Amazon's inevitable missteps becoming a problem for its products, services

Amazon.com has a Facebook-size problem: It’s become such a gigantic, sprawling, powerful business that its inevitable missteps are beginning to erode trust in its products and services, good will in Washington, and its ability to achieve globe-spanning dominance.

Let’s pause to reflect that the company that has made one-day shipping of tens of millions of items the industry standard is also the global leader in cloud computing services, owns the Whole Foods grocery stores (and is building a second chain), helps police departments identify criminals, is building its own air cargo fleet, has an $11 billion-a-year advertising business, is working on a plan to give everyone on Earth internet from space, has put always-on microphones in at least 1 in 10 U.S. homes, built an Oscar-winning film and TV studio from scratch, and is competing directly with UPS, FedEx, Google, Facebook, Apple, Microsoft, IBM, the entire book-publishing industry, Netflix, HBO, Disney, Walmart, Target, Costco, Kroger, CVS, Walgreens and countless startups.

Phew.

The breadth of Amazon’s ambitions and its mounting problems are linked.

Amazon is embroiled in controversies over the use of its facial-recognition software, the treatment of both its warehouse workers and its delivery drivers, whether its talking speakers violate child-protection rules, how much it is really lowering prices at Whole Foods, and whether or not its Ring doorbell-camera subsidiary is protecting users’ privacy. 

In the past month, the company got into a very public Twitter spat with Democratic presidential candidate Elizabeth Warren, who has proposed breaking up Amazon, rebutted reports that it fires warehouse employees through an app, and denied that it dismissed seven workers on account of their pregnancies. Before that, the company had to start accepting cash at its cashless stores in order to avoid discrimination, and address allegations its employees listen to recordings from Echo devices. And then of course there was the time Amazon decided not to locate their HQ2 in New York City, after local and state politicians called the company so toxic they’d rather not host a massive economic stimulus.

“When you’re a disrupter, you have flexibility you don’t have as a leader,” says Alice Fournier, vice president of e-commerce at the research and consulting company Kantar. Amazon’s preferred view was once more widely held: that it is an engine of growth, a triumph of American free markets and a customer-obsessed innovator. 
 

Now, when it enters a new business, not only do competitors grow wary but politicians take note. What was once the “Walmart effect” on competitors, supply chains, labor markets and Main Street U.S.A. is now the “Amazon effect.”

How big is too big?

One oft-repeated line—brought up frequently by Amazon executives and cited in Jeff Bezos’ most recent letter to shareholders—is that Amazon is less than 1% of global retail, or less than 4% of U.S. retail. That’s a smaller share than Walmart. “The retail market is fiercely competitive, and we have competitors who are larger than us in every country where we operate,” says an Amazon spokesman. “The vast majority of U.S. retail sales—90%—still occur in physical stores,” he adds.

What you’ll never see Amazon citing are other statistics showing that Amazon is half of all US e-commerce.

Or that, as Kantar estimates, about 50% of U.S. households have an Amazon Prime membership, and of those, about half shop on Amazon weekly. Or, of course, that its e-commerce distribution infrastructure is far larger than that of any competitor.

Growth in its revenue may be slowing, but it’s still unparalleled among retailers of its size. In its most recent quarter, the company’s revenue grew 17% compared with a year before.

Some experts in antitrust law agree that Amazon doesn’t meet the bar for interest from regulators. “Amazon’s size per se is not something I am worried about, and size generally is not something economists worry about,” says Fiona Scott Morton, a Yale University economist who served in the Justice Department’s antitrust division under Barack Obama. “Anticompetitive conduct is what harms consumers, and that is what critics should be showing.” There are other legal scholars and potential regulators—epitomized by Sen. Warren—who are thinking in new ways about whether or not Amazon harms consumers or competition through its size. In 2017, Lina Khan, a legal scholar and now an adviser to the House Subcommittee on Antitrust, Commercial and Administrative Law, published a paper in the Yale Law Journal, “Amazon’s Antitrust Paradox,” that has since become hugely influential.

Rejecting the framing that dominates current antitrust law, that the only measure of whether a company is a harmful monopoly is when it unfairly raises prices, Ms. Khan argued that definitions of monopoly from the bygone era of trustbusting in the early 1900s should be revived. By its very bigness, Amazon stifles competition, she argued.

Mr. Bezos proudly touts the fact that the majority of retail sales on Amazon now come from sellers paying Amazon to use its infrastructure. While this relatively high-margin business might please investors, it also creates a feedback loop in which more people start their search for goods on Amazon, which in turn forces ever more (often reluctant) brands and retailers to be on Amazon’s platform.

“The thousands of retailers and independent businesses that must ride Amazon’s rails to reach market are increasingly dependent on their biggest competitor,” Ms. Khan wrote.

Fighting for Their Lives

At first, Amazon’s competitors tried copying it directly, and that didn’t work out, says Ms. Fournier at Kantar. But far from Amazon eating all of retail, the existential threat it represents has inspired its rivals to invest. Now, at least some are leveraging technology to play to their core strengths, whether that’s Walmart’s role as a grocer and mass retailer, or Target’s strategy of focusing on smaller-format stores and in-store pickup.

In 2017, Target pledged to spend $7 billion in capital over three years revamping its stores and an additional $1 billion a year from its profits to innovate and discover new, defensible moats, or unique advantages.

Amazon is also beginning to demonstrate a willingness to partner as well as compete. In 2018, Kohl’s Chief Executive Michelle Gasstold the Journal that her company was happy it had partnered with Amazon to accept returns for the internet giant. “There is a lot of space for both of us,” she said at the time.

Smaller competitors are looking for lessons for rapid growth. Hingeto, a startup recently launched by the Y Combinator accelerator program, promises to help its customers create their own Amazon-style marketplace in miniature, taking care of everything from fulfillment to payments.

The idea is that while no one company can match the scale of Amazon’s infrastructure, a large number of vendors banded together could give third-party fulfillment providers the ability to offer two-day shipping at a reasonable price. Pair that with off-the-shelf storefront software and payments handled by companies like Stripe, and each custom marketplace can sell its own set of specialty items, while behind it all is one giant collective operation operated by companies other than Amazon.

Amazon has one ace up its sleeve that none of its competitors can match: the vast quantities of data it collects. Loyalty programs have long been a way for companies to track customers’ habits, but Amazon’s data-gathering operation is producing a trove that even Mark Zuckerberg might find impressive.

As it builds out its targeted-advertising operation and continues to grow its list of corporate frenemies, that data will be a point of ever greater concern. When Amazon not only provides your on-demand videos, toiletries and home furnishings but also the cloud service your doctor uses to analyze your medical records, you might think twice about buying that pint of gelato at Whole Foods.