There Are Only Two Amazon Stories That Matter

It's the monopoly and the marketplace

Mar 14, 2019

What exactly is Amazon?

Amazon is an online retailer (you might say the online retailer) and a logistics company built to support that retail business.

It’s many other things as well, but at its core, that’s what Amazon is.

In a different world, one that developed along the trajectory of the personal computer and the open web of the late 1990s, when Amazon was beginning to thrive, one might imagine that this would be all Amazon is. And by all likelihood, this would be a very successful company. Maybe as successful as Amazon is today.

We do not live in that world.

That was driven home by Elizabeth Warren, Senator of Massachusetts and Democratic candidate for the Presidency, in what was at least the second most consequential Medium post in Amazon’s history.

In “Here’s how we can break up Big Tech,” Warren singles out Amazon by name, along with Facebook and Google, as an example of a still-young web company that’s exercising monopoly power over the marketplace. Amazon needs to be regulated as a utility, Warren argues. And Amazon needs to be unwound, its recent mergers undone, parts of its company spun off or dissolved.

Here are Warren’s examples of where the tech giants have run afoul of the principles of antitrust law. I’m going to focus on the points where she names Amazon.

America’s big tech companies have achieved their level of dominance in part based on two strategies:
Using Mergers to Limit Competition… Amazon has used its immense market power to force smaller competitors like Diapers.com to sell at a discounted rate… Rather than blocking these transactions for their negative long-term effects on competition and innovation, government regulators have waved them through.
Using Proprietary Marketplaces to Limit Competition. Many big tech companies own a marketplace — where buyers and sellers transact — while also participating on the marketplace. This can create a conflict of interest that undermines competition. Amazon crushes small companies by copying the goods they sell on the Amazon Marketplace and then selling its own branded version…

Here is Warren’s proposed remedy:

[M]y administration would restore competition to the tech sector by taking two major steps:
First, by passing legislation that requires large tech platforms to be designated as “Platform Utilities” and broken apart from any participant on that platform.
Companies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties would be designated as “platform utilities.”
These companies would be prohibited from owning both the platform utility and any participants on that platform. Platform utilities would be required to meet a standard of fair, reasonable, and nondiscriminatory dealing with users. Platform utilities would not be allowed to transfer or share data with third parties…
Amazon Marketplace, Google’s ad exchange, and Google Search would be platform utilities under this law. Therefore, Amazon Marketplace and Basics, and Google’s ad exchange and businesses on the exchange would be split apart.

And:

Current antitrust laws empower federal regulators to break up mergers that reduce competition. I will appoint regulators who are committed to using existing tools to unwind anti-competitive mergers, including:
Amazon: Whole Foods; Zappos

My first reaction to Warren’s post is this: any attempt to designate and regulate Amazon’s marketplace as a platform utility is much more serious and much more relevant to antitrust issues than any attempt to forcibly spin off Whole Foods, Zappos, or Amazon Basics. Whole Foods in particular is really at the periphery of where Amazon’s antitrust problems lie. It’s not clear to me how or why it’s included here other than that this is a political document and it’s pretty easy to make political hay out of the fact that Amazon owns Whole Foods. Relative to Amazon as a whole, Whole Foods is unpopular, Amazon’s acquisition of Whole Foods was unpopular, and therefore any attempt to unwind it makes the corresponding plan seem slightly more popular.

With Amazon Basics, Warren is on more solid ground, even if she is attacking something that is quite common practice among all retailers. Amazon really does sell its own goods on its extremely popular marketplace, and those goods arguably have an unfair advantage over their competitors. What’s more, Amazon can use its data on what’s been sold in its marketplace to create its own competing products, and/or buy the companies that are selling well. There’s nothing particularly digital about this strategy, though; Wal-Mart and Kroger and Sears and Target have done the same thing for years. You have to cast a wider net and do something other than call something a platform utility in order to stop this anti-competitive practice; otherwise, you give the brick-and-mortar retailers a competitive advantage.

