We tend to credit Amazon’s enormous reach to its inventiveness. Jeff Bezos has built a logistics operation that rivals UPS and FedEx in the volume of packages it delivers to consumers in the United States. Amazon’s Alexa is the dominant operating system in the new arena of voice-enabled devices and web access.
Amazon produces clothing and advanced computer chips, dispenses a growing share of the nation’s prescription drugs, markets surveillance services to police departments, and runs a rapidly expanding advertising business.
But the evidence presented this week in a long report by the House Judiciary Committee, following a bipartisan investigation of the tech giants, tells a very different story. Amazon’s website forms a choke point through which other companies must pass to reach the market. It has exploited this commanding position to strong-arm other companies, control their means of distribution and drive them out of business.
While the report concludes that Apple, Facebook and Google are also abusing their monopoly power, its findings about Amazon deserve our special attention. Through its marketplace, cloud division and voice interface, Amazon functions as essential infrastructure for an astonishing array of companies and industries. This gives it an extraordinary view into the activities of other businesses and an unparalleled ability to manipulate markets to its own advantage.
Preventing dangerous concentrations of private power is part of the necessary checks and balances of a democratic society, and it is Congress’s responsibility. The Judiciary Committee offers several proposals for what Congress should consider doing; the most important is its suggestion to break up Amazon and the other companies in “structural separations.”
To better understand why, it’s helpful to take a closer look at exactly how Amazon became such a force.
Amazon used to rely on other carriers. Today it controls a major share of the logistics industry. It’s now delivering two-thirds of the items ordered on its website and a growing share of those purchased on other sites, such as eBay. Analysts expect Amazon to surpass UPS and FedEx in total package volume by 2022. It’s also rapidly gaining on the Postal Service, which saw its parcel volume shrink last year, in part because of Amazon’s inroads.
Amazon accomplished this feat not just by competing with these other carriers on price and service. Rather, it exploited its control over the many businesses that depend on its website to reach consumers. It did this by making a seller’s visibility on its site, which dominates e-commerce traffic, largely contingent on buying Amazon’s warehousing and shipping services. Not surprisingly, the share of sellers using these services has skyrocketed and now tops more than 85 percent.
Amazon’s path to commanding the voice sector began with a series of acquisitions, including a British company that had created software with a remarkable grasp of natural language. That technology, on which Alexa was built, gave Amazon a crucial head start. It then leveraged its dominance in e-commerce and sheer size to take over this emerging field.
One tactic involved frequently putting its Echo line of smart speakers on sale, which some saw as effectively selling them at a loss. While Amazon can rely on revenue from other parts of its empire to subsidize such loss leaders, smaller competitors, such as Sonos, can’t do the same.
Amazon also restricted competitors from promoting their speakers on its site. And entrepreneurs told The Wall Street Journal that Amazon appeared to use its venture capital arm, the Alexa Fund, to help develop competing products. (Amazon has disputed their account.) Eight months after investing in the start-up Nucleus and getting an up-close look at its proprietary information, for example, Amazon announced an Alexa-enabled device that did many of the same things as Nucleus.
These tactics have put rivals at a distinct disadvantage, no matter how superior their products. Echo now accounts for nearly 70 percent of the U.S. smart-speaker market. And with Alexa functioning as the intermediary between users and the appliances and services they interact with, Amazon has gained a rich stream of data that it can use to expand into still more industries.
Mr. Bezos has often described Amazon’s strategy as a “flywheel” — the idea that momentum in each area of its business drives momentum in the others, creating a machine that spins ever faster. This is a metaphor for monopolization. Amazon exploits its power in one sector to take over neighboring markets. Each new conquest adds more momentum. The flywheel accelerates.
And it poses a considerable threat to American vitality. Investors talk of a “kill zone” for start-ups around the tech giants — broad segments of the market that lack competition because new entrants are seen as doomed and cannot attract investment.
It’s not only the big ideas that we’re in danger of losing; independent businesses are disappearing, and with them a crucial source of new ideas and products. A survey of about 1,000 independent businesses last year showed that Amazon overwhelmingly ranked as their top challenge. Most of those who responded, including most of those selling on its platform, said that Amazon is hurting their business. The loss of these businesses doesn’t just dampen innovation; it saps the strength and well-being of communities.
This is why the most important of the Judiciary Committee’s recommendations is its call for legislation that would effectively split up big tech platforms like Amazon by breaking them up in “structural separations” and forbidding them from operating in adjacent lines of business to those they are already dominant in.
This approach has been used in the past. In the early 20th century, Congress barred railroads from producing and distributing goods that required rail transport. Policymakers employed a similar approach to telecommunications and banking.
Compelling Amazon to spin off its online marketplace, retail, cloud and logistics divisions as distinct companies would eliminate its ability to exploit its dominance in one part of its business to thwart competition in another.
But that isn’t enough to restore a fair and open online market. We also need rules that would require major digital platforms to provide reasonable terms for access to their platforms and bar them from discriminating against companies.
Finally, it’s imperative to correct the failings in antitrust enforcement that have enabled Amazon to amass such power and abuse it. In recent decades, the courts and the antitrust agencies have weakened our once strong antitrust laws. As a result, Amazon has been able to vanquish competitors using tactics such as predatory pricing that might have invited criminal prosecution in an earlier era.
This permissive stance, the committee found, has also allowed Amazon to buy up other companies with the aim of snuffing out potential rivals and taking control of emerging technologies. Its report calls for imposing new hurdles on acquisitions by the tech giants and legislation to restore the vigor of the antitrust laws.
Jeff Bezos once led an inventive start-up, but today he commands an impenetrable empire. “No company is likely to pose a threat to Amazon’s dominance in the near or distant future,” the House investigation concludes. There is no other rival, no matter how smart, creative, or popular, that can change that. Congress will have to step in.
Stacy Mitchell (@stacyfmitchell) is a co-director of the Institute for Local Self-Reliance.
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