This is Jeff Bezos.
No this is Jeff Bezos.
Sorry this is Jeff Bezos.
His net worth will soon surpass $150 billion.
And this is his home.
The second company in the world to pass the$1 trillion mark.
But did you know that during more than twodecades of existence, Amazon has struggled to make any profit? In fact, the company has been regularly operatingat a loss, especially on international markets.
This is despite its exponentially growingrevenue stream peaking at $232 billion for the last year.
In the final quarter of 2018, Amazon reportedprofits of $3 billion with the revenue 24 times bigger.
And it wasn’t until the late success ofAmazon Web Services, the world’s leading cloud computing service, that Amazon beganreporting consistent profits.
So what is happening with all this revenue? It has everything to do with the businessmodel of Jeff Bezos.
In his own words, Bezos believes in shareholdersupremacy, which means everything is justified as long as the share value is growing.
The key metric for Bezos is the ability tolock customers in their Amazon ecosystem.
Bezos reassures his shareholders that Amazon“has invested and will continue to invest aggressively to expand and leverage theircustomer base, brand, and infrastructure as they move to establish an enduring franchise”.
The revenue growth is the manifest of thisvery expansion.
Amazon absolutely dominates e-commerce – controllingroughly half of all online sales, more than all of their competition combined.
In five different categories, Amazon claimsmore than 90% market share.
Jeff Bezos pushed Amazon great lengths toclaim this dominance.
From undercutting competitors with predatorypricing, through forcing itself into their business, to vertically integrating into strategicmarkets across the business line, Amazon is on track to gradually take over every aspectof e-commerce and to control and decide what we shop and what is allowed to be sold.
One of the first key steps for Jeff Bezoswas to lock Amazon’s grip on consumers.
To lure more customers to stay with Amazon, the company launched Prime membership subscription for a flat annual fee of $79.
By offering free two-day delivery and e-bookrenting along with music and video streaming, about half of Amazon customers have been convertedto Prime membership.
On paper, this was an immediate success, becauseon average, Prime members spent more than twice as much as non-Prime customers.
But by 2011, estimates showed that the averageannual cost of each Prime membership ranked up to $55 in shipping and $35 in streaming.
This left Amazon losing about $11 per Primecustomer.
All in all, Amazon was losing about $1 to$2 billion a year on Prime alone.
Not to mention that the expansion of Primewas happening right in the middle of the deepest recession since the Great Depression.
But Jeff Bezos managed to persuade shareholdersto stick with Amazon and their stock prices went up by almost 300% in two years, wheneveryone else in retail was failing.
So what made Amazon investors so loyal tothe company that was losing profit during a heavy recession? It was Amazon’s ability to lock down theirgrip on customers and claim monopoly position on the market.
In the words of a former member of Prime developmentteam, “It was never about the $79.
It was really about changing people’s mentalityso they wouldn’t shop anywhere else.
” And this strategy really succeeded in itsmission.
When Amazon finally raised the fee to $99in 2014, 95% of Prime members claimed to stay loyal and renew their subscriptions.
Studies found that less than 1% of AmazonPrime customers would consider competitor retail sites during the same shopping session, while non-Prime customers were 8 times more likely to shop between different retailers.
Investors back Amazon when it’s losing profits, because sacrificing short-term profit for aggressive long-term expansion pays off.
Amazon did this with e-books, when it beganselling Kindle devices below its manufacturing cost.
Like with Prime, the goal of Kindle was tolock book readers in the Amazon ecosystem.
Amazon did this with digital rights management, DRM, that locked its e-book formats to Kindle, so they couldn’t be read outside of Kindle.
With this strategy, Amazon also succeededin dominating the e-book market, claiming around 83% of e-book sales in the US and theonly real competitor left is Apple.
Undercutting competition with below-cost pricesand locking users in its ecosystem is a classic strategy of predatory monopolization.
It gives monopolies opportunities to unfairlyraise prices and enjoy the cash flow in a market with only that competition left whichthey can contain or control.
In ideal circumstances, antitrust regulatorswould have stepped in long before such dominant positions could have been acquired throughanti-competitive practices.
However, purposefully operating at a losswith the aim to price out competitors is not viewed as an anti-competitive practice onits own under the new anti-monopoly regulatory view in the US.
In order for the FTC or the courts to stepin, there has to be an intent to raise prices for consumers once the dominance is taken.
And this is what Amazon has been extraordinarilyclever at hiding.
Every new service Amazon rolls out allowsthem to track user behavior and collect personal and usage data of their customers.
Amazon then deploys algorithms to personalizepricing on individual scale, and even goes as far so to use bots to monitor prices oftheir competition and match them with Amazon prices in real time.
This mechanism obfuscates the baseline fromwhich it could be possible to observe price fluctuations and so if there is no body, thereis no murder.
