Amazon is destroying competition and market diversity, leaving us with fewer choices, less innovation, and diminished opportunities.
The following is one chapter from Amazon’s Stranglehold, our in-depth 2016 report about Amazon’s growing reach and impact on the economy, work, and communities. You can read and download the full report here, and see more of our writing and research related to Amazon here.
We once imagined that the web would be a democratizing force in the economy, making it easier for anyone with a good idea to start a business, find an audience, and succeed. “The digital revolution was supposed to create an age of empowered micro-entrepreneurship, with power devolving to the masses,” observes Steven Strauss, a visiting professor at Princeton. [7]
It hasn’t turned out that way. Five years ago, Americans spent $170 billion shopping online, and Amazon accounted for one in four of those dollars. [8] By last year, online spending had ballooned to $343 billion and Amazon’s share of the market had grown to 40 percent. [9] This year, we estimate, it has soared to 46 percent. [10]
As retail spending, one of the largest sectors of our economy, rapidly moves online, it’s even more rapidly becoming the domain of a single company. If the current trends continue, in five years, more than one-fifth of all the goods we buy will be purchased online, and more than two-thirds of this vast $700 billion stream of spending—spanning everything from washing machines to groceries—will be captured by Amazon.
As it has grown, Amazon has reached its tentacles into so many different industries that it can be hard to keep enough of the company in view to grasp big it is, or take its full measure. Even more striking than its scale, though, is its momentum. Amazon today has the feel of a jet aircraft at the moment when it starts to gain lift-off.
For several years after Jeff Bezos made Amazon.com live in 1995, the company sold only books. Today, many people still think of the company mainly as a bookseller, and Amazon does indeed loom large in the book business. Two-thirds of books, both print and digital, are now sold online and Amazon captures nearly 70 percent of those sales. [11] This is such a significant share of the market that Amazon can, at any moment, remove the buy-button from a particular title on its site and cause overall sales of that book to plummet by 50 percent or more [12] —a dominance so astounding that it warrants pausing a moment to consider what it means. We know Amazon has this power to destroy a book’s prospects because it demonstrated it two years ago when it suspended pre- orders and delayed shipping times by weeks for thousands of books put out by the publisher Hachette, and modified its search and recommendation algorithms to direct shoppers to other books. Amazon reportedly wanted Hachette to fork over more fees, and for several months it suppressed the career prospects and incomes of some 3,000 authors to get its way. [13]
Among them was Wisconsin Congressman Paul Ryan, a rising star in the Republican Party, whose Hachette-published book The Way Forward had just been released. Appearing on CNBC, Ryan described his frustration.
“Clearly Amazon’s making kind of a power play here,” he said. [14] Amazon soon restored Ryan’s book to normal, but other authors, lacking the same clout, could do little but watch as their creations floundered.
As big as Amazon is in the book business though, books are now only of small concern to Amazon, making up less than 7 percent of its revenue. [15] The rest comes from selling a vast array of other goods and
services. Amazon is on track to be the top seller of apparel by next year, having edged past Walmart and closing in on Macy’s. [16] It is the second largest seller of consumer electronics and will overtake the top seller, Best Buy, in 2017, according to analysts at Deutsche Bank. [17] Its share of the toy market has doubled in the last four years, putting it on par with Toys R Us and Target. [18] And Amazon is rapidly expanding into other big baskets of consumer spending, including the nation’s huge $800 billion grocery market, where analysts predict its new fresh food delivery service— now available in 17 U.S. markets [19]—and its planned network of hundreds of stores and pickup points [20] will make it a top player within five years. [21]
Even when we think we’re not doing business with Amazon, sometimes we are. It owns other big e-commerce brands, like Diapers.com, Zappos, Shopbop, and Audible.
Even when we think we’re not doing business with Amazon, sometimes we are. It owns other big e-commerce brands, like AbeBooks, Woot, and the fashion powerhouse Shopbop. It owns Zappos and Diapers.com, both of which Amazon acquired through a shotgun-wedding approach after crippling each company financially. It also owns Twitch, the leading streaming platform for gamers, with 100 million monthly users, and Audible, the world’s largest audio book company. And its tentacles are reaching ever deeper into the mechanics of our economy. Amazon recently obtained an ocean shipping license from the Federal Maritime Commission that will allow it to move freight from China to U.S. ports. [22]
The license is just one piece of a massive investment Amazon’s making in its capacity to move goods from factory floors to our doorsteps. It’s purchased thousands of truck trailers, leased cargo planes, and, in the last year, doubled the number of warehouses it operates.
As Amazon grows its logistics empire, it’s also manufacturing more of the goods that are moving through it. Earlier this year, the company unveiled 7 of its own fashion lines, offering more than 1,800 items of apparel. It’s added hundreds of new products to its AmazonBasics brand, which now furnishes a wide range of household items, from computer cables to swivel chairs. On Amazon.com, many of these products rank as top sellers in their categories and show up first in search results. Amazon publishes books too, and it’s not uncommon for as many as half of the titles on its Kindle bestseller list to be its own.
Last May, Chamath Palihapitiya, a Silicon Valley venture capitalist and owner of the Golden State Warriors, stood before an audience of fellow investors in New York City to give a presentation about Amazon. He opened with a stunning assessment.
“We believe there is a multi-trillion-dollar monopoly hiding in plain sight,” he said of the company. [23] Calling Amazon a monopoly was not an accusation or an admonishment. It was a tribute. Investors like Palihapitiya have sent Amazon’s stock soaring in the last two years. Between October 2014 and October 2016, Amazon’s market capitalization—the total value of its outstanding stock—rose from about $140 billion to about $380 billion.
In the eyes of investors, Amazon is now worth nearly twice what Walmart is worth, even though the latter generated $80 billion in profit over the last 5 years, while Amazon cleared only a little more than $1 billion. [24] It’s obviously not Amazon’s current profits that have sent investors clamoring to buy its shares. What they see in Amazon is a company that has attained such a powerful grip across multiple industries that it can be counted on to yield spectacular, monopoly- level returns in the coming years.
In this section, we look at how Amazon has come to have so much power, how it uses its position to eliminate competition and block startups that might challenge it, and how it exploits and hobbles manufacturers and then takes control of their industries. Amazon presents a vastly more dangerous threat to competition than Walmart, because its ambition is not only to be the biggest player in the market. Its intention is to own the market itself by providing the underlying infrastructure—the online shopping platform, the shipping system, the cloud computing backbone— that competing firms depend on to transact business. In effect, Amazon is turning an open, public marketplace into a privately controlled one.
We also examine how much Amazon’s accumulating power is already costing us, and how much higher that cost will rise if we don’t act to check it. As Amazon expands, the portion of the consumer goods economy outside of its control is shrinking. Over the last fifteen years, the number of independent retailers has fallen by about 108,000. [25] This decline has multiple causes, but surveys show that Amazon is now by far the biggest. As the retail sector becomes less diverse, we’re losing the invention and innovation that only a varied marketplace can yield. In our interviews with manufacturers, they all describe local retailers as a kind of keystone species in their industries. These businesses play an outsized role in enabling new products to find an audience. People shopping in a local bookstore, for example, are about three times more likely to discover a book they’d like to read than when they’re browsing books on Amazon. The difference, manufacturers say, is that these stores are run by people who are passionate about books or sewing or sports. They create a sense of community with customers, and maintain physical showrooms. Manufacturers are alarmed at the prospect of a future where this market diversity gives way to a single online platform, and they say Amazon’s dominance is already reducing their ability to invent and launch new products. Consumers have little way of detecting this. “As a consumer, how would you even know that something was missing?” one manufacturer asks.
Jeff Bezos is betting that he can make buying from Amazon so effortless that we won’t notice the company’s creeping grip and all that we’re losing as a result. One of his ongoing preoccupations is finding ways to remove even the tiniest friction in the buying process. “People do more of what’s convenient and friction-free,” he has said. [26] When we place an order with a single click, or casually ask our Amazon Echo speaker with its built-in voice assistant to send us Elena Ferrante’s first novel, it can feel like we’re not even choosing anything at all. Bezos has managed to make shopping on Amazon “something close to our unthinking habit,” notes journalist Franklin Foer. [27]
Amazon has the power to pick winners and losers, which is alarming enough in the context of toys or fashion, but downright tyrannical when it comes to the creative, cultural, and political life of the nation. If Amazon can stifle Paul Ryan, then surely it can do so to any writer.
Already there is evidence that Amazon is using its huge trove of data about our browsing and buying habits to selectively raise prices, and it’s also started blocking access to certain products and delaying shipping for customers who decline to join its Prime program. But to focus too much on prices is to miss the real costs of a monopoly. Amazon increasingly controls what products make it to market and appear before us as we’re browsing. It has the power to pick winners and losers, which is alarming enough in the context of toys or fashion, but downright tyrannical when it comes to the creative, cultural, and political life of the nation. If Amazon can stifle Paul Ryan, then surely it can do so to any writer.
And that’s hardly all that’s at stake. Amazon’s tightening hold on our economy is damaging our ability to earn a decent living. The rate of new business formation has fallen sharply over the last decade. There are fewer small, young, and growing businesses, which economists say is stunting job creation, pushing more people out of the middle class, and worsening income inequality.
