How Amazon Used Unregulated Web Monopolization To Became America’s Nightmare

Amazon makes no sense. It’s the most befuddling, illogically sprawling, and—to a growing sea of competitors—flat-out terrifying company in the world.

It sells soap and produces televised soap operas. It sells complex computing horsepower to the U.S. government and will dispatch a courier to deliver cold medicine on Christmas Eve. It’s the third-most-valuable company on Earth, with smaller annual profits than Southwest Airlines Co., which as of this writing ranks 426th. Chief Executive Officer Jeff Bezos is the world’s richest person, his fortune built on labor conditions that critics say resemble a Dickens novel with robots, yet he has enough mainstream appeal to play himself in a Super Bowl commercial. Amazon was born in cyberspace, but it occupies warehouses, grocery stores, and other physical real estate equivalent to 90 Empire State Buildings, with a little left over.

Investors have grown to love Amazon.com Inc. despite, or perhaps because of, its contradictions. Shareholders pushed its value above Microsoft Corp.’s for the first time on Valentine’s Day and to an all-time high of $774 billion on March 12. Only Apple Inc. and Google parent Alphabet Inc. remain more valuable, and unlike them, Amazon breaks all the rules of the modern corporation. It’s also wielding its power against an unprecedented range of other businesses.

Bezos’ brainchild has been fast-growing, influential, and anomalous for most of its 24 years, but it’s entered a new phase. Its dominance can’t be contained to a few areas such as books, electronics, or even computer networks. Remember my colleague Brad Stone’s book The Everything Store? That title may have undersold Bezos’ ambitions. He seems to want to establish his place in every industry. Parcel delivery, supermarkets and packaged foods, apparel, trucking, auto parts, pharmaceuticals, real estate brokerages, makeup, concert ticketing, swimming pool supplies, and banking are just a sampling of the fields battered at various points in the past year because of Amazon’s encroachment or even rumors of its interest in entering them. Amazon declined to comment for this story.

The company has grown so large and difficult to comprehend that it’s worth taking stock of why and how it’s left corporate America so thoroughly freaked out. Executives at the biggest U.S. companies mentioned Amazon thousands of times during investor calls last year, according to transcripts—more than President Trump and almost as often as taxes. Other companies become verbs because of their products: to Google or to Xerox. Amazon became a verb because of the damage it can inflict on other companies. To be Amazoned means to have your business crushed because the company got into your industry. And fear of being Amazoned has become such a defining feature of commerce, it’s easy to forget the phenomenon has arisen mostly in about three years.

The Amazon effect

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In 2014 everything was going wrong. Amazon introduced the Fire smartphone, one of the bigger flops in the history of consumer electronics. It posted its steepest quarterly loss before taxes and interest—an ignominious milestone for a company with a history of slim or no profits. Revenue growth in the 2014 holiday season was the second­-worst since 2001, and executives started to sound downright pessimistic, as if the business was starting to mature or even stall. They promised the company would be more discerning about spending on projects that might not pay off for years or decades. At one point, Amazon’s top finance executive even tried to blame disappointing sales on students trying to save money by renting textbooks. It was a lame excuse befitting a stodgy company struggling to adapt, not a rising technology superpower.

Investors lost patience. Over the course of 2014, Amazon’s stock price fell more than 20 percent, making the company much less valuable than Walmart Inc. or China’s Alibaba Group Holding Ltd., an Amazon look-alike that went public that September.

A year later, however, Amazon had leapfrogged to No. 6 on the list of most valuable companies. Since the end of 2014, its market value has quintupled. This was a case of preparation meeting opportunity. As the company started to clear key thresholds in several of its important businesses, it also revealed that it was sitting on a gold mine made of clouds.

Bezos bombshells

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In April 2015, Amazon had what technology analyst Ben Thompson called a second initial public offering. It disclosed for the first time the staggering profitability of Amazon Web Services, which started in 2006 as an experiment to rent out computing horsepower to companies that needed it. It proved to be a big idea that allowed young businesses to get off the ground more quickly and cheaply than before. Large companies, notably Netflix Inc., also started using AWS—first for side projects, then eventually to support essential operations.

Amazon had always been the clear market leader in this kind of cloud computing service, but few outside the company were prepared for just how valuable AWS had become. Inside Amazon was a division with the muscular profit margins of Starbucks Corp. and higher annual sales than the entire Chipotle Mexican Grill restaurant chain.

The AWS disclosure changed the way investors and stock watchers valued Amazon. Suddenly there was evidence the company could be consistently and nicely profitable if it chose that route. It was also among the biggest signs that Amazon’s head-scratching investments could pay off in a huge way. In 2015, AWS was responsible for two-thirds of total operating profit. Last year it was more than 100 percent.

Two other long-gestating Amazon businesses also found their groove in 2015. The company tested the loyalty of its 10-year-old Amazon Prime program by holding its first Prime Day, a fake shopping holiday during the summer retail doldrums. The program, which ­delivers fast, free shipping and other benefits to members, gave Amazon not only a predictable stream of membership fees but also a psychological advantage with shoppers. Once they pay their annual dues, they have an incentive to buy as much as possible from Amazon. A year later, on the second Prime Day, total orders rose 60 percent above the first outing. Like Costco Wholesale Corp., Amazon had found a way to compel customers to pay them for the privilege of buying more stuff.

The year 2015 was also a milestone for the last of what Bezos calls his “three pillars,” as Amazon topped $100 billion in sales for the first time. About half the merchandise sold on Amazon’s vast online mall comes directly from the company. But the other half is sold by millions of independent shops that open mini-storefronts on the site, a panoply Amazon calls its Marketplace business. It’s the equivalent of Walmart setting up swap meets in its parking lots and mixing stuff from its own shelves alongside the pickings of strangers’ card tables. The independent merchants bear most of the costs of distributing orders, and Amazon collects about 15 percent of the price of their merchandise, plus more fees if they want to be, say, included in Prime. (That’s another 15 percent.) Those rents amounted to $32 billion of revenue last year, or about half of Target Corp.’s yearly sales.

That holiday season, Amazon recorded its first quarterly operating profit of more than $1 billion, an achievement it’s notched five more times since. Management theorist Jim Collins coined the term “flywheel” to describe a virtuous cycle that makes successful companies ever more successful. For Amazon, it took 20 years for the flywheel to kick in. Bezos now loves to explain how happy customers (who happen to be locked in) give Amazon the ammo to add products and cut prices, which in turn draws more customers, more merchants, and the efficiencies to lower prices further, including by squeezing more money from partners.

Amazon is among world's most valuable companies

Amazon's market cap compared to the 100 most valuable companies