In the global online economy, there are winners and losers. The winners win big and become whales, and the losers go the way of Eaton’s and its mail-order catalog. With 90 per cent of web traffic going to just the top 10 sites, there is no online middle class. The COVID-19 pandemic has elevated major online retails – Amazon especially – to the status of an essential service. Between industry consolidation and being deemed an essential service, are online retails too big to fail, and thus in need of regulatory action? .The first issue is one of creative destruction. If these online whales are too big to fail, what will happen to capitalism without creative destruction? The libertarian argument is that no firm is too big to fail and there should always be creative destruction. Eaton’s was once the largest retail business in Canada and its mail-order catalog played arguably a more important role in the lives of rural families 75 years ago than Amazon Prime does today..The classic Canadian children’s book, The Hockey Sweater, might have never been written if set today. Instead of accidentally ordering the socially unacceptable jersey of the Toronto Maple Leafs from Eaton’s English mail-order catalog and being stuck with it, Roch Carrier’s mother would have used a French language version of Amazon.ca to ensure she was ordering the correct Maurice “Rocket” Richard number 9. She also would have enjoyed Amazon Prime two-day free shipping and all the related streaming video and music that comes “free” with the Prime membership. Perks that didn’t exist in the town of Sainte-Justine, Quebec in 1946..While Amazon is the whale of both business-to-business cloud computing and online retail, it is hardly the first large tech business or large retail business. It is also not alone in the competitive landscapes it dominates. In the same way that Eaton’s used to dominate mail-order and large retail, nothing lasts forever, and there’s no grantee that Amazon will enjoy perpetual dominance – or even rival Eaton’s 100+ year corporate existence. Brick and mortar retailers are constantly expanding their online presence to rival Amazon both from an online order standpoint as well as providing live inventory. Free two-to-three-day shipping is convenient, but so is buying online at lunch and picking it up from your local store’s customer service desk on your drive home from work. Although this only applies during normal times, during a pandemic with mass social distancing, the advantage swings back towards Amazon..In the cloud computing business, Amazon is up against other giants like Google and Microsoft as well as software-as-a-service solutions sold directly by major software vendors like Oracle. When HP purchased IT outsourcing company EDS in 2008 for $14 billion (USD) to become a rival to outsourcing whale IBM, Amazon Web Services (AWS) was two years old and so small that it didn’t even fully host Amazon.com. Fast forward a few years and AWS is the cloud whale that upset the outsourcing industry apple cart. IBM has had to refocus on high margin services, consulting, software, and revolutionary AI solutions like IBM Watson. Whereas HP – once the world’s largest IT company – announced an $8 billion accounting write-down on the value of their EDS outsourcing business in 2012, shut down their AWS competitive cloud business, and split into two much smaller companies in 2015. .While retail giants have typically been dominant over the course of a century, the lives of modern IT companies are at far greater risk of being the victim of creative destruction. The internet survived the rise and fall of Nortel, HP EDS, Blackberry, and many more technology whales. The internet would survive a loss of AWS..Companies eager to be described as “too big to fail” are often eager for regulatory action tailored to advance their interests. Amazon is no better or worse in this regard, always willing to entertain discussions about regulatory burdens for their competitors and direct taxpayer subsidies. The massive loans and grants being offered in response to COVID-19 have businesses big and small jockeying for a slice of taxpayer money. Taxpayers must remain vigilant lest the aid packages disproportionately end up in the hands of the politically well-connected firms that need it the least..It has been reported in the Wall Street Journal and the Financial Post that Amazon, as well as other online retailers, benefit greatly from lower delivery costs afforded to them by the money losing U.S. Post Office and Canada Post. While all online businesses that ship using the government-owned post offices benefit relative to retail locations, Amazon – the largest online retailer – enjoys the bulk of the indirect subsidy. Estimates put the value of this subsidy in the billions of dollars in the US. While lobbyists for physical retail businesses are looking for equally generous subsidies the better solution, and the one employed in Germany, is to privatize the postal service and end the taxpayer subsidy for shipping..A more egregious and direct subsidy was the competition for Amazon’s “HQ2” second headquarters project. The competition involved governments submitting bids – like they would to the International Olympic Committee – to buy Amazon’s residency with tax breaks and direct handouts. New Jersey and Maryland both submitted bids that – had they been successful – would have been close seconds to the largest state funded tax subsidy of a corporation in US history: Washington State’s $8.7 billion (USD) handout to aviation giant Boeing. The blatant crony capitalism was ridiculed by Reason.com with a brilliant satirical video..With the downturn in the aviation industry caused by COVID-19, Boeing is back at the trough asking for more taxpayer funded handouts. Boeing’s current crisis is largely one of its own making. Its trade dispute with Canada over the Bombardier C-Series jet ended up backfiring spectacularly. The Canadian Government cancelled a planned order for Boeing Super Hornet fighter jets and Bombardier – driven to exit the commercial aviation market – sold the C-Series to Airbus. The deadly 737 Max scandal alone should disqualify Boeing executives from expecting any sympathy from the general public. If Boeing needs money, then it should sell bonds, issue new shares, or sell parts of its business. The military jet businesses Boeing acquired through its 1997 merger with McDonnell Douglas would undoubtedly fetch billions..On March 31, 2020 Alberta Premier Jason Kenney announced a plan that “will accelerate the diversification of Alberta’s economy:” a plan to invest $1.5 billion in the Keystone XL pipeline for an undisclosed equity state in the project and provide $6 billion in taxpayer loan guarantees to TC Energy (the $1.5 billion “investment” would come from new Alberta Government debt). Premier Kenney explained that this deal was the result of six months of negotiations between TC Energy and government officials and claimed that without this investment the pipeline would have not been built. .In justifying partially nationalizing a pipeline Kenney said, “our failure to get pipelines built has been a failure of government policy and politics, not of markets.” The previous week, the premier accused Russian and Saudi oil companies of “predatory dumping” and proposed trade barriers to keep foreign oil out of North America. Trade barriers, mandated curtailment, and taxpayer ownership of pipelines all adds up to a new National Energy Program based around a government supply management scheme..TC Energy is a heavily regulated multibillion-dollar company with billions of dollars in annual profits. Until recently, TC Energy seemed committed to building the pipeline. So long as “more government” is the solution, then the taxpayer is always going to be asked to fund bigger and more expensive government. Why would anyone build a multibillion-dollar project in Alberta in the future without first engaging in rent-seeking to see if they too can get a $1.5 billion equity deal with $6 billion in loan guarantees?.In The Wealth of Nations, Adam Smith pointed out that cronyism and collusion are nothing new, writing “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” However, he also went on to warn that regulations to prevent such meetings would be inconsistent with liberty and would likely make things worse. The best solution for policy makers wrote Smith, was to simply “do nothing to facilitate” such cronyism..The old French proverb, “The more things change, the more they stay the same” rings true today. The optimal policy solution for regulating modern commerce remains the same optimal policy solution proposed in 1776, when commerce was powered by sail and horse (steam railways were invented in the early 1800s): policymakers should neither help nor hinder big companies..Alex McColl is the National Defence Columnist with the Western Standard and a Canadian military analyst
