Amazon – the jack of all online trades

Somehow the idea persists among many people that Amazon invented e-commerce. In fact, Amazon is only responsible for about half of all online sales, but only three quarters of this admittedly are a direct part of Amazon’s core business. The rest, about 25%, is handled by Amazon Marketplace, where third-party vendors are invited to conduct their business, for which Amazon charges them a fee of about 25% off of every article sold.

To find a parallel between Amazon and the Wild West, one has to look back as far as 1886. That was the year a railroad agent named Richard Warren Sears bought a crate full of watches that had been delivered to his station in North Redwood (MN) but never picked up. He placed ads in various newspapers throughout the Midwest, and his tiny firm which he named R.W. Sears Watch Company quickly managed to sell its entire stock at a substantial profit. A year later he made the acquaintance of a watchmaker called Alvah Roebuck who knew how to repair watches, and the two went into business together. Sears printed his first mail-order catalog the same year, in which he offered not only watches, but also diamonds and jewelry. In 1889, the two partners relocated to Chicago and founded a new company, Sears, Roebuck & Company. A legend was born.

The Wild West was, admittedly, a little tamer by then: thousands of farmers had settled the Great Plains who often had to travel great distances to reach the nearest General Store where choice was limited and prices high.

Sears Roebuck, on the other hand, were comparatively cheap, their range broad. Business boomed, and the two kept adding new items to their increasingly hefty catalog which had grown to 532 pages by 1895. You could buy almost everything by mail order; dolls and sewing machines, bicycles and sporting goods, later even automobiles manufactured for Sears by the Lincoln Motor Car Works in Chicago. In 1896, kitchen stoves and dry goods were added.

In 1893, the United States went through a stock market crash that led to a severe depression, and  Alvah Roebuck was caught short, so he sold his shares for $75.000 (or $2.2 million in today’s money) to Julius Rosenwald from Illinois, an experienced businessman and manager. Rosenwald introduced modern management methods and expanded the product line. In 1906, he took the company public and gathered in $40 million ($1.1 bn at today’s dollar valuation) from investors, which he used some of the money to build the 14-storey Sears Tower in Chicago, the highest building in the Windy City at that time.

Many years later, in 1973, the successor to the old Sears Tower became the tallest building in the world, and it remains Chicago’s landmark to this day, even though Sears was forced to move out in 1995 and the skyscraper was sold to a London insurance company called Willis Group who unsuccessfully tried to rename it. For native Chicagoans, thought, it remains Sears’ Tower to this day.

Real estate was the ruin of Sears Roebuck. Its mail-order business focused on rural customer, who however were increasingly becoming wealthy enough to afford cars. Starting in the 1920ies and continuing up until the 1950ies, Sears embarked on a building spree, erecting big department stores in almost every mall that sprang up in the suburbs of the big urban metropolises. At their height, Sears Roebuck owned thousands of stores across the nation, and in 1993 the wrenching decision was reached to discontinue publishing the company’s hallmark catalog with which it all began. Unfortunately, the department store business started to go into decline during the 90ies. Kmart took over the ailing business in 2004 and reduced the number of stores, which dropped from 3,500 in 2010 to 695. By April 2018, there were only 555 stores left, and financial analysts believe that Sears/Kmart will eventually disappear from the market altogether.

Fast-forward to 1993, when Jeff Bezos was driving from New York to Seattle, and somewhere along the way he had this bright idea. Legend would have it that Bezos never intended to become the world’s biggest bookseller – that would have been too small a dream for an ambitious guy like him. From the very beginning, Bezos really wanted to become the world’s biggest retailer – nothing less! Books just happened to be an easy starting point.

His dream, it seems, is rapidly coming true today. One important milestone was reached in March 2018, when Bezos overtook Bill Gates in Forbes’ list of the world’s richest people. At the time his fortune was estimated to be worth $110 billion!

Like all good startups, Amazon first saw the light of day in Bezos’ garage. The idea for the name came to him because he always wanted to go on an expedition to the Amazon. Besides, if he ever founded a company, he always said its name would have to start with an “A” so it would rank way up there on the search results. His parents lent him $300.000 they had originally earmarked for their retirement savings. He admitted to them and other early investors that there was about a 70% chance he would be unable to pay them back since his firm might not survive through its first year.