For all of Bezos’s insistence that Amazon represents a modern form of commerce, and that to challenge it is to challenge the digital revolution itself, what’s striking when we look closer is how much this company seems to belong to the Robber Baron age. Back then, men like Cornelius Vanderbilt and J.P. Morgan harnessed a new technology, the railroad, to stifle competition across multiple industries and extort money from farmers and small business people who depended on the rail lines. Americans responded by launching the antitrust movement, and it’s to the ideas and policies they brought forward that we should turn today in the face of this new colossus.
Blocking Competitors and Locking-In Consumers
“The fact that it’s always on, you never have to charge it, and it’s there ready in your kitchen or your bedroom or wherever you put it, the fact that you can talk to it in a natural way—removes a lot of barriers, a lot of friction,” Bezos said in October at an event in San Francisco. [28]
He was referring to the Echo speaker, Amazon’s latest device. Echo is powered by Alexa, an always-listening voice assistant, and it allows people to play music, check sports scores, review a bank balance, adjust the thermostat, hail an Uber ride, and, of course, order from Amazon, all by speaking. Amazon’s already sold over 5 million Echospeakers, [29] which the company prices,as it does most of its devices, below what it costs to produce them. [30] Thousands of companies are now integrating Alexa into their own products. People will soon be able to use Alexa to control their GE appliances, [31] and they’ll be able to call up the voice assistant while driving several models of Ford cars. [32]
“Jeff Bezos is betting that he can make buying from Amazon so effortless that we won’t notice the company’s creeping grip.”
Bezos’s idea is to make Alexa the central nervous system of our daily lives, so that Amazon will always be at our beck-and-call, mediating our activities and taking our shopping orders, while our lives, in turn, will always be open to Amazon’s tracking and data- gathering. To lure more users to the system, Amazon recently added a perk: anyone who buys an Echo can sign up for Amazon’s new music streaming service for just $3.99 per month. [33] That’s less than half the cost of competing services like Spotify, and analysts say it’s below what Amazon spends to license and stream the music, meaning the company plans to lose money on both the speaker and the service with each customer who signs up. [34]
Over the years, Amazon has deliberately incurred losses like this in one venture after another, and these losses, together with investors’ willingness to back the company despite them, form a key part of the story of how Amazon came to be a “multi-trillion- dollar monopoly hiding in plain sight.” The company uses losses as a tactic for wresting market share from competitors, which are generally smaller and lack the financial backing to match Amazon’s below- cost selling. It also incurs losses to fund perks, like cheap music and all-you-can-eat shipping for a flat annual fee, that hook customers, entwine them in the Amazon ecosystem, and sharply reduce the chances they’ll shop anywhere else.
Bezos, who worked on Wall Street before founding Amazon, has always been candid with investors about his strategy. In a letter to shareholders after the company went public in 1997, Bezos wrote that he would “make investment decisions in light of long-term market leadership considerations rather than short-term profitability.” [35] In other words, Amazon would spend as much as it could to grab market share. Over the next six years Amazon lost a staggering $3 billion [36] and investors barely winced. [37]
One ongoing target of this strategy has been the book business. “Amazon has sold tens or possibly hundreds of millions of physical books at or below cost,” Authors United, a coalition of authors, wrote in a letter to the head of the Antitrust Division of the U.S. Department of Justice last year. [38] When Amazon introduced the Kindle e-book reader in 2007, it extended this practice to e-books, selling many titles for less than it was paying publishers. [39] This drove sales of the Kindle, which in turn ensured customers would buy virtually all of their e-books from Amazon. Since potential challengers were unable or unwilling to incur similar losses, Amazon was able to amass and hold 90 percent of the market for e-books. [40]
In 2010, publishers pushed back, changing the terms of their e-book contracts to bar Amazon’s below-cost pricing. Amazon’s market share dropped to 65 percent, [41] as Apple, Barnes & Noble, and independent bookstores, through a partnership with Kobo, finally had a chance to compete for e-book sales. But the U.S. Department of Justice, prodded by Amazon, sued the publishers for collusion, [42] and Amazon soon regained its footing. In 2011, Borders Books filed for bankruptcy. In 2014, Sony ceased producing its e-reader and shuttered its e-book store, [43] and Barnes & Noble, which has closed dozens of stores, has shifted resources away from its Nook reader. [44] Independent bookstores have seen a modest resurgence in recent years, and they continue to sell e-books, but their numbers remain well below what they were 15 years ago, according to the American Booksellers Association. Today, Amazon’s market share appears to be inching up.
Amazon has also used its capacity for taking on big losses to crush upstart competitors. One such challenger was the shoe retailer Zappos. As Zappos soared in popularity, doubling its sales between 2004 and 2007, Amazon offered to buy it. When Zappos executives refused to sell, Amazon debuted a competing shoe site and started selling shoes at a loss, offering free overnight shipping and, later, a $5 rebate on every purchase. The site was called Endless.com, perhaps a reference to Amazon’s endlessly deep pockets. Straining to keep its customers, Zappos matched Amazon’s express shipping and began to lose money itself on every pair of shoes it sold. All told, Amazon lost $150 million on the gambit, and it prevailed: in 2009, hemmed in by financial constraints, the Zappos board voted to sell. [45]
Similarly, when Quidsi, the innovative e-commerce firm behind Diapers.com, emerged as a vigorous competitor in diaper sales in 2009, Amazon offered to the buy the company and, when the founders refused, slashed its diaper prices to well below its own cost. According to reporting by Brad Stone in his book The Everything Store, Amazon was prepared to lose $100 million over three months in its bid to force Quidsi to sell. [46] It succeeded. Although Diapers.com and its sister sites, like Soap.com, remain standalone online stores, they are now owned by Amazon.
The point of the membership fee for Prime has never been about money. Signing up for Prime greatly reduces the chances that a person will shop around.
By 2009, Amazon was capturing more than 15 percent of online spending. It had begun to post modest profits, but by then had earned only barely enough to make up for its previous losses. After 13 years in business, Amazon had generated virtually no return for investors, but, as Bezos had promised, it had taken over a sizeable share of the market and now had a huge revenue stream to fund further expansion. At this point analysts began to track an even more telling metric of its power: In 2009, nearly one in five people looking to buy something online skipped search engines like Google and headed straight to Amazon. [47]
To drive that figure even higher, Amazon had launched Prime, a program that offers customers unlimited 2-day shipping, and same-day shipping in some cities, along with perks like streaming movies and television shows, for a $99 annual membership fee. Much like Echo, what customers pay for Prime is less than it costs Amazon, which loses an estimated $1 billion a year on the shipping perks alone. [48] But the point of the fee has never been about money. As Vijay Ravindran, a former technical manager at Amazon, explained to Brad Stone: “It was never about [the fee]. It was really about changing people’s mentality so they wouldn’t shop anywhere else.” [49] Signing up for Prime greatly reduces the chances that a person will shop around, in part because the more one orders from Amazon, the more value in free shipping one derives from the annual fee. Less than 1 percent of Prime members visit competing sites while shopping on Amazon, and Prime members spend almost three times as much with the company as non-Prime customers do. [50]
Already, 63 million Americans, representing about half of all households, are enrolled in Prime. [51] To prod the rest to join, Amazon has begun using sticks as well as carrots. It has slowed shipping times for non-Prime households [52] and made some products, including popular video games, unavailable for purchase by non-Prime customers. [53]
Today, 55 percent of people looking to buy something online are skipping search engines and starting their shopping directly on Amazon’s site. [54] The spread of Echo will almost undoubtedly drive that figure higher. And, in a bid to further minimize friction and cement Amazon as our unthinking habit, the company recently secured a patent for “anticipatory shipping,” [55] a technique that will enable it to use its extensive cache of data about our habits to determine what products we need and want even before we know it ourselves.
Enclosing and Privatizing the Market
“For 37 years, we were constantly reinventing, and we did that over and over again,” says Bill Keller, who, together with his wife Joan, opened a travel store in San Diego in 1976. [56]
They took the business online at LeTravelStore.com in 1997 and for more than a decade, the Kellers did a brisk business on the web, even as they continued to run their store. “At our peak, web sales approached 60 percent of our business,” says Keller. But sales began a steep slide in 2011 as more shoppers stopped using search engines to find products, which might lead them to Le Travel Store, and headed straight for Amazon instead. At that point, Keller says, “It became clear that if you were going to sell online you had to go [through] Amazon.” Desperate to salvage their business, the Kellers enrolled Le Travel Store as a third-party seller on Amazon’s site. But they quickly found that what had made their own web site and store a success—their wealth of knowledge about world travel and travel gear, and the attentive, personalized service they provided—was impossible to replicate on Amazon, which restricted their interactions with customers. A few months later, the Kellers closed for good.
By corralling an ever larger share of the web’s shopping traffic, Amazon has forced other retailers and producers who want to sell online to reckon with a Faustian choice. They can either continue to be independent, hanging their shingles out on search engine byways less and less traveled by shoppers, or they can set up shop as third-party sellers on Amazon’s site, forfeiting much of their knowledge, revenue, and autonomy to their most powerful competitor.
