‘Behemoth, Amazon Rising,’ Presents Critical Economics-Based View

The power of a corporate behemoth is such that it dissuades companies from providing new services because they’ll be squashed. And the irony is that the behemoth may not even be competing in these areas yet. It only needs to nod in that direction.

Microsoft was in that position before the government’s 1998 anti-trust action. In the early 1990s, the biggest conversation I would have with digital companies is: “Does Microsoft want to go there?”

Political scientist Robin Gaster’s new book, “Behemoth: Amazon Rising,” ranks Amazon as the most prominent of today’s behemoths, alongside Alibaba (China’s giant that has 6 x Amazon’s revenue), Google, and Facebook. Amazon operates on a scale we have never seen in business before in the U.S. and many parts of the world.

As Gaster notes, retail stores, grocers, brands, content publishers and B2B players grapple with a retail environment that has Amazon’s fingers in every part of their ecosystem, including Web services, marketing, warehousing, shipping, and fulfilment. Health care providers, pharmaceuticals, banks, financial services, and travel providers also must deal with the Amazon effect – and Amazon has not even fully entered these segments.

Is this a bad thing? Not always. With Amazon’s help, companies can focus on what they do best: serving their customers with products and services. After initial resistance, most companies learn to live with Amazon. Indeed, retailers and small and medium sized businesses (SMBs) have generally gone from an attitude of beating back Amazon to hopefully, learning the best ways to utilize and win with Amazon’s services.

In the small business space, for instance, Amazon provides customer acquisition via advertising and Amazon Services such as SMB hosting, warehousing, fulfilment, lending, and transaction services. That’s progress. Left to their own devices, prior to Amazon, many small businesses even had trouble placing an annual (and overpriced) Yellow Pages ad.

But as a company that often exploits its merchants’ data and self-deals, Amazon’s long-term threat, looms large. Gaster colorfully calls Amazon a “vampire,” noting that it is “agile, immortal, brilliant, efficient, superhumanly strong and intelligent, undeniably seductive.” Yet, he notes, it is “also heartless, deeply amoral, selfish exploitative and cold. That’s all on display at Amazon, where the cult of customer obsession provides sufficient moral justification – for anything.”

The book’s main thesis is that Amazon feeds off all its parts to cross-subsidize its operations and continually outpace the competition. Indeed, Gaster contends that Amazon’s basic retail store is a perpetual money loser, hampered by overly ambitious inventory (“The Everything Store”); deep infrastructure expenditures, including an astounding 825 U.S. warehouse and storage facilities; and cut-throat pricing on hardware and other items that cannot turn a profit.

It can afford to take these losses. Rival stores may not like it, but the Amazon store’s tremendous volume cross-subsidizes Amazon’s other high margin departments, including the $119 a year Prime loyalty program, which has 126 Million U.S. subscribers, according to CIRP.

Other high margin departments include Marketplace, the third-party sales division that now accounts for 58 percent of Amazon’s sales volume, and which Gaster contends is Amazon’s “casino” (i.e., the house always wins, as Amazon makes money from every service it provides and takes none of the risk of retail). “Marketplace has become the financial lifeboat of Amazon’s online empire,” says Gaster. In fact, his analysis contends that Marketplace pays for 55 percent of Amazon’s losses from the retail store.

Inevitably, Amazon is going to focus more on having brands and suppliers switch to their own stores on Marketplace from the retail store, says Gaster. It is in Amazon’s strategic interest to make them, essentially, 21st Century sharecroppers. “It makes no sense for Amazon to take the inventory risk for unprofitable producers, when Amazon can generate higher margins at zero risk from those same goods sold by third parties on the marketplace,” he says.

Meanwhile, Amazon Web Services, the breakout division that delivers Amazon’s highest margin profits, should be spun off, says Gaster. It is going to remain highly profitable, even in the face of enhanced competition from Microsoft and Google. But it is no longer strategic to the company since it does not enhance other divisions such as the retail store, Marketplace, or prime.

In Gaster’s eyes, there are, in fact, many good things about Amazon’s ascendance. For one, Amazon’s Marketplace has become a major enabler of small businesses. The vast majority of Marketplace store providers have fewer than four employees, he notes. Amazon has made their creation possible.

But Gaster believes – as do new Biden Administration appointees Tim Wu and Lina Kahn — that certain information age companies, such as Amazon, operate in a new type of monopoly environment that is resistant to anti-trust regulation. While Amazon has plenty of theoretical competition, its customers don’t have realistic alternatives. It also operates as a platform of many parts that hides or obfuscates much of its financial information, even though it is a public company.

Given this – and his analysis that traditional anti-trust tools won’t work — Gaster contends that it would be in the public interest for the U.S. Government and other countries to create a “Digital Platform Regulator.” The regulator would require Amazon (and any similar company) to provide open information and operate from an enforceable code of fair play.

“Amazon is ruthless, relentless and increasingly dominant,” says Gaster. “We worry about its culture of secrecy, its untrammeled power within its increasingly dominant retail platform, its sheer scale and its expansion into new sectors.”