Obfuscating its true intentions allowed Amazonto vertically integrate into the markets on which its competitors were dependent on.
It’s not a coincidence Jeff Bezos turnedAmazon into a marketing platform, a network for logistics and delivery, a book publisher, a hardware manufacturer, a fashion designer, a film and TV producer, a payment serviceand a cloud service provider.
Every industry domination is a step in theBezos’ plan.
Amazon expands to these different marketsby either acquiring key businesses or undercutting them with below-cost pricing if they refuseto sell.
A company called Quidsi used to be one ofthe fastest growing e-commerce businesses in the world, overseeing Diapers.
First, Amazon offered to buy the whole companyin 2009.
When Quidsi refused, Amazon bots began trackingDiapers.
com and cut their own prices for baby products by up to 30%.
But unlike Amazon, Quidsi was a new ventureand didn’t have investors backing their losses while they competed with Amazon’smonopolistic ambitions.
Amazon then began rolling out subscriptionservices for care takers and significant discounts on diapers, which cost Amazon additional $100million per quarter.
Quidsi was bleeding and had no option butto sell.
Both Walmart and Amazon made an offer.
When Bezos found out Walmart offered a higherbid, his deputies went to Quidsi founders with threats that Amazon would cut their priceseven further if Quidsi sells to Walmart.
The FTC investigation found no evidence ofanti-competitive behavior, and in 2010 Quidsi sold to Amazon.
What happened to the generous offers and discountson baby products? They were discontinued or significantly reduced.
Many users who converted to Amazon from Diapers.
combecause of those discounts, wanted to go back after they were abruptly scraped.
But there was no Diapers.
Amazon doesn’t just compete with their competitors.
It forces itself into their business.
As a dominant online retailer, Amazon hadenough bargaining power to secure discounts of up to 70% on deliveries from fulfillmentcompanies like UPS and FedEx.
Amazon then used these discounted deliveriesto pack them in its own delivery service called Fulfillment by Amazon.
Because Amazon was almost bigger than thewhole e-commerce industry combined, UPS and FedEx didn’t have enough negotiating powerover Amazon.
To make up for the excruciating discountsrequested by Amazon, UPS and FedEx began hiking their prices to other independent sellers.
This created a paradox – Amazon’s strategyeffectively directed sellers to use Fulfillment by Amazon as it was cheaper than to use UPSand FedEx directly.
And now Amazon is investing hundreds of billionsof dollars to establish its own physical delivery capacity to completely eliminate relianceon UPS and FedEx and it will succeed in doing so.
Controlling e-commerce infrastructure enablesAmazon to build a marketplace where it discriminately favors its own products without getting punishedfor it.
As a marketing platform, Amazon opened itsdoor to third party sellers to reach customers in exchange for fees ranging from 6% to 50%.
What these third party vendors also unwittinglygave up was the valuable data of their businesses and their customers.
Amazon is using this data to study purchasingpatterns and trends to undercut third-party merchants on price or give their own productsa featured placement.
Another benefit none of Amazon’s retailcompetitors enjoy, is Amazon world leadership in cloud computing.
Amazon Web Services is on track to controlhalf of the cloud infrastructure market share with Microsoft as the only strong competitioncurrently standing.
Many new startups rely on Amazon cloud serviceto deliver their services without committing to build expensive infrastructure on theirown.
But this also serves as an ultimate tool ofindustrial espionage that Amazon can use to learn about new emerging competition to acquireor undercut on price before it endangers its business.
It gives Amazon a control over data none ofits competitors have, and thus Amazon can enter new markets much more quickly and effectivelythan any other retailer out there.
There is no real competition to Amazon left.
There is no company quite like it.
Amazon’s path to become a global monopolyacross different markets isn’t just an anomaly.
It was Jeff Bezos’s intention from the verybeginning.
Monopolies destroy free markets, and withthem the freedom to choose not just as a consumer, but as a small business owner, a worker, anInternet user, and a citizen.
The best solution users of the Internet cando right now is to support merchants, authors, developers, entrepreneurs and vendors by purchasingtheir products directly from them, rather than going through an intermediary like Amazon.
Sure, you might be getting a better bargainon Amazon, but the long-term cost of saving few bucks now is unbearable.
Decentralizing our economy away from monopoliesback to middle class and small businesses is the only sustainable solution and is aresponsibility of every individual participating in this economy.
The story of Amazon domination isn’t uniquebut rather reflects the nature of the business model that’s become a standard in SiliconValley.
It leads towards market domination and monopolizationwithin the hands of the most aggressive corporations.
The little convenience of economic centralizationcomes at the cost of small businesses, middle class jobs, wealth distribution, privacy, free speech and free market as a whole.
Should we let Amazon monopolize one marketafter another? Or should we step in with drastic measuresto protect what allowed Amazon to exist in the first place? It’s time to have this conversation now.