“In Amazon’s early years, a running joke among Wall Street analysts was that CEO Jeff Bezos was building a house of cards. Entering its sixth year in 2000, the company had yet to crack a profit and was mounting millions of dollars in continuous losses, each quarter’s larger than the last. Nevertheless, a segment of shareholders believed that by dumping money into advertising and steep discounts, Amazon was making a sound investment that would yield returns once e-commerce took off. Each quarter the company would report losses, and its stock price would rise. One news site captured the split sentiment by asking, “Amazon: Ponzi Scheme or Wal-Mart of the Web?”” – Lina Kahn, Yale Law Review
Eighteen years later, it’s no longer a joke. No one seriously doubts that Amazon is anything but the titan of twenty-first century commerce.
Success, efficiency and scale are achievements to be admired. Should they be regulated?
Amazon argues that the company is not as dominant as it seems.
“I think there’s a big difference between horizontal breadth and vertical depth…”
– Jeff Wilke, head of Amazon’s consumer division, told The Wall Street Journal in October.
Wilke said that Amazon accounted for less than 1 percent of worldwide retail and cited “incredible competition” in all of Amazon’s different businesses.
“I don’t think any one of these areas is a football game where there’s only one winner.”
Charting Amazon’s Marketshare
Three charts illustrate Amazon’s growing retail presence and ecommerce dominance:
- $53 Billion in eCommerce Revenue
- 66% of U.S. Households shop with Amazon regularly
- 49% of product searches start at Amazon
At nearly $53 Billion, no other company comes close to Amazon’s total general merchandise ecommerce revenues and marketshare in the U.S.
Second-placed Walmart sold $14 billion worth of merchandise online last year, which is less than a third of Amazon’s haul.
Here’s an eye opener… 66 percent of U.S. Households shopped Amazon over a four-week period, matching the number of households that shop at Walmart in stores and online.
Kantar Research recently published this data… the percent of households that shopped Amazon, Walmart and Target during a four-week period, 2007–2017 (12 month average — 2018 shows only Jan. and Feb.)
And, nearly half of all product searches begin with a visit to Amazon…
Chart from Mary Meeker of Kleiner Perkins.
Amazon Enables the Creation and Expansion of Millions of Small Businesses
As a retailer, vendor, manufacturer, supplier should you embrace Amazon or should you shun them?
In 2017 more than half of the units sold on Amazon worldwide were from third-party sellers, including millions of small and medium-sized businesses. Over 300,000 U.S.-based small and medium-sized businesses started selling on Amazon in 2017 alone, and “Fulfillment by Amazon” shipped billions of items for small businesses worldwide.
More than 140,000 small and medium-sized businesses surpassed $100,000 in sales on Amazon in 2017, and over a thousand independent authors surpassed $100,000 in royalties in 2017 through Kindle Direct Publishing.
– Data from Jeff Bezos’ 2018 SEC “Letter to Amazon Shareholders“
21 Public Companies Generate Over 10% of Their Revenue From Amazon
“Lifetime Brands, a houseware maker best known for its FarberWare and KitchenAidproduct lines, used to finish most of its holiday shipments by the end of October. As a traditional brick-and-mortar wholesaler, Lifetime Brands shipped the products to retailers in advance of the holiday season so the stores could fill their racks in time.
But this year, its warehouses remain busy deep into December. That’s because Amazon is ordering huge quantities to meet the growing demand from online holiday shoppers. Dan Siegel, president of Lifetime Brands, says, at this pace, he wouldn’t be surprised if Amazon became its biggest customer in three years (Amazon wasn’t even in the top 25 until four years ago).
“We’ve shifted our resources in our warehouse to be competent for Amazon’s high demand,” Siegel said. “Amazon is really smoking right now.”
The change at Lifetime Brands, a public company with roughly $600 million in annual revenue, is illustrative of how even large public companies are starting to become reliant on Amazon’s online shopping site. As Amazon has grown its dominance, it’s changed the game for many companies in a wide range of industries.
Lifetime Brands, whose stock is down about 5 percent for the past year — doesn’t yet generate more than 10 percent of its revenue from Amazon, which requires disclosure, and sells through other retailers like Walmart and Costco as well. But at least 21 public companies have generated 10 percent or more of their revenue from Amazon in their most recent fiscal year, according to FactSet.
The list includes consumer electronic companies like GoPro, Roku and FitBit, but also United Natural Foods, a major Whole Foods supplier. Air Transport Services Group, a freight company that handles parts of Amazon’s air cargo shipments, saw 29 percent of its revenue come from the e-commerce giant. Applied Optoelectronics, whose data center equipment helps Amazon sell its AWS cloud service, generated a whopping 58 percent of sales from Amazon.
That’s a much deeper list than some of its competitors. Target, for example, only has eight suppliers that passed the 10% revenue threshold for disclosure, while Microsoft has just seven. EBay only has two. Companies like Walmart and Apple, meanwhile, still have a longer list of mega suppliers than Amazon.” – Eugene Kim, CNBC, “As Amazon’s dominance grows, suppliers are forced to play by its rules.”
Job Destruction or Job Creation?
