- How US v. Google Antitrust Case Changes Internet Platform Antitrust Outlook - September 18, 2020
- How Section 230 Is Anticompetitive - July 21, 2020
In proposing to buy WholeFoods for $14b, Amazon has surprisingly invited unwelcome serious antitrust investigation into, and public discussion about, Amazon’s core conflicted retail/MarketPlace business model and the many alleged predatory, discriminatory, and unfair standard Amazon business practices, that Amazon commits, not only in the grocery business segment, but in all other retail segments.
In stating “the parties expect to close the transaction in the second half of 2017,” that means Amazon expects no serious antitrust investigation of whether the transaction “substantially lessens competition,” and thus no “second request” from antitrust authorities requesting more information and questions to answer.
If a “second request” comes, which is likely, there is no way the companies can continue to “expect” the deal will be approved in 2017. That’s because such an investigative process effectively does not have any deadline for the reviewing authority, DOJ or the FTC, to either: approve, approved with conditions, or challenge the deal.
The facts and analysis that follows will show why it is quite clear that the reviewing antitrust authority will want to be thorough and not cursory in its formal review of this Amazon-WholeFoods transaction.
The combination of: the likely multiple alleged anticompetitive behaviors; the likely number of complaints and complainants; the online-offline complexity of investigating the complaints; the importance of this case as an online-offline antitrust merger precedent; the exceptional size, scope, reach, speed and non-transparency of Amazon’s online business; and the expected high-public profile of this transaction; all would auger for the reviewing authority to err on the side of caution and investigate the transaction fully.
Let me be clear here about what I am saying and not saying.
First, what’s obvious here is that the transaction will attract a lot of concern in private and publicly in multiple dimensions. That’s precisely because of the many serious implications this “Everything Store” proposed transaction will have for the future of competition in many markets, which in turn will delay Amazon’s transaction timetable.
Second, I doubt there will be any serious traditional horizontal concern about combining Amazon’s small shares of the offline grocery business — depending on how the grocery market is defined here.
Third, most of the antitrust concern will come with the exceptional market power that Amazon wields online, combined with the under-appreciated conflict in its business model where half of its retail revenues come directly from consumer-customers, and the other half of its retail revenues come from its MarketPlace offering where Amazon is the mall and gatekeeper for around 15 of its top 20 grocery competitor-customers, that have had to capitulate to Amazon’s market power and operate on Amazon Marketplace in order to reach all their offline customers online.
In layman’s terms, the problem Amazon’s retail intermediary model causes competitors is that it simultaneously is a direct retail competitor overall, at the same time it is the dominant online broker that has disintermediated its competitors from their customers when they are in the online world, and in that broker role, they are routinely criticized as not being an “honest broker” or as being a “non-neutral platform,” that routinely self-deals anti-competitively, because Amazon has market power to extract it with impunity, and no antitrust or regulatory accountability to speak of – to prevent it.
Fourth, this transaction review is the first genuine opportunity and powerful legal process for those alleging anti-competitive harm by Amazon to have antitrust authorities’ full ear in a confidential process where warranted.
Therefore this transaction could be the first antitrust risk to the Amazon MarketPlace’s mothership monopoly model.
Fifth, at this early stage I would not be surprised if Amazon had to commit to some conditions to this deal to gain its approval, so that Amazon could not anti-competitively leverage and extend its clear Amazon-Prime online retail market power, into the offline grocery-delivery and retail markets.
While Amazon Prime’s delivery model has blurred and connected the online and offline retail markets, for antitrust purposes they will very likely be considered separate markets, given their very different fundamental characteristics.
This would make Amazon Prime the tie that binds Amazon’s online and offline market power.
Let me now provide some facts and information that will provide insight and evidence to my initial point of view and conclusions above.
First, why does this matter? How important an economic player is Amazon on the Internet?
If we use the Internet Association as the best proxy for the economic import of the U.S. Internet market, Amazon is the single biggest economic force among Internet/online-based public and private companies of economic significance.
