decade, compared with about $8.9 billion in Seattle, the research firm Pitchbook estimates.

Photo

Microsoft offices in Vancouver. Canada’s more open immigration policies are a draw for American tech giants. Credit Ruth Fremson/The New York Times

Still, the city’s hoped-for tech boom may hit a wall if it cannot address its cost-of-living issues, which are by some standards more acute than those plaguing other thriving cities. Vancouver was ranked the third most unaffordable city in the world, after Hong Kong and Sydney, in a study published this year by Demographia, a consulting firm.

Mr. Yan has spent years analyzing his hometown’s soaring real estate values and concluded that a surge in foreign capital, primarily from mainland China, has decoupled Vancouver home prices from the local economy. British Columbia recently imposed a 15 percent tax on new home purchases in the Vancouver area by foreign buyers, a move now facing legal challenges.

The housing market is showing signs of cooling off, though it is not yet clear how much of that is because of the tax. The total number of homes sold in the area in August dropped 26 percent from a year earlier and price growth has slowed, according to the Real Estate Board of Greater Vancouver.

Dennis Pilarinos, chief executive of Buddybuild, a Vancouver maker of developer tools for mobile apps, says affordability has been less of a problem for young tech workers, who may be willing to rent smaller apartments and live with roommates.

But when start-ups get bigger, many struggle to recruit senior executives with families, said Mr. Pilarinos, who previously worked for Microsoft and Amazon in Vancouver.

“Companies tend to run into scaling issues,” he said. “You end up with fewer Microsofts or Amazons.”


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