×

A former Amazon exec explains why Newark is a doubtful choice for HQ2

  • Cities that think Amazon will make its decision based on short-term — and 10 years is short-term — incentives are sadly mistaken, writes Amazon's former VP of Relational Database Services.
  • Amazon is a company where it is always "Day 1" and would want HQ2 to be in a location that is supportive of a Day 1 company, if not outright still in Day 1 itself.
  • Local reactions to Day 1 disruptions like Uber can offer a useful test for how cities would support a new Amazon headquarters.
People walk past the signature glass spheres under construction at the Amazon corporate headquarters on June 16, 2017 in Seattle.
Getty Images
People walk past the signature glass spheres under construction at the Amazon corporate headquarters on June 16, 2017 in Seattle.

Let me start off by saying I have no non-public information about Amazon's search for a second headquarters, aka HQ2. And I have no idea how Amazon's senior leaders will score proposals and make a decision.

But I have a couple of observations I'd like to make based on how Amazonians think.

Last week's big news on the HQ2 front was how Newark was offering $7 billion in incentives if Amazon chose it for HQ2. The $7 billion was composed of $5 billion over 10 years from the state of New Jersey and $2 billion over 20 years from the city. Nice.

But cities that think Amazon will make its decision based on short-term incentives — and 10 years is short-term for Amazon — are sadly mistaken. Incentives are going to be a tie-breaker, not the primary driver of a decision.

Amazon thinks long-term, so senior leadership is going to be thinking about picking a location that they believe will be the right one for 2030, 2040 and 2050. Incentives that mostly run out in the 2020s won't mean much if it means having 50,000 people in the wrong place in 2035. So they will narrow things down based on other criteria, get to a few finalists, then start weighing the value of the incentives.

The Uber test

On Facebook, a friend who grew up in Memphis suggested that city for Amazon HQ2. This was in response to The New York Times' analysis saying HQ2 would go to Denver.

Memphis isn't an obvious choice, and I don't know how it lines up with the official criteria. So how can one quickly weigh if Memphis, or any other location, would be a good choice for Amazon?

Amazon is a company where it is always "Day 1". Among other things, that means it tends to pursue disruptive ideas, such as using drones for deliveries. Amazon would want HQ2 to be in a location that is supportive of a Day 1 company, if not outright still in Day 1 itself. What I needed was a simple test for Day 1 type disruptions, and the last decade presented us with a perfect one: Ride sharing, and more specifically Uber.

Uber has been disruptive in applying technology to an urban transportation system (taxis) that hasn't changed significantly in almost a century, and has deeply entrenched interests. Moreover, that system had become highly regulated with substantial public bureaucracies and government revenue streams linked to them. So wherever Uber (or Lyft) went, it was going against "the system" and friction was to be expected. What you could measure, very quickly thanks to Google and Bing, was just how much friction (or support) Uber ran into with local government.

So I did a search on Memphis and Uber and discovered that in 2013 the city of Memphis had sent its police force to arrest Uber drivers. That seemed like a pretty extreme case of being unfriendly to Day 1 type disruptions, and I pointed that out to my friend.

He pointed out this was 2013 -- four years ago -- so I did a search on Denver and Uber and discovered that in 2013 the Colorado Legislature became the first in the country to explicitly legalize ride-sharing. What Colorado Governor John Hickenlooper said at the time was, "Colorado is once again in the vanguard in promoting innovation and competition while protecting consumers and public safety." And when there was some friction in the city of Denver after that, the Police Chief acted quickly to resolve it.

Which makes more sense to locate the headquarters of a Day 1 company in: A place that sent the police to arrest Uber drivers or one that acted quickly to accept and encourage the disruption?

So let's get back to Newark. There are many reasons I could think of for picking Newark as HQ2. In particular the close proximity to New York City and all its benefits, with much better housing costs. Making the reverse commute from Manhattan to nearby New Jersey cities has even become reasonably common in the last 20 years. The incentives being offered are nice, but again they are a short-term benefit in a long-term play.

So I applied the Uber test to Newark, and it failed miserably.

Newark was still trying to force Uber into their taxi regulatory scheme as recently as 2016, banning them from Newark Airport and train station in February and planning to enact further regulation in April. Uber was planning to abandon the city when a last minute deal was reached. Compare what Newark Mayor Ras Baraka said about Uber —"Just because they have a great idea, doesn't mean they have an exemption from rules and regulations that have been in existence for decades," — with the earlier quote from Colorado Governor Hickenlooper.

I was particularly caught by the "rules and regulations that have been in existence for decades" part. That doesn't read like a Day 1 supportive location to me. It is quite possible that those words will come back to haunt Mayor Baraka when Amazon is evaluating the HQ2 proposals.

The Uber test isn't perfect for a couple of reasons. One is that pretty much any locality that regulates taxis and limousines will try to put some regulatory regime around ride sharing. The other is that Uber itself has valued confrontation with local governments and agencies over reaching an accommodation, and that in some cases has raised the heat significantly. For example, I know of airports where Lyft was able to pick up months before Uber, because they negotiated a deal while Uber was still trying to fight the local airport authority.

So the Uber test isn't black and white, it is varying shades of grey.

But compare the light grey of Denver to the very dark grey of Newark and it, at the very least, gives an indication of which city would be more accommodating to a company where it is always Day 1.

This post was originally published on Berenson's blog on Oct. 17.

Hal Berenson is President of True Mountain Group, LLC which provides technology and management consulting. He previously worked at Amazon Web Services and Microsoft.