Among online/Internet companies, Amazon’s revenues rank #1 generating $136b in annual revenues, 45% higher than #2 Google at $94b, and as a percentage of collective Internet company market share, Amazon commands the most 31%, to Google’s #2 at 22%.
In terms of new absolute annual revenue growth Amazon ranks #1 with +$25.4b to #2 Google’s $17b, which means Amazon commands 34% of Internet/online economy market share to Google’s 23%.
In terms of employees, Amazon is #1 with 49% of all Internet/online economy jobs.
Second, what about relevant Amazon-WholeFoods market shares?
In the $750b U.S. grocery market, WholeFoods has <2% and Amazon <1%; and the biggest U.S. grocery company is Walmart at >17% share per Cowen, company reports and Supermarket News. Once again, this is what Amazon will point to and it obviously is not the antitrust problem area.
In online groceries, however, the power of Amazon begins to appear in this early stage market. In 2015, per another Cowen estimate reported in IBD, Amazon was #1 with 22% share of the U.S. online grocery market, ahead of #2 Walmart at 13%, and #3 Peapod at 3%. Given Amazon’s fast growth and increasing online retail dominance, I would assume Amazon’s online grocery lead has already grown substantially.
In online retailing overall, CNBC reported eMarketer stats last December that had Amazon as the overwhelmingly dominant online retailer, with $86.8b, which is 65% more than the next nine top U.S. online retailers combined.
Thus, Amazon is approaching command of half of all U.S. online retail sales.
Amazon is also appropriately and uniquely called “The Everything Store” because it offers about 500 million products and services on its site or about ten times more than #2 Walmart’s product offering, which reportedly is approaching 50 million products and services.
Where antitrust authorities will likely, and should, focus their attention is how completely Amazon has come to dominate online shopping overall via its awe-inspiring tying of its dominant online shopping share with its Prime membership delivery service. Amazon has 80 million Prime members, according to WholeFood’s CEO today in the Washington Post.
80 million Prime members would be about 63% of all U.S. households, but probably is 90+% of high-income households that would use a delivery service.
Why this dominance is especially noteworthy is because ILSR’s excellent report on “Amazon’s Stranglehold” about Amazon’s exceptional dominance, reports a survey that indicates that99% of Amazon Prime subscribers do not check other sites prices! Wow.
Now one can understand how profitable Amazon could assume WholeFoods will be under Amazon’s ownership, in that its Amazon Prime subscribers apparently are not-price sensitive to purchases when they come through the Prime free delivery service program. That appears to be potential tied monopoly pricing power.
In sum, Amazon has enormous market power and is not bashful to use it in its algorithms, in its MarketPlace terms and practices, and in its fulfillment terms and practices.
What one should take away from this analysis is Amazon has two different sets of very different “consumers.”
Normal Amazon consumer-customers are a very happy and satisfied bunch. If those “consumers” are the only consumers that matter to antitrust authorities, Amazon has little to worry about with this transaction.
However, if antitrust authorities consider that the half of Amazon’s retail business that is not direct to American consumers, but it involves Amazon MarketPlace (where its competitors must come and become business-consumer-customers of Amazon to reach all their offline customers when they shop online), then this transaction will undergo a much rockier and problematic antitrust review.
Lots of grocers, retailers, and consumer goods providers, will be grateful and eager to share confidentially how they are routinely treated anti-competitively and unfairly on the Amazon MarketPlace platform.
Why am I confident antitrust authorities will provide serious scrutiny to this transaction?
Unlike Amazon’s retail customers, many of their Amazon MarketPlace wholesale customers are NOT a satisfied or happy bunch. And they have a lot of insights of how Amazon abuses its market power to anti-competitively, and unethically rob their MarketPlace customer-competitors’ businesses, in a number of anticompetitive ways. Let the investigation and accountability begin!
Forewarned is forearmed.
[First posted at Precursor blog.]