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Tuesday, October 15, 2019

At This Point Amazon Seems Unstoppable. But Don’t Be Too Sure

Amid the growing fear and loathing for Amazon espoused by national figures as diverse as Elizabeth Warren, Joe Biden, and Donald Trump, two prominent publications weigh in on with their own take on what they see as the threat posed by the Seattle-based e-commerce giant. The articles also reveal the ambivalence, love and loathing, that Amazon and Jeff Bezos inspire.

Both articles portray Amazon as a uniquely powerful company, and its CEO Jeff Bezos as a brilliant if unempathetic leader. And both suggest that his company’s ever expanding success needs to be restrained to allow for fair competition.

In “Is Amazon Unstoppable,” published in the latest issue of the New Yorker, writer Charles Duhigg argues that Google and Facebook, like Ford before them, are product companies with discrete markets, and therefore limited potential for growth. Amazon, he says, is more like General Motors, a process company with the ability to enter and quickly dominate completely new markets. With Amazon’s widely-admired management smarts (Warren Buffet once called Jeff Bezos “the best CEO in the United States”), the power it wields due to its 40-percent share of the nation’s e-commerce market and its dominance in web services, Amazon commands a power that justifies greater regulatory scrutiny.

Franklin Foer’s essay, “Jeff Bezos’s Master Plan” in this month’s The Atlantic also looks to the past to underscore his  concerns about Amazon’s growing power.  He  argues that the empire that Jeff Bezos has built is larger in scope than that of John D. Rockefeller, who refined 90 percent of American oil, or Bill Gates who controlled much of the personal computer industry for decades thanks to is ownership of the Windows operating system. Foer concludes: “Jeff Bezos has won capitalism. The question for the democracy is, are we okay with that?”

Both articles use a lot of ink describing Amazon’s guiding Leadership Principles, the two-pizza teams and other cultural practices often described as key to Amazon’s flexible, risk-taking culture. Duhigg’s essay quotes Ian Freed, a technical assistant to Amazon CEO Jeff Bezos, who was impressed by Bezos’s insistence on simplifying processes; his emphasis on in-depth product proposals rather than PowerPoints; and his creation of a culture designed to avoid bureaucracies. “Everything Jeff does is to stop a big-company mentality from taking hold,” Freed tells the author.

Amazon executives are given freedom to make mistakes and move on. Although Freed was involved in developing the Fire Phone, a smart phone that resulted in Amazon’s writing off $170 million in losses, Bezos told him, “You can’t, for one minute, feel bad about the Fire Phone. Promise me you won’t lose a minute of sleep.”

Foer of The Atlantic, meanwhile looks at the hiring practices that have enabled Amazon to build a meritocratic system that has managed Amazon’s rapid growth in market after market from electronic books to Alexa devices. He describes Amazon’s culture as “a paradigm—a distinctive approach to making decisions, a set of values, the Jeff Bezos view of the world extended through some 600,000 employees.” The approach encourages risk taking, but only after all data are carefully examined. He notes that Amazon employs 150 economists, more than any university in the country, and uses them to run controlled experiments.

Both authors suggest that Bezos’s strength, his focus on data, may also be his achilles heel: a lack of empathy for employees.

As a reporter I have followed Amazon for more than 30 years. I first interviewed Jeff Bezos in 1996 when he ran Amazon out of a small warehouse in Pioneer Square. I’m struck at the extent to which reporters who were deeply skeptical of Amazon’s potential for success a decade ago now seem convinced that the company is unbeatable thanks to its powerful business culture. It reminds me of the way American business magazines viewed every emerging Japanese multinationals as a looming threat, a dark shadow over America’s future.

Foer’s suggestion that Amazon has “won capitalism” is particularly questionable. Amazon has tried and failed in its efforts at develop businesses in dozens of ventures including restaurant food delivery, smart phones, event ticketing, flash shopping, hotel booking, a Groupon-style booking site, a Square-like credit card reader competitive, a PayPal competitor and an eBay alternative. Amazon has certainly been disruptive. But it, too, will one day be disrupted, as Bezos is the first to admit.

