Last fall, as Virginia's state economic development agency pitched a plan to legislators for Amazon to place a second headquarters in the state, officials highlighted risks that could derail the project. Second on the list, in a presentation made by the state agency, was the e-commerce giant's exposure to possible antitrust litigation.
At the time, aside from the odd presidential tweet about Amazon being a monopoly, there was no sign that the company faced imminent legal heat over its exploding footprint and competitive practices.
For years, the company seemed insulated from laws focused on breaking up destructive monopolies, thanks in part to the e-tailer's reputation for low prices and happy customers. Critics calling for more scrutiny of Amazon's market power and that of other big tech companies were derided on Twitter as part of the "hipster antitrust" movement.
Now it's September 2019, and the so-called antitrust hipsters are having their day. Along with other ubiquitous tech platforms, Amazon faces probes into its competitive practices from multiple branches of the federal government, as well as in Europe.
The investigations are in their early stages, and outcomes, if any, are uncertain. But they are being closely watched. Aside from the obvious business risk to Amazon in the worst-case scenario — i.e., the government breaking up its business (which the feds haven't done in decades) or restricting its practices — the investigations could shed more light on the structure of the modern retail market and one of the industry's most feared players.
Reached for comment about the current government probes, a company spokesperson pointed Retail Dive to past statements by Jeff Wilke, Amazon's CEO of worldwide consumer operations. Wilke said in response to questions about calls to break up big tech, "I think that substantial entities in the economy deserve scrutiny and our job is to build a company that passes that scrutiny."
Bloomberg reported in September that attorneys and an economist with the Federal Trade Commission (FTC) were talking to third-party merchants who sell on Amazon's Marketplace platform.
Questions touched on what share of revenue merchants' made from Amazon sales, suggesting investigators wanted to know if there are viable marketplace alternatives besides Amazon's site. Bloomberg reported that "[t]he length of the interviews and the manpower devoted to examining Amazon point to a serious inquiry rather than investigators merely responding to complaints and going through the motions."
Neither the FTC nor Amazon have publicly confirmed the probe, though most reports have discussed it as a given for months. The Bloomberg report follows an announcement in July from the Department of Justice (DOJ) that it was "reviewing whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers."
"[S]ubstantial entities in the economy deserve scrutiny and our job is to build a company that passes that scrutiny."
CEO of Worldwide Consumer Operations, Amazon
The FTC is also reportedly examining a deal between Apple and Amazon that knocked hundreds of third-party sellers of Apple products off its site.
DOJ and FTC have long shared the power of antitrust enforcement and merger review. In June, after the DOJ signaled heightened scrutiny of big tech, The Washington Post reported that the FTC would take on oversight of Amazon under an agreement with the DOJ. (That tidy division of labor may be undermined as The Wall Street Journal reports there is "discord" between the agencies over who will investigate what.)
The Democrat-led House of Representatives' Judiciary Committee also opened an investigation this summer.
The federal probes follow that of the European Commission, which notified Amazon in July that it was investigating Amazon's use of data from its Marketplace sellers and more generally looking into its dual role as marketplace operator and retailer on that marketplace.
'A bitter pill'
The current investigations follow years of reporting and research on Amazon's business practices as its reach and revenue exploded.
Bloomberg reported in August that Amazon was dropping sellers' products in searches on its site if they priced a product cheaper on rival sites, behavior the news service noted could draw antitrust scrutiny. The company told Bloomberg that sellers have "full control of their own prices both on and off Amazon, and we help them maximize their sales in our store by providing them insights on how to be the featured offer."
The Wall Street Journal also reported in September that Amazon changed its algorithms to promote more profitable products for Amazon, against the will of some programmers who thought search on the platform should continue to prioritize consumer interests.
Those reports are relatively recent. For several years prior, there has been a steady chorus of complaints from critics and businesses that say the e-commerce giant's power has hurt smaller players.
"Virtually every manufacturer and retailer of consumer goods in America faces [the] same predicament ... In order to reach more than half of the online market, they have to sell through a platform operated by one of their most aggressive and formidable competitors."
Co-director, Institute for Local Self-Reliance
A 2016 paper by the Institute for Local Self-Reliance (ILSR) alleged that Amazon uses "its vast financial resources" to hold prices down and hoard data — moves it concluded allow Amazon to create its own market and effectively levy a tax on commerce inside it.
"Virtually every manufacturer and retailer of consumer goods in America faces [the] same predicament," Stacy Mitchell, co-director of ILSR and author of the 2016 paper, said in recent testimony to the House of Representatives' Judiciary Committee. "In order to reach more than half of the online market, they have to sell through a platform operated by one of their most aggressive and formidable competitors."
"This is a bitter pill," she added. "It means handing over to Amazon their customer relationships, their product expertise, and a sizeable cut of their revenue."