Well, Amazon made the cut, and in 1998 Bezos added music and video CDs to his lineup, followed a year later by a wide range of consumer goods. He took Amazon public and stuck every cent of the $54 million he earned back into the company, buying up lesser competitors left and right and starting an online service he called Amazon Web Services (AWS), that collected and sold weather and traffic data. Not every acquisition panned out, and in 2002 Amazon was almost bankrupt. Instead of folding, Bezos persuaded his bankers to lend him a staggering two billion dollars, closed a couple of unprofitable ventures and send 14 percent of his workers home. A year later, Amazon was back in the black, earning $400 million before taxes.

In November 2007, Bezos launched the Amazon Kindle, an e-book reader. Not that there was any appreciable market for e-books at the time, but Bezos believed their time had come. Analyst dismissed him and foretold his quick demise: “This time, Bezos has gone too far!”

Instead, Bezos’ crazy plan actually worked! People began to engage and interact with books the same way they had been doing with Videogames for years. Sales of e-books skyrocketed, and Bezos’ Kindle took off, too. By 2017, more electronic books were being sold in America than paper ones.

Since its foundation, Amazon has been at the center of an acrimonious debate about whether it will be the death of old-fashioned bookstores or not. Time will tell, but the signs aren’t all bad: In Germany, for instance, book sales dropped only insignificantly between 2011 and 2017, namely from €9.8 bn to €9.05 bn. In America, book sales were even up 1.9% in 2017 according to Publishers Weekly. And Amazon itself has begun a chain of bricks&mortar bookstores in selected inner-city locations in North America, so maybe there is still life in the old business model.

However, Amazon’s outlets are quite unlike the old mom & pop bookstores. For one thing, they sell more than books; at least a quarter of the shopfloor at Amazon’s Manhattan flagship store is reserved for things like electronic gadgets, Bose loudspeakers, disc drives, digital cameras and of course Amazon’s own Kindle readers.

“Amazon bookstores don’t do much business”, an article in the trade magazine Business Insider stated in 2017, “but they are an important building block in Amazon’s overall strategy which is all about Jeff Bezos’s brilliant idea called Amazon Prime.”


Prime Time

Prime is much more than just a classic customer retention scheme. As Matthias Schrader writes, “Prime was one of Amazon’s very first transformational products – for three reasons:

  • First, Prime ups the ante in terms of customer expectations. Prime members can order anything in the world that carries a barcode, and it will be delivered to them free of charge and faster than anywhere else. Amazon has invested great sums in its logistics and delivery services, and they’re miles ahead of the competition as a result. Due to Same-Day Delivery, shopping at Amazon is actually faster and more convenient than driving to the mall, at least if you live in an urban area.
  • Secondly, Amazon has expanded the Prime experience into other areas such as Prime Music, Prime Video, Prime Photos, an online lending library (Prime Reading), as well as a gaming and merchandise portal (Twitch Prime). In effect, Amazon has created a huge customer loyalty platform which binds consumers to Amazon voluntarily. All of this is included in the price of a Prime membership which was raised in May 2018 from $99 to $110 without denting the program’s popularity. Schrader quotes market research from Millward Brown Digital claiming that the probability of a Prime customer actually purchasing something is a whopping 74 percent – 20 times the rate of a normal webshop!
  • And thirdly, says Schrader, Amazon isn’t a real merchant at all but instead an errand service. “Bezos isn’t interested in building the best tablet or e-reader. For him, atoms are just the necessary physical embodiment of a service.” Amazon is so successful in E-Commerce, he believes, because it doesn’t play by the rules other vendors follow.

Amazon has transformed commerce – and not just the online variety, either – almost beyond recognition. Not everyone is happy about this. The company is under pressure from various directions. In 2015, the New York Times published an article detailing the scandalous conditions warehouse employees at Amazon were forced to work under, often laboring for 55 hours a week under forced overtime, which led to frequent cases of staff collapsing on the job and requiring emergency medical attention. Toilette breaks were limited. In the UK, temporary workers were required to report on the job seven days a week and were fired if they called in sick, the Times wrote.

Opening another front against Amazon, Donald Trump complained (via Twitter, of course) that the retailer was ripping off the U.S. Postal Service, using its market power to extort price cuts for package deliveries, ostensibly causing billions in losses for the postal service. As usual when Trump butts in, a heated debate ensued in early 2018 about the truth of the President’s allegations, along the lines of “Is Amazon the savior or the destroyer of the postal system?”

