Jeff Bezos Warns: Amazon Will Someday Go Bankrupt
Amazon's First Headquarters
Amazon was launched in 1995 as an online
bookseller headquartered in Jeff Bezos’ garage. Two company names favored by Bezos were rejected; “Cadabra” sounded
mysterious but a lawyer rejected the name as sounding too close to "cadaver," and
“Relentless.com” sounded too sinister according to Bezos’ friends (apparently
Jeff was sufficiently attached to the name to keep it for posterity -- enter
the URL relentless.com in a
browser.). Bezos settled on the name Amazon
while looking through the dictionary. The name engendered visions of an exotic
place, it is the longest river in the world and begins with the first letter
of the alphabet making it prominent in an alphabetical list.
Amazon has been astoundingly successful; its
share price has risen 355% in the last five years and it has become the largest
online retailer in the world measured by revenue. But Amazon may eventually hit a
regulatory speed bump that could break up the world’s largest retailer. We have
witnessed the breakup of AT&T, Microsoft, Standard Oil, even Kodak. Now
Amazon, Google, Uber, and Facebook are in the regulators’ sights.
Jeff Bezos is the wealthiest person alive
today. Unlike Bill Gates, Steve Jobs, or Mark Zuckerberg, Bezos, did not emerge
from the ranks of high tech but made his fortune in the retail business.
However, if there is trouble ahead, we can blame the Internet and its technological
offspring.
Although Jeff Bezos' wealth is a modern-day record it falls well short of matching that of a historical record; that status belongs to
Mansa Musa about whom I wrote a blog post three years ago. Unless you studied
the Middle Ages or read my earlier blog post, you may be surprised to learn
that the wealthiest man in history made his fortune in Timbuktu, the iconic name
representing “the middle of nowhere”. The primary messages in my musing about
Mansa Musa is, as you will soon see, related to my alert about Amazon’s
prospects for uncapped growth.
The recounting of Mansa Musa’s unsurpassed
accumulation of wealth was not published in my blog purely for its entertainment value, but
also to highlight two economic concepts
that, when used in combination, are both used and abused to make a lot of
money. Those economic concepts are “the essential facilities doctrine” and “property rights" (no worries, I won’t drag
you through any economic lessons but you may learn something).
Essential facilities
In In the early 1980s when I was consulting with telephone companies about how to
deal with competition, I addressed the top executives of
Bell Atlantic. “Imagine a future point in
time when telecommunications competition becomes a reality,” I said. “School is just letting out and Grandpa is designated to pick up his grandson, Tommy, but Grandpa has a problem. Grandpa, sitting in
his chair at home, simply announces ‘Tommy, my car won’t start. Can you get a
ride home with Jenny’s mom?’ Tommy walks towards Jenny and says ‘I see Jenny
now. I’ll ask her.’ Tommy secures his ride home. As Tommy approaches the car he
informs Grandpa Jenny's mom can take him home. There is no traditional telephone in sight.”
I then asked the executives “who in the future will carry the messages between
Tommy and Grandpa? An executive answered, “unless there is a microphone connected to a pair of wires at their feet, it isn’t
Bell Atlantic.” Grandpa’s day has arrived. Today Grandpa could make a phone
call from his chair using Amazon’s Echo or another voice activated internet connection between Tommy's Apple watch and Grandpa.
At the time I gave the talk, AT&T owned
Bell Atlantic and all their central office switches, all the cables, all the
wires in the walls of their customers’ premises, and all the telephones in
their service areas; no potential competitor could compete without accessing at least some of these
facilities. The federal antitrust courts forced AT&T to
unbundle the essential network components and lease them to competitors at prices that would prevail in a competitive market.
Property Rights
In Mansa Musa’s day, all trade routes in
Northern Africa, and reaching into the Arabian Peninsula, converged at a point
where overland trails and the Niger River met. Surrounding the travel routes
were the old world’s majority of gold and salt mines providing the two most
important commodities at the time. Trade throughout the region was entirely
dependent on access to Mansa Musa’s land and therefore it constituted an essential
facility -- trade could not occur without access to the only existing
transportation routes in and out of the resource-rich area. Mansa Musa had
secured and maintained the property
rights to the essential facility by military force. He, therefore, was able
to extract taxes on all trade in the region while carefully keeping the taxes
low enough to prevent competition or a hostile takeover, but high enough to get
very rich. The latter tactic is analogous to predatory pricing discussed below.
Property rights to essential facilities are granted to natural monopolies if a single provider can achieve efficiencies that could not be obtained by splitting the market into two or more pieces. AT&T argued for many years that telephone service prices would increase if regulators allowed competitors to use AT&T facilities. They even argued that allowing a competitor's telephone to be plugged into the wall would require additional costs to avoid the risk of electrocuting their repair crews (no such event has occurred under competition). Regulators responded to complaints from potential competitors and investigated the question for several years before determining that competition would reduce prices rather than increase prices.
Mansa Musa was free to exploit essential facilities to become the richest man in history. In the 20th century, AT&T used its essential facilities to make excessive profits but regulators had the legal authority to strip AT&T of their property rights and parse it into many smaller companies; the Baby Bells were born.
Mansa Musa was free to exploit essential facilities to become the richest man in history. In the 20th century, AT&T used its essential facilities to make excessive profits but regulators had the legal authority to strip AT&T of their property rights and parse it into many smaller companies; the Baby Bells were born.
