Amazon: Monopoly in the 21st Century, Part 1
- By Stepan Lavrouk
Amazon.com Inc. (AMZN) is big. Extremely big. There's no other way to describe a company whose sales accounted for around 50% of the entire U.S. e-commerce market in 2018. The company, which started off as a online book merchant, has expanded into a large number of other industries - from TV and film to cloud services to logistics.
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The intrinsic value of AMZN
Should consumers be worried? After all, we generally do not think monopolistic control of any market, let alone many different markets, by one company is something to cheer for. The answer is: probably yes. Are regulators doing something about it? Not really. To understand why, it is necessary to look at the ways in which Amazon increases its grip on markets and the consequences of these actions.
Amazon price gouges to destroy competition
The first thing to understand about Amazon and its founder and CEO Jeff Bezos is their willingness to invest aggressively in order to capture market share, regardless of the short-term costs to the company. In a recent letter to shareholders, Bezos wrote: "As a company grows, everything needs to scale, including the size of your failed experiments." This suggests Amazon is perfectly happy to bear the cost of failures like the Fire phone if it means eventually hitting a big win like the Echo home assistant.
But it also means engaging in what essentially amounts to predatory pricing in order to force out smaller competitors. For instance, Amazon sells the Kindle e-reader at or below the cost of production in order to take control of the ebook market and makes that money back from the fact that those ebooks can only be read on Kindles (due to restrictive copyright agreements), thus strangling competing hardware producers.
Amazon's Prime subscription also started out as a loss leader. It initially had a price point that (in 2011) was, on average, $11 below break-even. Amazon was willing to lose money on Prime if it meant being able to lock customers into using their services. When prices were hiked in 2014, the vast majority of customers kept their subscription.
Why haven't regulators acted?
These are all fairly glaring and obvious examples of predatory pricing. So why don't regulators do something about it? The problem is the simple act of a company cutting prices to establish market dominance is not enough grounds for regulators (at least in the U.S.) to step in. Regulators need evidence the company is abusing its power by raising prices on its captive customers. Unfortunately, this makes regulatory action a fundamentally reactive, rather than proactive, approach to the problem of monopolies, at least in the case of Amazon.
There are, however, signs that this may be changing. Back in November, President Trump said Amazon, Alphabet's Google (GOOG) and Facebook (FB) were being investigated for anti-competitive behaviour. Only time will tell whether regulators will update their playbooks for the modern age, but so far, there has been little substantial change.
Conclusion
In short, Amazon has a long and well-documented history of employing loss-leading practices in order to aggressively pursue market dominance. Once that dominance is established, the company is then able to do things like raise prices and cross-sell services, thereby increasing its grip on a number of different sectors. In the next installments of this series, we will look at how Amazon has used its status as a near-monopoly to exert pressure on logistics companies in order to get preferential treatment, the cost of which is passed down to smaller businesses.
Disclosure: The author owns no stocks mentioned.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with AMZN. Click here to check it out.
The intrinsic value of AMZN