The weird cases are the ones that are in between. What about the Amazon products that Amazon offers on its marketplace that have no exact competitors, because the products offer unique access to Amazon’s digital marketplace? What about the Kindles, the Kindle Fires, the Kindle Fire TVs, and the Echos? Are these products spun off? Are they required to offer equal access to other digital marketplaces? Are their competitors required to do the same?

Here is really the original sin of digital marketplaces and monopolistic lock-in. And it’s a sin Amazon participates in but didn’t create.

It really starts in this generation with Apple and iTunes. Apple had a series of very popular post-PC devices, beginning with the iPod and culminating in the iPhone, iPad, and Apple TV. If you wanted to buy media for use on these devices, you had to use Apple’s marketplace, iTunes. If you wanted to sell software for use on these devices, you had to use Apple’s marketplace, the App Store.

Once that example was set, every other company hoping to sell digital media and software for this new generation of devices had to create their own line of devices, their own marketplaces, and in some cases, all new categories of devices and types of software, and all-new business models to entice customers to come along. That’s how you get the Kindle, the Kindle e-bookstore, the Echo, the Fire TV, Amazon Prime Video, the Kindle phone, the tablets, the Android app store, and every other Amazon product that’s come along. It’s an attempt to get around the fact that Apple and Samsung make all the hardware, Google handles all the searches, Google and Microsoft make all the rest of the software, and Facebook manages all the private social transactions.

Amazon devices like the Kindle or the Echo or the Fire TV are not really devices. Amazon devices are stores. They are points of entry for Amazon’s marketplace. In particular, they are points of entry for the sections of Amazon’s marketplace where it is the most dominant and faces the fewest competitors from traditional brick-and-mortar sellers: digital media goods.

You could imagine a world in which Apple, Samsung, Sony, Huawei, LG, Vizio and other hardware manufacturers were forced to give up control of their digital marketplaces and allow consumers to choose whichever retailer they wished to provide media and other marketplace services for their smartphone, smart television, PC, e-reader, and other devices.

That’s probably a world where Amazon is not in the hardware business at all. It’s a world where Amazon is happy to divest its marketplace from its retail goods division because Amazon would be the marketplace to the world. All Amazon wants to do is sell you everything on any device it can. You can’t convince me Amazon wouldn’t thrive in that universe.

You also can’t convince me that Amazon wouldn’t come under serious scrutiny for its dealings with vendors, its attempts to pressure them to sell to Amazon at the lowest possible price or forego access to the platform. You can’t convince me Amazon’s dominance in digital and printed books wouldn’t become an issue under a more robust anti-monopoly regime.

But that’s not what we’re talking about. We’re talking about USB cords and batteries. We’re talking about Whole Foods. And while these may be easier issues to grasp for primary and caucus voters, they don’t scratch the surface of the monopoly issues currently facing major tech companies.

So you can come to one of two conclusions:

This isn’t serious; Warren’s plan is flawed.
This is only the beginning; Warren’s plan is the foundation for something bigger.

A lot of people are coming down on the former. I come down on the latter. I think this is headed somewhere that I don’t think many of us will fully recognize when it’s done.

The best document here remains Lina M. Khan’s “Amazon’s Antitrust Paradox.” Here are some relevant excerpts:

