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Amazon’s HQ2 Gambit

Amazon Spheres, panoramic detail
Amazon Spheres, Seattle. Photo by Flickr user W & J.

Part of what has made Amazon so successful is the company’s ability to make virtue of necessity. In the case of its recent “HQ2” announcement, Amazon proved it can make profit of necessity, too.

A little more than a year ago, Amazon created a frenzy reminiscent of the search for Willy Wonka’s golden ticket when it announced it would take bids for a second headquarters. As my colleague Paul Jacobs pointed out at the time, the winner of HQ2, as it was quickly dubbed, would get an infusion of capital and jobs, but could also expect to pay handsomely for the privilege.

On Nov. 13, the search officially ended. Amazon announced not one, but two winning cities: Long Island City in Queens, New York and the Crystal City neighborhood of Arlington, Virginia.

There was no shortage of Monday-morning quarterbacking regarding these decisions. But as with most of Amazon’s moves, the business logic is easy enough to follow.

Amazon decided it needed a lot more space, and a lot more talent, than it had in its Seattle home base. By referring to its new concentration of both as a “headquarters,” it encouraged a bidding frenzy among cities hoping to host the future location. In January, Amazon selected 20 finalists from 238 initial applicants in the U.S., Canada and Mexico. (Other than Toronto, all of the finalists were U.S. locations.) States and cities were eager to offer a variety of incentives, including grants and tax breaks, to try to sway the retailer.

With the announcement of its final choice, Amazon made clear it was not going to deliver a second headquarters at all. Indeed, some academics labeled the so-called HQ2 a “marketing ploy” from the outset. More current, harsher characterizations have included “stunt” and, dramatically, “an absurd spectacle, concluding with a plot twist, which revealed a deep and dark truth about the modern world.” But Amazon is not the showrunner of a reality series; it is a business, and one famously ready to pivot when it sees an advantage to doing so.

If a second headquarters was ever the plan, that plan had been abandoned by the time Amazon concluded it should split its new offices between two locations. Doing so will secure it more talent, transit options and housing. It also likely secured it more money, by keeping more cities in the finals, spurring on competing offers. The Wall Street Journal reported that Amazon has secured $1.525 billion in incentives from New York state and $550 million from Virginia, with the potential for $200 million more contingent on job creation. It also expects to secure additional incentives from New York City and Arlington. Amazon picked up some cash from Nashville, Tennessee, too; an HQ2 finalist itself, the city will become a major operations center for the company.

Amazon’s actions follow a trail blazed by many other companies, notably including large defense contractors. The idea is simple: Put facilities in as many jurisdictions as possible to build maximum political support. Defense contractors like to spread their workforce across congressional districts, the better to win bigger appropriations. Multinationals make the most of their footprint in a variety of ways too, including identifying the most beneficial regulatory and tax environments. Amazon is spreading itself among states and cities to win better legislative and regulatory treatment.

All of this may, in part, serve as a large reality check for the city of Seattle. Amazon can demonstrably put as many jobs as it wants in other places, and is happy to remind its home town of that fact – just in case Seattle is ever tempted to revisit the head tax it enacted, and promptly repealed, to try to make Amazon and other large local employers pick up the tab for dealing with the city’s large homeless population. Amazon is not-so-subtly alerting Seattle that a lot of housing could abruptly become available if the “everything store” takes its workforce elsewhere.

Beyond the financial incentives and other inducements, Amazon gathered a lot of data about various metropolitan areas from its HQ2 search. That data could be useful for future expansion, or for leverage in disputes with the cities where it already operates.

Amazon’s expansion choices display good business sense, beyond any intended message to Seattle. Crystal City, a suburb of Washington, D.C., is a good location for running operations like the Amazon cloud and data centers that have military and other government application. In sharp contrast to Google and other Silicon Valley tech firms, Amazon has shown no reluctance to work with the military and other arms of the government.

New York, meanwhile, offers a more hospitable business climate than California. The weather is not always as nice, but there are no wildfires, no earthquakes – and, perhaps most importantly, no legal barriers to enforcing noncompete agreements for employees. Although Los Angeles made the short list of finalists, I suspect it never had a serious chance of winning. Amazon founder and CEO Jeff Bezos is not in the habit of inventing new lines of business so that his employees can build them via their own startups.

Most companies with multiple “HQs” set themselves up that way for tax and other regulatory reasons. As a practical matter, a real headquarters is where the decisions are made. In Amazon’s case, that probably is wherever Bezos happens to be at the moment. But given the decentralized structure of the company, each business unit may effectively have its own “HQ,” subject to strategic review by the Big Boss. In reality, the new Amazon locations are likely to just be large branch or divisional offices.

Whatever they are called, and whatever they actually are, the new Amazon digs in New York and Virginia will have more or less the same impact on their surrounding communities. But their impact on Amazon’s bottom line was probably bigger for giving them two capital letters.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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