The Amazon monopoly and the problem with Jeff Bezos' business model - YouTube

This is Jeff Bezos.

No this is Jeff Bezos.

Sorry this is Jeff Bezos.

His net worth will soon surpass $150 billion.

And this is his home.

Amazon.

The second company in the world to pass the $1 trillion mark.

But did you know that during more than two decades of existence, Amazon has struggled

to make any profit?

In fact, the company has been regularly operating at a loss, especially on international markets.

This is despite its exponentially growing revenue stream peaking at $232 billion for

the last year.

In the final quarter of 2018, Amazon reported profits of $3 billion with the revenue 24

times bigger.

And it wasn’t until the late success of Amazon Web Services, the world’s leading

cloud computing service, that Amazon began reporting consistent profits.

So what is happening with all this revenue?

It has everything to do with the business model of Jeff Bezos.

In his own words, Bezos believes in shareholder supremacy, which means everything is justified

as long as the share value is growing.

The key metric for Bezos is the ability to lock customers in their Amazon ecosystem.

Bezos reassures his shareholders that Amazon “has invested and will continue to invest

aggressively to expand and leverage their customer base, brand, and infrastructure as

they move to establish an enduring franchise”.

The revenue growth is the manifest of this very expansion.

Amazon absolutely dominates e-commerce – controlling roughly half of all online sales, more than

all of their competition combined.

In five different categories, Amazon claims more than 90% market share.

Jeff Bezos pushed Amazon great lengths to claim this dominance.

From undercutting competitors with predatory pricing, through forcing itself into their

business, to vertically integrating into strategic markets across the business line, Amazon is

on track to gradually take over every aspect of e-commerce and to control and decide what

we shop and what is allowed to be sold.

One of the first key steps for Jeff Bezos was to lock Amazon’s grip on consumers.

To lure more customers to stay with Amazon, the company launched Prime membership subscription

for a flat annual fee of $79.

By offering free two-day delivery and e-book renting along with music and video streaming,

about half of Amazon customers have been converted to Prime membership.

On paper, this was an immediate success, because on average, Prime members spent more than

twice as much as non-Prime customers.

But by 2011, estimates showed that the average annual cost of each Prime membership ranked

up to $55 in shipping and $35 in streaming.

This left Amazon losing about $11 per Prime customer.

All in all, Amazon was losing about $1 to $2 billion a year on Prime alone.

Not to mention that the expansion of Prime was happening right in the middle of the deepest

recession since the Great Depression.

But Jeff Bezos managed to persuade shareholders to stick with Amazon and their stock prices

went up by almost 300% in two years, when everyone else in retail was failing.

So what made Amazon investors so loyal to the company that was losing profit during

a heavy recession?

It was Amazon’s ability to lock down their grip on customers and claim monopoly position

on the market.

In the words of a former member of Prime development team, “It was never about the $79.

It was really about changing people’s mentality so they wouldn’t shop anywhere else.”

And this strategy really succeeded in its mission.

When Amazon finally raised the fee to $99 in 2014, 95% of Prime members claimed to stay

loyal and renew their subscriptions.

Studies found that less than 1% of Amazon Prime customers would consider competitor

retail sites during the same shopping session, while non-Prime customers were 8 times more

likely to shop between different retailers.

Investors back Amazon when it’s losing profits, because sacrificing short-term profit for

aggressive long-term expansion pays off.

Amazon did this with e-books, when it began selling Kindle devices below its manufacturing

cost.

Like with Prime, the goal of Kindle was to lock book readers in the Amazon ecosystem.

Amazon did this with digital rights management, DRM, that locked its e-book formats to Kindle,

so they couldn’t be read outside of Kindle.

With this strategy, Amazon also succeeded in dominating the e-book market, claiming

around 83% of e-book sales in the US and the only real competitor left is Apple.

Undercutting competition with below-cost prices and locking users in its ecosystem is a classic

strategy of predatory monopolization.

It gives monopolies opportunities to unfairly raise prices and enjoy the cash flow in a

market with only that competition left which they can contain or control.

In ideal circumstances, antitrust regulators would have stepped in long before such dominant

positions could have been acquired through anti-competitive practices.

However, purposefully operating at a loss with the aim to price out competitors is not

viewed as an anti-competitive practice on its own under the new anti-monopoly regulatory

view in the US.

In order for the FTC or the courts to step in, there has to be an intent to raise prices

for consumers once the dominance is taken.

And this is what Amazon has been extraordinarily clever at hiding.

Every new service Amazon rolls out allows them to track user behavior and collect personal

and usage data of their customers.

Amazon then deploys algorithms to personalize pricing on individual scale, and even goes

as far so to use bots to monitor prices of their competition and match them with Amazon

prices in real time.

This mechanism obfuscates the baseline from which it could be possible to observe price

fluctuations and so if there is no body, there is no murder.

