Amazon Sweepstakes: The Finalists Who Aren’t

Member Group : Keith Naughton

Twenty locations have made it to the second act of the kabuki also known as the Amazon HQ2 competition.  But it’s not really a competition.  I still contend that Amazon has had a short list of 3-4 cities (or fewer) from Day One.  The real purpose of the competition has been threefold:  1) Publicity; 2) Generate a bidding war; and 3) Collect free data to be used for other locational decisions by Amazon.

As for the ultimate winner, only Jeff Bezos knows.  But, here are the likely losers.

Toronto:  Toronto has two strikes against it:  Canada and incentives, or the lack thereof.  There is no chance Amazon locates HQ2 outside of the US.  Canada has just 11% the population of the US and less than 9% the GDP.  Amazon is not going to risk regulatory or trade blowback by locating HQ2 outside the US.  Further, Toronto offered no incentives.  Amazon is not likely to go for the biggest check, but the unwillingness of Toronto to offer financial incentives indicates a city not willing to bend itself for Amazon.  And the company is going to need plenty of political help to operate flexibly and efficiently.  Why is Toronto on the list?  Politics.  Canada is still an important market and naming at least one Canadian city as a finalist is smart and Toronto is a more plausible candidate than Flin Flon.  Sorry, Toronto, you are #1 on the “No Chance” list.

Los Angeles:  High taxes, onerous regulations and a housing crisis make Los Angeles #2 on the No Chance list (Pacific Time Zone doesn’t help, either).  One of the main drivers for HQ2 is rising costs and congestion in Seattle.  Los Angeles has these problems on steroids.  No incentive package will make up for the cost of doing business in southern California.  Unless LA is willing to de-regulate the housing supply, Amazon workers are going to be faced with worse costs than in Seattle.  Like Toronto, Los Angeles is on the list for political purposes.  Amazon Studios is in LA.  Making the city a finalist is an easy gesture to a city where Amazon has a significant investment.

Miami:  There are a lot of things to like about Miami, no state income tax, business-friendly regulations, sun, surf, Latin American connections, etc.  Unfortunately, these factors don’t overcome the problems.  Miami has no major research university focused on tech.  Miami has not been an incubator of new technology — HQ2 would be a tech outpost.  Climate change is even more trouble.  There’s little chance Jeff Bezos, firmly in the climate change camp, is going to commit to low-lying Miami.  My guess is that the inclusion of the city is a publicity gift to Bezos’s hometown.

Washington DC and Montgomery County, MD:  My personal hunch is that the Washington DC area is the frontrunner, but northern Virginia would be the top choice.  The city and Maryland are just on the list to squeeze a better deal from Virginia.  DC has three big unique problems.  First, the city is a ward of the federal government and not fully in control of its policies – that lack of control allows Congress to mess with Amazon on very narrow, local issues.  Second, with no voting representation in Congress, there are no hometown Senators or Congressmen to defend the company.  Third, having a DC address itself is not good public relations for a company.  There’s a reason that, in an urban agglomeration of over 9 million, DC only has two major publicly traded companies headquarters – and one is Fannie Mae, a creation of the federal government.

As for Montgomery County Maryland, the county just cannot compete with northern Virginia.  Maryland is higher tax and higher regulation than Virginia.  HQ2 would create increased housing demand that would be hard to supply.  From media reports, only one site is really on offer – the empty graveyard of a deal mall — not a lot to choose from.  Maryland is not competing with 19 other “finalists,” it’s competing with Virginia.  And it’s not going to win that battle.

And now for places that might be in the running, but shouldn’t:

New York:  The city that seems to have it all, business infrastructure, international links, culture, etc. is not only expensive and congested, it’s a political minefield for Amazon.  The company may be the belle of the ball now, but the second it commits to New York it becomes just another interest group in shark-infested political waters.  Neighborhood groups are highly organized and effective obstructionists.  Other industries are going to demand their own tax breaks – or seek to undermine Amazon if they see the company as a competitor.  Already Morgan Stanley is demanding an equivalent incentive package for its new headquarters in Manhattan.  Amazon’s moves into media and finance strike at major incumbents in the New York area.  Unlike pro-business cities like Atlanta and Dallas, or mid-tier cities where Amazon can dominate politics (Columbus, Indianapolis, Pittsburgh), Amazon is practically guaranteed to be stuck in a political morass and will find the city much more expensive than it thinks.  The bright lights of the big city just aren’t worth it.

Chicago:  The Second City presents a similar cost problem to New York, but in a different way. Chicago and Illinois have the worst public finances anywhere in the US.  Not only is any incentive package unaffordable, the city and state are going to go through an incredibly painful fiscal reckoning.  In addition, city politics are corrupt and overflowing with rent-seekers.  Amazon presents a juicy target for demands.  Once Amazon commits, the power balance will shift against it.  The corrupt politics and fiscal problems will present Amazon with a very big bill.

All the Amazon contestants have their pluses and minuses, but Toronto, Los Angeles, Miami, Washington DC and Montgomery County have the biggest strikes against them.  Too bad there’s no participation trophy up for grabs.