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Amazon’s Ambiguous Power As Joan Didion once suggested: “We tell ourselves stories in order to live.” With apologies to Ms. Didion, it’s a pity that most of the stories we tell ourselves suck. When it comes to large, powerful companies, there are two dumb stories people tell themselves. Some people tell themselves that large companies become large because they are good and tough and have won the social Darwinian battle of each against each. (Blech.) Others tell themselves that large companies are predatory forces and potential monopolists who manipulate consumers and destroy the mom-and-pop stores that made our economy great. (Sigh.) Last week, the news came out that Amazon has obtained wholesale pharmacy licenses in 12 states and suddenly pharmaceutical distributor stocks have fallen off a cliff. Most people will immediately fit this news into one of the tidy, but tiresome narratives about Amazon. Only, there’s nothing tidy about this news. Imagine if Amazon is successful in this effort. It will do to pharmacies what it once did to bookstores. This will deepen the so-called “retail apocalypse,” depressing the real estate market which our economy depends on. Pharmacies tend to be the retailer of first and last resort for a lot of lower income urban populations. Which will exacerbate the problem of internet access since the people who rely on pharmacies the most are least likely to have internet access. On the other hand, the large pharmaceutical distribution companies operate as a virtual cartel, keeping drug prices high through too-cozy relationships with pharmaceutical companies. Amazon will squeeze the pharmaceutical companies (as it squeezes all of its vendors) to get bulk discounts. It will then pass on those savings to health insurance companies (by way of its customers.) Which should lead to reduced health care costs. However, lower profit margins in the pharmaceutical industry could lead to less spending on research and development. Why does this matter? The internet happened. You can't blame Amazon for that. Amazon isn’t successful because they’re mean. (Although they are a little mean.) Amazon is successful because they understand that all of this change is going to happen and they’ve decided to be ahead of the curve. Blaming Amazon for what is about to happen to pharmacies is like blaming Henry Ford because your great-great-grandfather’s horseshoe factory failed. Pharmacies are going to fail because their retail business model is failing and because they were bad to their customers. Walmart (the power behind Jet.com) has been quietly squeezing pharmacies for years. Amazon couldn’t ignore the potential that Jet would own pharmacy sales. So they acted. It’s not good and it’s not bad. In a nutshell: Pharmacies are going away. Read More Facebook’s Ambiguous Influence I could happily read Benedict Evans’ blog posts all day. This week, the Andreessen Horowitz VC comments on the influence of Facebook on social behavior by comparing it to punk style and Christian Dior’s New Look (link below.) Evans makes the point that people misunderstand the influence of Facebook on people’s behavior on social media. He claims that, just as fashion companies can introduce new looks and styles, Facebook can introduce new innovations into your social feed. However, in both cases, if those new looks don’t appeal to consumers then they will be a failure. Facebook cannot “make” consumers do things on its platform and Dior cannot “make” people wear their clothes. According to Evans, Facebook is successful because they are focused on surfing user behavior. To hear him tell it, the behavior comes first and then Facebook reacts. He contrasts this with Snapchat, which is more innovative in their approach. They try to anticipate user behavior and introduce innovations that should appeal to their users. Why does this matter? I’m going to have to disagree with Evans on this one. He makes the point that fashion companies can put clothes in stores, but consumers don’t have to buy them. Similarly, Evans says, Facebook can introduce things into their platform but consumers don’t have to use these new innovations. But he’s comparing apples and kumquats here. Facebook is able to change things in an app that is already in your pocket. A more accurate analogy would be if fashion companies could put clothes in your closet. Yes, you still could decide not to wear them. But are you really going to go out and buy a new coat when Dior has already put one in your closet? Most people would probably choose to just use the coat they find in the closet. Similarly, Evans is ignoring how Facebook leverages network effects to get people to adopt the new features they introduce. To stretch our analogy to the breaking point, Dior would not only put the coat in your closet but would also host a really awesome party with all your friends that you can only attend if you wear the coat. Suddenly, that influence is feeling a little coercive. In a nutshell: Sorry, Ben. Facebook is doing much more than just surfing user behavior. Read More Ethereum vs. Bitcoin Cryptocurrencies are misunderstood. Some people imagine that Bitcoin was created to handle black market transactions on the Dark Web. Bitcoin is good for that. But it was actually created as a sort of thought experiment. Could a system be created that would allow for transactions in a trust-free environment? Bitcoin solved this problem by creating the block chain – literally “blocks” of transactions that were cryptographically linked to one another. The transactions cannot be falsified because the falsification would contradict the other elements in the block and the fake data would stand out immediately. The minute Bitcoin was released, people started to understand how a system that facilitated unfalsifiable, high security transactions could be useful for things beside a cryptocurrency. After all, our economy depends on transactions of money and data. Ethereum was constructed to replicate the awesome functionality of the blockchain in a looser, programmable form – a platform for building blockchain-based programs. The blockchain demands that there is a large, open network of computers to process and verify transactions. Ethereum “borrows” this processing power from its users and gives them Ether coins in return. So Bitcoin is a cryptocurrency that uses the blockchain, but Ethereum is a blockchain platform that uses a cryptocurrency. Why does this matter? Bitcoin has been on a bit of a tear lately. Although I disagree with J.P. Morgan chief Jamie Dimon on his negative assessment of Bitcoin, I do agree that the present valuation owes more to speculators than to some inherent, useful value. I doubt there is enough of a need for Bitcoin-based payments to justify the implied demand. But leaving aside speculators, there is another reason Bitcoin is so highly valued. Investors have begun to grasp the power of the Blockchain and are investing in Bitcoin as a proxy for the entire category. It’s being treated like an ETF for the Blockchain. Investors who are interested in Bitcoin for this reason, would be well-advised to look at Ethereum instead. The company offers a technology platform and Ether coins have the benefit of deriving some value from the transactions they facilitate. For Ether coins, Ethereum-based programs are like gold in Fort Knox. The dollar doesn’t need that gold to be valuable, but it doesn’t hurt things to know it exists. In a nutshell: I don’t give investment advice. But if I did, I would probably suggest investing in Ether rather than Bitcoin. Read More

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