Monopolies have historically been a detriment, typically delivering restricted supply and inflated prices. From US Steel’s slipshod management of the industry to AT&T’s suppression of telecom innovation and Microsoft’s bundling of Internet Explorer and Windows, there’s a track record of companies consolidating significant market power and abusing consumers.
Recent murmurings on Capitol Hill and on Wall Street have suggested that Amazon is in the same boat, that’s it’s a monopoly in need of immediate antitrust activity by regulators. However, the online retail platform can hardly be blamed for its success and shouldn’t be punished by such a misrepresentation.
First and foremost, Amazon demonstrates what should be well-known by now: platforms strongly tend to upend existing or create new markets, often becoming the dominant player.
Google created the market for search and is now the verb used by many to mean “search for information.” Uber disrupted the ride-hailing world and incumbent taxi companies with its platform approach, also becoming another industry-wide verb. Facebook blew up the largely nascent social media world and took it by storm, capturing over 2 billion users.
Platforms have winner-take-all dynamics because they scale really well, but they don’t create harmful monopolies because they deliver increased efficiencies and value to the consumer.
At present, Amazon delivers an efficient shopping experience with an unparalleled product catalog, competitive pricing, and a very economical shipping program that delivers inside two days. Amazon’s innovations only serve to improve market outcomes, not harm the consumer through inefficiencies and gouging.
As well, when a platform is seen ascending to market dominance, the typical response is to build a competing one and vie for the top spot. Microsoft launched Bing to compete with Google; Zelle was created to compete with Venmo and Square Cash; Lyft found room to compete with Uber.
While platforms often win the market, it’s never a sure thing. There’s almost always room to compete and room to fail. MySpace didn’t retain its hold over social networking; dozens of nuanced Tinder competitors are certainly doomed to fail; Grubwithus couldn’t get strangers to eat with each other.
Incumbent or adjacent companies always have an opportunity – they merely need to seize it and be smart.
When Netflix started delivering DVDs by mail and launched its streaming service, no one thought to blame it for Blockbuster’s losses. As it became the dominant site for watching movies and shows and Blockbuster went belly-up, no one was suddenly bearish or calling it a monopoly.
It was simply innovation taking its natural course – what economist Joseph Schumpeter termed “creative destruction.”
Amazon is having the same effect, yet in more avenues than is typically seen. Its marketplace model is built on a bedrock of third-party sellers, which translates quite well across verticals, from apparel and groceries to industrial goods and medical supplies.
Amazon may steamroll its competition, but it is in itself an engine of competition. Those third-party sellers still compete on price and quality, but in a new venue. Consumers benefit from this transformation due to the increased convenience, with no harm in sight.
This capital-light approach means Amazon can deliver better prices, forcing incumbents to reevaluate their business models.
Look at Circuit City, which firmly believed it was safe from the transition to online retail, even being so bold as to sell many of its products on Amazon’s newly minted Marketplace. Long story short: Circuit City watched its margins shrink even as the stock hit all-time highs. Just a few years later, bankruptcy.
Surely Circuit City can be forgiven – it was the first of its kind to really fall so hard due to Amazon. In the meantime, traditional retail is experiencing a quasi-apocalypse, driven by shifts toward online shopping, but also by gross inefficiencies in the status quo of malls and brick-and-mortar stores.
Retailers like Macy’s and Sears have had every chance to innovate and produce a marketplace for their vertical – or they could have even established a partnership with Amazon that would have made them much more indispensable.
Instead, these companies pursued business as usual and are closing stores in unprecedented numbers, largely ignorant of the headwinds blowing in their faces and not delivering better outcomes to consumers.
Meanwhile, Amazon was prepared to seize on the growth of online retail and provided competitive pricing and superb convenience. Anyone could have done it – CEO Jeff Bezos started the company by driving book orders to the post office in a Chevy Blazer.
A company with a few billion in annual revenue could have at least made some strategic investments or partnerships with startups in the industry as a hedge against disruption. Now, retailers’ stocks are in freefall without any visible path to recovery.
The same thing is playing out in B2B distribution. Amazon is innovating with a marketplace model in markets like industrial supply, wholesale food, medical supply, and many more. The total addressable market for this new expansion amounts to about $8 trillion and much of it is highly commoditized and fragmented, which leave the door open for Amazon’s disruption.
Incumbents are either shoving their heads in the sand or trying to backhandedly fight a price war that Amazon is poised to ultimately win. History is repeating itself.
Pegging Amazon as a monopolist in need of breaking up is backwards. Bezos and his cohort are simply innovating aged industries in severe need of modernizing. Every opportunity they exploit is one ignored by the incumbent players.
Established B2B distributors are hardly choosing to compete – they won’t even address the $500 billion elephant in the room on their oft-underwhelming earnings calls. Their market is a massive one and the margins are good, so Amazon’s disruptive waves will be far-reaching and quite painful.
Amazon’s incredible expansions are not the doings of a greedy monopolist; they’re the actions of inspired innovators which have yet to be met with equally spirited competition. And there’s no end in sight.
When the status quo gets upended and giant companies start flopping harder and more often, the blame lies not with Amazon, but with the executives who refused to take a chance on something new.
Platform InnovationRead more
Platform InnovationRead more
Platform InnovationRead more