Obfuscating its true intentions allowed Amazon to vertically integrate into the markets on

which its competitors were dependent on.

It’s not a coincidence Jeff Bezos turned Amazon into a marketing platform, a network

for logistics and delivery, a book publisher, a hardware manufacturer, a fashion designer,

a film and TV producer, a payment service and a cloud service provider.

Every industry domination is a step in the Bezos’ plan.

Amazon expands to these different markets by either acquiring key businesses or undercutting

them with below-cost pricing if they refuse to sell.

A company called Quidsi used to be one of the fastest growing e-commerce businesses

in the world, overseeing Diapers.com, Soap.com and BeautyBar.com.

First, Amazon offered to buy the whole company in 2009.

When Quidsi refused, Amazon bots began tracking Diapers.com and cut their own prices for baby

products by up to 30%.

But unlike Amazon, Quidsi was a new venture and didn’t have investors backing their

losses while they competed with Amazon’s monopolistic ambitions.

Amazon then began rolling out subscription services for care takers and significant discounts

on diapers, which cost Amazon additional $100 million per quarter.

Quidsi was bleeding and had no option but to sell.

Both Walmart and Amazon made an offer.

When Bezos found out Walmart offered a higher bid, his deputies went to Quidsi founders

with threats that Amazon would cut their prices even further if Quidsi sells to Walmart.

The FTC investigation found no evidence of anti-competitive behavior, and in 2010 Quidsi

sold to Amazon.

What happened to the generous offers and discounts on baby products?

They were discontinued or significantly reduced.

Many users who converted to Amazon from Diapers.com because of those discounts, wanted to go back

after they were abruptly scraped.

But there was no Diapers.com anymore.

Amazon doesn’t just compete with their competitors.

It forces itself into their business.

As a dominant online retailer, Amazon had enough bargaining power to secure discounts

of up to 70% on deliveries from fulfillment companies like UPS and FedEx.

Amazon then used these discounted deliveries to pack them in its own delivery service called

Fulfillment by Amazon.

Because Amazon was almost bigger than the whole e-commerce industry combined, UPS and

FedEx didn’t have enough negotiating power over Amazon.

To make up for the excruciating discounts requested by Amazon, UPS and FedEx began hiking

their prices to other independent sellers.

This created a paradox – Amazon’s strategy effectively directed sellers to use Fulfillment

by Amazon as it was cheaper than to use UPS and FedEx directly.

And now Amazon is investing hundreds of billions of dollars to establish its own physical delivery

capacity to completely eliminate reliance on UPS and FedEx and it will succeed in doing

so.

Controlling e-commerce infrastructure enables Amazon to build a marketplace where it discriminately

favors its own products without getting punished for it.

As a marketing platform, Amazon opened its door to third party sellers to reach customers

in exchange for fees ranging from 6% to 50%.

What these third party vendors also unwittingly gave up was the valuable data of their businesses

and their customers.

Amazon is using this data to study purchasing patterns and trends to undercut third-party

merchants on price or give their own products a featured placement.

Another benefit none of Amazon’s retail competitors enjoy, is Amazon world leadership

in cloud computing.

Amazon Web Services is on track to control half of the cloud infrastructure market share

with Microsoft as the only strong competition currently standing.

Many new startups rely on Amazon cloud service to deliver their services without committing

to build expensive infrastructure on their own.

But this also serves as an ultimate tool of industrial espionage that Amazon can use to

learn about new emerging competition to acquire or undercut on price before it endangers its

business.

It gives Amazon a control over data none of its competitors have, and thus Amazon can

enter new markets much more quickly and effectively than any other retailer out there.

There is no real competition to Amazon left.

There is no company quite like it.

Amazon’s path to become a global monopoly across different markets isn’t just an anomaly.

It was Jeff Bezos’s intention from the very beginning.

Monopolies destroy free markets, and with them the freedom to choose not just as a consumer,

but as a small business owner, a worker, an Internet user, and a citizen.

The best solution users of the Internet can do right now is to support merchants, authors,

developers, entrepreneurs and vendors by purchasing their products directly from them, rather

than going through an intermediary like Amazon.

Sure, you might be getting a better bargain on Amazon, but the long-term cost of saving

few bucks now is unbearable.

Decentralizing our economy away from monopolies back to middle class and small businesses

is the only sustainable solution and is a responsibility of every individual participating

in this economy.

The story of Amazon domination isn’t unique but rather reflects the nature of the business

model that’s become a standard in Silicon Valley.

It leads towards market domination and monopolization within the hands of the most aggressive corporations.

The little convenience of economic centralization comes at the cost of small businesses, middle

class jobs, wealth distribution, privacy, free speech and free market as a whole.

Should we let Amazon monopolize one market after another?

Or should we step in with drastic measures to protect what allowed Amazon to exist in

the first place?

It’s time to have this conversation now.