Amazon opened its platform to third-party sellers back in 2000 and dubbed the initiative Amazon Marketplace. “We wanted to position ourselves as the place to start for shopping,” Amazon executive Diego Piacentini explained to the Los Angeles Times. [57] To do this, Amazon would need to offer just about anything a shopper might want to buy, and it would need evolve into an “everything store” quickly, before competitors gained a toehold. At the time, though, the company understood few product categories besides books. Rather than hire its own buyers and try to figure out complicated industries like apparel, Amazon invited other sellers onto its platform. Their arrival began to spin Amazon’s
“flywheel,” which is a favorite Bezos metaphor for the way each of the company’s strategies feeds the others. As third-party sellers broadened Amazon’s selection, more customer traffic migrated to the site, which in turn induced more sellers to join, and so on.
Along the way, Amazon drew on its sellers’ expertise, and the immense stream of data their transactions generated, to master one industry after another and expand its empire. “That was something we did quite well,” Randy Miller, a former merchandising director at Amazon, told Brad Stone. “If you don’t know anything about the business, launch it through the Marketplace, bring retailers in, watch what they do and what they sell, understand it, and then get into it.” [58]
Marketplace was more than a transitional strategy though. Today, nearly half of Amazon’s unit sales worldwide are generated by third-party sellers, up from one-quarter a decade ago. [59] Most shoppers have scarcely noticed this evolution, because Amazon gives its Marketplace sellers only the barest visibility. The seller’s name is mentioned just once in small text on the product page (“sold by such-and-such”), the checkout process is the same, and many sellers use Fulfillment By Amazon, or FBA, so their products are warehoused by the company and shipped from its fulfillment centers in Amazon boxes.
By operating as both a direct retailer and a platform for competing sellers, Amazon can toggle back and forth, leveraging the interplay between these two parts of its business to maximize its market power.
These inconspicuous sellers, and their dependence on Amazon, form another piece of the story of how Amazon came to be “a multi-trillion-dollar monopoly hiding in plain sight.” By operating as both a direct retailer and a platform for competing sellers, Amazon can toggle back and forth, leveraging the interplay between these two parts of its business to maximize its market power. It uses the data it gleans from sellers to expand its direct retail operations, picking off the most advantageous segments for itself. And it uses its platform, now the gateway to more than half of online shoppers, to induce its smaller rivals to supply the rest of its selection, while it levies a lucrative tax on their sales.
At its core, Amazon is an infrastructure company, and it’s positioning its platform to be as indispensable to commerce online as our road network is offline. Amazon has the same vision for another of its divisions, Amazon Web Services. AWS controls one-third of the world’s public cloud computing capacity, more than Microsoft, IBM, and Google combined. [60] The list of companies that rely on it is miles long and includes Netflix, Dow Jones, and Comcast. In his presentation last May, as he illustrated Amazon’s potential to produce monopoly-level returns, Palihapitiya noted that AWS amounts to “a tax on the internet.” [61] AWS allows Amazon to tax one large segment of the world’s economic activity; Marketplace allows it to tax another.
It would be as if Walmart owned most of our malls and Main Streets, decided the terms by which its rivals could rent these spaces, and oversaw every sale they made.
In effect, Amazon is supplanting an open, public marketplace, governed by democratic rules that facilitate competition and fair play, with a privately controlled market in which entrepreneurs have to abide by Amazon’s rules and pay tribute to it. [62] It would be as if Walmart owned most of our malls and Main Streets, decided the terms by which its rivals could rent these spaces, and oversaw every sale they made.
As if keen to divert attention from the existential threat this poses to a competitive market, Amazon’s executives have recently been touting Marketplace as a cradle of entrepreneurship. In an interview with the Seattle Times earlier this year, Peter Faricy, an Amazon vice president, said of Marketplace: “What this really created is kind of a level playing field for entrepreneurs and small-medium businesses.” [63]
This is the fox characterizing his efforts on behalf of the hens. Amazon exploits its sellers, benefiting from their product expertise and work, while destabilizing their businesses. Its market dominance means sellers have little recourse or alternative, and there’s always a steady supply of new sellers to take their place.
Sidebar: Who Are Amazon’s Third Party Sellers?
Because Amazon reveals so little information about third-party sellers, it’s hard to develop a complete picture of who they are. Amazon reports that it has 2 million sellers worldwide, but the vast majority of these are people casually selling a few things, much like people do on eBay or Craigslist. Only a tiny fraction are businesses, in the sense that they generate enough income to support at least one person. In the U.S., we estimate that these number in the thousands.
Perhaps the largest part of this group, and the mainstay of Marketplace at least until recently, consists of sellers whose entire business is selling online, mostly on Amazon. Some specialize in particular products, but most are retail arbitragers who offer an ever-changing assortment of goods, often acquired from grey-market dealers. To succeed, these sellers rely on software that adjusts their prices every few minutes, with the aim of underpricing other sellers and winning the buy- box—that is, being selected by Amazon as the default seller on a product page. Most have no expertise in the products they sell and little contact with customers. It’s “like they are trading stocks,” explains Juozas Kaziukėnas, founder of Marketplace Pulse. [64] “It’s not like traditional retail. If you talk to sellers, they tend to quote movies like Moneyball.” A growing share of these sellers are based overseas and use Amazon’s logistics network to get their products to U.S. doorsteps.
As Amazon has siphoned off a larger share of customer traffic in the last few years, the arbitragers have been joined by a stream of manufacturers and consumer brands. They include small businesses like Carved, whose 17 employees design and produce wooden iPhone cases in Elkhart, Ind., as well as industry giants like Levi Strauss and KitchenAid. Many became Marketplace sellers only reluctantly. “We realized you are damned if you do, damned if you don’t,” the CEO of a toy company told us. [65]
Alongside the arbitragers and producers, a small but steady trickle of independent retailers are giving in to Amazon too. “Philosophically, it is tough, but competitively, you have to think, how are you going to continue to survive?” the owner of a 31-year-old sporting goods business with several stores in the Upper Midwest said, referring to his recent decision to become an Amazon seller. [66] His own web site has been generating decent sales, but he can feel the tide shifting as his customers spend more time on Amazon and the site becomes their default provider of everything. Amazon, he says, is now “both a competitor and an access to the consumer base.” The decision isn’t sitting well, though. “My business model is all about the customer relationship and I can’t do that on Amazon,” he says.
Amazon keeps a percentage of each Marketplace sale; for most products, it’s 15 percent, but can be as high as 50 percent for some items. It gets this cut “through zero effort,” notes Juozas Kaziukėnas, founder of Marketplace Pulse, which tracks the industry. [67] And Amazon takes its piece off the top. If other sellers, or Amazon itself, drive the price of an item down, and a seller is stuck with inventory to unload, the seller can end up losing money while Amazon still takes 15 percent.
On top of this, there are fees for warehousing and shipping if the seller is using FBA, which Amazon strongly encourages by giving FBA sellers a much better shot at the buy-box—that is, being chosen by Amazon’s algorithms as the default seller on a product page. By inducing sellers to use FBA, Amazon has upped the volume of packages it handles, which has given it more leverage to wrest discounts from carriers like UPS. These discounts have in turn led carriers to raise shipping prices for small businesses, some evidence suggests, creating a further inducement for them to use FBA. [68] (This added package volume has also given Amazon greater scale economies as it builds out its own package delivery systems, the next piece of its infrastructure empire, which we’ll explore later in this report.)
But these fees are hardly the most valuable thing Amazon takes from sellers. It also appropriates their product knowledge. Upstream Commerce recently tracked 857 apparel items first offered for sale by Marketplace sellers and found that, within 12 weeks, Amazon began selling 25 percent of their top-selling items. [69] Another study by researchers at Harvard Business School also looked at patterns in Amazon’s entry into new product areas and found, “The likelihood of Amazon’s entry is positively correlated with the popularity and customer ratings of third-party sellers’ products.” [70] The researchers, who described their findings as a “gloomy picture” for sellers, added, “Results also show that third-party sellers affected by Amazon’s entry appear to be discouraged from growing their businesses.”
Once Amazon brings a seller’s most popular products into its own inventory, it can lower its price so that it becomes the default seller, or simply award itself the buy-box anyway. “In our setting, we observe across many instances of Amazon entry that Amazon may present itself as the default seller even when third- party sellers’ products are offered at lower cost,” the Harvard researchers report. A ProPublica analysis this year likewise found: “About three-quarters of the time, Amazon placed its own products and those of companies that pay for its [FBA] services in [the buy- box] position even when there were substantially cheaper offers available from others.” [71]
Amazon blocks sellers from building relationships with their customers, which, alongside product expertise, is another key to being a successful retailer. Amazon fiercely guards these customers as its own, allowing sellers to communicate with them only through its system. It monitors these exchanges and forbids sellers from, among other things, including links to websites. Doing so prompts an immediate warning. “It has come to our attention that you may be attempting to redirect Amazon.com buyers to another Web site,” read the message Stardust Memorials, a purveyor of cremation urns, received from Amazon last year after responding to a customer’s question about engraving. [72] An employee of this Michigan-based small business had replied that custom engraving orders could be made through Stardust Memorials’ own website. But however helpful that message may have been to the customer, it was unwelcome by Amazon, whose automated system immediately flagged it.