My argument is that gauging real competition in the twenty-first century marketplace—especially in the case of online platforms—requires analyzing the underlying structure and dynamics of markets. Rather than pegging competition to a narrow set of outcomes, this approach would examine the competitive process itself. Animating this framework is the idea that a company’s power and the potential anticompetitive nature of that power cannot be fully understood without looking to the structure of a business and the structural role it plays in markets. Applying this idea involves, for example, assessing whether a company’s structure creates certain anticompetitive conflicts of interest; whether it can cross-leverage market advantages across distinct lines of business; and whether the structure of the market incentivizes and permits predatory conduct…
Focusing antitrust exclusively on consumer welfare is a mistake. For one, it betrays legislative intent, which makes clear that Congress passed antitrust laws to safeguard against excessive concentrations of economic power. This vision promotes a variety of aims, including the preservation of open markets, the protection of producers and consumers from monopoly abuse, and the dispersion of political and economic control. Secondly, focusing on consumer welfare disregards the host of other ways that excessive concentration can harm us—enabling firms to squeeze suppliers and producers, endangering system stability (for instance, by allowing companies to become too big to fail), or undermining media diversity, to name a few. Protecting this range of interests requires an approach to antitrust that focuses on the neutrality of the competitive process and the openness of market structures…
Amazon controls key critical infrastructure for the Internet economy—in ways that are difficult for new entrants to replicate or compete against. This gives the company a key advantage over its rivals: Amazon’s competitors have come to depend on it. Like its willingness to sustain losses, this feature of Amazon’s power largely confounds contemporary antitrust analysis, which assumes that rational firms seek to drive their rivals out of business. Amazon’s game is more sophisticated. By making itself indispensable to e-commerce, Amazon enjoys receiving business from its rivals, even as it competes with them. Moreover, Amazon gleans information from these competitors as a service provider that it may use to gain a further advantage over them as rivals—enabling it to further entrench its dominant position…
Given Amazon’s growing share of e-commerce as a whole, and the vast number of independent sellers and producers that now depend on it, applying some form of public utility regulation could make sense. Nondiscrimination principles seem especially apt, given that conflicts of interest are a primary hazard of Amazon’s vertical power. One approach would apply public utility regulations to all of Amazon’s businesses that serve other businesses. Another would require breaking up parts of Amazon and applying nondiscrimination principles separately; so, for example, to Amazon Marketplace and Amazon Web Services as distinct entities. That said, given the political challenges of ushering in such a regime, strengthening and reinforcing traditional antitrust principles may—in the short run—prove most feasible.

Once you open up Amazon’s marketplace and Amazon Web Services (which Warren does not talk much about) to being reframed as platform utilities, and capable of regulation as such, then you start to broach questions not just about the ways that Amazon competes for sales of discrete retail goods like batteries and USB cords, or freely delivered high-end groceries, but also for immaterial goods like data use and digital video. You start to map the full range of marketplaces in which Amazon is competing, and you begin to see that that range is enormous.

And all of this rests on the fact that Amazon is an online retailer, and Amazon is a logistics company built to support that retail business. In dominating the former, Amazon began to dominate the latter. And the latter is where the examples start to get a lot more difficult to explain, but also get a lot richer and more plentiful.

Again, you can draw two conclusions from this; Warren is naïve, or Warren is up to something. I think she’s up to something. Already, by holding Apple back from her initial example set, she’s shown that she has a bigger plan than she’s spelled out in that blog post. It’s up to her own willingness to elaborate on that plan and the politics that she’ll need to win in order to get there to determine just how far down the road she gets to go.

What if you broke off the retailer from the logistics company? What if you broke off the marketplace from physical goods from the marketplace for virtual goods? What if you put a robust regulatory regime charged with policing any and all attempts at predatory pricing? Any of these approaches would pose much more existential problems for Amazon than spinning off Whole Foods or Amazon Basics. And all of these approaches are in play once you open up the “Amazon and antitrust” box.

This is real; it’s not going away. I think there is political support across the spectrum for a hard look at Amazon, even though Amazon customers generally like what they’ve been getting from the company. I think Amazon is worried, Amazon is spending money, and Amazon is right in both of those things.

If you want to read “Elizabeth Warren is wrong to talk about breaking up these companies” takes, Mike Masnick has a pointed one at Techdirt, and Ben Thompson has a more nuanced one behind the paywall at Stratechery. From Thompson’s “Where Warren’s Wrong”:

Then again, perhaps it is best for Senator Warren’s argument that her article never does explain how these companies became so big, because the reason cuts at the core of her argument: Google, Facebook, Amazon, and Apple dominate because consumers like them [emphasis added]. Each of them leveraged technology to solve a unique user needs, acquired users, then leveraged those users to attract suppliers onto their platforms by choice, which attracted more users, creating a virtuous cycle that I have christened Aggregation Theory. Specifically…
Amazon leveraged the Internet to achieve a dominant strategy of offering superior selection and the lowest price, starting with books. This gained Amazon customers, which gave the company leverage to bring on first other media like CDs and DVDs, which gained them more users, and later goods of all types; Amazon then launched the Amazon Marketplace, through which suppliers could come onto Amazon directly. Why? Because that is where demand was.

