The Strategist

Is Amazon a monopoly?

09/06/2017 - 12:26

Nowadays, Amazon is one of the world’s most successful companies. But how the company achieved such an incredible results?

Mike Mozart
Mike Mozart
First, was a bookstore. Nowadays, Amazon is a giant company with its own solutions in the field of logistics, Internet payments, equipment development and data storage, as well as media business.

Prime program, whose membership costs $ 99 per year, covers 85 million US subscribers, that is, more than half of families in the US. It would be strange to call such a company a mere online store.

Behind every business decision of Amazon is the philosophy of "flywheel". Head of the company Jeff Bezos took this term from Jim Collins, a business consultant, in the beginning of the startup. Flywheel Effect is a period when a company reduces prices to lure customers. This, in turn, increases sales and attracts more customers. The company thus can take advantage of economies of scale (through logistics and other common costs). Ultimately, prices go down again.

The image of the flywheel best reflects Amazon's two main aspirations: to conquer the global trading space and to get acquainted with its target audience. These ambitions were clearly visible at the earliest stage, when Bezos called his company in honor of the world's largest river, and also bought the domain Now, the domain leads to Amazon. Bezos has always been putting clients ahead of the shareholders and their interests. Amazon appeared in May 1997, suffered losses for the following 6 years, and was balancing on the verge of profitability in the next 10 years. For Bezos, these losses and some other financial indicators were not as important as maintaining low prices and quality customer service, that is, factors that allow the flywheel to spin. Surprisingly, he has managed to persuade Wall Street to tolerate this sad situation.

In 2016, sales of Amazon amounted to 136 billion dollars. This year, the corporate sales day Prime Day surpassed Amazon's turnover on both Black Friday and Cyber Monday (the traditional sales days in the US on Christmas Eve). Amazon itself declared the day "the world's biggest event" in the history of the store. The stock exchange is favorable to the company's shares, and even too much, given that Amazon is still barely profitable. Yet, $ 100 invested at the time of the IPO in May this year, turned into $ nearly 64 000 by the firm's 20th anniversary.

The secret of Amazon's incredible success in online commerce is logistics. The company provides American customers with a free two-day delivery. Within the framework of the Prime Now program, which spreads to some US cities, about 25,000 goods are delivered to the buyer within two hours - nothing similar to FedEx and UPS.

Amazon’s logistic infrastructure includes 28 sorting centers, more than 180 warehouses and 59 local delivery points, as well as 65 stations for two-hour delivery in the framework of Prime Now. Piper Jaffray investment bank believes that 44 percent of the US citizens live within a radius of 32 kilometers from Amazon’s delivery station or warehouse, and 431 distribution center will join the network after the purchase of Whole Foods, according to Quartz.

In 2013, Amazon launched the Dragon Boat project. This is a shipping line that will transport goods directly from Chinese and Indian manufacturers to the United States.

Apart from the distribution centers, Amazon owns more than 4,000 trucks and rents over 20 planes for the delivery and redistribution of parcels. In this case, information about every packet delivered at any time is analyzed and used to optimize the network.

According to the company, more than 90 thousand of its employees work in the American processing centers. Judging by what these workers tell, the conditions there are very tough, and efficiency comes first. They describe the scoring system, which involves taking into account any violations, including morning delays or delays after the break. Walking to the bathroom is not approved as it interferes with the work. Each employee has their own rating, and the least effective ones are dismissed. The same applies to office employees.

Amazon Prime, the core of Amazon

Amazon Prime program was presented in 2005, when Amazon’s shares were falling , and investors began to think that they would not wait for the promised revolution in Internet trading. However, Bezos again convinced the world to wait, saying that his client-oriented plan "will not bring profit for years." He said: "If we care of customers, everything will be in fine with the shares."

Ten years passed. Today, Amazon Prime is a huge business. Subscribers are still offered a free two-day delivery, and, in addition, access to music, video services, free storage of photos, free electronic books, closed sections of the site and other services. In May, Bezos told the shareholders: "We want to make sure that every responsible user has Amazon Prime." And the plan works: 63% of American users of Amazon have already subscribed to Prime.

Is Amazon a monopoly?

Purchase of American supermarkets chain Whole Foods for $ 13.7 billion caused concern among the public. Amazon has always competed tough with rivals, but so far has avoided antitrust control, as this competition turned out to be to consumer's benefit. When Amazon entered the electronic book publishing market in the late 2000s, Bezos rated the bestsellers at $ 9.99, which was significantly less than cost of new hardcover books in US stores. As a result, customers turned away from traditional publishers, and Amazon received a huge share of the electronic literature market.

In 2011, Amazon stopped selling new subscriptions for the Amazon Mom service, and in 2012 dramatically reduced discounts on children's products. In a note to Yale Law Journal published in January 2017, a researcher of monopoly and technology Lina Khan, argued that Amazon's client-centered policy allows the company to avoid antitrust control even when it takes control of all new industries. The antimonopoly legislation is a complex sphere, if we are going to talk about monopoly, it is necessary to determine the market on which the problem may arise.

 Amazon is theoretically competing with the entire retail industry, which further complicates the situation. Amazon's most important weapon in the fight against competitors is low prices, and in recent decades, US regulators have avoided declaring such proposals anti-competitive, suggesting that the market will prevent companies from lowering prices indefinitely. However, if Bezos has proved something for the last 20 years, it is that the logic of the market is not a rule for him.