Mitchell's 2016 report cites merchants who have had to remake their businesses in response to an Amazon policy change, or who suddenly had to compete with the company. Or, like Birkenstock USA CEO David Kahan, asserted in interviews in 2017, Amazon would only work with them to clean up brand counterfeits if it offered its catalog directly through the site.
Home furnishings retailers Williams-Sonoma arguably went even further than Birkenstock, alleging in a lawsuit filed last year that Amazon has actively counterfeited its trade name and trademarks on its website and infringed on them by selling its own competing "knockoffs" under Amazon's Rivet brand. Amazon has denied the allegations in court papers. The case is still in process.
'Shady sellers' and 'super-dominance'
By some counts, counterfeits have proliferated on Amazon's site as third-party sales eclipse Amazon's own. The company for the first time this year mentioned the word counterfeits in its 10-K among the list of risks to the business. Some, including competitors and brands, see a market power problem given Amazon's dominance of online marketplaces.
"The shady third-party sellers, the counterfeits, the defects, the things that people are getting, they're harming them. They don't want to talk about that," Rob Gross, COO of fake review spotting software maker Fakespot, told Retail Dive in an interview. "I do give Amazon credit here, though. They're trying their hardest. The thing is, Amazon is just a huge platform to maintain from a tech perspective and an operations and logistics perspective."
"I do give Amazon credit here, though. They're trying their hardest. The thing is, Amazon is just a huge platform to maintain from a tech perspective and an operations and logistics perspective."
"At a certain level of super-dominance, you can get away with not being as rigorous about tracking those things down as you might otherwise be, especially if you're making money," Nicholas Ahrens, vice president of innovation at the Retail Industry Leaders Association (RILA), a trade group that includes Walmart, Target and other major retailers, said in an interview.
In a letter to the leader of the House's tech inquiry, Amazon told the House that it has 5,000 employees worldwide dedicated to rooting out fraud and abuse. "Protecting our customers and selling partners from fraud and abuse is our top priority," Amazon General Counsel David Zapolsky wrote. He also noted that Amazon has 10,000 employees, and another 5,000 contractors, working to support third-party sellers on the company's platform.
Information as power
Research has found that Amazon is more likely to go after products that others have sold successfully when making its own retail plays. In other words, the company knows what does well on its site far better than anyone else and can use that to its advantage in its own retail operations. Amazon has used that strategy, for example, to boost its private label apparel brands, according to other research.
Amazon's top lawyer told the House that "while we prohibit in our private label strategy the use of data related specifically to individual sellers, like other retailers we use aggregated store data (e.g., total sales) and customer shopping behavior (e.g., search volume) to identify categories and products with high customer demand over a given time period."
RILA also raised the issue of product search in a letter to the FTC this summer, noting that Amazon and Google effectively control product search, which they argue, "can very easily affect whether and how price and product information actually reaches consumers."
The trade group, whose members have an obvious interest in the outcome of any investigation, urged scrutiny of tech platforms while maintaining it wants strong all-around competition.
Is Amazon too big? Is that the right question?
There are plenty of observers who say Amazon is not a monopoly and point to tough competition in the broader retail market.
In a July client note, Moody's analysts led by Charlie O'Shea addressed the federal probe. Contrary to antitrust officials' public statements that online platforms have hurt competition, the analysts argued, "consumers are the force that has made online competitor [Amazon] the runaway growth phenomena it has become."
In the analysts' view, Amazon has driven other traditional retailers to become more competitive and invest in their businesses, to customers' benefit. They also pointed to Amazon's limited market share in most product categories, outside of books and physical media, and its small overall retail market share.
While noting Amazon's dominance over online marketplaces, O'Shea's team estimates Amazon brings in around $240 billion in retail revenue, about 6% of total retail sales in the U.S. And Amazon itself maintains that it represents less than 4% of retail in the U.S. and it has larger competitors wherever it operates.
"[C]onsumers are the force that has made online competitor [Amazon] the runaway growth phenomena it has become."
Last year, the company's online market share was estimated at 49% — with all other competitors far behind. This year eMarketer revised the figure down to about 38%, based on disclosures by the company that third parties accounted for more than half of sales on its platform.
Sally Hubbard, a former assistant attorney general of New York and current director of enforcement strategy with Open Markets Institute, a think tank that advocates for more aggressive policing of competition laws, argues that total retail market share is irrelevant to Amazon's potential antitrust violations. Even sector or specific category market share is only a barometer of monopoly power, not the end-all test of whether Amazon violates competition laws, she said. What matters is power.
"The direct evidence of monopoly power is the ability to control prices or exclude competition," Hubbard said in an interview with Retail Dive. "You ask anybody who knows anything about Amazon, and they will say yes, Amazon has the ability to control prices in some respects. And it certainly has the ability to exclude competition."
