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Amazon Needs a Leash

Joe Nocera

(Bloomberg Opinion) -- The New Yorker and the Atlantic have never been known for their business coverage, so when both magazines published long articles about Amazon.com Inc. in their current issues it signaled that something is in the air. That something is antitrust.

More precisely, what’s in the air is the question of what the government should do to rein in the tremendous power of the big four tech companies: Facebook Inc., Alphabet Inc.’s Google, Apple Inc. and Amazon.

Once the province of think tanks and law reviews, this topic has become such a public concern that 48 of the 50 state attorneys general are conducting antitrust investigations, presidential hopefuls are calling for tech giants to be broken up, and general interest magazines like, well, the New Yorker and the Atlantic are asking whether the companies abuse their market power. In this particular case, the magazines are asking it about Amazon.

The Atlantic article is by Franklin Foer, who has long raised concerns about Big Tech. Five years ago, for instance, he wrote a cover story for the New Republic titled “Amazon Must Be Stopped.” It focused on Amazon’s dominance over the book business.

This time around, he is writing about the unbridled ambition of Amazon’s founder and chief executive officer Jeff Bezos. (The new article is “Jeff Bezos’s Master Plan.”) “Bezos’s ventures are by now so large and varied that it is difficult to truly comprehend the nature of his empire, much less the end point of his ambitions,” Foer writes. He then goes through a list. Bezos wants to conquer space with his company Blue Origin. Bezos’s ownership of the Washington Post makes him a significant media and political figure. Bezos’s brainchild, Amazon, “is the most awe-inspiring creation in the history of American business.” And so on.

He also points out that while critics fear Amazon’s monopoly power, the company is loved by consumers. “A 2018 poll sponsored by Georgetown University and the Knight Foundation found that Amazon engendered greater confidence than virtually any other American institution,” he writes. I have no doubt that this is true; Amazon’s obsession with customer service instills tremendous loyalty among consumers. It’s no accident that over 100 million people now pay the company $119 a year to be Amazon Prime members. That loyalty is also one reason taking antitrust actions against Amazon would be much more difficult than going after Facebook or Google. I’ll get to some other reasons shortly.

Charles Duhigg’s New Yorker article “Is Amazon Unstoppable?” is both smarter about Amazon and more pointed about its power. Duhigg captures its relentless culture, comparing it to a flywheel that never stops. He described Bezos’s efforts to ensure that Amazon never loses the feel of a scrappy startup. The phrase that came to mind as I was reading Duhigg’s article was Andy Grove’s famous dictum: “Only the paranoid survive.”

Duhigg is also interested in what Amazon’s critics have to say. Amazon paid no federal taxes last year. Amazon's work culture can be difficult for women who have children. Amazon’s warehouse workers are sometimes fired after being injured on the job. Amazon doesn't effectively police the sale of counterfeit goods on its site. (In the article, Amazon’s representatives deny these allegations.)

Then there’s the fact that Amazon both serves as a platform for companies wanting to sell things and sells things itself. In other words, it competes with the same companies it enables. According to Duhigg, Amazon has been known to track items that do well, and then make its own version of the same item — which it then sells at a discounted price. (Amazon denies this, too.) Margrethe Vestager, the European Union’s commissioner for competition, told Duhigg that the practice “deserves much more scrutiny.”

The story’s killer anecdote, at least as it concerns antitrust, is about Birkenstock USA LP’s experience with Amazon. Although Birkenstock sold millions of dollars of shoes using the Amazon platform, it was constantly hearing customer complaints that the shoes were defective. Why? Because, according to Birkenstock, Amazon allowed counterfeits to be sold on the site. Not only would Amazon not take down the counterfeit goods, but it also wouldn’t even tell Birkenstock who was selling them.

Amazon also had stocked a year’s worth of Birkenstock inventory, which terrified the company. “What if Amazon decides to start selling the shoes for 99 cents, or to give them away with Prime membership, or do a buy-one-get-one-free,” wondered Birkenstock’s chief executive officer, David Kahan. “We were powerless.”

Kahan’s complaints went nowhere. So he pulled Birkenstocks off Amazon. What did Amazon do? It solicited Birkenstock retailers, offering to buy shoes directly from them. Today, if you search for Birkenstocks on Amazon you’ll be deluged with choices even though the company itself refuses to do business with Amazon. I found a pair of Arizona oiled leather sandals — listed on Birkenstock's website for $135 — marked down to $60 on Amazon. Is it the real thing, or is it a counterfeit?

The hard question: What do you do about this kind of behavior? On one extreme is the Democratic presidential candidate Senator Elizabeth Warren, who believes the most appropriate solution is to break up Amazon. At the other end of the spectrum, there are still plenty of antitrust economists who believe that if a $135 sandal is being sold for $60, that’s good for consumers. They argue that the government should just stay out of the way.

I’m a proponent of breaking up Facebook, mainly because I believe if you force it to disgorge two of its prized platforms, Instagram and WhatsApp, you’ll instantly create serious competitors. That could help raise the bar on privacy, data usage and other concerns. But I’m not sure that would work with Amazon.

For instance, if Amazon had to separate its highly profitable cloud service, Amazon Web Services, from its retail business the power dynamic between Amazon and the companies that use its platform would remain.

What’s more, it’s harder to make a classic antitrust case against Amazon than it is against Facebook and Google. According to the research firm EMarketer Inc., Amazon is expected to account for 37.7% of all online commerce in 2019. By contrast, Google controls 89% of the search market.

Still, for too many retailers, Amazon has the power to control their destiny, for good or ill. As the antitrust activist Lina Khan wrote in her now-famous 2017 article in the Yale Law Journal: “History suggests that allowing a single actor to set the terms of the marketplace, largely unchecked, can pose serious hazards.” I take that assessment to mean that government intervention at Amazon is needed.

To my mind, the simplest and most sensible solution is from the economist Hal Singer: Don’t allow platform companies to favor their own products over competitors’ products. Singer calls this a “nondiscrimination regime,” and models it after the Cable Television Consumer Protection and Competition Act, which prevents cable distributors from favoring their own content over content from competitors. In that scenario, a company that felt it was being discriminated against by Amazon could bring a complaint to federal regulators just as cable stations can do now. This regime has worked well for the TV industry. It could work for Amazon, too.

Secondly, the government should hold Amazon accountable for counterfeits. Counterfeiting is against the law, and although Amazon told Duhigg that it spends “hundreds of millions of dollars” on anti-counterfeiting efforts it’s no secret that many deceptively labeled goods are still sold on the site. (See, for instance, this recent Wall Street Journal story.) Companies like Birkenstock have a right to expect that a platform selling its products will rigorously police counterfeits — and will identify counterfeiters so manufacturers of authentic goods can take legal action.

These are solvable problems. They don’t require extreme measures. What they do require is a government with the will to transform Amazon’s platform from what it is now, a vehicle that squelches competition, to one that lets competition flower.

(Corrects paragraph eight to accurately describe the year in which Amazon paid no federal taxes and to more accurately describe the experiences of women with children who work for the company. Also changes language in paragraph eight to more accurately describe how effectively Amazon combats the sale of counterfeit goods on its site. Also corrects paragraphs 12 and 13 to accurately reflect pricing disparities between sandals sold on Birkenstock's website and those sold on Amazon.)

To contact the author of this story: Joe Nocera at jnocera3@bloomberg.net

To contact the editor responsible for this story: Timothy L. O'Brien at tobrien46@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."

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