Wednesday, February 22, 2017

Is Amazon's growth anticompetitive?

Amazon's focus on growing market share with low prices has benefited consumers but given it a big share of the online market.
  • In 2013, it sold more than its next twelve online competitors combined. 
  • By some estimates, Amazon now captures 46% of online shopping 
  • In addition to being a retailer, it is 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 provider of cloud server space and computing power. 
  • Although Amazon has clocked staggering growth—reporting double-digit increases in net sales yearly—it reports meager profits, choosing to invest aggressively instead. 
  • The company listed consistent losses for the first seven years it was in business, with debts of $2 billion. ...ts highest yearly net income was still less than 1% of its net sales.
Despite its low income, investors have bid up its stock price in anticipation that its size will eventually pay off:
  • Despite the company’s history of thin returns, investors have zealously backed it: Amazon’s shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor’s 500
  • ...critics often fumble to explain how a company that has so clearly delivered enormous benefits to consumers—not to mention revolutionized e-commerce in general—could, at the end of the day, threaten our markets. Trying to make sense of the contradiction, one journalist noted that the critics’ argument seems to be that “even though Amazon’s activities tend to reduce book prices, which is considered good for consumers, they ultimately hurt consumers.”
The linked article tries to make a case that the antitrust authorities should intervene now, but they it not address an obvious solution, if Amazon starts behaving anticompetitively, the antitrust authorities can act when it does.

HT:  Quinn


  1. Amazon has definitely done a phenomenal job leveraging technology and human resources to develop a number of competitive advantages in the internet selling space. A company with 136 billion in revenue for 2016 has nearly an unlimited research and development budget in order to protect its existing advantages and develop new ones (Kim 2017). Indeed, as far back as 2015 amazon reported spending over 13 billion for the prior twelve months on R & D ( Fox 2016).
    Some of the ways that it is protecting itself and developing new competencies has been to start investing into its own shipping infrastructure. In 2016, Amazon announced plans to lease 40 cargo airplanes as it begins to build its own shipping fleet ( Fitzpatrick 2016). Bad news for UPS and Fed Ex there. Amazon has also begun exploration into investing into ocean freight liners to save on shipping from its number one seller – China ( Chang 2017).
    Another move by Amazon to develop an additional market and protect itself from competition by others has been to facilitate direct from China sales on its site and to aggressively educate the Chinese these direct sale opportunities ( Levy 2016) As one entrepreneur recently quoted “This year, every Chinese supplier was talking to us about Amazon. Two years ago they just thought it was a river in Brazil,”( Weise 2017).
    As of 2015 China’s share of global manufacturing “is nearly a quarter. China produces about 80% of the world’s air-conditioners, 70% of its mobile phones and 60% of its shoes” ( Bacon 2015). Clearly Amazon recognizes this, hence the heavy investment into shipping and facilitation of direct from China sales. By selling so much of Chinese made products on its site Amazon has in essence turned itself into a new Silk Road, only this one connecting China with the magical land of never ending money which to Chinese manufacturers is the US.
    Amazon needs to thread carefully with its “ directly sold from China business”. When a third party American retailer sells a product on Amazon, most of the money with the exception of wholesale price paid to an overseas manufacturer stays here. For example a shirt sold for $ 20 on Amazon may cost as little as $ 2 from the overseas manufacturer. So a simple breakdown of the sale of a $ 20 shirt by where the money is going (omitting marketing and shipping costs)
    $ 3 ( 15% of sales) to Amazon
    $ 15 to an American reseller
    $ 2 ( 10%) to an overseas manufacturer.
    10% leaves the country, 90% stays here.
    Break down of where the money goes with a direct from China sale ( $ 20 shirt) (omitting marketing and shipping costs) ;
    $ 3 ( 15% of sales ) to Amazon
    $ 17 ( 85 %) to overseas
    In the scenario where Amazon applies its proven, best in class, e-marketing and e-sales techniques to successfully flood its Silk Road with direct from China sales, they are going to create a return flow of more US currency than the regulators should be comfortable with. My guess is that Amazon is playing a dangerous game where it may find itself overly regulated or spending heavily on lobbying.

    Bacon 2015

    Chang 2017

    Fitzpatrick 2016

    Fox 2016

    Kim 2017

    Levy 2016

    Weise 2017

  2. This comment has been removed by the author.

  3. “Amazon is strongly committed to conducting its business in a lawful and ethical manner, including engaging with suppliers that are committed to the same principles. They require suppliers in their manufacturing supply chain to comply with their Supplier Code of Conduct1 ("Supplier Code"). Amazon also expects their suppliers to hold their suppliers and subcontractors to the standards and practices covered by our Supplier Code. Their products must be manufactured in a manner that meets or exceeds the expectations of Amazon and their customers as reflected in our Supplier Code.” This is why Amazon’s customers are so loyal to them.

    Amazon has done a great job on branding themselves. Branding is another area that Amazon has emphasized to their target market. They have push to their customers that they stand out from competitors by using a differentiation strategy. They have shown their customers how they are constantly being innovative to keep their customers satisfied. Customers know Amazon and are very loyal. Branding helps identify and helps differentiate the services of one seller from another. What also keeps Amazon on top is they are always ahead of their competitors because they are not afraid to try something different and innovative. They have invested in unmanned vehicles. They probably looked at the opportunities and/or threats derived from the firm’s present and future environment. They probably looked at what demographics, social, technological, political, economic, and natural trends are significant. How will this trend affect their target market, competitors, suppliers, and channel intermediaries. Which opportunities/threats emerge from within the firm? In the case of marketing unmanned vehicles, they probably looked at the opportunities and/or threats for marketing this product.