And So It Begins: FTC vs. Amazon
One of the wealthiest companies in the world, the e-commerce giant faces an anti-trust suit years in the making.
Hey, everyone. This will be short because we plan on releasing a full episode about this issue ASAP. But we didn’t want the week to pass us by without mentioning the huge news this week that the Federal Trade Commission (FTC) filed a long-anticipated anti-trust suit against global commerce giant Amazon.
The suit alleges the online behemoth has engaged in such massive levels of anti-competitive behavior that it not only stifles competition but hurts smaller businesses and results in higher prices for the rest of us.
“We’re bringing this case because Amazon’s illegal conduct has stifled competition across a huge swath of the online economy. Amazon is a monopolist that uses its power to hike prices on American shoppers and charge sky-high fees on hundreds of thousands of online sellers,” John Newman, deputy director of the FTC’s Bureau of Competition, said in a statement announcing the suit. “Seldom in the history of U.S. antitrust law has one case had the potential to do so much good for so many people.”
There’s so much to get into about this, and we want to do it the right way, so we’re scheduled to interview a guest next week who can offer incredible insights into monopoly power and anti-trust action. Stay tuned for that.
In the meantime, we thought it would be helpful to cut up a portion of an episode we released this spring called “Chokepoint Capitalism” tackling how Big Tech is hoarding profits and destroying creators. This snippet briefly explains how Amazon crushes competition and hurts sellers on its platform, and consumers. You can also read the transcription under the video (note that ‘unknown’ speakers are voices from audio clips that we intersperse throughout each episode).
Transcription
CORY DOCTOROW 0:00
It's actually the case that people have been deliberately misreading the laws of America that guarantee anti-monopoly enforcement, that if you squint hard enough at these laws, you will find that all they care about is blocking harmful monopolies, not monopolies per se, that they don't care about power at all. All they care about is prices. If a monopolist is raising prices, because they have market power, then the state should intervene. So along comes Jeff Bezos, who has a lot of access to the capital markets out there. Who are you? I'm Jeff Bezos, and what are your what is your claim to fame?
UNKNOWN 0:40
[AUDIO CLIP] I'm the founder of Amazon [dot] com.
UNKNOWN 0:42
[AUDIO CLIP] Where did you get an idea for Amazon [dot] com?
UNKNOWN 0:45
[AUDIO CLIP] Well, three years ago, I was in New York City working for quantitative hedge fund, when it came across the startling statistic...[END]
CORY DOCTOROW 0:52
People like his vision, which is to take over all of commerce, right? So first of all, to make all commerce, electronic commerce, and then to make all electronic commerce happen within Amazon's boundaries. Investors really like the idea of a monopoly. They hate competition. Peter Thiel says competition is for losers, Warren Buffett very famously has a giant hard on for companies with wide sustainable capital moats, which is to say businesses that nobody can compete with.
UNKNOWN 1:18
[AUDIO CLIP] And you want to always avoid competition. And so hence, competition is for losers, something we'll be talking about today. [END]
CORY DOCTOROW 1:27
And so investors threw money at Jeff Bezos. And that let him do what he calls the flywheel. And here's how the flywheel works. Jeff Bezos uses his investors capital to subsidize the price of goods on his platform. Some of those goods come from suppliers that Amazon deals with directly. So they're ordering books from publishers and putting them in their warehouse and then listing them on Amazon. And a lot of them, increasingly in these days, I think the majority of those goods come from third-party sellers that just sell through Amazon.
UNKNOWN 1:57
[AUDIO CLIP] Amazon under pressure. State investigators from California and Washington state reportedly looking into the tech giant's business practices.
UNKNOWN 2:05
[AUDIO CLIP] So what is being looked at right now is the dynamic between Amazon and external sellers. So let's say it's a mom-and-pop shop, selling their product on Amazon and how Amazon was able to use data on the purchase data, the amount of money going into sales and marketing, to actually create competing products with Amazon's own third-party vendors. And the reason this is so key is that due to the fact that Amazon has so much data on both what consumers are buying, as well as how third-party vendors are selling it, it's leading to the conclusion that it's a handful of very unfair business practices, as it relates to these third party vendors. [END]
CORY DOCTOROW 2:52
And so at first, Amazon allocates the surplus, the money that comes from its investors, to consumers, and it says you can buy these goods at a loss for me, and you consumers will be gathered into my silo. And that silo, it has both chains of steel, and kind of silk ribbons that bind customers to Amazon. So the silk ribbon would be something like your Prime subscription, where if you give Amazon some money, it'll throw a ton of benefits at you to make sure that for the whole year, the only place you shop is Amazon. More than 95% of prime shoppers start their shopping on Amazon, and if they find the product they're looking for, they don't shop anywhere else. But then there's the chains of steel that bind customers to Amazon. So if you buy a book from Audible, which is Amazon's monopoly audiobook distributor with 90% of the market, it mandatorily comes encrypted with Amazon's digital rights management. And it's a felony to remove that digital rights management and move the audiobook to another platform, which means that every book that you buy on Audible is locked to Audible forever. And if you quit audible, you have to throw away the books, or you have to just never resign from Audible never get rid of your account. So you're an audible customer for life at the expense of all the books you've ever bought from Audible. And so with all of these customers locked up in this choke point, Amazon lures in more businesses who need to reach those customers, which is a reason for more customers to get within Amazon's walled garden, right, to sign up for Amazon. And then once that you reach a kind of critical mass, once those customers are locked in, Amazon can start allocating some of that surplus to its shareholders instead of to the users or to the sellers. So Amazon can say to those sellers, for example, if you want to be listed on the front page, you need to be Prime eligible and you need to be fulfilled by Amazon. And the fees for that come out to sort of 40 to 50% of the sale price of your goods. But also you have to sign, just like with Spotify, a most favored nation deal. So if you raise your prices to cover those fees, you have to raise them everywhere else. So the price on Amazon will be the same price as Walmart or you know, Costco. But that's because if you raise the price in order to make staying on Amazon sustainable, you have to raise the price on Costco and Walmart. That's one of the reasons that when you tell Amazon when they have a price-matching deal, when you tell them that you found a better price somewhere else, they really want to know where else it is, because they want to punish the seller for violating that most favored nation status deal, and force them to raise the price in that other firm. And giving you a refund of the difference is cheap for Amazon, if the benefit of that is being able to extinguish this rival's competitive advantage. And so you get this kind of what Amazon calls a virtuous cycle. But what is really a vicious cycle, this flywheel that goes faster and faster.
UNKNOWN 5:51
[AUIDO CLIP] I want to go back to the sort of core approach that our company has taken to take care of customers and grow the company. And it's this thing we call the 'virtuous cycle.' This is true, it was written on a napkin by Jeff, probably eight or nine years ago, napkin will eventually be in the Smithsonian Institution I imagine. But we've taken the liberty of converting it into PowerPoint. [END]
CORY DOCTOROW 6:14
The more customers that are locked in, the more concessions it can bring from its suppliers. The cheaper or the more suppliers that can bring in, the more customers will sign up, and so on, and so on, and so on. Actually, in the long run, what this is doing is just producing more and more surpluses, both from consumers and from producers, that Amazon gets to allocate to its shareholders. And the ultimate version of this as Amazon gets to use its intelligence and insight into how the market is structured based on the fact that it sells everyone's goods, and it can decide whose goods to clone. And it can just clone their their goods, and it can put its clone of their goods way above those original goods on the search results. So if you search for a Product X, you don't get Product x, you get Amazon's clone a Product X and to find Product X you might have to click two or three screens in and that's when Amazon gets all the surplus for itself.