As if all this wasn’t enough, Amazon is under siege from all over the world because of the way it dodges tax local laws on both sides of the Atlantic. In the U.S., Amazon paid virtually nothing in 2017, despite reporting roughly three billion dollars before tax earnings. This was only possible by exploiting just about every legal loophole they could find, such as massive write-downs on investments in R&D and manager bonuses. Amazon has also been very successful in avoiding having to pay sales tax, although it must be said in all fairness that this practice was sanctioned by the Supreme Court in 2017. American online retailers in general enjoy an unfair advantage over their bricks&mortar competitors. Unless they were physically located in the same state as a shopper, they were not obliged to collect state and local sales taxes. In theory, shoppers were legally required to pay sales taxes on stuff they purchased online, but nobody did. Since state and local sales taxes can add up to as much as 12% of a product’s price, this gave online dealers, especially Amazon, a huge advantage. But on June 21st, 2018, the Supreme Court reversed itself and ruled that online retailers did have to collect sales tax themselves.

Amazon has argued for years that it is only subject to the tax laws in places where they operate a physical presence, which essentially meant that they only paid taxes in their home state, Washington. However, over the past years Amazon has erected giant distribution facilities all over the United Stated and the rest of the world, each one effectively establishing a physical presence and thus obliging the company to ante up. It has been reluctant to do so, and it now is facing proceedings brought by tax authorities in Germany, France, the UK, and Luxembourg. In 2009, Japan forced Amazon to accept a bill for ¥14 bn (about $119 mil) in back taxes.

While it might seem as though Amazon is up against a wall, facing their obligations as a taxpayer may prove a boon in the long run. After all, the ruling applies to the competition, too, so any cheeky startup trying to undercut Amazon through the old loopholes will be in trouble. Besides, it will stop many consumers from effectively using Amazon as a search engine for checking prices before moving on to other retailers who may offer the same product a few cents cheaper. The Economist wrote recently: “Amazon, which once lobbied against legislation requiring online retailers to charge sales tax, has in recent years switched to lobbying in favor of them.”

Seen together, these various strands of criticism may seem par for the course for a company as large and successful as Amazon. However, trouble is brewing on another front, far away from the glare of the public spotlight. This touches a more general question, one which pertains to the other members of GAFA, too, namely do we need to reconsider our entire system of addressing competition and fair trade in the era of the World Wide Web? Or, to put it another way, are our Antitrust Laws hopelessly out of  date?

Market-driven censorship

Everybody know what a monopoly is. But what is a monopson? A monopoly is where many buyers face a single seller, the classic example being the U.S. Postal Service back in the days when it was the only company licensed to deliver letters and packages, so it could set its prices ad libitum, with only the United States government in a position to reign them in through oversight.

A monopson works the other way around. The word comes from the Greek mono (for “single”) and the verb opsōnia (for purchase of food) and is defined by the Free Dictionary as “a market situation in which the product or service of several sellers is sought by only one buyer.” The classic example here could be the U.S. military, which in effect represents a single buyer who purchases from numerous competing members of the industrial-military complex.

Paul Krugman, the Nobel Prize-winning economist and columnist for the New York Times, wrote back in 2014 that Amazon “has too much power”, and that it abuses its power systematically. To understand this we need to know that Hachette, on of the biggest publishing houses in France, and Bonnier, the Swedish media conglomerate, were locked at the time in a bitter fight about eBooks on Amazon. Amazon wanted a bigger slice of the cake, which the publishers were unwilling to grant. To force the intransient booksellers into submission, Amazon simply tweaked their algorithms until eBooks from Hachette and Bonnier began landing at the bottom of the heap. As a result, sales of bestseller authors like Ingrid Noll (The Pharmacist), Gunter Wallraff (Lowest of the Low) and Nobel Prize-winner Elfriede Jelinek (The Piano Teacher) plummeted.

Apparently adding insult to injury, Amazon began taking longer and longer to deliver books from the effected publishers who eventually called Jeff Bezos out in an open letter, accusing him of holding them and their authors hostage and thus working against the interests of their readers. “Amazon thereby directly contradicts its own pledge to be ‘the earth’s most customer-centric company’”, they wrote.

Amazon is prime example of the kind of unbridled power the era of GAFA has allowed digital operators to accumulate and exercise. In the case of Amazon versus the publishers, one might well ask: so what? Who cares if one filthy-rich corporation applies the thumbscrews to another filthy-rich corporation who happens to be its supplier? It’s a free market, ain’t it? That’s just business as usual.

Not so, argues Paul Krugman. What would stop an unbridled Amazon from suppressing content it deems politically incorrect? Could free markets lead to censorship? Why not, he asks, and raises a warning flag. Amazon’s behavior, he believes, isn’t just evil and unethical in itself; it’s also bad for trade and markets. Unfortunately, Krugman complains, our anti-trust laws are hopelessly out of date and completely unable to act against monopsons. This must change, he demands.


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