The risks to Amazon
How afraid should Amazon be of the FTC? Based on recent history, or even the last few decades, the answer is probably: not very afraid.
Hubbard points to the FTC's recent settlements with Facebook and Google and its YouTube unit over data use and children's privacy, respectively. Both settlements yielded fines ($5 billion for Facebook, $170 million for Google), but Hubbard described them in an interview as "woefully insufficient and not aggressive."
"They really made misconduct completely worth it in a business sense, because of the fact that what they were forced to pay was less than the financial gain they got for breaking the law," she added.
ILSR's Mitchell said in an interview that the FTC was "arguably worse than asleep at the wheel" when it came to antitrust enforcement.
The House probe may raise the stakes. The House's antitrust subcommittee hired as its counsel Lina Khan. Khan authored a widely read and reported-on paper in the Yale Law Journal that argued Amazon's "business strategies and current market dominance pose anticompetitive concerns."
In her view, the company has delayed profits to gain market share and become "essential infrastructure" for a wide array of businesses, especially through its online marketplace, logistics network and cloud services. With competition enforcers focused on price, Amazon could fly under the radar, in her view.
"No doubt Amazon has pioneered in a lot of ways and has taken on a lot of risk," Khan told Retail Dive in a 2017 interview. "It's transformed 21st century retail and 21st century markets. But I think it is important to separate the way Amazon has introduced new technologies and the ways it's potentially abused its power. These things are not one and of the same. We as a society can live in a world of internet commerce without resigning ourselves to all that commerce being mediated by Amazon."
"I think it is important to separate the way Amazon has introduced new technologies and the ways it's potentially abused its power. These things are not one and of the same. We as a society can live in a world of internet commerce without resigning ourselves to all that commerce being mediated by Amazon."
Majority Counsel, U.S. House Subcommittee on Antitrust, Commercial and Administrative Law
That the House subcommittee has chosen as an attorney the legal scholar who advocated for a re-thinking of competition laws — specifically to deal with problems she saw in Amazon's business — signals that the investigation is no hollow show of governance. It appears serious about its stated aim of investigating Amazon and other tech companies and reviewing the enforcement framework around them.
In July, the antitrust subcommittee's chairman, Rep. David Cicilline, a Democrat, grilled an Amazon attorney about what he described as a conflict of interest posed by Amazon's control over a Marketplace that it also sells on through its retail arm and private labels. (Amazon associate general counsel Nate Sutton told Cicilline, "I respectfully disagree" and pointed to brick-and-mortar retailers that sell private labels in their stores, according to the New York Times.)
Since that hearing, the Judiciary Committee has sent an expansive request for documents addressed to Amazon CEO Jeff Bezos. The request asks for Amazon's market share in key markets like online retail, apparel, books, toys and consumer electronics, in addition to executive communication around search rankings, seller policies, use of third-party data and numerous other topics.
"Congress used to do these kinds of investigations of concentration in different industries, on a fairly regular basis," Mitchell said. "And they have largely stopped in recent decades. And so this is historic, in terms of returning to doing that kind of investigation."
Hubbard said findings from the House's probe could pressure federal authorities to do something "more meaningful." It could potentially inform a case opened by federal enforcers, she noted, or possible legislation that could address issues raised by the probe. With state attorneys general examining big tech, too, an investigation at the state level could also put pressure on Amazon and feed on the information from the House inquiry.
"That there are some benefits is no justification for allowing anticompetitive conduct to go unremedied."
Director of Enforcement Strategy, Open Markets Institute
Muddying the waters politically is President Donald Trump's reported fixation on Amazon and Bezos. A politically motivated case against Amazon could delegitimize any government action and antitrust laws generally, Hubbard said. Also complicating the politics around Amazon's place in the market is a campaign reported to be funded by competitors, including Walmart, that alleges Amazon is "stifling competition."
While there is talk of the government breaking up Amazon — something Democratic presidential candidate and Senator Elizabeth Warren has advocated — the feds haven't split up a company on antitrust grounds since forcing AT&T to give up Bell Operating Companies in the early 1980s. There was talk of splitting up Microsoft in the 1990s, but the Department of Justice instead placed behavioral conditions on the software company's business.
Any outcome of an antitrust investigation would depend on what, exactly, it found. Hubbard said breaking up Amazon might not even be the worst thing for it business-wise. Worse, financially, could be forcing the company to operate its Marketplace with a neutrality or non-discrimination principle, or to interoperate with other e-commerce marketplaces, she said.
As the investigations intensify, Amazon's high brand loyalty from customers may not protect it should enforcers find legal violations. "A factory could be producing something of value, but that doesn't mean it's allowed to emit toxic smoke into the air. That there are some benefits is no justification for allowing anticompetitive conduct to go unremedied," Hubbard said.
"I think people are starting to slowly wake up to the hidden costs of the conveniences that they're getting," Hubbard added.