[Disclosure: over a ten-year period I testified as an expert witness against AT&T, and in over 100 similar legal and regulatory cases in more than 20 countries, arguing that a well-managed transition to competition would benefit consumers.]
Predatory Pricing
The primary complaint about essential facilities is that businesses can use their
ability to block competition in order to profit from exorbitant prices. If a
large company has an abundance of cash but lacks an essential facility, the
same end can be accomplished by predatory pricing (i.e., normally but not always, pricing below cost) to drive competitors
out of business or devalue competitors in order to acquire them at bargain
prices. These are common practices in predatory
pricing. While Mansa Musa didn’t price below cost in the traditional sense,
through predatory behavior he was able to maintain his monopoly position by taxing trade at levels that made it prohibitively
expensive for outsiders to challenge his control of the essential facility.
As the Internet changes the way we engage in
commerce, predatory pricing becomes more ambiguous. For example, Google provides
a lot of services free (a fortiori, below cost). Google makes up the loss associated with free services by selling complementary goods (e.g., advertising). Shopping
malls collect rent from shops, provide event space, host museums, house
theaters, and in some cases offer lodging). The portfolio of revenue sources makes the shopping mall profitable even though not every activity covers its own cost. More generally “multi-sided markets” profit
from the entire platform of goods, losing money on some and making it up on others.
Consumers are not necessarily harmed by such businesses and most appreciate the extra benefits. The problem is differentiating competitive multi-sided market offerings from
predatory pricing of some items on the platform.
Antitrust authorities are hesitant to take
action against companies that benefit consumers. Lower prices benefit consumers
so it is no surprise that predatory cases are rare, and when they are successfully
prosecuted, the remedies are often criticized. Amazon is being closely monitored in the
U.S. and Europe for anti-competitive behavior.
Yesterday Jeff Bezos held an all-hands meeting warning that Amazon will not last forever. He predicted that Amazon will someday be dismantled by regulators as were Microsoft, Kodak, Xerox, Standard Oil, and the divestiture of AT&T.
Yesterday Jeff Bezos held an all-hands meeting warning that Amazon will not last forever. He predicted that Amazon will someday be dismantled by regulators as were Microsoft, Kodak, Xerox, Standard Oil, and the divestiture of AT&T.
Platforms
 |
| A Two-sided Market |
Multi-sided markets are called “platform markets” because they provide a
platform supporting two or more interconnected businesses. Newspapers and
magazines are platform companies; they sell subscriptions to printed articles
and they sell advertising to businesses that want to reach the subscribers. It
takes a combination of revenues from both sources to be financially viable.
Amazon and eBay are platform companies, as are cable TV companies, Google, Apple, and Facebook.
Amazon sells its own products on its platform
alongside competitors’ products. 40% of Amazon’s revenues derive from third-party sellers using Amazon’s platform. This tactic is successful because Amazon
makes money whether you buy their product or choose to buy a competing product.
Amazon’s ultimate objective is to have a platform big enough to offer anything
that can be purchased online. Amazon stacks onto their platform: their own
products (Echo, Kindle, its own movie exclusives, Amazon’s own TV show, and
much more); companies they have acquired (Zappos, Alexa.com, Israeli chip maker
Annapurna Labs, Amazon Robotics, Whole Foods Market, CreateSpace, Amazon
Handmade, and several others); and products offered by almost 2 million third-party sellers.
Amazon is the most diverse and largest
platform company in the world. For example, Amazon’s platform extends beyond selling
products; it competes with UPS and FedEx and is investing $1.5 billion dollars
in its own cargo airline hub in Kentucky which will dispatch 40 leased
planes to deliver cargo to its warehouses.
Platform companies in general and Amazon in
particular, have caught the attention of antitrust regulators around the world
(Amazon operates in 12 countries). And those regulators have caught the
attention of Jeff Bezos. Here’s what Bezos told his staff this week:
“Amazon is not too big to fail. In fact, I
predict Amazon will fail likely in the next ten years. If you look at large
companies, their lifespans tend to be 30-plus years, not a hundred-plus year.”
He told his staff to avoid looking inward and instead “obsess over customers”. “If we
start to focus on ourselves, instead of focusing on our customers, that will be
the beginning of the end, We have to try and delay that day for as long as
possible.”
Bezos didn’t explicitly address regulatory and
antitrust concerns but his employees internally express concern about being
broken up in the future as Amazon nears a 50% share or all online sales in the
U.S. market. To date, Trump’s administration is threatening antitrust
investigations, and Japan and Europe have already opened active antitrust cases
scrutinizing Amazon’s businesses. Bezos didn’t comment on the antitrust risks in his all-hands staff meeting but was quoted in a public statement saying
“It's reasonable for large institutions of any kind, whether it be companies or
governments, to be scrutinized.”
As an economist, I fully expect future
regulatory and legal constraints to be imposed on Amazon, even to the point of forcing the divestiture of some of its businesses, but that is not on the
immediate horizon. Both lawyers and economists specializing in antitrust
(myself included) are conflicted about just what public harm Amazon is
inflicting on consumers who appear so happy with the efficiency and convenience
Amazon brings to the shopping experience. There is a stronger case to be made
that disgruntled smaller businesses are harmed but counterbalancing that are
the 5 million worldwide sellers who have gained a sales platform that is
otherwise out of reach of the local boutiques or artisan selling handcrafted
goods. Of course, time will tell…