As successful as Bezos has been, he won’t be CEO forever. Bezos is already spending less time at Amazon and more time in Washington D.C. with his new love interest (who led to a divorce and the loss of $35 billion of his fortune) and in Kent with his old love interest, his childhood passion for space taking shape in the form of Blue Origin, the rocket company on which he will spend most of the rest of his still-enormous fortune. Without Bezos to keep up the pressure, its unclear how long Amazon will be able to maintain its current level of intensity. Even so, the company’s recent move from two-day to one-day shipping has certainly led to another surge in spending and frenetic activity.

It’s also interesting to me that so many reporters, while admitting that customers love Amazon’s services, are also convinced that the company is bad for the economy.

Amazon has built an efficient logistics system capable of delivering just about anything in a matter of days. That has vastly improved convenience in our lives as well as the efficiency of business, just as Google search has made it our lives more efficient and productive. Those efficiencies make the United States more competitive, not less.

In many cases, Amazon’s presence has resulted in more competition, not less. The threat from Amazon’s hugely successful web services division forced Microsoft to transform itself around cloud computing. That strategy pulled the company out of a two-decade funk and drove new revenues that more than doubled Microsoft’s valuation to over $1 trillion, well above Amazon’s $851 billion. Microsoft is no longer the powerful monopoly it once was, but it’s expanding its workforce again for the first time in years.

Google, IBM, Oracle, and IBM are all now pouring money into cloud computing. All those cloud offerings have made it far easier for startups to get the computing power they need to operate without investing substantial capital. Meanwhile, Amazon’s logistics platform has made it easier for small companies to reach new customers quickly and relatively cheaply.

Finally, as powerful as Amazon is in e-commerce, it controls a relatively small proportion of the entire retail market, perhaps a few percent. That pales in comparison to Facebook’s overwhelming dominance in social media and Google’s dominance in search — monopoly positions that enable them to charge monopoly prices. By contrast, Amazon’s profit margins remain small as it continues to steadily drive down prices to consumers.

As long is U.S. antitrust policy is based on whether a company drives up prices, it’s difficult to see how regulators will be able to make a convincing case for either heavily regulating it or breaking it apart. Arguments that Amazon is unfairly using its position to launch its own products in competition with other companies selling on their marketplace may be similarly weak. Promoting store-branded products have been core strategies for supermarkets for decades and Costco’s Kirkland-branded products are a key reason for its profitability.

We’d all like to see Amazon become a bigger contributor in areas like environment and social equity, but Microsoft had a similarly single-minded focus on its corporate mission two decades into its creation. Now Bill Gates’s substantial fortune is transforming global health.

Amazon, too, is beginning to change. It has promised to spend $700 million to retrain a third of its workers, and it recently committed to buying 100,000 electric vehicles as part of an ambitious effort to slash its carbon footprint. Baby steps perhaps, but when a company that size starts to move it can soon make a difference.

If Amazon truly creates what amounts to a utility in the world of selling and shipping products, then sure, it should be regulated as a utility. It’s not there yet.

Image: Flickr user Joe Wolf

Leslie Helm
Leslie Helm
Leslie Helm is the former Editor of Seattle Business magazine and former Tokyo Correspondent for the Los Angeles Times

1 COMMENT

  1. In 2018, nearly 58 percent of the sales on the Amazon web site — $160 billion dollars — were made by third-party sellers. Hundreds of thousands of separate retail businesses gain national (and international) reach by using the Amazon platform (while paying Amazon a cut).

    According to Amazon’s April 2019 letter to shareholders nearly 200,000 businesses sold more than $100,000 worth of their products on the site in 2018, and 25,000 businesses did more than $1 million in sales. Amazon is increasingly a retail platform — a central clearinghouse for online sales — as opposed to being a direct seller itself, and it seems to me that transition undercuts the “anti-competitive” and “monopoly” arguments against the company.

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