A violation of this or any of Amazon’s many rules can lead to the abrupt cancellation of a seller’s account and an immediate halt to her income. “The biggest thing everyone is scared of is being suspended,” says Kaziukėnas. Suspensions are frequent. Amazon seller boards on Reddit are filled with frantic sellers trying to figure out how to get their accounts reinstated. A cottage industry of consultants has sprung up to help them. Sellers describe Amazon’s process as confusing and inconsistent, and they say it’s made harder by the fact that Amazon insists on handling everything through email. [73]
Amazon can upend a seller’s livelihood by abruptly changing its terms.
Short of dismissing a seller, Amazon can also upend his livelihood by abruptly changing its terms. “You completely rely on Amazon’s rules and those rules tend to change a lot,” explains Kaziukėnas. He points to Amazon’s latest round of price hikes for sellers, announced in May, which sharply raised fees for FBA. [74] “All of the sudden your business model has changed. You have to change how you manage supply and demand,” he says, adding: “No matter how successful you are, depending on what you do, it might become impossible for you to do it anymore.”
Sellers who mistakenly think of Amazon as a partner have learned the hard way that it has little interest in their survival. Competition for the buy-box has grown more ruthless in the last year as Amazon has recruited a new contingent of sellers based in China, and extended its FBA service into a global logistics network that directly links Asian factories with U.S. and European households. [75] “U.S. sellers on Amazon.com Inc.’s marketplace have taken note of the growing number of Chinese companies offering their wares on Amazon.com, often at low prices,” Internet Retailer reported last December. [76] “It’s no accident: Amazon is actively encouraging Chinese merchants to sell on its sites, and recently unveiled new services designed to increase the selection of Chinese goods available.”
And Amazon remains as remorseless as ever in cutting off sellers who displease it. In a story reported by Spencer Soper of Bloomberg, Emad Abukheit described building a business in North Carolina selling health and beauty products on Amazon, only to have his account abruptly suspended, forcing him to lay off his employees. [77] “It’s been a nightmare,” he told Soper. “They were our partner. You can’t just put your partner out of business.”
In theory, sellers like Abukheit could diversify their revenue or drop Amazon entirely. But where could they go? Amazon commands such a large share of online shopping traffic that platforms operated by other companies, including Walmart and eBay, are only anemic options. According to Kaziukėnas, even the biggest companies selling on Amazon are almost wholly dependent on it. “While they are trying to sound as if they are diverse and that they are selling in different places,” he says, “there is no doubt that 90 percent of their sales are Amazon.”
Shaking Down Producers
In July Birkenstock announced that it would no longer sell its popular shoes to Amazon, and that, as of January 1, 2017, it would not authorize third-party sellers to sell them on the site either.
“Amazon direct was one of our largest accounts,” David Kahan, CEO of Birkenstock USA, wrote in a letter to the company’s retail partners. Giving up the revenue, Kahan explains, was necessary to protect the 240-year-old company’s reputation with customers and ensure “a fair and competitive environment” for its retail partners. [78] At issue was Amazon’s refusal to stem a “constant stream of unidentifiable unauthorized sellers” who disregard Birkenstock’s policies, including “postings by sellers proven to have counterfeit Birkenstock products.”
Kahan goes on to disclose that, in three years of discussions with Amazon’s management, he “presented multiple proposals and ‘out-of-the-box’ ideas” to address the problem. But Amazon declined to act. “Amazon has made it clear that the only way to achieve a ‘clean’ environment (no counterfeits and no unauthorized sellers),” Kahan reports, “is to sell our complete product offering to Amazon directly.” Like many manufacturers, Birkenstock sells its most popular shoes through every channel, including mass retailers like Amazon, while it reserves part of its line, typically new and niche designs, for brick-and-mortar stores. These stores provide extensive marketing and customer service for Birkenstock, which helps it sell more shoes, and, in exchange, they get to carry a deeper selection.
Amazon would like to take these sales for itself, but it needs access to Birkenstock’s entire line of products to do it. It’s been using the threat of allowing an unending river of counterfeits on Marketplace to bully Birkenstock into giving in.
As strictly as Amazon patrols the behavior of Marketplace sellers in some ways, it’s conspicuously lax in others. Amazon’s platform has “become a haven for counterfeiters,” according to reporting this year by Ari Levy of CNBC. Among his many examples is the story of a California company called Forearm Forklift, which has had to lay off more than half of its 52 employees as shoddy knock-offs of its patented moving tools have proliferated on Amazon, causing its sales to plummet. Levy writes that Amazon’s responses to the company’s many complaints have “ranged from terse to deflecting.” [79] Alongside the counterfeiters, there are the fly-by-night arbitragers, who acquire goods from grey-market dealers, dump them on Amazon, and let their pricing bots drive margins to near-zero. For smaller manufacturers especially, this is crippling since they suddenly find that the retailers they’re counting on to move their full line are not able to compete on popular items.
And Amazon is no help. “They don’t help at all when it comes to helping us contact unauthorized sellers,” says the CEO of a 20-year-old clothing brand that specializes in sustainable, U.S.-made fabrics. [80] In fact, Amazon shields the identities of sellers and makes it easy for them to open multiple accounts under different names. Even the consumer products giant Johnson & Johnson, which makes Tylenol, has struggled to get Amazon to take action against sellers peddling damaged and expired medications. [81]
Amazon has a long history of retaliating against suppliers who resist its ever- mounting demands for bigger discounts and more fees.
This is another way that being both a platform and a direct retailer magnifies Amazon’s market power: it enhances the company’s ability to bend manufacturers to its will. For one, Marketplace takes away producers’ only real source of leverage in negotiations: even if they decline to sell to Amazon, at least some of their products will likely still be available on the site through unauthorized sellers, preserving Amazon’s status as a place one can find anything. Indeed, Birkenstock’s Kahan expects that shoppers will still be able to find a pair of Birkenstocks on Amazon next year, but warns: “It may be counterfeit. It may be stolen.”
Second, Amazon uses its ability to selectively police this activity to pressure suppliers into agreeing to its terms. Manufacturers we interviewed described meetings in which Amazon buyers pressed them aggressively and made direct references to Marketplace. “One of the things they said when we were leaving was that it would be a wild, wild West,” an executive with a mid-sized sporting goods manufacturer told us, referring to a conversation with Amazon buyers shortly after his company decided to stop selling directly to Amazon. “Sure enough, we saw people [selling our product] all over the place [on Marketplace].” [82]
Birkenstock enjoys an exceptional level of brand recognition and stature with its customers and, perhaps owing to this, its declaration against Amazon is unusual for its daring. Most manufacturers can ill afford to give up half of the online market, much less risk Amazon’s retaliation by publicly denouncing it.
Their fear is well-founded. Amazon has a long history of retaliating against suppliers who resist its ever- mounting demands for bigger discounts and more fees. In the early 2000s, as Amazon solidified its dominance in the book business, Bezos initiated a campaign to squeeze small publishers for better terms. Inside Amazon, the campaign was dubbed the “Gazelle Project,” according to Brad Stone, after Bezos told buyers that they “should approach these small publishers the way a cheetah would pursue a sickly gazelle.” [83] One target was Melville House, a small Brooklyn-based publisher of quality fiction and non-fiction books. When Amazon approached Melville House and demanded it pay another sizeable fee, its CEO Dennis Johnson bristled at the shake-down, refused to pay, and called Publishers Weekly. A story soon appeared and the following day, Amazon removed the buy-buttons from every Melville House title on its site. At the time, Amazon represented 8 percent of the company’s sales, which it couldn’t afford to lose. “I paid that bribe,” Johnson said, “and the books reappeared.” [84]
“When you are small, someone else that is bigger can always come along and take away what you have,” Bezos has said. [85] As Amazon’s share of book sales has soared, so have its demands for more payments from publishers. “Amazon frequently surprises publishers at the end of the year with a sudden demand to pay a flat fee equal to a percentage of the previous year’s sales,” according to Authors United. [86] These fees “keep rising, though less for the giant pachyderms than for the sickly gazelles,” writes George Packer in a 2014 investigation for The New Yorker. [87] If publishers don’t pay up, Amazon pulls their books out of its recommendations algorithms, so they are no longer promoted to customers. (Unbeknownst to many shoppers, placement is for sale on Amazon: What shows up in search results and recommendations is partly determined by payments extracted from suppliers.)
As Amazon has squeezed bigger fees from publishers, both authors and readers have paid a price. Money to invest in “serious fiction and nonfiction has eroded dramatically in recent years,” writes Packer. Publishers are putting out fewer titles, [88] while the average’s author’s income has fallen by about 30 percent since 2009, [89] and publishers are focusing more on books by established authors that offer better odds of success. “The quest for publishing profits in an economy of scarcity drives the money toward a few big books,” Packer explains.
As Amazon expands its grip on other industries, becoming the dominant seller of clothing and office supplies, toys and tennis rackets, it’s repeating the same hardball tactics it first developed in the book business, and with the same damaging effect on new product development. “With Amazon as a customer, every year we would go to sign the papers, and they would ask for more and more and more. Every year they would ask for more shipping allowance, more co-op, and so on,” says the sales manager of a 20-year-old game and puzzle company. [90] “So the question becomes, now that you have gotten yourself into this mess, how do you get yourself out?”
Today, producers find themselves sinking ever further into Amazon’s quicksand. Amazon uses the money it extracts from them to fund the many perks it provides Prime members, and to cover the losses it incurs enticing more people to install Echo speakers in their homes. This in turn binds consumers ever more tightly to Amazon’s ecosystem, which then makes suppliers more dependent on Amazon to reach customers, and thus even more vulnerable to its demands.