Retail jobs, two points of view:
“Record numbers of store closings and a surge in retail bankruptcies, as well as the shift to online shopping, have forced retailers to slash jobs even as other employers scramble to find qualified workers.”
“General merchandise stores, the segment that includes department stores, were hit the hardest, losing 90,300 jobs, according to the 2017 December jobs report from the Labor Department. Clothing stores cut another 28,600 jobs. Drug stores lost 18,400.” – Chris Isidore, CNN, “Jobs everywhere! Except at stores.”
“Some economists argue that e-commerce has created more—and, perhaps, better paying—work. The economist Michael Mandel estimates that since the Great Recession began, the e-commerce sector has created 355,000 new jobs, compared to about 50,000 total jobs lost in physical retail stores. Much of that growth has come from large fulfillment centers in warehouses. Warehousing is not used exclusively for e-commerce, but the change in warehousing jobs is highly correlated with Amazon’s job growth in the state; since 2009, warehousing employment has soared by almost 50 percent. Fulfillment centers pay 26 percent better than general retail jobs, and warehouse wages are currently growing twice as fast as the national average.” – The Atlantic, “The Silent Crisis of Retail Employment.”
According to Amazon, the company has created over 1.7 million direct and indirect jobs around the world.
In 2017 alone, the company directly created more than 130,000 new Amazon jobs, not including acquisitions, bringing the global employee base to over 560,000. New jobs cover a wide range of professions, from artificial intelligence scientists to packaging specialists to fulfillment center associates. In addition to these direct hires, Amazon estimates that Marketplace has created 900,000 more jobs worldwide, and that Amazon’s investments have created an additional 260,000 jobs in areas like construction, logistics, and other professional services. – Data from Jeff Bezos’ 2018 SEC “Letter to Amazon Shareholders”
If You Can’t Beat Them Join Them… or, Break Them Up
Success, efficiency and scale are achievements to be admired. Should they be regulated?
“Antitrust authorities should not be in the business of making life easy for incumbents. What, then, should they do? There are two schools of thought. One is to focus on consumers’ interest in quality, variety and price. This has been the standard approach in US antitrust policy for several decades. Since Amazon makes slim profits and charges low prices, it raises few antitrust questions.
The alternative view — which harks back to an earlier era of antitrust during which Standard Oil and later AT&T were broken up — argues that competition is inherently good even if it is hard to quantify a benefit to consumers and that society should be wary of large or dominant companies even if their behaviour seems benign.” – Tim Harford for the Financial Times, “The Case for Ending Amazon’s Dominance.”
In addition to being a retailer, Amazon is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space.
Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has escaped antitrust scrutiny.
Lina Kahn, in her widely-read study, “Amazon’s Antitrust Paradox,” published last year in the Yale Law Review, argues that “the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy.
We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive.
These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.”
Conversely, Wharton professor of legal studies and business ethics, Herbert Hovenkamp, named the “dean of American antitrust law” by The New York Times in 2011, states in “How to Build a Better Antitrust Policy”:
I don’t think antitrust policy should have as its goal keeping small businesses in the market. I think its goal should be to maximize the welfare of consumers. And consumers are usually best off when output is highest. High output translates into low costs and high quality, and that benefits consumers. The fact is that sometimes it takes a pretty big business to benefit consumers.
Trust vs. Antitrust
Consumers trust, and love, Amazon for convenience, assortment, pricing, speed, ease of purchase, frictionless experience, and constant innovation in their favor.
“One thing I love about customers is that they are divinely discontent,” Jeff Bezos wrote. “Their expectations are never static — they go up. It’s human nature.”
Bezos notes that as technology improves, customers are demanding more — and more quickly — than ever before. That means that companies and organizations that do not rapidly adapt to meet these challenges could quickly get dropped from customers’ minds.
“You cannot rest on your laurels in this world,” Bezos says. “Customers won’t have it.”
Competitors mistrust, and despise, Amazon for the company’s marketplace dominance, their unique position of investing in large long-term CapEx without paying the price in short-term penalties to Market Cap, and Amazon’s willingness to accept low profits in exchange for customer acquisition and loyalty. It’s interesting to note that these same competitors are less vocal when it comes to Costco, TJX Companies and Ross Stores.
Retailers are afraid. Brands are concerned. Suppliers are divided. Job seekers are angry. And, legacy regulations no longer apply.
A federal judge on Tuesday, June 12, approved the blockbuster merger between AT&T and Time Warner Inc., rebuffing a government antitrust attempt to stop the $83.5 billion deal. The judge ruled that the merger would not lead to “fewer choices” nor “higher prices.” By this standard, Amazon’s huge assortment and slim margins should raise few antitrust questions. However, modern marketplace economics leverage a new business model wherein companies control infrastructure and access to consumers and information in unprecedented fashion. The legacy regulations may not apply to this emergent model.
It’s a new landscape, one with accelerating innovation, new paths to purchase, and heightened customer expectations. It is not the strongest that survives, nor the most intelligent. It is the one that is most adaptable to change.
We can’t apply the old rules to the new world order. Retailers, brands, suppliers, job seekers and regulations all need to change.
© 2018, David J. Katz — New York City
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