Is Amazon a monopoly?
A monopoly exists when there is effectively only one supplier of a good or service. They can set the price, and anyone who wants what they’re selling has to pay it. There’s really no alternative. This was the case with Standard Oil in the late 19th century. They were an innovative oil refinery that bought out competitors in the oil products area, the integrated vertically with exploration and production enterprises to become the largest oil company in the world. In 1911 the Supreme Court ruled that they were an illegal monopoly, and broke them up.
Is Amazon a monopoly? It sure feels like it. When I want to buy something online, there’s really only one comprehensive alternative. Sure, I can go to individual retailers’ sites for specific purchases, or a manufacturer’s site, but for online shopping, it seems like Amazon is the only game in town. Last year, Amazon sold six times as much as Walmart, Target, Best Buy, Home Depot, Nordstrom and Macy’s did – combined. They also generated 30 percent of all the growth in US retail sales.
And it’s expanding into more and more areas. Amazon Web Services provides cloud-based computing; Amazon Video streams TV and movie shows and has started to produce its own content – just like Netflix; Amazon Publishing prints books. Jeff Bezos purchased the Washington Post, and if you have an Amazon Fire tablet, you can get the Washington Post for free. Now Amazon is in the grocery business.
In purchasing Whole Foods, Amazon acquires over 400 small distribution centers, spread out among some of the most Amazon-using neighborhoods in the US. It’s existing logistical network is already powerful. If you’re in a business that Amazon wants to get into, watch out.
Monopolistic pricing. Source: Wikipedia
There are two problems with monopolies. First, they can raise prices to extract as much as possible from consumers. That doesn’t appear to be happening here. Second, they subtly change management’s own incentives, from serving customers to building their empires. Monopolies can run afoul of government regulations, but a more pervasive threat comes from within, with all the politics, power-plays, and other distractions from business issues. Consider Amazon’s publishing dispute with Hachette a few years ago, where they turned sales of Hachette books on and off overnight.
Amazon may run afoul of antitrust regulators, but its greatest danger is the hubris and court-intrigue that come with empire. Jeff Bezos needs to remember: “Sic transit gloria mundi.” All power is fleeting.
Douglas R. Tengdin, CFA