And, as if slowly hollowing out their companies were not enough, Amazon is now going a step further: It’s taking their best ideas and competing directly against them.
Expanding into Manufacturing
After selling their cleverly designed aluminum laptop stands through Amazon for more than a decade, employees at Rain Design, a small business in San Francisco, were dismayed last year when Amazon introduced a nearly identical product.
The only visible difference is that Amazon swapped the stand’s iconic rain drop imprint for its own smiling arrow logo. [91] As of this writing, if you shop for a laptop stand on Amazon, the first three images you see, aside from those in the paid ads, are of the company’s own stands. [92] Rain Design’s stand, despite having a higher rating and more customer reviews than Amazon’s, has dropped further down the search results, and its sales have fallen in turn. “We don’t feel good about it,” Harvey Tai, the company’s general manager, told Bloomberg. [93]
By now, Amazon is highly adept at exploiting its control of one market to move into adjacent markets. As we’ve seen, through Marketplace, it provides essential market access for competing retailers and then uses the data it gleans from them to expand its own retail sales. In a similar way, Amazon has begun to exploit the data it’s gathered from manufacturers to compete directly with them by producing the same products. Amazon has targeted both everyday goods made by large brands like Procter & Gamble and products dreamed up and produced by small companies like Rain Design.
For these manufacturers, the sudden arrival of an Amazon-made knockoff topping the site’s search results can devastate sales. Amazon’s laptop stands are part of its AmazonBasics label, a rapidly expanding line that now includes over 900 products, nearly one-third of which were introduced just in the last 18 months. [94] Search for batteries, headphones, an exercise ball, or a desk chair, and there at top of the results will be an item from AmazonBasics. [95] “When we saw AmazonBasics products as best sellers in numerous categories, our stomachs dropped,” Tristan Clausell, a staffer at Skubana, which sells software for third-party sellers, wrote in a post on the company’s blog. [96]
Amazon also offers bed linens through its Pinzon brand, and baby wipes under AmazonElements. It recently debuted several lines of perishable foods, including coffee, baby food, and snacks, sold under brands such as Happy Belly and Mama Bear. [97]
And, early this year, Amazon quietly unveiled seven separate fashion labels—under names like Franklin & Freeman and Lark & Ro—offering over 1,800 items of clothing for men, women, and children. [98] It’s Amazon’s bid to become both the apparel industry’s largest retailer and its largest manufacturer. The move is “a threat more to us because we sell basics with a twist,” the CEO of the sustainable clothing brand told us. [99] “The brands are bringing as much excitement and energy to that site as Amazon itself. If all the brands are being show-roomed, and Amazon is using that data to undercut the brands, that’s an unfair market.”
For manufacturers, the sudden arrival of an Amazon-made knockoff topping the site’s search results can devastate sales.
Store brands are nothing new, of course. Supermarkets and other retail chains have long offered their own private-label products. But Amazon’s move into manufacturing is different. One reason it’s a bigger threat to competition and consumer choice is the company’s sheer market power. By being the first-destination for more than half of internet shoppers, Amazon has unprecedented power to direct consumers to its own products and disadvantage particular competitors in its search rankings and recommendations.
Another reason that Amazon’s advance into manufacturing is a more serious threat to competition is the company’s vast trove of data. Unlike Kroger or CVS, which gather basic sales data on the products they stock, Amazon has data on everything sold on its platform, and that data is matched to individual consumers. It knows what we search for, find, don’t find, browse, buy, and don’t buy. It also knows much about what we do when we are not shopping, including how we spend our time online, what we watch on Amazon Prime, and what we tell our Echo speakers to do. This gives Amazon a formidable advantage in going after its suppliers’ customers.
One telling clue as to the scope of Amazon’s ambitions as a producer is that its own products, unlike typical store brands, are not a low-budget alternative to the leading brands. Many of Amazon’s wares, including its coffee and baby food, carry higher price tags than competing premium-brand products. [100] These private-label products earn higher margins for Amazon than what it makes selling other firms’ goods.
That’s not the only advantage. By making its own products, Amazon also gains leverage in its negotiations with suppliers; should they resist its terms, Amazon can offer consumers a nearly identical product. Speaking at a fashion industry event last fall, Jeff Yurcisin, vice president of clothing at Amazon Fashion, delicately delivered a threat as he explained Amazon’s reasons for launching its own clothing lines to a nervous audience of apparel producers: “When we see gaps, when certain brands have actually decided for their own reasons not to sell with us, our customer still wants a product like that.” [101]
Independent retailers negotiate vigorously with their suppliers, but they also view these relationships as mutually beneficial partnerships. Amazon, on the other hand, seems intent on weakening all of the other players in each of the industries it enters. It starts by courting top brands, as it did for years in the fashion world by sponsoring events like the Met Ball and New York’s first Men’s Fashion Week, [102] all the while building its knowledge and market share before unveiling its own competing lines.
Amazon followed the same playbook in the book industry. It cozied up to publishers in the lead up to the release of its Kindle e-reader in 2007. “Publishers— including all the major publishers—have embraced Kindle, and we’re thankful for that,” Bezos wrote in his letter to shareholders that year. Two years later, Amazon became a book publisher itself, launching the first of several imprints. Today, books from Amazon’s imprints and its self-publishing division are featured prominently on both its site and the Kindle platform, and it’s not unusual for as many as half of the top 25 titles on the Kindle bestseller list to be Amazon’s. [103] Asked recently about his former partners in the publishing industry, Bezos remarked, “It’s very difficult for incumbents who have a sweet thing to accept change.” [104]
Fewer Choices and Shrinking Opportunities
As the world under Amazon’s umbrella expands, the world outside its control is shrinking. Over the last fifteen years, the number of local, independent retail businesses in the U.S. fell by 108,000— a drop of 40 percent when measured relative to population. [105]
A primary cause of this decline has been consolidation in the retail sector and the increasing dominance of a few big retailers, especially Amazon. In a national survey this year, independent retailers ranked competition from large internet retailers as their top challenge, identifying Amazon as a far bigger threat to their businesses than anything else, including big-box stores, rising health insurance costs, and difficulty obtaining financing. [106]
To many local businesses, going up against Amazon doesn’t feel like a fair fight. It doesn’t seem that way when they have to add sales tax to a customer’s purchase while Amazon does not, [107] or when they have to scramble to cover the cost of adding inventory or bringing on a new employee while Amazon picks up hundreds of millions of dollars in subsidies to fund its own growth.
Independent retailers play a pivotal role in helping new products find an audience. Manufacturers are alarmed at the prospect of a future where this market diversity gives way to a single online platform.
It’s also not a fair fight when Amazon sells entire product categories at a loss, or when its third-party arbitragers’ pricing bots drive margins to zero. “It really erodes the value [of our product] and makes it harder for the [brick-and-mortar] sellers that we depend on,” the toy company CEO says. The paradox of this race-to-the- bottom pricing, according to the manufacturers we spoke with, is that it actually reduces their overall sales. The brick-and-mortar retailers they rely on to sell their full line and help them launch new products cannot match the prices on Amazon, because they need to earn at least enough margin to pay the rent and their employees. As these stores struggle and disappear, sales on Amazon do not make up for the losses. “Our product pricing got massacred on Amazon and we actually didn’t sell that much either,” says the sales manager at the game and puzzle company, referring to a time when his products were sold by both Amazon and many third-party sellers.
Amazon’s platform is a poor substitute for what independent retailers do for an industry, according to the manufacturers we spoke with. They all describe these local, small businesses as a kind of keystone species, the absence of which would deeply damage the ecology of their industries, harming both producers and consumers.
ndependents, for one, play a pivotal role in introducing new products and helping them find an audience. Almost invariably, they are the ones who provide the initial runway for a new author, an innovative tennis racket, or a toy so ingenious you have to play with it to believe it. One reason for this is that these stores are owned by people who have a passion for books or sports or toys, a genuine interest that propels them to search out and feature new products. Another is that these retailers maintain valuable physical spaces to showcase these products and build a sense of community around reading, or playing sports, or parenting.
“When somebody is providing all of this one-on- one contact and a place to hang out and be part of a community of people who also love what you love, that’s really valuable. That’s where consumers are introduced to our brand,” says the executive at the mid-sized sporting goods manufacturer. Local retailers organize meets and races, bring in trainers, and guide customers taking up a new sport. All of this activity, he says, benefits both the surrounding community and companies like his. “But if they can’t get the margins they need to afford the rent, those places will go away,” he adds. Customers may value what these stores provide but they don’t always connect the dots: “I hear retailers talk about long-time customers who come into their stores for advice and they are wearing a running shoe they didn’t buy there. They say: Oh, I found it on Amazon for $20 cheaper.”
For companies just starting out, local retailers are the way to find an audience. “They are on the front lines of helping parents find great toys for their kids,” explains Mike Acerra, co-founder of Lux Blox, a startup toy company in Galesburg, Ill. [108] Galesburg has been hit hard by factory closures, as companies like Maytag, under pressure from big retailers to cut costs, have left. Acerra hopes Lux Blox, which makes its novel building blocks locally, can help reverse the decline. Lux Blox would never have gotten off the ground, though, he says, without independent toy stores, who have showcased its blocks and offered kids and parents a hands-on chance to try them. “To see it in person really clinches the sale,” he says.
