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Why Amazon’s Antitrust Dilemma Boils Down to Third-Party Data

Last week, House lawmakers released a critical report on four of the conglomerates comprising Big Tech, including Amazon, Apple, Facebook and Google, summarizing what it alleges are the companies’ anticompetitive activities and ultimately recommending to not only split up the companies in some fashion but also reform and strengthen current antitrust laws.

For Amazon, the central issue that has remained in the public eye is the company’s “pattern of exploiting sellers” particularly in the usage of third-party sellers’ data, which led to CEO Jeff Bezos testifying in Congress over the summer alongside Facebook’s Mark Zuckerberg, Alphabet’s Sundar Pichai and Apple’s Tim Cook.

The subcommittee, and other governing bodies, has been largely critical of the e-commerce giant’s treatment of third-party sellers and overall business practices. A Wall Street Journal investigation in April found that Amazon employees used non-aggregated or easily identifiable data from third-party sellers to inform its own product strategy, which appeared to contradict testimony by Amazon associate general counsel Nate Sutton at a July hearing in front of the subcommittee last year. At the hearing, Sutton said Amazon does not use individual seller data to launch private brands, a tactic that would likely be considered anti-competitive.

Yet despite Sutton’s denials and other repeated denials, the subcommittee staff uncovered information in interviews with former Amazon employees, as well as current and former sellers, that is consistent with the public reporting about Amazon’s misuse of seller data.

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In a submission to the subcommittee, a former employee said: “In 2010, I started working on the Amazon marketplace team…It was widely known that many (10+) of my peers were running very successful [third-party] accounts, where they were pulling private data on Amazon seller activity, so they could figure out market opportunity, etc. Totally not legitimate, but no one monitored or seemed to care.”

The same individual told subcommittee staff, “It’s a candy shop, everyone can have access to anything they want,” referring to accessibility of third-party seller data. The source added, “There’s a rule, but there’s nobody enforcing or spot-checking. They just say, don’t help yourself to the data … it was ‘wink wink,’ don’t access.”

In September last year, former Amazon coders confirmed the existence of an algorithm that boosted the company’s private-label products to the top of the marketplace’s search results while obscuring competitors.

Aside from the private-label business, Amazon also uses third-party seller data to benefit its retail business, the subcommittee alleged. At the hearing, the subcommittee’s chairman, Congressman David Cicilline (D.-R.I.), asked Bezos about an instance of “a small apparel company that makes and sells what they call ‘useful apparel’ for people who work on their feet and with their hands, like construction workers and firefighters.”

In this instance, Cicilline noted that the particular business discovered and started selling a unique item that had never been a top seller for the brand, one which ended up generating $60,000 a year in revenue.

“One day, they woke up and found that Amazon had started listing the exact same product, causing their sales to go to zero overnight,” Cicilline said. “Amazon had undercut their price, setting it below what the manufacturer would generally allow it to be sold so that, even if they wanted to, they couldn’t match the price.”

The subcommittee said it had heard “repeated” concerns from both former employees and third-party sellers that Amazon uses seller data to either copy products or source the product directly from the manufacturer. It then sells it direct to consumers, according to the subcommittee’s findings.

The report highlights that while Amazon describes third-party sellers as ‘partners’ publicly, internal documents show that, behind closed doors, the company refers to them as “internal competitors.”

Amazon was quick to respond to the report in a company blog post, saying that the small and medium-sized third-party businesses account for approximately 60 percent of all physical product sales on Amazon, and those sales are growing faster than Amazon’s own retail sales.

“In addition to great value and low prices for customers—we also have strong financial incentives to support third-party sellers because we typically make the same or more revenue on third-party sales,” the post said. “Clearly, when it comes to Amazon and third-party sellers in our store, it’s not zero-sum. Amazon and third-party sellers have a mutually beneficial relationship, and our interests are well aligned.”

The e-commerce giant says it sought to initially split up the first-party and third-party sales channels, with one store for Amazon and one store for third-party sellers.

“But that approach required customers to effectively walk two sets of aisles—searching for products in two different stores,” Amazon says. “Unimpressed by the inconvenience, customers simply didn’t go to the third-party store. After that failed experiment, we invited third parties to sell in our store right alongside us.”