Khan’s written persuasively about how antitrust regulators need to take a more comprehensive view on competition than whether it immediately benefits consumers, or whether consumers choose one platform or another, but there’s another element in play here.

I’ve written before about how customers love Amazon, in the same way that customers love Apple. This is the brake on anti-Amazon sentiment, whether it comes from the left or the right. Already with HQ2, that love has been put to the test; the antitrust push will put that love to the test again.

See, There’s the Marketplace, and Then There’s the Marketplace

The second story about Amazon that matters this week is the little three-step dance Amazon did with its vendors this week. First, Amazon declined to renew many of its vendors’ contracts, encouraging them to sell in Amazon’s third-party Seller Central marketplace instead. Then, Amazon reversed itself, renewing many of its contracts but asking its vendors to participate in its “brand registry” product authenticity program. Finally, Amazon ended its longstanding practice of asking for most-favored nation clauses from its vendors, which guaranteed that vendors could not sell their goods at a lower price at other retailers.

Let’s look at all three of these moves from the point of view of antitrust. First, access to Amazon’s retail marketplace is driven by a fundamental asymmetry. The relationship is not now nor does it have any reason to be at the discretion of the vendor. The relationship is at the discretion of Amazon. Amazon has tremendous purchasing power, and it is not loathe to use it.

Amazon can exert pressure in any direction it wishes. It can punish brands for selling to customers directly on the third-party marketplace, pushing them from Seller Central to Vendor Central, which it did in November. Or it can do the opposite, as it’s done this month. None of this would be possible if Amazon had either more transparent and consistent policies with its vendors, or if it did not offer access to such a huge marketplace of potential buyers. The message to vendors is not “you are cherished partners.” It is “we can do whatever we want with you.” It doesn’t feel like an open marketplace. It feels like a place where Amazon’s whims are law.

Now, if Amazon is going to take such a heavy hand with its vendors, it has to have a good reason. That reason has to resonate with brand partners and consumers alike. It has to cost the company something, and it has to offer the company a strategic advantage. Protection against counterfeit goods offers all of these things. It also outflanks potential competitors like StockX and other companies whose differentiating claim is offering authenticated goods. Amazon has to use its monopoly power for good, and if offering lower prices, whether through good retail practices or predatory pricing, is no longer good enough, offering value through another channel like authentication will have to do.

Finally, Amazon already stepped away from its price parity requirements in Europe after regulators raised issues with the practice. Here in the United States, Senator Richard Blumenthal of Connecticut had already asked the FTC and Justice Department to investigate Amazon’s use of price parity as well.

“Amazon’s wise and welcome decision comes only after aggressive advocacy and attention that compelled Amazon to abandon its abusive contract clause,” Blumenthal said Monday. “I remain deeply troubled that federal regulators responsible for cracking down on anti-competitive practices seem asleep at the wheel, at great cost to American innovation and consumers.”

Not everything Amazon does in part to keep prices low for consumers fits the description of competitive behavior. Antitrust regulation in the United States has, for the most part, assumed that lower prices equals good for consumers equals good competition. That is not necessarily true throughout the world, and it is no longer settled fact in the United States.

Everything Amazon does, just like Google, Facebook, Apple, Microsoft, and other online giants, is going to be subject to additional scrutiny from this point going forward. Many of the decisions the company makes will be done to avoid raising questions and inviting further inquiries about antitrust implications. It is already a very different world that Amazon is navigating, and no one in Iowa or New Hampshire has yet cast a vote.

Amazon Chronicles

Discussion about this post

Amazon Chronicles

There Are Only Two Amazon Stories That Matter

It's the monopoly and the marketplace

See, There’s the Marketplace, and Then There’s the Marketplace

More Things to Read

Tim Carmody

https://tim-carmody.glitch.me

Discussion about this post