Photo:
Reuters/Ralph D. Freso
November 6, 2017
Quartz Media
There’s precedent for Amazon competing with so many companies. It doesn’t end well.
Perhaps no other company in history has sold so many different products ( 354 million) while competing against so many other companies (hundreds). In the past, that power hasn’t lasted. Amazon is betting it will be different.
Amazon today is a retailer, a logistics network, a book publisher, a movie studio, a fashion designer, a hardware maker, a cloud services provider, and far, far more. The private equity firm Pitchbook estimates the company Jeff Bezos founded in 1994 competes head-to-head with at least 129 major corporations just in major markets. That number grows higher as it adds new business units such as fashion, food, and analytics.
The company so far has escaped serious antitrust scrutiny by US regulators in part because it can point to so many commercial adversaries with a piece of the market. Even in its primary business—e-commerce—Amazon only took in 23% of the $395 billion Americans spent online last year, and far less when that spending is broken down into individual markets. The one exception is books, where it controls about 65% of the e-book market.
But Amazon’s unprecedented logistics and delivery infrastructure, paired with access to personal data about Americans’ purchasing habits, means it is unique in the history of global commerce. No company has ever wielded this combination of consumer insight and infrastructure, say historians and legal analysts, which means the company grows stronger and less assailable with every purchase.
The seed of Bezos’s vision of a store that could sell everything was planted long ago. Bezos told shareholders (pdf) in 1998 that Amazon “may make decisions and weigh tradeoff differently than some companies…At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.” Not much has changed. This year’s $13.7 billion Whole Foods acquisition, and Bezos’s personal purchase of The Washington Post in 2016, are merely stepping stones in Bezos’ globe-spanning ambitions.
Regulators are starting to size up whether Amazon is on the verge of becoming a monopoly. Amazon may find it doesn’t like the answer.
Everyone is a competitor
In industry after industry, Bezos is playing a ruthless game. The Amazon CEO charges into unsuspecting markets, slashes prices and waits for others to adjust or perish. The retail industry is a case in point. Out of 350 global retailers surveyed by JDA Software and PwC this year, only 10% say they have figured out how to make money off orders that involve both the web and their physical stores, thanks to high labor and logistical costs.
The Bezos adapt-or-die strategy is stressing out his fellow executives. In this year’s second quarter, 10% of all earnings calls in the US mentioned Amazon, including McDonald’s, Johnson & Johnson, and 3M, reports Reuters. The German drugmaker Bayer, which saw its profits fall 17% in the third quarter of 2017 as pharmacies closed, even has a name for it: “ the Amazon Effect.”
Those mentions are largely from fear, says Rob Siegel, a lecturer at Stanford’s Graduate School of Business. He interviews dozens of global business leaders in industries from finance to packaged goods. “I often ask them what are you most worried about,” he says. “I hear Amazon more than any other company, by a long shot.” That panic was on public display the day Amazon announced it had acquired the Whole Foods supermarket chain. Within two hours, the market value of industry incumbents had plunged by almost $12 billion
Amazon’s strategy drives down prices by leveraging a direct relationship between customers and its massive e-commerce and logistics operations. This “ flywheel” attracts even more loyal customers who return for the convenience and low prices. Amazon’s scale means it can cross-subsidize huge losses from different ventures, plowing profits back into businesses that work. The aim is not to make money on any particular service; Amazon likely lost $7.2 billion on shipping last year and is selling hardware supporting its virtual assistant Alexa around or below cost. It’s adding to the value of the system itself. Entire industries are loss leaders for Amazon. For companies that must make money on what they sell, it’s a terrifying prospect.
So is Amazon a monopoly?
This unprecedented economic power does not make Amazon a textbook definition of a monopoly. Online spending still is just 8% of the $4.8 trillion Americans spend on retail purchases, reports the US Census Bureau. Cusumano, who wrote a book on Microsoft’s antitrust trouble in the 1990s, suspects market share will not be a lever regulators use to go after Amazon, if they do.
“The government can’t even make the claim that Amazon has a monopoly on retail, and that’s their strongest position,” he says. “All the other markets are smaller. Ultimately, you have to look at market share and whether they are abusing their position.”
But they are, argues Lina Khan in the Yale Law Journal . Anti-competitive behavior is at the core of Amazon’s growth. Kahn states that many of the practices that make Amazon the behemoth it is today would have been considered illegal a few decades ago. The nature of predatory pricing, prohibited under earlier, more expansive views of antitrust law, is changing as commerce moves online, but the effect is the same.
So far Bezos has deftly skirted antitrust laws by trumpeting Amazon’s ability to lower prices. Eventually, however, the company may reach a tipping point. Some 44% of Americans (paywall) go to Amazon first when searching for online products and more than half of all e-commerce growth in 2016 came from the online retailer. “The more goods and services Amazon sells, the more customers it has, and the more likely it becomes that more buyers and sellers will use Amazon, especially if competitors vanish or falter,” writes Cusumano . “With weak or no competitors, Amazon is also free to raise prices.”
Don’t expect Amazon to play nice once it gains true domination. Journalist Brad Stone’s chronicle of Amazon’s early years (paywall) depicts Bezos as a ruthless operator who pushes employees to the brink (posting ambulances outside of warehouses on hot days instead of installing more air conditioners) and competitors toward bankruptcy.