“The cheapest way for us to build a brand is to work closely with our brick-and-mortar stores. They are in a much better position as small retailers to do that boot-strapping,” says Michael Levins, who founded Innovative Kids, a 27-year-old company that makes books and puzzles for kids. [109] Levins and his partner are in the midst of launching a new toy brand, and all they need to get it going are a few enthusiastic toy retailers. If Amazon succeeds in killing off local stores, he says, creating a new venture like this would become too expensive for most entrepreneurs. “If we were owned by a private equity firm with a huge trove of capital, then I suppose we could do it. We could do a bunch of advertising and build a brand online,” he says.
Manufacturers are alarmed at the prospect of a future where the great variety and diversity that independent retailers bring to the market gives way to a single online platform. In a diverse retail sector, products can find their way to consumers via any one of a vast number of streams and tributaries, some large and many small. When these give way to a single river, fewer products make it downstream.
We can’t know how Amazon is using the torrent of data it’s gathering as we search, browse, and click, but we can be certain the algorithms that direct and focus our attention are serving Amazon’s interests, not ours.
Research confirms this. Readers browsing in a bookstore discover new books they’d like to read at about three times the rate they do while shopping on Amazon, according to the market research firm Codex Group. Even though it dominates the market, capturing about half of book sales, Amazon accounts for only 7 percent of new book discovery. Local bookstores account for 20 percent. [110]
As more browsing and shopping migrates to Amazon, the company is gaining unprecedented power to decide what products we encounter, and to pick which companies, authors, and creators will be winners, and which will be losers. “Amazon has the ability to promote or destroy a book in the national marketplace for any reason it chooses, and nobody outside the company can know why or how—or even that it was done,” observes Authors United. [111] We also can’t know how Amazon is using the torrent of data it’s gathering as we search, browse, and click, but we can be certain the algorithms that direct and focus our attention are serving Amazon’s interests, not ours.
As Amazon uses its market power to extract ever higher fees from manufacturers, and as it demotes their products in its search rankings in favor of its own private-label goods, producers are left with less revenue to invest and fewer opportunities to compete by innovating. “If you can’t make any money, it takes away invention and innovation,” the sporting goods executive points out. Indeed, studies have shown that industries populated by lots of small businesses generate new products at a much faster clip than those dominated by a few large companies. [112]
The trouble is, as much as this loss of innovation and variety impacts our choices, and as much as it stunts the economy over the long-term, it’s virtually impossible for consumers to detect in real time. “As a consumer, how would you even know that something was missing?” asks the sales manager at the game and puzzle company.
As Amazon reduces the choices available to us as consumers, it’s having an even more alarming impact on our liberty as producers, workers, and people who need to earn a living. Amazon’s tightening hold on our economy is narrowing our opportunities, eroding our agency and self-determination, and making it harder to earn a decent income. Starting a new business has become less and less possible: the number of new businesses launched each year has plummeted by more than one-quarter in the last decade, [113] a trend many economists say is owed to the increasing dominance of big companies like Amazon and their ability to crush smaller rivals and block new firms from entering markets. This in turn is hobbling job growth, because young, growing businesses are responsible for virtually all net new job creation. [114] It’s also propelling economic inequality, according to a growing body of scholarship, which has found that, as small and medium-sized businesses give way to large companies, the middle class shrinks and the gap between rich and poor expands. [115]
Jeff Bezos is counting on us not to notice all that we’re losing. His big bet is that we’ll be so charmed by the ease of ordering a book from one of Amazon’s bestseller lists, or telling our Echo speaker to deliver more Amazon-branded baby food, that we will fail to see how our freedom and our choices are shrinking— not only for what to buy and whom to buy it from, but for how we can earn a living.
Bezos is also betting that we’ll mistakenly attribute the effects of Amazon’s power grab to the digital revolution, and that we can be hoodwinked into believing that the sharp decline in competition and market diversity are the inevitable price of this new technology. During an interview on 60 Minutes a few years ago, Bezos was asked about all the small publishers and local bookstores who “worry that the power of Amazon gives them no chance.” [116] His response was emphatic: “Amazon is not happening to book selling; the future is happening to book selling.”
The real future that Bezos has in mind for bookstores began to arrive last year. Amazon opened its first bookstore in Seattle. Clad in brick and mortar, the store is a cozy simulacrum of an independent bookstore. More of these Amazon bookstores are coming: to San Diego, Portland, Boston, Chicago, and Washington, D.C. On a call with investors in February, Sandeep Mathrani, CEO of the mall operator General Growth Properties, revealed that Amazon plans to open between 300 and 400 bookstores. [117]
As Amazon reduces the choices available to us as consumers, it’s having an even more alarming impact on our liberty as producers, workers, and people who need to earn a living.
It turns out that Bezos knows what publishers and independent booksellers have known all along: There is nothing obsolete about bookstores or even printed books. It is not the analog nature of these stores that Amazon has set out to challenge. Rather, it is their ownership and their independence.
Amazon’s Monopoly Power
Amazon is indeed a monopoly hiding in plain sight. Monopoly is a word that seems to belong to another age, but Amazon warrants its resurrection. A monopoly exists, the conservative economist Milton Friedman wrote, when an “enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it.” [118] Amazon certainly has this power in books, an industry in which the majority of sales have migrated online and Amazon’s share of those sales is now larger than Standard Oil’s was in 1911 when it was broken up by federal regulators. [119] And it is rapidly gaining this ability to dictate terms across much of the economy as it comes to control the basic infrastructure that both producers and competing retailers depend on to access customers and transact business.
And yet, aside from Amazon’s giddy investors, most people have been slow to recognize the breadth of the company’s power and the threat it poses to competition, open markets, and self-determination.
This is partly because we’re accustomed to thinking of the web as a highly fluid place where upstarts can come along at any moment and fundamentally reorder entire industries. Yet, as the cases of Quidsi and Zappos make clear, Amazon has the financial resources to crush and devour would-be competitors. And that’s not its only weapon against challengers. Its vast logistics infrastructure, which now encompasses about 190 warehouses and other facilities, forms a formidably high fortress. It’s “why they have the monopoly,” observes Kaziukėnas. “As a new e-commerce player, how do you get to the same level? People are used to the speed of Amazon’s deliveries. Anything else seems so bad.” Amazon’s cache of data adds yet another bulwark, giving it an extraordinary knowledge advantage over its suppliers, competitors, and customers. [120]
More than anything, though, the reason we’ve been slow to recognize Amazon’s tightening grip is that the company seems so consumer-friendly, and so unlike our image of a monopolist. We’re too busy marveling at Amazon’s effortless check-out and lightning-fast shipping to worry about the vanishing competition. But there is every reason to be deeply concerned about the ways Amazon is already using its dominance, and the ways it may do so in the future.
“There is an assumption that they are treating us the consumer fairly and it’s not at all obvious that that is actually the case. And even if they are today, they might not be tomorrow,” says Sabeel Rahman, a law scholar at Brooklyn Law School and a fellow at the Roosevelt Institute and New American Foundation.
“How do we make sure they are not putting their thumb on the scale and driving you toward Amazon goods rather than those from competitors who might offer a product that is better? How can you be sure that the search is not biased?” [121]
Already, there are signs that Amazon has quietly begun levying its monopoly tax on consumers as well as producers. “Now, with Borders dead, Barnes & Noble struggling and independent booksellers greatly diminished… Amazon is, in effect, beginning to raise prices,” a 2013 New York Times article reported, noting that the increases were mostly on books put out by smaller presses, not the bestsellers readers could more easily shop around for. [122] Another analysis found that Amazon continues to offer low prices on high-visibility items like televisions, but charges more than competitors for other goods, like the cables that go along with a new TV. [123]
As buying from Amazon becomes habitual, as more households install its Echo speakers and sign up for its subscription service, which provides regular deliveries of household staples, the more the company can drive sales based on convenience rather than price. And when it comes to setting prices, Amazon’s data cache gives it an information advantage over customers, which it puts to prodigious use. Amazon adjusts its prices constantly, making at least two-and-a-half million price changes a day. [124] These non-stop price changes, notes Lina Khan, a law scholar and fellow at New America Foundation, mean that, for both consumers and regulators, “it may not be apparent when and by how much Amazon raises prices.” [125] For shoppers who subscribe to monthly deliveries of supplies like dog food and toilet paper, New York Times reporter Brian X. Chen found that these adjustments can result in unexpected price swings of up to 170 percent. [126]
But Amazon’s potential to raise prices is not the only, or even an especially important, reason to be alarmed about its tightening grip. Amazon has the power to shape and limit the choices available to us and, even more worrisome, it is rapidly curtailing our ability to build a business, engage in commerce, and earn a living independent of its oversight. Although we have largely forgotten this today, concerns about our liberty and agency as producers of value, not just as consumers of it, propelled the passage of our antitrust laws a century ago. At that time, a few industrialists had harnessed another technological revolution, centered on railroads, to become all- powerful gatekeepers. We responded with laws that, among other things, bar companies from using their dominance in one industry to gain control of another, and prohibit them from leveraging their size to sell goods at a loss with the intention of driving smaller competitors out of the market. We also designated railroads, the essential infrastructure of commerce in those days, as “common carriers,” a status that entails strict regulation to ensure open and fair access for competing businesses.