The report lists other concerns including the “forced arbitration” of third-party sellers, who are required to sign away the right to their day in court if a dispute arises, and rising seller fees that tallied approximately 25 percent of Amazon’s $160 billion in gross merchandise volume in 2018. The platform now takes an average of 30 percent of each sale compared to 19 percent in 2015, according to the committee’s interview with Jason Boyce, founder and CEO of Avenue7Media, a company helps third parties boost sales on Amazon.

Power over suppliers and manufacturers, fulfillment expansion raise eyebrows

Lawmakers also pointed out the company’s “significant market power” over its suppliers, noting that this power spills over to the brand manufacturers it works with. Additionally, the committee detailed Amazon’s rapid development of its extensive shipping, logistics and fulfillment infrastructure. More than 73 percent of third-party sellers use Amazon’s services to fulfill orders, and the e-commerce titan is on track to surpass UPS and FedEx in delivery market share by 2022, according to Morgan Stanley estimates.

The report identifies three barriers for potential competitors that make potential entry or expansion unlikely. The first is Amazon’s network effects, which make it difficult for another marketplace to achieve a comparable number of buyers and sellers. The second is the switching costs associated with consumers shopping outside of the Amazon ecosystem, and the third includes the steep costs of building a logistics network comparable in size and scope to Amazon’s massive international footprint in fulfillment and delivery.

The subcommittee even highlighted Walmart, which has taken significant steps to go toe-to-toe with Amazon on the loyalty and delivery front through its fulfillment investments and recent Walmart+ loyalty program, as a competitor that “does not come close to matching Amazon” when it comes to providing free and fast delivery for a large volume and inventory of products. The report cited Amazon’s ability to offer Prime members free, next-day delivery on over 10 million items anywhere in the continental United States, while Walmart has only about 200,000 products eligible for two-day shipping in select markets.

One of the resolutions proposed by the subcommittee that could significantly affect Amazon’s operations in the event that courts find the tech giant guilty of monopolistic practices is “structural separations.” These separations would effectively require Amazon to split its e-commerce marketplace in two, at minimum.

Amazon criticizes regulation, points to small business investments

In its blog post, Amazon rebutted the notion that regulation would do more harm than good.

“All large organizations attract the attention of regulators, and we welcome that scrutiny. But large companies are not dominant by definition, and the presumption that success can only be the result of anti-competitive behavior is simply wrong,” the post said. “And yet, despite overwhelming evidence to the contrary, those fallacies are at the core of regulatory spit-balling on antitrust. The flawed thinking would have the primary effect of forcing millions of independent retailers out of online stores, thereby depriving these small businesses of one of the fastest and most profitable ways available to reach customers. For consumers, the result would be less choice and higher prices. Far from enhancing competition, these uninformed notions would instead reduce it.”

The small business angle is one Amazon has been pushing hard in recent months,  launching a TV spot in September that claims SMBs on its site have created an estimated 2.2 million jobs, and sell 6,500 products on the platform every minute. Early in the month, Amazon announced that it was setting aside as much as $18 billion for SMBs selling on its platform, including various forms of assistance in logistics, services, programs, customer support and for Prime Day.

As part of the initiative, Amazon plans to provide the more than 500,000 U.S. SMBs currently selling on its e-commerce platform with online selling guidance, education, and customer support in the next 12 months. The company plans to onboard an additional 100,000 U.S. businesses as new sellers within its e-commerce site.

Amazon also has a different argument as to its role in retail. The subcommittee estimates that Amazon’s share of U.S. e-commerce is about 50 percent based off Pymnts.com data, well ahead of the 38.7 percent often cited by eMarketer, and it pointed out that the online juggernaut reportedly controls about 65 percent to 70 percent of all U.S. online marketplace sales.

But Amazon still takes the “overall retail” side of the argument, claiming it accounts for less than 1 percent of the $25 trillion global retail market and less than 4 percent of retail in the U.S.

The House Subcommittee had plenty of information to work from over the 16 months it took to complete the investigation, as Amazon produced 24,299 documents, including internal emails among the company’s senior executives, memoranda, presentations and other materials. The information also included extensive market research, interviews with third-party retailers, submissions from industry groups and testimony including the widely followed hearing this summer with Bezos and others.