The Prime Battle

by Warren Seah

Prime Battle

On Tuesday, the FTC and 17 state attorneys general filed a lawsuit against (ticker: AMZN), accusing the company of antitrust violations and maintaining an illegal monopoly over the e-commerce retail and online marketplace services markets. According to the regulatory agency, Amazon’s power enables it to “inflate prices, degrade quality, and stifle innovation for consumers and businesses.”

The merits of the case will be decided by the court. However, it is worth noting that current law favors the FTC, just as it did in the regulator’s case against Microsoft (MSFT). The FTC sued to block Microsoft’s merger with game maker Activision Blizzard (ATVI), arguing that it would harm competition in high-performance consoles and subscription services markets. However, a U.S. court disagreed and refused to halt the deal, which is now close to completion.

The FTC, in its 172-page complaint, faces another challenging legal battle.

Highlighting Amazon’s dominance in e-commerce, the FTC provides several charts showing Amazon’s market share of 70% to 80% in U.S. e-commerce sales across the top four online platforms: Amazon, Walmart, Target, and eBay.

However, online retail is essentially just retail. It is not unreasonable to say that Amazon competes against the entire retail industry. Narrowing down its market to a few online retailers presents an opportunity for Amazon to counter the FTC’s claims.

Although I am not a lawyer, I spend numerous hours each week analyzing corporate income statements. And Amazon’s numbers clearly tell a different story: the company’s retail business is barely profitable. If Amazon truly had a monopoly in e-commerce, wouldn’t it be generating significant profits?

Amazon’s Retail Business: A Different League

In 2022, Amazon faced a significant setback with its retail business, experiencing an operating profit loss of $10.6 billion, excluding its thriving cloud computing arm, Amazon Web Services (AWS). Surprisingly, this loss actually translates to an additional $10.6 billion in value for Amazon’s retail consumers.

To put this into perspective, let’s compare Amazon’s performance to other tech giants. In their recent fiscal years, Apple recorded a staggering $119 billion in operating profit, while Microsoft achieved $83 billion. Clearly, Amazon’s retail business operates in a league of its own.

It’s important to note that these losses aren’t solely a result of the pandemic. Looking back at 2019, Amazon’s non-AWS operating profit amounted to a modest $5.3 billion, barely scratching a 2% operating margin.

While it might be tempting to assume that Amazon can simply raise prices to boost profits, it’s crucial to consider the company’s historical approach. Throughout its three-decade tenure, Amazon has consistently prioritized providing value to customers with competitive pricing.

However, if Amazon is compelled to alter its business model or divest its highly profitable AWS division, the retail business would be left to stand on its own. In this scenario, Amazon might be forced to increase prices and compromise its steadfast commitment to exceptional customer service.

Unsurprisingly, Amazon argues that any government intervention could potentially harm consumers. According to David Zapolsky, Amazon’s general counsel and senior vice president for global public policy, if the FTC gets its way, it would result in a narrower product selection, higher prices, longer delivery times, and limited options for small businesses. This outcome stands in stark contrast to the goals of antitrust laws.

Ultimately, the numbers support Amazon’s argument. Despite the challenges it faces, the company remains dedicated to providing value and maintaining its positive impact on consumers.

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