When it comes to setting prices, Amazon’s data cache gives it an information advantage over customers, which it puts to prodigious use.
About 35 years ago, a radical ideological shift in how these laws are interpreted and enforced took root. Codified under Ronald Reagan, and backed by a key block of liberals, these changes stripped antitrust enforcement policies of their commitment to protecting competition and open markets, and limited regulatory action to the narrow goal of maximizing economic efficiency. As this new way of thinking swept in, we came to see antitrust policy as solely about keeping prices low. This has confounded our ability to see Amazon for the monopoly it is, creating a pathway for the company to gain a stranglehold on our economy with little interference from regulators. “With its missionary zeal for consumers, Amazon has marched toward monopoly by singing the tune of contemporary antitrust,” notes Khan.
With corporate concentration soaring, a growing number of scholars, policymakers, journalists, and public interest advocates are now questioning this sharp shift in antitrust oversight, and many are calling for the restoration of the broader range of concerns and values that, for decades, animated these policies. No company better illustrates the stakes than Amazon, and it’s beginning to draw more scrutiny. Both the European Union and Japan have opened antitrust investigations into Amazon. Former Republican Senator Olympia Snowe has described some of Amazon’s tactics as “anti-competitive.” [127] In June Democratic Senator Elizabeth Warren gave a groundbreaking speech on antitrust, in which she singled out Amazon as a particular threat. “The opportunity to compete,” she said, “must remain open for new entrants and smaller competitors that want their chance to change the world again.” [128]
This is an excerpt from Amazon’s Stranglehold, a 2016 report from the Institute for Local Self-Reliance. You can read and download the full report here, and see more of our writing and research related to Amazon here.
Notes
[7] “Is it time to break up the big tech companies?” Steven Strauss, Los Angeles Times, June 30, 2016.
[8] Figures for retail e-commerce sales are from the U.S. Census Bureau’s Quarterly Retail E-Commerce Sales reports. Amazon’s market share was calculated by the authors, drawing on information from Amazon and Channel Advisor.
[9] Ibid.
[10] Projected by the authors, based on Amazon’s 1st and 2nd quarter results, drawing on information from Amazon, Channel Advisor, and the U.S. Census Bureau’s Quarterly Retail E-Commerce Sales reports.
[11] Codex Group survey, via: “Amazon Has Basically No Competition Among Online Booksellers,” Polly Mosendz, The Wire, May 30, 2014.
[12] Letter from Authors United to William Baer, Assistant Attorney General for the Antitrust Division, U.S. Department of Justice, July 14, 2015.
[13] Ibid.
[14] “Paul Ryan is of two minds about Amazon—or is he?” Carolyn Kellogg, Los Angeles Times, Aug. 21, 2014.
[15] “Cheap Words: Amazon is good for customers. But is it good for books?” George Packer, The New Yorker, Feb. 17, 2014.
[16]“Cowen: It Looks Even More Like Amazon Will Become America’s Top Clothing Retailer in 2017,” Julie Verhage, Bloomberg, May 11, 2016.
[17]“Deutsche Bank: Amazon set to eclipse Best Buy as top consumer electronics retailer,” Daphne Howland, Retail Dive, June 22, 2016
[18]“The Western Toy Market,” Lutz Muller, Toy Directory Online, Feb. 1, 2015.
[19] “AmazonFresh Expands to New Cities, including Chicago and Dallas, with Monthly Membership Plan,” Amazon, Oct. 26, 2016.
[20] “Internal Amazon documents reveal a vision of up to 2,000 grocery stores across the US,” Eugene Kim, Business Insider, Oct. 26, 2016
[21] ”Amazon is poised to chew up the food chain,” Bloomberg News, March 17, 2016.
[22] “Amazon expands logistics reach with move into ocean shipping,” Mari Saito, Reuters, Jan. 15, 2016.
[23] “Why One Amazon Bull Thinks Jeff Bezos Is Building A $3 Trillion Company,” Antoine Gara, Forbes, May 4, 2016.
[24] Walmart’s Annual Reports; Amazon’s Annual Reports.
[25] U.S. Economic Census, 1997–2012.
[26] Letter to Shareholders, 2007 Annual Report, Jeff Bezos, Amazon, 2007.
[27] “Amazon Must Be Stopped,” Franklin Foer, The New Republic, Oct. 9, 2014.
[28] “Jeff Bezos explains why the Echo is harder to hack than smartphones,” Anita Balakrishnan, CNBC, Oct. 20, 2016.
[29] “Amazon’s Music-Streaming Service Competes on Price and Robotic Assistance,” Hannah Karp, Wall Street Journal, Oct. 12, 2016.
[30] “The Real Story of How Amazon Built the Echo,” Joshua Brustein, Bloomberg, April 19, 2016; “Amazon: The Real King of Smart Home Appliances,” Seeking Alpha, Jun. 16, 2016; “Amazon Is Now a Gadget Company.” Will Oremus, Slate, Sept. 17, 2014; “Kindle Fire Touchscreen Eats Up 46 Percent of its Manufacturing Costs,” David Murphy, PC Magazine, Nov. 19, 2011.
[31] “Amazon Alexa will now talk to GE’s connected appliances in smart home push,” Teena Maddox, Tech Republic, Sept. 13, 2016.
[32] “These Ford Cars Will Soon Be Able to Talk to Amazon’s Alexa,” Reuters, Oct. 3, 2016.
[33] “Amazon’s Music-Streaming Service Competes on Price and Robotic Assistance,” Hannah Karp, Wall Street Journal, Oct. 12, 2016.
[34] “Amazon’s Plan to Infiltrate Homes This Holiday: Music Via Echo,” Spencer Soper, Bloomberg, Sept. 27, 2016.
[35] Letter to Shareholders, 2007 Annual Report, Jeff Bezos, Amazon, 1997.
[36] Figures calculated from Amazon’s Annual Reports.
[37] “Amazon.com enjoys a rare competitive advantage: It doesn’t seem to need to make a profit,” observes reporter Miriam Gottfried in “Profits Don’t Swim Through the Amazon,” Wall Street Journal, Jul. 25, 2013.
[38] Letter from Authors United to William Baer, Assistant Attorney General for the Antitrust Division, U.S. Department of Justice, July 14, 2015.
[39] “Cheap Words,” The New Yorker, Feb. 17, 2014.
[40] Letter from Authors United to William Baer, Assistant Attorney General for the Antitrust Division, U.S. Department of Justice, July 14, 2015.
[41] “Amazon Vs. Book Publishers, By the Numbers,” Jeff Bercovici, Forbes, Feb. 10, 2014.
[42] “Amazon Loves Government,” Wall Street Journal, Sept. 11, 2014.
[43] “Sony exits the North American ebook business and gives its customers to Kobo,” Laura Owen, Gigaom, Feb. 6, 2014.
[44] “Is This the End for the Barnes & Noble NOOK?,” Daniel B. Kline, The Motley Fool, Mar 11, 2016.
[45] The Everything Store: Jeff Bezos and the Age of Amazon, Brad Stone, New York, N.Y.: Little Brown, 2013, p. 268-273.
[46] The Everything Store, Brad Stone, p. 294-300.
[47] “Amazon Beating Google as First Stop for Shoppers,” Lauren Inuvik, Mashable, July 26, 2012 (citing Forrester Research).
[48] “How Amazon Loses on Prime and Still Wins,” Nanette Byrnes, MIT Technology Review, Jul. 12, 2016 (citing Forrester Research).
[49] The Everything Store, Brad Stone, p. 287
[50] “These new stats about Amazon should make Google very nervous,” Jillian D’Onfrio, Business Insider, April 20, 2015.
[51] Consumer Intelligence Research Partners, cited in: “52% of U.S. Amazon customers belong to Prime,” Elizabeth Weise, USA Today, July 11, 2016.
[52] “Amazon Shipping Has Gotten Slower For Non-Prime Members,” Kate Ashford, Forbes, Jan. 30, 2016.
[53] “Amazon Has Begun Labeling Some Items Prime-Exclusive,” Andrew Liptak, Gizmodo, Apr. 24, 2016.
[54] “Amazon Grabs 55 Percent of Consumers’ First Product Search, Set to Dominate 2016 Holiday Shopping,” BloomReach press release, Sept. 27, 2016.
[55] “Amazon Wants to Ship Your Package Before You Buy It,” Greg Bensinger, Wall Street Journal, Jan. 17, 2014.
[56] Quotations are from authors’ correspondence with Keller on August 16, 2013, and a phone interview on June 11, 2015. Additional details of the Kellers’ story can be found in: “Amazon.com and Retail: Predatory Pricing, Bully Tactics Squeezing Competition, Retailers and Small-Business Advocates Say,” Christopher Zara, International Business Times, Dec. 20, 2013.
[57] “Amazon Acts as Guide in Online Retail Jungle,” Chris Gaither, Los Angeles Times, Nov. 29, 2004.
[58] The Everything Store, Brad Stone, p. 182.
[59] 2015 Annual Report,” Amazon; “Letter to Shareholders,” Jeff Bezos, Amazon, 2006.
