Amazon has all but confirmed the two winning cities of its search for a second headquarters (“HQ2”) – Crystal City, VA and Long Island City, NY, in the suburbs of Washington, DC and New York City, respectively. The project was initially proposed as an equal to the company’s Seattle headquarters with a promise of 50,000 jobs and $5 billion in investment. What began as a beacon of opportunity for less educated and developed cities is now reportedly being split between two of the least needy cities in the country. Consequently, the yearlong search has revealed some key information about Amazon and the economic future of the United States.
Firstly, Amazon is still a profit-driven technology conglomerate that needs its aggregated network of young professionals to thrive. It operates within the same tech economy as the rest of the US, where cities such as Seattle and San Francisco, with wealth, opportunity, infrastructure and highly educated workers continue to attract more of the same people and businesses. Amazon needs its localised network of smaller service businesses and these businesses need Amazon. As the cycle suggests, rich cities will only get richer with Amazon. So what will Crystal City and Long Island City deliver?
Crystal City, in the neighbourhood of the official and political capital, is home to top US universities such as Georgetown, an international airport, government agencies, defence contractors and security companies. Many of these groups rely on Amazon Web Services; with a central hub already operating in Northern Virginia, Amazon’s cloud-computing arm generates most of the company’s operating income. Moreover, Crystal City is a ten minute drive from Capitol Hill and the White House, where every regulatory decision in Amazon’s foreseeable future will be made. “It’s hard to think that regulatory issues won’t become a big driver for them going forward … everything from tariffs to potential Federal Trade Commission questions over monopoly power in pricing or Alexa voice search,” explained Aaron Cheris, head of Bain & Company’s American retail practice. “Demographics and population density and access to government were going to be really hard for anyone else to overcome.”
Long Island City offers similar access to New York City, itself a burgeoning hub for financial services technology. Beyond being the largest metropolitan economy in North America, New York is of course home to Columbia University and NYU, and attracts the highest calibre of college graduates every year from across the country.
Although setting up in these cities will likely require far more than a $5 billion investment, from a long-term growth perspective this decision makes absolute sense. By placing HQ2 in Washington or New York, economists expect the 50,000 workers there to be more productive than if the same 50,000 jobs were dropped into Denver or Atlanta. Simply locating them near so many other tech workers increases the likelihood that Amazon invents more services, connects to more markets, and makes more money. Albeit larger, a safer investment.
Crystal City and Long Island City appear perfect for Amazon to set up their new base. It is hard to believe that a year ago there was any belief at Amazon that a less educated, developed city would be chosen. So why did Jeff Bezos spend so long encouraging smaller cities to apply? Simply, data. Amazon is algorithm-driven. Its business has always been about leveraging its ever-growing mass of consumer and seller data to optimise strategy across its platforms.
238 cities applied to become Amazon’s HQ2. They were asked to submit proposals that included city plans for access to public transit, airport connections and top universities. Of course, this was simply a proxy to distract from the knowledge that only a global city with the right network of talent and services could serve as the ideal home for Amazon. As the New York Times reported, communities that vowed to rapidly build the transit from scratch missed that point. But of course the Amazon request didn’t say, “We’re looking for knowledge spillovers and agglomeration effects.”
A key to Amazon’s e-commerce business model is its delivery network. Amazon has pioneered the acceleration of delivery times. Its warehouses are located within 20 miles of 31% of the US population. As standard delivery times get faster, critical to future strategy will be deciding the optimal locations for warehouses, regional offices and data centres. Amazon’s model will now apply economic development information for 238 cities when it makes further expansion decisions.
Joseph Parilla, a fellow at the Brookings Institution’s Metropolitan Policy Program, called it “the largest database of political and civic intelligence at the local level in the world.” Accessing the information may have been somewhat manipulative, but it is hard to argue with Bezos’ commercial brilliance. “They were able to basically crowdsource every current or planned transportation investment, infrastructure investment, housing site plan, potential real estate site, workforce development partnership and university research and development partnership. And they got the willingness to pay in terms of incentives. That is the gold mine,” Parilla said.
Evidently the economic steam train of Amazon and Jeff Bezos has plenty of levers left to pull. For better or worse, both the direction of American tech innovation and its wealth concentration could be following close behind. As New York and Washington continue to grow, we hope that their success trickles down to the cities now acting as data points in the Amazon algorithm, that could really use an investment like HQ2.
Lachlan Mackay is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.