[60] “AWS Remains Dominant Despite Microsoft and Google Growth Surges,” Synergy Research Group, Feb. 3, 2016.
[61] “Why One Amazon Bull Thinks Jeff Bezos Is Building A $3 Trillion Company,” Antoine Gara, Forbes, May 4, 2016.
[62] “The Secession of the Successful: The Rise of Amazon as Private Global Consumer Protection Regulator,” Jane K. Winn, Arizona Law Review, 2016, p. 193-212.
[63] “Third-party sellers giving Amazon a huge boost,” Ángel González, Seattle Times, May 31, 2016. In his most recent letter to shareholders, Bezos wrote that Marketplace provided “selling tools that empowered entrepreneurs.” See: “Letter to Shareholders,” Jeff Bezos, Amazon, 2015.
[64] Author interview, June 28, 2016.
[65] Author interview, June 29, 2016.
[66] Author interview, July 19, 2016.
[67] Author interview, June 28, 2016.
[68] “‘Free’ Shipping Crowds Out Small Retailers,” Laura Stevens, Wall Street Journal, April 27, 2016.
[69] “Upstream Commerce Retail Intelligence Research Finds Amazon Muscles In On Its Own Vendors’ Best Sellers,” News Release, Oct. 28, 2014.
[70]“Competing with Complementors: An Empirical Look at Amazon.com,” Feng Zhu and Qihong Liu, Harvard Business School, Working Paper 15-044, April 28, 2015.
[71] “Amazon Says It Puts Customers First. But Its Pricing Algorithm Doesn’t,” Julia Angwin and Surya Mattu, ProPublica, Sep. 20, 2016.
[72]”Sellers Need Amazon, but at What Cost?” Angus Loten and Adam Panofsky, Wall Street Journal, Jan. 14, 2015.
[73] “Amazon Angers Mom-and-Pop Sellers With ‘Arbitrary’ Suspensions,” Spencer Soper, Bloomberg, Aug. 26, 2016.
[74] “Sellers who use Fulfillment by Amazon consider their options after a fee hike notice,” Sandra Guy, Internet Retailer, May 19, 2016.
[75] “Amazon sellers have to work harder to grow,” Fareeha Ali, Internet Retailer, Sept. 20, 2016; “Amazon Building Global Delivery Business to Take On Alibaba,” Spencer Soper, Bloomberg, Feb. 9, 2016.
[76] “Amazon helps Chinese merchants double their sales on Amazon sites in 2015,” Frank Tong, Internet Retailer, Dec. 9, 2015.
[77] “Amazon Angers Mom-and-Pop Sellers With ‘Arbitrary’ Suspensions,” Spencer Soper, Bloomberg, Aug. 26, 2016.
[78] Birkenstock’s letter is included in full in: “Birkenstock quits Amazon in US after counterfeit surge,” Ari Levy, CNBC, Jul. 20 2016.
[79] “How Amazon counterfeits put this man’s business on brink of collapse,” Ari Levy, CNBC, Oct. 24, 2016.
[80] Author interview, July 21, 2016.
[81] “Amazon and J&J Clash Over Third-Party Sales,” Serena Ng and Jonathan D. Rockoff, Wall Street Journal, Nov. 10, 2013.
[82] Author interview, July 22, 2016.
[83] The Everything Store, p. 243.
[84] “Cheap Words,” The New Yorker, Feb. 17, 2014.
[85] The Everything Store, Brad Stone, p. 52.
[86] Letter from Authors United to William Baer, Assistant Attorney General for the Antitrust Division, U.S. Department of Justice, July 14, 2015.
[87] “Cheap Words,” The New Yorker, Feb. 17, 2014.
[88] Letter from Authors United to William Baer, Assistant Attorney General for the Antitrust Division, U.S. Department of Justice, July 14, 2015.
[89] “The Wages of Writing: Key Findings from The Authors Guild 2015 Member Survey,” Authors Guild, 2015.
[90] Author interview, Jun. 27, 2016.
[91] “Got a Hot Seller on Amazon? Prepare for E-Tailer to Make One Too.” Spencer Soper, Bloomberg, April 20, 2016.
[92] Site searched Sept. 9, 2016.
[93] “Got a Hot Seller on Amazon? Prepare for E-Tailer to Make One Too.” Spencer Soper, Bloomberg, April 20, 2016.
[94] “The Best Kept Secrets of Amazon’s Private Label Initiative: AmazonBasics,” Tristan Clausell, Skubana blog, Apr. 20, 2016.
[95] Site searched Sept. 9, 2016.
[96] “The Best Kept Secrets of Amazon’s Private Label Initiative: AmazonBasics,” Tristan Clausell, Skubana blog, Apr. 20, 2016.
[97] “Amazon Begins Selling Perishable Private-Label Foods,” Greg Bensinger, Wall Street Journal, Jun. 29, 2016.
[98] “Amazon has quietly launched its own clothing lines, as it tries to take over fashion retail,” Marc Bain, Quartz, Feb. 23, 2016.
[99] Author interview, July 21, 2016.
[100]“Amazon Begins Selling Perishable Private-Label Foods,” Greg Bensinger, Wall Street Journal, Jun. 29, 2016.
[101] “Amazon Is Considering Making Its Own Private Label Clothing Lines,” Sapna Maheshwari, BuzzFeed, Oct. 27, 2015.
[102] “Amazon Fashion, Playing the Long Game,” Lauren Sherman, Business of Fashion, Jun. 30, 2015.
[103] This was the case when we checked on Sept. 12, 2016.
[104] “Jeff Bezos: Amazon Fire Phone Flop Was ‘Bold Bet’ That Will Take Many Iterations to Get Right,” Todd Spangler, Variety, Dec. 2, 2014.
[105] U.S. Economic Census, 1997–2012.
[106] “2016 Independent Business Survey,” Institute for Local Self-Reliance, 2015.
[107] For most of its history Amazon has been exempt from collecting sales tax in most states, a significant competitive advantage that we discuss in more detail in the final section of this report. Today, Amazon still does not collect sales tax in 16 states.
[108] Author Interview, July 19, 2016.
[109] Author Interview, July 29, 2016.
[110] Codex Group research, as cited in: “Why Online Book Discovery is Broken (and How to Fix It),” Laura Owen,Gigaom, Jan. 17, 2013.
[111] Letter from Authors United to William Baer, Assistant Attorney General for the Antitrust Division, U.S. Department of Justice, July 14, 2015.
[112] “Industry Innovativeness, Firm Size, and Entrepreneurship: Schumpeter Mark III?,” Wilfred Dolfsma and Gerben van der Velde, Journal of Evolutionary Economics, 2014.
[113] “The decline of American entrepreneurship — in five charts,” J.D. Harrison, Washington Post, Feb. 12, 2015 (citing analysis from the Kauffman Foundation); “Declining Business Dynamism in the United States: A Look at States and Metros,” Ian Hathaway and Robert E. Litan, Brookings Institution, 2014.
[114] “The Importance of Young Firms for Economic Growth,” Jason Wiens and Chris Jackson, Kauffman Foundation, Sept. 14, 2015.
[115]“Wage Inequality and Firm Growth,” Holger M. Mueller, Paige P. Ouimet & Elena Simintzi, LIS Working Paper 632, 2015.
[116] “Amazon’s Jeff Bezos looks to the future,” transcript of a 60 Minutes interview with Jeff Bezos, which was conducted by Charlie Rose and aired Dec. 1, 2013.
[117] “Amazon Plans Hundreds of Brick-and-Mortar Bookstores, Mall CEO Says,” Greg Bensinger, Wall Street Journal, Feb. 2, 2016.
[118] Capitalism and Freedom: Fortieth Anniversary Edition, Milton Friedman and Rose D. Friedman, University of Chicago Press, 2002, p. 120
[119] Market Dominance, David Ira Rosenbaum, Greenwood Publishing Group, 1998, p. 33.
[120] “By collecting an extensive and rich dataset on user activity and habits, dominant platform operators have created a high barrier to entry,” law scholars Sabeel Rahman and Lina Khan noted in a recent paper, referring to both Amazon and other digital platforms, such as Google and Facebook. “Restoring Competition in the U.S. Economy,” in Untamed: How to Check Corporate, Financial, and Monopoly Power, Nell Abernathy, Mike Konczal, and Kathryn Milani (editors), Roosevelt Institute, June 6, 2016.
[121] Author interview, Aug. 1, 2016.
[122] “As Competition Wanes, Amazon Cuts Back Discounts,” David Streitfeld, New York Times, July 4, 2013.
[123] “How Amazon Tricks You Into Thinking It Always Has the Lowest Prices.” Jason Del Rey, Recode, Jan. 13, 2015.
[124] “Amazon changes its prices more than 2.5 million times a day,” Robert A. Ferdman, Quartz, Dec. 14, 2013.
[125] “Amazon’s Antitrust Paradox,” Lina Khan, Yale Law Journal, 2017 (forthcoming).
[126] ”Subscribe and Save on Amazon? Don’t Count on It,” Brian X. Chen, New York Times, Aug. 24, 2016.
[127]The Everything Store, Brad Stone, p. 316.
[128] “Reigniting Competition in the American Economy,” Senator Elizabeth Warren, Keynote Remarks at New America’s Open Markets Program Event, June 29, 2016.
